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Cameron and Osborne have padlocked themselves into a sports bag

May 4, 2012

The British economy is screwed, but sorting it out would be less controversial than you’d think.

People bleat on about various ‘isms’:  Keynes versus Friedman, or whether the solutions lie with market or state. Some say the government could rescue us from crisis single-handed. Others — notably that a whole stratum of middle earth England — seem to have bought the notion that the UK is fatally laden with debt and that anything other than fiscal rectitude of constipatory proportions will lead us the way of Greece and Spain.

I suspect that a lot of the ideological confrontation is false. For a start, a lot of folk don’t appear to understand how government bonds work. Osborne and Cameron induce a collective national flinch by comparing national debt with a household. The narrative is that we should all tighten our belts because Labour over-indulged.

That’s the wrong analogy.

The government isn’t in hock to some crowbar-wielding loan shark. It borrows off you and me. A lot of our bank savings get reinvested in government Treasuries, which are considered super safe even though returns are low.

A better analogy is probably a father lending to his daughter: yes, she probably doesn’t want to take too much advantage, and sooner or later she’ll want to stand on her own two feet, but most dads wouldn’t turn up at their daughter’s door with a large henchman demanding repayment at 1000%.

Here, Jonathan Portes, Director of the National Institute of Social and Economic Research, points out that some of the most moderate voices suggest that Britain should spend its way out of the bust. Even conservative chancellor Norman Lamont (for whom Portes wrote speeches) purposefully held off raising taxes and lowering spending during the last recession in the early nineties.

The IMF, normally a bastion of budgetary conservatism, says that the British government could boost the economy by balancing spending with tax hikes.

the Fund wants us … to spend more on infrastructure (and housing) and increase welfare benefits for poor people (who will spend them), and pay with it by taxing the rich (those with a lower “marginal propensity to consume”).  This would raise demand in the short term, without worsening the fiscal position.

Number 11 Downing Street can borrow almost for free to pay for the infrastructure precisely because the economy is floundering and there aren’t that many other places to invest. By buying government debt foreigners, too, are giving a vote of confidence in British standards.

But the current coalition has so committed itself to austerity that it can’t backtrack.

Of course, the Conservatives have ideological fixation with the free market. Some of their posh mates will stand to make millions out of the privatisation and contracting out that comes with shrinking the state. I’m not saying that ideology is dead. Debt is also high and needs to be paid down.

But Cameron and Osborne appear handcuffed in some Bullingdonian death pact in which they have to follow through their austerity until the rancid conclusion. It’s as if they’ve squeezed inside a sports bag, somehow padlocking it from the inside, and now they can’t get out.

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2 Comments leave one →
  1. May 5, 2012 9:47 pm

    The worst thing about the “household credit analogy” is it doesn’t even work on its own terms.

    Consider a household in which the main breadwinner loses their job. The household *could* respond by reducing spending, but in most situations that doesn’t help much. You still have mouths to feed and an unemployed breadwinner. So maybe the breadwinner goes back to university to do a Master’s degree, or retrain, or whatever. Maybe the breadwinner takes out a loan to pay the tuition fees (analogous to borrowing and spending to get out the recession).

    The frustrating thing about all this is that our economic problems are actually fairly tractable. We know the solutions but are rulers are too ignorant and selfish to implement them.

  2. May 8, 2012 10:23 am

    The rhetoric of austerity never ceases to astonish me. You’d think that Osborne, with his 2:1 in history, would know about the great depression. But no; they continue to witter on about the importance of continuing with their difficult task. The battle isn’t being fought over what’s objectively right or wrong. As you say, we already know what should be done. It’s a propaganda war which the sensible appear to be losing.

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