In the midst of a solvency crisis, stimulating demand is clearly not the top priority. Rather, it’s convincing your citizens that their savings are safe and the money markets that your country is still capable of honouring its debts. This means bailing out the banks and getting control over public spending. It’s only when the danger of bank runs and sovereign defaults is over that governments can even think about rekindling the ‘animal spirits’ of the economy.
That’s why, 10 years ago, when George Osborne took the driving seat, the British government made the right call. Never forget that Britain was in a perilous position. With our outsized financial sector, we were fully exposed to the global financial crisis; and, to make matters worse, our nice little earner — North Sea oil — was running dry. This was no time to test the confidence of the money markets.
Osborne (though he also made a big mistake that I’ll come back to) was right to defy his Keynesian critics. The subsequent jobs miracle would vindicate his position.
So, no, I’m not a raving Keynesian. The fact is there are some economic emergencies in which the go-to Keynesian solutions are not appropriate. I’d also like to add that the online obnoxiousness of certain Keynesians really gets up my nose. Admittedly, that’s a rather less important consideration, but I mention it to make it clear where my personal biases definitely don’t lie.
It thus gives me no pleasure to admit that in the context of 2020 the Keynesians are right. We really do have to borrow our way out of this one. That’s because this is unequivocally a crisis of demand. Rishi Sunak, unlike George Osborne, must spend spend spend to stop the economy from blowing up.
In phase one — i.e. the pandemic itself — government has had to support household incomes so that employers can retain staff and workers can pay for basic necessities.
In phase two — i.e. the recovery — we’re going to have to work out how to get people consuming normally again. It’s barely been noticed, but for the first time in decades, Britain’s trade balance is back in the black. As Frances Coppola points out, that’s not because we’ve suddenly become an exporting powerhouse, but because we’re saving our money like mad.
Believe it or not, this is an age of surplus — of £3 coffees and unused gym memberships. It’s not just the top 1% who can afford the second or third family car or the second or third family holiday. Abundance, while far from universal, is sufficiently widespread to allow millions of us to spend substantially more than we need or even truly want. Indeed, a lot of spending is motivated by nothing more than habit — and habits, in this pandemic, have been broken.
As soon as those with spare cash have the confidence and opportunity to spend it again, there will be some rebound in consumerism. But we can also expect an enduring downshift in lifestyles — in some cases out of preference, in others because we have no choice but to pay off debts, rebuild savings and compensate for lost income.
It all adds up to a long-lasting loss of demand, which must be replaced if we’re to get back to full employment and anything like normal GDP. Government must be ready and willing to provide the stimulus needed to get recovery truly underway. ‘Eat out to help out’ was just the beginning — and truly radical ideas, like experimental shots of universal basic income, should be actively considered.
Obviously, there are limits. We can’t push fiscal and monetary policy much beyond that of comparable economies. If the money markets take fright, interest rates will go up — a disaster when you’ve accumulated so much debt. However, it’s not just the absolute size of each country’s debt pile that the markets are comparing. They’re also looking at other metrics like debt servicing costs as a proportion of GDP. It’s therefore really important that things like growth and productivity look good compared to other nations.
This brings us to phase three of the challenge facing us as a nation — how to tackle the underlying weakness of the British economy. In this respect, Rishi Sunak must not repeat George Osborne’s big mistake. Though the Coalition government was right to get current spending under control, it was wrong to stick to Labour’s spending plans and slash the capital budget. Instead, stimulus took the form of quantitative easing — funny money pumped into the financial sector. This helped to inflate share values and house prices, but what we didn’t get was the real investment that we actually need, the sort that supports innovation and enterprise and therefore growth.
We’ve just had a decade of ultra-low interest rates, low inflation and no pay rises. This was a perfect opportunity for the corporates to invest in the future; instead they busied themselves with share buy backs and other get-rich-quick schemes. They had their chance, so now government must lead the way. That will require the Chancellor to have some difficult conversations with his fellow Conservatives — especially over tax policy. Raising sufficient revenues in the next years will not be easy, but it makes sense to target idle wealth in preference to job creation.
Ten years ago, George Osborne had to face down his Keynesian critics, but most of those were in the Labour Party and other hostile institutions. Rishi Sunak has the harder task of taking on vested interests and free market ideologues on his own side. Nevertheless he must do so if he is to swing the power of the state behind the productive use of capital.
As long as we’re not doing really stupid stuff, like building nuclear power stations, we shouldn’t hold back on public investment or sharper incentives for private investment. It’s not that there’s any lack of work to be done. We have entire regions of the country to level up, houses to build and natural environments to regenerate. Under-investing, as we have done for decades, will only damage our growth prospects and thus make our debts less bearable.
One has to ask whether Rishi Sunak really gets this agenda. It’s still too early to tell, but he’s already gone much further than any previous Chancellor — Tory or Labour — would have dared. He’s made the state the wage-payer of last resort and gone halves with us on lunch. Looking ahead, he sees the sense in tackling this country’s greatest structural weakness: the economic disparity between North and South.
Later today we’ll get an idea of how big a commitment this government’s willing to make, but there has been one encouraging sign. It’s reported that a National Investment Bank will be established. If true, this would reverse the most telling error of the previous decade — which was when the Green Investment Bank, only set up in 2012, was flogged off five years later to a private equity firm. As well as being an incredibly shortsighted thing to do in itself, it was symbolic of a misplaced trust in the neoliberalism that’s failed us over and over again.
While the Chancellor has an economy to save, he shouldn’t feel so protective about our current model of capitalism. Even before the virus came, it was falling to bits and running out of road.
So, let’s not blow this chance to move on.
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SubscribeSome interesting points about spending but I would also raise another issue, our tax code is massively complex, almost impossible to understand and no longer really fit for purpose. It needs drastic, if not revolutionary, reform. Given that it currently stands at 21000 pages and is growing all the time then there will never be a better time to do this. With a government holding an 80 seat seat majority, it depends on whether we have the PM and ministers with the political will, fortitude and stubbornness to see it through. I would look at the tax code that is considered by most to be the most effective and efficient in the world and at 276 pages, is probably one of the shortest, that of Hong Kong. Use it as a template if you will but so something to rid us of this burden. Making our tax code simpler will make it easier and much, much cheaper to implement, to administer and everyone will be able to understand it. On the other side, do the same with public spending. In order for tax to be effective it much be spent properly. I disagree with the author about nuclear power stations, we should be investing in them, not only to rebuild our capability in knowledge and engineering but because they provide a constant source of power that we will not be able to do without. Advances and research in molten salt reactors and small reactor assemblies mean that we could secure our future energy needs without destroying our landscape and potentially become a net energy exporter again.
Furlough principled that social security could be delivered remotely through tax codes. This would save on bricks and mortar jobcentre costs and the costs of remunerating thousands of non-job psycho-babbling work coaches and their unemployable backroom bureaucrats. In the event of mass unemployment post covid-19 social security must not be allowed to again become the welfare cheque of the unemployable work coaches of the benefit office, an invitation to the industrial scale scamming of the treasury by the third sector or a work programme slave market.
I agree with you that taking 276 pages as a template is a much more promising way forward than trying to reform 21000 pages. It is so vast it is beyond reform.
Why have a tax code at all?
Why not zero income tax, in fact no tax at all except on purchases. Then you can have low or zero taxes on essentials and higher taxes on luxury goods. Combine that with transparency; e.g. want better roads, low emission vehicles? Wack up fuel taxes and show the public how much is actually going on transportation.
Of course it will never happen as all governments use tax as a political weapon and want less democratisation and transparency.
I agree on the obscene cost of nuclear where big plants are concerned, let alone having Chinese involvement.
But investing in small reactors with Rolls-Royce or the molten salt designs of Moltex Energy is different.
Home grown solutions like these are an investment in UK technology and jobs, as well as being far cheaper and quicker to build.
I noticed, Peter that when you advised against “stupid” things like building nuclear power stations you were talking about the the large one at Hinkley Point and also Chinese power stations in Britain. But how about the small RR modular power stations? We can’t rely on on wind and solar because they are inherently intermittent and there is no as yet proven large-scale storage technology to smooth out intermittent renewable energy. Home grown nuclear technology would be a useful addition, in my opinion, to our energy mix, as well as creating high value jobs especially in the North.
I thought that was a pretty bizarre off-hand comment. I really don’t see how we can avoid expanding nuclear power, if we are to take seriously net zero (whether we should or not is another question…) The point that seems to have to be made to green enthusiasts over and over again, the wind don’t always blow and the sun don’t always shine…
‘As long as we’re not doing really stupid stuff, like building nuclear power stations..’
Actually this is just about the first sensible thing any government has done in my lifetime.
Meanwhile, my understanding is that a lot of people – well, the middle classes who can work from home – have saved a lot of money during lockdown. All we need to do is to open up so that this money can once again be spent on absurdly overpriced coffees and other assorted nonsense.
“All we need to do is to open up so that this money can once again be spent on absurdly overpriced coffees and other assorted nonsense.”
All good points, but I’d rather the rich invested their money in things that really matter, like modular nuclear reactors and the Skylon spaceplane, not silly little trinkets.
An excellent idea, but would you really trust HMG with ‘modular nuclear reactors’ given our truly abysmal record on civil nuclear power, since its inception in 1957?
As for the ‘Skylon’, it will probably go the same way as the unfortunate R 101 or the DH 106: Comet, to name but two, of HMG’s aeronautical fiascos.
I believe the “unfortunate R101” was subject to a bit of a cover-up.
Having an interest in the history of British Aviation I used to visit the Public Records office in the mid 1970s to view Air Ministry documents. I was suprised to find that drawings and documents concerning the R101 were closed until well into the 21st Century. Suprising for outdated airship technology of the 1920s.
I came accross a possible clue as to why couple of years ago when I read Neville Shute’s autobiography The Slide Rule. As well as being a novelist he worked in aeronautics and had intimate knowledge of the R101 project. The airship suffered from a major structural design flaw and should never have been sent out on its maiden overseas flight. Political pressure from the government of the time overcame caution ““ it was the pet project of the Labour Secretary of State for Air Christopher Birdwood Thomson. Ironically, he was a passenger on that flight and was killed in the crash.
The moral is: beware of projects which have a close link to a politician’s career ambitions. They have to be seen to work, and quickly.
A year later we were equally supine over the invasion of Cyprus.
Your concluding sentence is remarkably apposite with regard to the various vaccines coming our way. And no, I am not an anti-vaxxer. Indeed, I happen to believe that mass vaccination programmes are one of the few things that the state should be doing.
Didn’t Neville Shute work on the rival R100?
It is ludicrous that the files on the R 101 are still closed, unlike those on the much later DH:106 Comet explosions. What is there to hide, after all these years?
If it were something as controversial as say, the Hindenburg disaster, one might understand?
Yes, he did work on the R100 ““ a privately financed project. The Slide Rule provides a telling comparison of public-funded versus private-funded projects. The former have money to burn and can afford failures while the latter, working on limited funds, are often pressed to find ingenious solutions to major problems because failure can mean financial disaster.
I don’t think the R101 documents are still closed. I tried to access them back in the mid-70s. If memory serves they were closed until about 2010. According to Shute the design flaw was insufficient lateral strength ““ the airship folded and collapsed when turning. Thomson was warned of the danger but pressed for the flight to go ahead. Perhaps his reputation depended on it.
That’s good to hear that the R101 facts are now in the public domain. The comparison between the two is interesting.
Off course we shouldn’t forget the USA had an even worse record with the destruction of both the USS Akron and USS Macon, in 1933 & 1935 respectively.
The anomaly was the Hindenburg, particularly after the outstanding record of the Graf Zeppelin.
He wrote a novel in which the protagonists were passengers on a doomed airliner. I can’t remember the title but it probably had something to do with his experiences on the R100.
Thank you, I had forgotten that. All I can recall now is the apocalyptic ‘On the Beach’.
I wouldn’t trust our government but I do trust Rolls-Royce which has a solid track record in small nuclear power plants for our nuclear submarines
That is very reassuring, thank you.
Depends on how much private industry gets involved.
As for Skylon, I think Alan Bond has enough experience with government to attempt to keep to as much of the private sector as possible.
To be fair in 1957 the Government had to take on technology that was in it’s infancy and along with other Governments sort out the basics.
Those basics are sorted now and the building of smaller reactors is now routine.
I was thinking about what happened post Calder Hall, particularly in relation to how the French handled things so much better than us.
By all means, let’s endlessly hector people on the need for green energy while NOT building the one emission-free source.
Recent events have exposed industrial scale institutionalised corruption of so many ‘worthy’ institutions and of course the perfected ‘yes minister’ immunity to liability for any of it plus how one institution will never call out the other – Obvious that the rules we live under from tax to town planning are insanely and deliberately over complicated – Obvious that non of the main parties throughout the UK have the slightest self interest or intention of actually doing anything about it except make it worse – To actually seize the opportunity of the freedom of a proper Brexit and and prevent the otherwise permanent authoritarianism facilitated by the virus a completely new party would be needed – The incompetence of the establishment regarding the virus and the Brexit (plus the illegals) give an opportunity for a Nigel Farage party to sweep the board again and give us a new hope of real freedom and prosperity.
Well, call it poverty if you prefer, but it’s coming for you all the same.
Excellent article. ‘right on the money’
Entered the the Covid-19 stretch with a load of funny money and fabricated debts and will probably exit the Covid-19 stretch with even more funny money and fabricated debts, hope Rishi Sunak can work that neo-liberal conundrum out of the finances and make money real again.
Money will never be ‘real again’. At least, not until we have Paper Money Collapse and have to start again.
If you “remodel capitalism,” then it’s not capitalism any longer. And it’s not capitalism to blame for govt’s excesses.
Keynesianism is the counter-intuitive idea that the best way to deal with mounting debt is to keep on borrowing.
I believe it also suggests that govt spending be dialed back when the economy is strong, not doubling down on even more spending that ultimately creates even more debt. Has this philosophy ever worked anywhere? At some point, the debt must be addressed. It is true in the home, it is true in every business, yet govt somehow believes itself exempt from this reality.
Homes and businesses cannot issue their own currency – well not legally anyway, so yes they are different from those entities with very different responsibilities.
Again, debt has to be addressed at some point. And the ability to endlessly issue your own currency eventually makes that currency worthless.
But the existing 2.1tn debt is really a 1.2-1.3tn debt since we own (via the APF/BoE) 845 bn of our own debt, which that markets have hardly blinked an eye at (since many developed nations have been indulging in their own form of debt monetisation.
This was a weak piece by Peter. “Austerity” to describe measures to bring deficits under control is an encouragement to reckless spending. One seldom hears “extravagance” used to describe measures to greatly expand deficits for dubious spending purposes. Now, of course, would be no time for Sunak to balance the budget, but it is surely misleading to say that the problem is a lack of demand, and fiscal policy should encourage spending. A lot of the falloff in economic activity is due to government shutdowns, either in the UK or abroad. It is a quite different situation than at the time of the financial crisis.
Osborne’s stint as Chancellor of the Exchequer saw the downgrading of the RPI for upratings in favour of the CPI, something that seemed to be done only for budgetary reasons, with no inherent logic. The promising initiative to replace the RPI with an RPIJ was quickly abandoned, while that duckbilled platypus of an index, the CPIH, was promoted. It was encouraging to see that Sunak refused, for the moment at least, to step any further down the path of error that Osborne started the UK on, declining to make the RPI a carbon copy in its movement to the CPIH as it had been widely anticipated he might do. Hopefully, for him and the Johnson government this will be just the start of a major policy reset. No country has had its economy suffer more from housing booms and busts than Britain’s. The UK must keep housing prices in its inflation measures, although there are legitimate differences of opinion on the best way to do so.
Peter
You absolutely wrong about nuclear power.
We desperately need our aging and soon to close nuclear power stations to be renewed.
Wind power is erratic and unreliable, as I type this at 22.50, wind power is providing 6% of our electrical requirement. Nuclear is at 19%.
Gas is our main provider at 48% – even coal is at 2%
As, both Nuclear & Coal are being phased out what is going to replace the 21%?
This is before the attempt to “Green” our environment with electric cars & home hearing, which is estimated to treble electrical power requirements.
Peter, you no doubt have more resources than I do, how about an article showing how we are going to power society, with our existing knowledge and technology? But, please no magic batteries – which have not been invented, or indeed magic cables that will charge cars on our streets.
I’m sure that Sunak has now worked out that the government cannot run out of money because it has never had any. It gets what it wants from us, and we are the ones who will ultimately run out of money. If people are spending as claimed, it is because there is no point in saving, and as most now believe, the government will provide. The economy is like a giant plate spinning act, more and more plates are being added but the spinner is getting exhausted.
Your mistaken. All money comes from the government either through direct creation and spending or the bank licences to allow credit/debit creation when creating loans (and of course destruction of credit/debit when loans are repaid). Tax is used to control inflation amongst other things. Spending always comes first, a sovereign government cannot run out of money, although if it continues printing when the economy is purring along utilizing available recourse’s there would be inflation implications – but we’re very far from that position at the moment
“a sovereign government cannot run out of money”.
I suppose it depends on your definition of “run out”. I think the people of former middle ranking countries such as Greece, Venezuela, Argentina, Zimbabwe, etc, might disagree and think your comments somewhat semantic.
Also, to be pedantic, not “…all money comes from the government”. Trading commodities/currencies such as gold (safer than ‘government’ money at the moment), cryptocurrencies and local community currencies and trading systems certainly don’t emanate from government – and the way European states are blowing our money, people may well start to turn towards these alternatives.
With 845 billion of QE the Gov (via the BoE and the APF) now owns almost 40% of the National debt, which we may well pay interest on, but that part of it comes straight back to the Treasury. It may have been touted as refloating the financial sector, but the legacy of the initial round of QE was the monetisation of debt, which is again being used to finance government spending during the pandemic.
I’m not sure I agree with the analysis especially around the 2008 crash and the aftermath and George Osborne’s disastrous foray into austerity.
Once Q.E. was instigated there was never going to be any problem selling gilts since we were effectively buying them up (via the secondary market admittedly) creating a floor, and allowing the expansion of the gilts market as required to finance the recovery.
In 2020 the Tories came into power via the coalition with the goal of getting rid of the deficit by 2015 (Labour’s aim was to half the deficit but provide more investment to help the economy grow).
Osborne tried out austerity for a couple of year and almost put us into a double dip recession in 2012 (it can be argued the the Olympics and associated economic activity saved us from that), but then had to ramp up spending to stop the economy grinding to a stop.
The result was that the Tory led government only managed to half the deficit, but with little of the growth that the investment that Labour had proposed would have produced. So we ended up with a smaller economy than we would have had but with the same level of debt.
I do though agree with the conclusions. With households and companies paying down debt there is less credit/debit being created by the banks and government spending to support jobs needs to continue for at least another year and maybe beyond, and supplement the job support with infrastructure spending – council house building could be a start. That said there need to come a point when the new reality is recognised and non profitable companies allowed to go to the wall.
https://m.huffingtonpost.co…
Great piece. This was interesting. Tax thresholds being used to encourage investment and hiring.
Something I’ve never understood is how those from the ‘business’ community always are the ones to insist that government must always run balanced budgets, that fiscal austerity is a good and necessary thing… while they invariably float corporate bonds and borrow funds to run their own businesses, and particularly when they find themselves in a down-turn for whatever reason. The old expression, and entirely correct expression, is that it takes money to make money. The only way a government ‘makes money’ is to either increase taxes or increase the tax base all other being equal. The latter takes money, and so again… why do the ‘fiscally conservative’ object?
Keynesianism has its place and has worked in certain circumstances, examples being Japan, pre-war USA, post-war West Germany, Britain & USA plus one might also add China into the mix. It worked where there were large pools of idle labour and low aggregate demand. The government investment helped create industries, companies and jobs. Once successful, many of the companies were either completely sold off or semi-privatised.
The situation now seems somewhat different. We had relatively high demand up to March 2020 then pulled the rug away. We have run the state finances into the ground propping up once successful companies and businesses and, through furlough, paying people not to work. We are stuck because we know that if we withdraw the subsidies the system will collapse. Keynesian economics was about rebuilding a collapsed system not wasting vast amounts propping up a successful one.
Western Europe has engaged in economic self-destruction in 2020 and it is hard to see how it will recover. In an era of ultra efficient high tech, it is hard for Government or companies to generate the number of jobs required. The future does not look bright however you cut it.
Our present global crisis is “unequivocally a crisis of demand”? But surely it is also one of supply, perhaps even more so in the days to come? With rumours of global shipping being under collapse as a result of the crisis, surely our supply problems are only just beginning? I’m sure the 250,000 or so sub-Saharan African kids who are slated to die this year by the UN due to the lock-downs will view it unequivocally as a crisis of supply.
Another worrying point, is that investment by government is seen as uncritically a good thing. I am open to persuasion, but the track record has historically been pretty abysmal. Politicians love a certain kind of fancy project, which then gain a huge amount of support from vested interests and can never be killed off, despite changing circumstances and objectives. Ah, HS2, the cavalry coming over the hill to help Cleethorpes very soon…..
We should never have been put into this nonsense position, lock down at any stage was not necessary, Sweden was the model we should have chosen. As for Sunak his approach is very mixed and he has not been at all brave in trying to fix our stupid tax system.
I think the thing that can get us out of this will be inflation and that’s what I expect to see encouraged from around the end of next year to however long it takes, coupled with great encouragement for true entrepreneurs.
I remember inflation in the 70’s happening to a society unable to react and it nearly broke us…in the eighties it wasn’t a significant problem, indeed according to most people comparing *now* to *then* the ‘Boomers’ had so good they were laughing fatcakes