Economics & Finance – Page 10

How should Lib Dems embrace economic policy?

The British Liberal Democrats are setting up a policy working group on the “21st Century Economy”. I was among over 200 people to volunteer to take part, but sadly I was not picked. Those that have been picked will face truly daunting quantities of advice and reading material, but nevertheless but doesn’t stop me from offering my thoughts today. This time I won’ focus on the hard content of any new policy, but on its all-important political framing.

So far as content is concerned, regular readers will have got the hang of it. I blogged about it last year as part of another Lib Dem initiative, recommending Four Themes. These themes are green growth, small is beautiful, humane public services and redistribution of imbalances.

This line of thinking is very compatible with Lib Dem values and should go down well with the membership. But it presents a political problem. It means overturning several beliefs that the British public policy establishment holds dear. These include that higher volumes of consumption of things are essential to economic health (and may even be a measure of it), and that large, centrally controlled systems and organisations are the most efficient. It amounts to a policy revolution. And revolutions make people uncomfortable.

It is essential for future political success for the Lib Dems to have one foot in the political mainstream – so that they are regarded as being basically a sensible party. If they aren’t they will be condemned to the margins of politics like the Greens. It is the same dilemma faced by Labour supporters as they challenge capitalist ways. You do not secure lasting political progress in a democracy from the extremes.

The Lib Dems should therefore present a radical policy agenda in an un-radical way. It must be evolutionary, not revolutionary. The party needs to specify small steps forward, each of which is able to achieve demonstrable improvements, that will over time change the conventional wisdom.

This is why I particularly like the idea of Green Growth. it contains a highly constructive ambiguity. On the one hand it suggests that the party favours economic growth in the conventional sense, which the public has come to associate with better employment conditions and higher pay. But it does not quite say what is actually meant by growth – it could mean general wellbeing and quality of life rather than volume of consumption. Meanwhile the phrase unambiguously points to environmental sustainability. I strongly suggest that the Lib Dems make the phrase central to their proposition, or come up with something that does the job even better.

That’s my first piece of advice. My next advice is that they need to tread very carefully around two hot political topics: free trade and macro-economic management (aka “austerity”). These may well be excluded from the policy group’s formal scope, but the party’s wider narrative cannot avoid tackling them.

Free trade is a totemic issue for the Liberal Democrats. It was the one of the key organising themes of its predecessor: the Liberal Party. That was in a different time and context, of course. The Liberals then saw free trade as a way of breaking the hold of the landowning classes, who sought to protect their business interests (especially agricultural) at the expense of high prices for the masses. But even now, it is clear that freedom of trade, and competition, is a good way of keeping consumer prices down and freedom of choice up. By and large the general framework of world trade is something that Lib Dems will be quite happy with.

But something has changed in the power balance. Free trade helps keeps prices down, but it also seems to be doing the same with wages, until you reach a globally mobile elite of senior managers and other professionals. And worse, the instruments of free trade can allow globally powerful businesses to legally challenge public policy. There are some particularly odious examples from the tobacco industry as they have successfully slowed down, though not defeated, the introduction of plain packaging of cigarettes. Intellectual property is another issue that needs to be examined with a sceptical attitude. It is promoted by many businesses as being akin to any other form of property right and fundamental to civilised existence, but it is often used to stifle freedom and innovation, rather than encourage it. It is a favourite means for the manipulation of profits to low tax regimes by multinationals.

And trade agreements make this a hot topic. Brexit adds to the relevance. There were already cogent arguments that the EU was using its free trade rules to block general public policy (such as restricting state subsidies to the steel industry – though liberals should see two sides to that argument). Brexit does let Britain off the hook for the proposed EU-US trade pact – TTIP – which is causing a lot liberal angst. But the country must decide what sort of trading relationships it wants, and how far to go – including whether to join multilateral pacts such as the nascent one in the Pacific, TPP, which the country could join if it left the EU (or so I read). I have to say that I am agnostic on this question. My faith in free trade pacts has been shaken, but not destroyed. But the issue is becoming a political touchstone, and the Lib Dems would do well to apply some serious thought to this area, rather than recycling old slogans.

The Lib Dems will also find a minefield confronting them on macroeconomic management. The left have decided to make opposition to “austerity” one of its organising principles. I suspect that is because they draw so much strength from public sector employees and people from places such as universities and charities that depend heavily on public largesse in some shape or form. But anti-austerity does not resonate amongst the general public, who generally get the impression (justified or not) that public spending benefits other people. Since the Greens and Labour have drawn away the more trenchant political voices on the left, the Lib Dems have the opportunity to strike a more nuanced tone. Austerity is an elastic idea, so it is quite possible to say that you are against it, but the party should not apply “homeopathic policy” – mouthing anti austerity rhetoric while diluting the substance – as this did not work well for the previous Labour leadership.

My advice is for the Lib Dems is to stay clear as they can from the word “austerity”, and to strongly advocate higher levels of public investment in education (not just schools, incidentally) and green growth. Public services, though, must deliver value for money, and will need continued reform – though not the brainless outsourcing and “payment by results” favoured by the Conservative government.

So there are some hard questions and tricky politics. But as I said last week, the left has to develop a new economic narrative. Given the staleness of the economic discourse on the far left, the Lib Dems have real opportunity to take up thought leadership. There is a real prize to be taken here.

The Mandibles: Lionel Shriver’s liberal dystopia is a must-read

I have recently finished reading The Mandibles, the latest novel by Lionel Shriver, whom I chiefly know through her novel We Need to Talk About Kevin, which I haven’t actually read. The new book is set in the US in the future (2029 to 2047), and the core of the book’s meaning is in economics and politics. It is a must-read for anybody interested in either.

I don’t want to spoil the plot too much. I will say nothing about the interplay of the characters, which is very well done, in the first two-thirds of the book anyway. This may be strong enough to entice even readers not interested in the wider narrative, if it wasn’t for rather long passages of explanatory text in the first part of the book, thinly disguised as conversation. I found the economic explanation fun, of course, but it does slow things down in the first part of the book. Ms Shriver is very skilled at understanding how different the world looks from different points of view, and how this breeds misunderstanding. She also has a wry sense of humour, which is never very far away.

I will instead talk about the economic and political context which she sketches out. The book is in two parts. The first part (which is about two thirds of the text) is set in the years following 2029. In it the US economy suffers an implosion when the rest of the world turns on it. This follows from three trends which are clearly visible in the current US scene. First, the country can get away with huge net indebtedness to the outside world because the US dollar is the top global reserve currency. This allows it to sustain large trade and fiscal deficits, which “Keynesian” economists suggest is not an urgent problem; Ms Shriver suggests that liberals will never get round to taking it seriously. And second, the political liberals will come to dominate US politics, in the way they have Californian politics, through the rise of Hispanic Americans. And third demographic change will exert a growing pressure on state finances with rising demands on the state to deal with the needs of aging baby boomers.

So the US deficits persist until the rest of the world decides that it has had enough, and no longer wants to keep piling up US currency debt. They launch a coordinated coup to replace the US dollar as the reserve currency with a new currency that they create for the purpose. To cut a long story short, the US government reacts badly and the US economy collapses. I will leave the details for those who want to read the book. The striking thing to me is the plausibility of it all. Notwithstanding the elegant arguments put by one of the characters, who is a Keynesian economist, which at times sound very similar to the sorts of things I say in my blog (especially his hatred of gold).

The second part of the book takes the scene to 2047, after the US economy stabilises and recovers, and takes up a much diminished place in global terms. In terms of drama this part of the book is much weaker. The cast of characters is greatly reduced, and the main focus is on just two of them (one of whom, is Ms Shriver’s alta ego, a by then nonagenarian novelist), and much less actually happens. From purely a novelistic point of view, this section probably wasn’t necessary. But it is essential for the development of Ms Shriver’s political message. She sets out the US as a sort of liberal (in the US sense) dystopia. There is a wall along the US border with Mexico; it is built by the Mexicans to keep US refugees out. The demographic balance has become so out of kilter than the tax rates have to be raised sky high – and the government creates an insidious method of ensuring compliance – planting a chip in each citizen’s head that records all their financial dealings. Again I will spare you the details: read the book.

Ms Shriver’s political standpoint is clearly a libertarian one. She values individual freedom ahead of collective social obligations. Her novel’s message is that social democracy contains the seeds of its own destruction, and will either collapse, or undermine the liberal ideals that many of its supporters hold dear. I have to say that her alternative does not look much better: wellbeing seems to depend on inheriting wealth to create a degree of personal capital.

So why should somebody like me, who has very different political values to Ms Shriver’s, give so much time to this novel? Firstly, those ideas are presented in a digestible way. The second part of the book may drift into one–sidedness occasionally, but Ms Shriver’s great gift is to understand differing points of view, which makes her case much more accessible. Secondly we must resist the tendency for modern political discourse to be tribal. Liberals like me do spend quite a bit of time in dialogue with those on the left of the political spectrum, but not nearly enough trying to understand the right. That is a dangerous thing.

It is dangerous because so much of politics and economics is a matter of balance. It is not a matter of finding the right ideas and taking them to an extreme, but understanding the dangers of different policies and plotting a way between them. Too many on the left have an excessive faith in “Keynesian” economics (I use quotation marks because this economic philosophy has drifted so far from the flexibility of mind that characterised Maynard Keynes himself). The fact that many developed countries can easily afford high levels of government borrowing is not to say that such borrowing does not present longer term dangers. And high-tax high-public service societies have their attractions, but present major challenges for the longer term, which the political right see more clearly than we do. Above all the novel serves to show how fragile the foundations of modern middle class society might be.

So this book should promote a bit of healthy self-examination among those on the liberal left. As well as being a well-written and very enjoyable read.

Economics is at the heart of the left’s weakness

In my last post I said that the lack of a convincing economic vision was at the heart of the British Labour Party’s difficulties, and a problem for the left generally. It is worth unpacking that a bit and sketching the direction that any new thinking should take.

The central political problem for the left is the disaffection of so many working class and lower middle class voters, particularly ethnically native people. They are becoming increasingly voting for right wing populist parties and causes. This was a dominant factor in the vote for Brexit in Britain, and the rise of Donald Trump in the US and Marine Le Pen in France, to name just a few examples. These voters had been part of a left wing coalition, but leftist parties moved up market to attract liberal middle class voters, especially those employed by the public sector, and also pitched for ethnic minorities.

Meanwhile problems for the traditional working classes go beyond political neglect. They are overwhelming the losers from the advances in technology and globalisation which have destroyed the relatively stable and well-paid jobs on which they used to depend. Whole swathes of Britain are stuck in a post-industrial doldrums, especially in smaller towns in England and Wales. The left needs to win back these voters if it is to challenge the populists and the centre right. They have little clue as to how to do this, and distract themselves with other issues. Labour indulges in internecine strife. The Lib Dems are concentrating on rebuilding their core vote – i.e. focusing on the middle class vote.

But the cluelessness of the left in Britain struck me most forcibly from a comment made by the Green MP Caroline Lucas. She blamed the Brexit vote on austerity – government cutbacks since 2010 following the financial crisis. And yet the bulk of the disaffected voters were never very dependent on government jobs and handouts, and are often quite supportive of austerity policies, as they felt they hit the undeserving – immigrants and layabouts – rather then themselves. Indeed, they benefited probably more than most from government generosity on raising tax allowances. It’s not austerity, it is the lack of decent jobs that is the problem. And government handouts are not the answer because these foster dependency and undermine people’s sense of self-worth.

The left starts with a cultural problem. They are by and large liberal, inclusive and cosmopolitan in outlook. This helps in coalition building generally, and especially in outreach to ethnic minorities, but it creates immediate distrust from native working classes. In order to overcome this the left needs to offer hard benefits – and that involves two things. Good quality jobs and decent public services. The left loves good public services too, of course – they provide lots of employment opportunities for their core supporters – though they are less certain how to pay for them as an aging population pushes up demand. But on jobs they have almost nothing to say.

Such talk as there is concerns macroeconomics. The left favours stimulating demand through generous fiscal policy to create jobs in the economy as a whole. Jeremy Corbyn, the Labour leader, talks of investing in infrastructure. This may be a good idea in itself, but by and large these policies create the wrong jobs in the wrong places. New housing, for example, needs to be built in the prosperous south east, where the shortage is greatest, and firms often have to import the workers from abroad because local ones lack the skills. Some infrastructure projects should help the economies of the more run-down regions, it is true, but these need to be part of a more coherent strategy of regeneration. Meanwhile the centre-right has cottoned on the ideas of infrastructure and regional redevelopment as well.

What to do? The first thing is accept that the problems of the disaffected working classes are more than a little local difficulty with conventional economic policy. It is an aspect of a broader crisis brought about by globalisation and technology change, and a blind spot in conventional economic thinking, with its emphasis on aggregated statistics like GDP, and one dimensional concepts of efficiency and productivity. It needs fresh thinking of a type that will be heavily criticised by the conventional public policy establishment. As fellow blogger David Boyle has pointed out, this is not necessarily a problem with economists, but with public servants tied to the old conventional wisdom.

The problem is that conventional policies are tied to highly centralised political structures and tend to concentrate the benefits of economic growth at the centres of power, while hollowing out the rest. While promising efficiency, it is in fact wasteful because it leaves so much human capital under-used. So political decentralisation is a large part of the solution. This is very hard for Britons to grasp, since we have been centralising since William the Conqueror in 1066. But countries with a more distributed history of political power, like Germany, Scandinavia and Switzerland, perform much better while having very similar cultural conditions.

But if political decentralisation is part of the answer, it is incomplete. The USA is politically highly decentralised and yet suffers similar problems of alienation. There localised political units have not been able to challenge the power of big corporate interests, who collect large monopoly profits and suck them out of the local economies in the name of economic efficiency. Wider national and international political structures need to keep these corporations in check, and yet too often they are captured by them. This is an unresolved battle in the European Union, incidentally, and the best reason to be sceptical of the EU project – though the EU also does much to counter global corporate power.

Meanwhile we need to stack the economic odds in favour of local entrepreneurship and innovation, and celebrate localised, human and integrated services that tailor service solutions to individuals. Much more public money needs to be channelled into rebuilding skills in de-industrialised regions – something Britain is woefully bad at by international standards (consider this interesting article in the Economist).

Some on the left are starting to get this. American Democrats are waking up to the evils of large corporate oligopolies. British Lib Dems are sympathetic to the decentralisation agenda. A number of Labour city leaders also grasp it. But it is complex and difficult area. It needs both grand visions to change mindsets and capture the imagination, and small, practical steps that will achieve the goals in an evolutionary way that convinces sceptics.

I will try to use this blog to help develop the new economic thinking in my very small way.

Don’t panic, but look for signs that Britain’s finances are holed below the waterline

Last week, before Britain voted, I suggested that Britain’s finances were vulnerable, and that a vote for Brexit would lead to a financial crisis. After Britain duly voted for Brexit, many commentators have suggested that just such a crisis is unfolding. Is it?

My form on predicting such crises is mixed. I thought that Britain’s failure to join the Euro in 2000 might lead to a crisis in due course, as international investors shunned Sterling. This was very wide of the mark. But in 2007 I correctly foresaw that the apparent calm after the interbank markets froze could lead to a serious financial crisis, moving all my pension fund’s assets to index-linked gilts and cash. Its value rose while most funds were badly battered in the crisis of 2008/09, facilitating my early retirement. So I need to take a deep breath and try to look at this objectively.

First, what do I mean by a financial crisis? There are two things to look out for. First is a collapse in asset prices that causes people who have borrowed to finance assets (which what people usually do for property) difficulties, which in turns affects banks and squeezes demand, causing job losses and recession. The second is one of governmental finance, whereby the government finds it hard to finance the national debt, forcing interest rates up, and a drive to austerity regardless of any need to stimulate demand. This is likely to be combined with pressure on the currency that makes it impossible for monetary policy to take up the slack. The 2008 crisis was of the first type, but the government managed to head off the second type. For the second type examples are Brazil currently, and Britain in the late 1970s and early 1980s.

Why did I say Britain was vulnerable? First, the country has a large current account deficit, running at about 7% of GDP, historically high. This suggests that the economy requires substantial amounts of foreign investment to keep going, at a time when uncertainty would put such investment off (both by foreigners and locals’ overseas assets). Second the national debt is high, at over 80% of GDP, and there is still a fiscal deficit; though at 3% this is far from scary, there is not much margin for it to deteriorate into scary territory. Against this Britain’s national financial management, led by the Treasury and the Bank of England, is world class, prepared (unlike the government for Brexit negotiations) and with an excellent track record. British banks are also in much better shape than in 2008, adding to overall resilience. International financial flows are very mysterious, and it is hard to forecast safety or disaster.

The best thing to do from where I’m sitting, without high powered computer models, is to describe the danger signals, and keep a watchful eye. This means keeping an eye on some key statistics.

First there are share values. The FTSE100 is a darling of journalists, because it is so accessible. It also tells us not very much, since many of its components are multinationals and not really British. Last Friday was not a good day for share markets, but nothing out of the ordinary either. Today is also bad, with the more representative FTSE 250 falling by 4.6% in three hours (the 100 fell by an unremarkable 1.3%). If these sorts of falls persist, then that could be a wider sign of poor business confidence, which will affect all important investment. But for an asset based crisis it is real estate that is much more important, and this moves at a more sedate pace. Too early to tell there.

Next, there is the pound Sterling. This is much more important. A weak pound will feed through to inflation, for example in petrol prices. This could put pressure on the Bank of England to raise interest rates, which would have all sorts of nasty knock-on effects. But I think that risk is overdone in market commentary – it is very 20th Century. These days employers do not feel the need to match price rises with wage rates, which puts a cap on general inflation. In the recent crisis the Bank was able to ignore rises in consumer prices without risk. But it will mean the public faces a squeeze, which will reduce domestic demand. A second issue with the pound is any effect it has on investment; a weak Sterling will reduce the attractiveness of gilts (government bonds) as a safe haven asset.

The pound had a bad day on Friday, though that was partly because markets were so confident of a Remain victory. But is has continued its fall this morning; if this trend persists there is serious trouble ahead. But there is no sign that the pound’s troubles are affecting gilt prices; they have risen, as they are still regarded as a safe haven. If this continues the government stands a good chance of weathering the crisis. So far it is definitely a case of Don’t Panic.

Looking further ahead, there are two statistics to keep an eye on. One, inevitably, is GDP. The stats here are wobbly and don’t deserve the attention they get. But if growth slows or even goes into reverse, then the government will be under pressure either to extend austerity or to provide Keynesian stimulus, depending on its reading of the situation. The second, more relevant , statistic is tax collections. If this is under pressure then there is a risk of government finances spiralling out of control.

The first question is when the short term reaction to the vote overwhelms the country’s financial system, causing emergency measures. Based on the gilt yields this looks highly unlikely, even in today’s febrile conditions. The more important question is whether, having survived the immediate storm, the financial system is holed below the waterline, to use a nautical metaphor. When a ship is holed below the waterline, it sails serenely on, with only fairly minor signs of damage. But it is taking in water that may cause it to keel over later, if it does not make to safety in time. This was how the world financial system looked to me in 2007 – while many fund managers were saying that the crisis had passed. And the drying up of inward investment could make that metaphor appropriate to the British financial system now.

So my message is this. Don’t panic, but look at for small but significant signs of longer term trouble.

Afterthought

What I probably should have emphasized is that I think it is gilt yields/prices that are the critical statistic to watch. If these stay low (yields) or high (prices) than it indicates that the government can readily borrow Sterling, which gives it the scope to manage the financial situation. If they go in the opposite direction, then it could be a sign of a more serious crisis.

The Brexit paradox: its strongest argument is its least attractive

I originally posted this article on Friday 25 March, but there was a problem with either my web host or WordPress or some other technical factor, which mean that although the email was sent out, and it appeared to be published on my browser, the publication never actually happened. This is the second attempt.

I have been relatively quiet about the biggest issue in current British politics: the referendum on membership of the European Union. It’s not that I don’t care – it has defined my politics for well over 40 years. It’s a feeling of inadequacy that I can say much that will heard beyond the babble. When I started this blog in 2011 I posted prolifically on the referendum for electoral reform. All I was doing was cheering along a rather small band of the already committed. No serious debate was actually taking place over the merits of the reform. I don’t want to be just another pro-EU voice that is only heard by other pro-EU voices. Alas, the remains my likely fate.

Still, I do want to engage in serious discussion of the issues, beyond the polemic. That debate will mainly be with myself, no doubt, but it is better than nothing. In this post I will to look at the economic arguments. Life will clearly be harder outside the EU, but might not that actually be a good thing? It is, perhaps, the central paradox of the whole debate.

The most commonly heard economic arguments for leaving the EU are based on three themes: the taxes the country pays to the EU budget; the weight of EU regulations; and the economic problems and slow growth suffered by other EU countries. None of these stands up to close examination. The budget contributions are the price paid for access to the market, and are payable by non-members like Norway and Switzerland for access rights; any savings made post Brexit will be balanced by costs, such as tariffs payable on imports, and loss of exports. This is a hard calculation to make, but the contributions look like small change in the bigger picture for an economy, like the British one, that is so dependent on trade. The argument that a sweetheart trade deal can be secured easily because the country has a substantial trade deficit with the EU is nonsense. That deficit is largely with one country: Germany, and the deal has to be done with 26 others too. And Germany’s support of sanctions against Russia, which were very costly to it, shows that politics trumps economics anyway, in Germany as in all countries.

On regulation it is hard to believe that things wills be much different outside the EU; much regulation will stay in order that the country is able to export goods. Those that don’t will be replaced by home-grown regulations that will be approximately as onerous. Democracy and regulation go hand in hand, and Anglo-Saxon cultures are as prone to this tendency as any other. Just try to set up a hairdressing business in the US. If the Brexit campaigners talked about which regulations they want to throw in the bin (other then fictional ones like those specifying the shape of bananas, etc.) they would quickly provoke a backlash. What they generally mean is employee rights.

And the economic problems of the rest of the EU do not stop Britain from exporting to the rest of the world. After all, one of the most dynamic of the world’s exporting nations, Germany, is at the heart of the EU.

And yet. A while ago I heard an interview on the BBC Radio 4 Today programme with British businessman Peter Hargreaves (co-founder of financial adviser Hargreaves Lansdown, with whom I had many dealings when I worked in financial services). The Telegraph report is here. He spouted a lot of the usual nonsense, waving away concerns about disruption to trade and investment, and suggesting that relations with Commonwealth countries could substitute for those with our European neighbours. It is remarkable about how disciplined and on-message the disparate Leave campaign is, so early. But Mr Hargreaves went onto say something much more interesting. He suggested that life out of the EU would be more “bracing”, and that would stimulate British society to greater efforts that would make it more efficient. He wanted Britain to emulate Singapore after its breakaway from Malaysia.

It would be easy to poke fun at this. Singapore might be a paragon to Mr Hargreaves, but the country is subject to an authoritarian regime that puts British complaints about political correctness (and state paternalism) into the shade. It is also a city-state, without the complexities that a large hinterland brings. But. Think about that persistent trade deficit with the rest of the EU, which contributes an trade deficit. Since joining the EU the country has been living beyond its means. A strong pound, strong inward investment, and drawing down generations’ worth of foreign assets has given the country an illusion of economic success. There are no doubt many reasons for this: North Sea oil, the illusions brought about by global finance, loose fiscal policy after 2001, and so on. But being in the EU has surely contributed. It has anchored the country in a wider international system that makes imbalances easier to sustain; it has been most helpful in drawing in inward investment, a key factor in supplying the country with the foreign currency it needs to keep going. Life outside would surely be more bracing.

An interesting digression from this line of reasoning is how things might have been different if Britain had been part of the Euro, since so much of the economic illusion was sustained by a strong pound. A topic for another time, except that I must point out that the Euro was brought in too late to be of any use – the pound was already too high by then.

And so the best economic argument for Brexit is this: the EU is a comfort blanket that is preventing our political and economic elites from facing up to the country’s true predicament. Leaving the EU would provoke a necessary economic crisis, but this would head off an even deeper crisis down the road. Of course Remainers will hope that the deeper crisis can be headed off by British economic reform within the EU, while Leavers will hope that Brexit will have a delayed economic impact, allowing the crisis to be headed off.

But, of course, the Brexiters cannot sustain this line of argument in public. It is a hair shirt argument, and the wider public would rightly suppose that it would be them that would wear the shirt (the “necessary price”) and the various business elites that would scoop the benefits. In fact the line that life outside the EU would be “more bracing” was distinctly off-message for the Leavers – though the consistent refusal of Brexit campaigners to acknowledge any risk of economic cost or uncertainty is their least convincing line.

Nevertheless, we supporters of Britain’s future in the EU should pause and reflect. Our relationship with the rest of the EU is not quite right. That trade deficit is a worrying sign of weakness. Too much of our country is inward looking. The paradox is that membership of the EU makes that inward focus more sustainable – and yet it is precisely what makes it is easy for so many people to contemplate life outside.

Tax is the Budget gorilla

As a rule I hate clichés. I cringe whenever I hear about a “perfect storm”. But I have a soft spot for the gorilla in the room, who is sometimes an elephant. The huge thing, obvious to everybody, but which it is impolite to talk about. In responding to Britain’s annual (OK, twice yearly) Budget I’m looking at one of them.

Britain’s Budgets are political theatre staged by the Chancellor of the Exchequer, as our senior finance minister is known, annually, or whenever there is new government. There is also an Autumn Statement, which amounts nearly to the same thing. The whole exercise is a process of heavily manipulated speculation in advance, followed by a tumble of instant reaction. All this shows how news is the enemy of information. By the time facts are known, contextualised and properly analysed the news media have long since moved on. People who try to be a bit more serious, like me, are torn. By joining the circus of speculation and premature response we get more readers and more reaction. But this is often at the cost of saying anything that is worth saying. My compromise is not to respond until after I have read the reactions the morning after.

The Budget process seems particularly farcical at the moment. The government is trying to set out its plans over a five year period, and in particular over the five years of a parliament, which in both cases means up to 2020 at the moment. This means they depend on five year projections of the economy. These projections are produced independently of the Treasury by the Office of Budget Responsibility (OBR). Without the smoothing hand of political manipulation, the five year outlook is highly volatile. Last Autumn the OBR “found” £27 billion; a mere six months later they had “lost” £56 billion. I can’t offer much help about what is going on here, except to point out that economic forecasting is a dodgy business, and this sort of volatility simply shows the absence of manipulation. It is no basis upon which to carry out serious economic planning. And yet the government says that it is doing just that. Last Autumn it used the £27 billion windfall to relax its fiscal plans. This time it was forced to tighten up a little, plus deploy a few accounting tricks to pretend that it is on course to meet tis five year target to move the budget into surplus, even as interim targets fall by the wayside.

But nobody is convinced, and nobody cares. It is far too early to worry about 2020, with so many unknowns. The critical thing is the next year, and nobody disagrees much with the overall thrust of George Osborne’s strategy. The muddle is particularly noticeable on the left. They are trying to capitalise on the fact that the government is missing its short-term austerity targets, while at the same time condemning austerity. Since 2010, the government has taken a pragmatic, Keynesian stance to fiscal policy, while pretending that it is being austere. This means that the country’s fiscal deficit and levels of public debt are higher than pretty much any other major developed economy apart from Japan, having started the crisis in a much stronger position. That this has still meant dramatic cuts to public spending shows just how out of control the government finances had become under the previous government, as it pursued the illusory goal of Scandinavian public spending backed by US taxes. The left are still in denial about this.

So what did Mr Osborne do? Not much. There were promised tax cuts on personal allowances and higher rate thresholds. He failed to increase tax on petrol, even after petrol prices have fallen so far. There were cuts to company taxes and capital gains. I don’t approve of much of this, though many liberals do. But the impact will not be huge. He stepped up the ratchet on public spending, without being too specific, but pushing the hard decisions way into the future in the hope, no doubt, that the economy will come to the rescue. There were gimmicks and irrelevances aplenty, like a sugar tax, and pushing schools towards academy status, which I comment on in another post.

But here’s the problem. Constraining, never mind cutting, public spending is getting harder. Benefit cuts are causing anguish that even Conservative MPs feel; the ambitious idea for Universal Credit could yet collapse amid its technical problems. The attempt to drive efficiency savings in the NHS through ratcheting up financial pressure annually, a policy that predates 2010, has now collapsed. Hopes that the NHS can achieve substantial savings through re-engineering are vanishing. The ugly behemoth is unmanageable, and the reforms made by the Coalition aren’t helping. Outsourcing bits of it will not help. Meanwhile demand continues to rise. The government’s bid to reform schools finance requires a lot of extra money to placate the losers if it is not going to run into big problems. Social care is in crisis. Attempts to curb the defence budget have collapsed.

Behind this can be spied a strategic problem. Or, rather, two. The first is a growing proportion of older people, with an added demand for public pensions, and health and social care support, while dropping out of the tax base. The second is that the benefits of a modern economy are increasingly going to the richest, leaving many behind without adequate savings, and putting pressure on the social security safety net. Rising property prices are exacerbating this, burdening many younger people with huge rents and no prospect of joining the property bonanza. I could add a number of further issues which suggest that the days of easy economic growth are over.

So demand for public services is rising, but the tax base is shrinking, or at least stagnating. There is a substantial current account deficit, which limits the scope for creative government finance (like “people’s QE) we need lots of foreign currency to buy the all those foreign goods we depend on. There is really only one way out. Taxes will have to go up, and not just on the richest. That means the sacred trio of income tax, national insurance and VAT. But nobody talks about this. Not even the opposition parties.

And that is the gorilla.

Neither fish nor fowl, why I will oppose the economics motion at #ldconf

This weekend the Liberal Democrats meet for their Spring Conference. To most observers of the political scene, this is an irrelevance. But with the growing gap between Labour members and the general voting public, and the Conservative Party riven by splits on Europe, who knows what opportunities might arrise for the party? I still care about it, anyway.

The party is rebuilding itself after the five year car crash of coalition government ended last year with it being reduced to near irrelevance in the House of Commons. And that followed five years of rather gentler decline after its peak year of 2005. The party conferences are an opportunity for members and leaders to decide what the revitalised party stands for.

One complaint after last year’s meltdown was that the party was weak on economic policy, and so let others set the agenda. No doubt that motivated the submission of a motion on the economy as the first item of policy business on Saturday with just an hour’s debate. Alas the motion plumbs the depths of awfulness.

I can’t find a neat link to it, so I will reproduce it here in full below, so you can judge for yourself. But with its 10 whinges about the current situation, and 15 proposals, I’m not sure I would recommend a close read. It is mostly unobjectionable. It has some worthy ideas, and some airy aspirations. Item 11 od the 15 reads: “Addressing inequality through a renewed commitment across Government and society to analyse and address Beveridge’s Five Giants in modern society.”

In some contexts a list of 15 rather disconnected policy ideas is not a bad idea for a policy motion – for example if the party was planning to negotiate a coalition programme from a position of strength. This is hardly the context now, and even then it fails. Just what would you do with a commitment to tackle the Five Giants in a coalition negotiation? Instead all such a long list of vague ideas serves is to offend people whose own hobby horses are left out of the 15, or are underrepresented, or given too low a prominence.

What the party actually needs from a debate on economics at this stage in the political cycle either of two things.

The first thing it could do is set out a very limited number of general themes, around which to hang more detailed policies. These need to display a bit of vision, and show what the party is all about. I suggested a few last year: green growth, small is beautiful (or greater diversity and innovation, if you will), problem-solving public services and addressing inequalities and imbalances. It would not be hard to do better than that, and any debate would say something about the party’s values and campaigning priorities. I can find no such clear general themes in the motion. Worse, I am rather shocked to see so few references to environmental sustainability in a party that used to pride itself on environmental consciousness – that alone is reason enough to vote the motion down.

The second thing it could do is develop a particular economic idea or solution to a specific economic problem. There are plenty of places where this needs to be done: investing for green growth; tackling the housing crisis; free but fair trade; taxing businesses. Or the role of fiscal policy in economic management, though the chances of getting a rational debate on that area in a left of centre political party are slim. This is actually where the heavy lifting needs to be done, and where the Lib Dems can make a substantive contribution to the wider political debate on economics. The real world of democratic politics is evolutionary; revolutions fail. What is needed is a series of practical changes, each of which will works on its own merits, and which collectively will amount to radical change. The motion does point to some specifics, but each of its 15 proposals needs to be picked apart in a debate of its own. Instead we have a series of vague and useless commitments.

And as a result the motion is a complete waste of time. Much hope seems to be being placed on amendments. But unless these are allowed to replace the motion with an entirely new one, which would be an abuse of process, I can’t see how it can either be turned into a general vision or a specific economic proposal. It is neither fish nor fowl. The best thing to do with it is to throw it out and start again.

Conference re-asserts the Liberal Democrats’ continuing commitment to sound public finances, social justice, an open economy in an open society, and the principle of free markets whenever possible with intervention where necessary by an enabling state.

Conference notes:

a) The Liberal Democrats’ effective record in Government in stabilising the public finances and major contributions in the fields of apprenticeships, banking regulation, the British Business Bank, the Green Investment Bank and the promotion of innovation through the Catapult network.

b) The fragile nature of economic recovery following the 2008 crash, evidenced by interest rates which are historically low and continued Eurozone uncertainty.

c) The growth of house prices carrying the threat of a price bubble and subsequent crash.

d) The Chancellor’s unhelpful and arbitrary re-definition of the deficit, doubling the total by including capital spending, in his attempt to justify Tory spending cuts.

e) The medium-term risk to the UK economy posed by increasing and unsustainable private and household debt.

f) The threats to the UK economic prospects posed by Conservative approaches to UK membership of the European Union and immigration.

g) The International Monetary Fund’s advice to reduce debt through growth not cuts.

h) The UK economy’s over-dependence on London and the South-East.

i) The UK’s bad record in allowing the growth of an increasing number of young people with low levels of education, training and aspiration.

j) Growing inequalities in wealth and income, coupled with unfair and regressive action against the poorest people in the country, now exacerbated by the assault on welfare spending.

Conference calls for effective measures to support and grow the UK economy, including by many established Liberal Democrat policies:

1. Increased investment, both directly by Government financed by public borrowing, and stimulated by Government, particularly in affordable housing including social housing and infrastructure to support balanced growth throughout the UK.

2. Support for planning reform, institutional lending to small builders and action by local authorities for planned development, including assembling land for auction.

3. Further measures to improve and regulate banking services by promoting efficient lending, particularly to small and medium-sized enterprises, encouragement of challenger banks and increased personal accountability.

4. Strengthening takeover legislation to protect the country’s science base.

5. Reversing cuts in the development of green energy and promoting investment in green business initiatives.

6. Further development of the Government’s industrial strategy, promoting co-operation and supply chain development in key sectors for the long-term.

7. Re-balancing the economy towards manufacturing industry and regions, based on the coherent and substantial devolution of political and financial power.

8. Further reform of corporate governance to encourage ‘long-termism’ and to discipline executive pay, including an employee role in determining executive pay.

9. Renewed emphasis on vocational education and training, particularly through effective apprenticeships and especially higher-degree level and engineering and construction apprenticeships.

10. Coherent efforts across Government Departments to address the needs of young people who are excluded from the labour market and participation in wider society.

11. Addressing inequality through a renewed commitment across Government and society to analyse and address Beveridge’s Five Giants in modern society.

12. Investigating sustainable ways of funding universal services, including a cross-party, cross-society settlement on funding health and social care.

13. A new commitment to taxing unearned wealth, including Land Value Taxation.

14. Measures to dampen the growth of asset bubbles in opposition to Conservative approaches which tend to increase that growth.

15. Support for more diverse ownership models including worker ownership, social enterprise, mutuality and co-operation.

Economics essay 2: why global trade is going into reverse

Now for the second essay on economics that I wrote in 2008. The topic is trade, and it investigates the theory of trade between developed and developing nations. It turns out that standard trade theory, based on comparative advantage, works rather well here. But it contains a prediction that goes largely unremarked. Apart from Paul Samuelson (in 2004) I haven’t seen anybody else raise the point. And yet it does much to explain what is going on in the world now, especially between Britain and China.

The theory of comparative advantage is part of what Americans call “Economics 101”: basic first year economics. It explains how mutual trade can benefit economies even when one is manifestly more efficient than the other. But generally this wonderful piece of logic, made famous two centuries ago by David Ricardo, fails to advance much beyond Economics 101. Modern economists have not found ways of using it to make concrete predictions. Attempts to make the theory more specific, for example by relating it to availability of factors of production (like land, capital, etc.) have come to not much. Instead the idea is used to give a warm glow to the idea of trade being a Good Thing, and the basis of patronising comments to non-economists advocating protectionism, while economists get on with the day job without touching it.

That is a pity, because the theory repays more examination. Its central idea is that gains from trade are based on opportunity costs of the various products in an economy, or comparative advantage – that is how much of one product you have to forgo to produce a given quantity of another. The corollary is that where the differences in opportunity cost are minimal, the gains from trade are likewise minimal. As different economies converge, the less incentive there is to trade.

In fact trade does take place between similar economies, but it is driven by other factors, such as economies of scale, and is quite sensitive to transport costs. But the theory of comparative advantage does explain trade between developed and emerging economies rather well. These economies are self evidently very different from each other, and gains may be made between countries on opposite sides of the globe. But as emerging economies develop; they converge with developed economies. What happens then?

To explore this I created a simple mathematical model. I divided the economy into four sectors: agriculture, where productivity grows, but which is not traded; services, also not traded, but where no productivity changes happen; and two types of goods, high and low tech, which are tradable and where productivity changes at differing rates. I looked at three stages of development. The first, undeveloped stage has a huge and inefficient agriculture sector. In the second, intermediate, stage, low tech manufacturing has got going. In the final developed economy stage, productivity has advanced in all sectors apart from trade, but especially in high tech goods.

I then looked at how trade would work between the developed and undeveloped economy. There was no major impact, but the undeveloped economy would buy all its high tech goods from the developed one, in exchange for low tech goods. The undeveloped economy’s currency traded at well below purchasing power parity. Next I considered what would happen if the undeveloped economy moved to the intermediate stage. Now trade becomes much more important to both economies; once again the intermediate economy buys all its high tech goods from the developed one, in exchange for low tech goods. But the developed economy imports a high proportion of its low tech goods. Both sides gain substantially.

But what happens as the economies converge further? The trade disappears; the developing economy supplies an increasing proportion of its high tech needs, and exports fewer low tech goods, substituting productivity gains for gains from trade. The developed economy has to supply its own low tech goods again, and loses gains from trade. It is worse off.

All this models what has been happening between Britain and China quite well. Nothing much at first, but as China’s agriculture became more efficient, and so its low tech manufacturing could grow, then trade ballooned, with gains to both sides. This took place in the 1990s and early 2000s. The price of manufactured goods in Britain dropped because of cheap imports, allowing other goods and services, and pay, to grow at a healthy 4% per annum or so, while keeping overall inflation at about 2%; the components of the inflation statistics became very revealing. A lot of the economic growth that took place in Britain in this period was surely driven by this, rather than advancing productivity.

But even in 2008 I could see that the party was coming to an end. Chinese costs were rising; they were moving increasingly into high tech areas. It has become harder for Britain to compete for high tech goods, but easier to repatriate lower tech manufacturing and services. This latter has been good for British jobs, but not for living standards, as what is being repatriated has lower productivity. Volumes of trade have fallen – though it is a complex affair so cause and effect are hard to prove.

Won’t China be replaced by other countries? Japan started the trend after all, to be replaced by the “Asian Tigers” (South Korea, Taiwan, etc.), before China entered the picture. There are emerging economies that are taking up some of the slack – Vietnam and Bangladesh, perhaps. Africa has huge scale. But not only are many of these economies slow to transition to the intermediate stage, with a strong export manufacturing base, but the sheer scale of China changes things. The emerging economies are as likely to trade with China (and India, whose emergence takes a different but parallel path) as they are with the developed world. And perhaps low tech is becoming more high tech too – making it hard for the newly emerging economies to find enough of scale where they have a comparative advantage.

And this is yet another reason why developed economies appear to be stagnating, and why much of the growth that took place before the crash of 2008 was unsustainable. Trade has a reverse gear that is nothing to do with protectionism and ignorance of economic theory. Economic theory predicts it.

Economics essay 1: economic growth will come to an end naturally

Last week I was looking for something I had written a few years ago, and I found two essays that I had written in 2008. I was trying to clarify my thinking on economics, using the device of explaining the discipline to a non-economist. They were meant to be the start of a longer series, but alas the rest of life intruded. I have decided to publish them through this blog, and to try and extend the series.

My blog posts are long enough (over 1,000 words a piece, usually), but they are not long enough to develop thinking properly. And the pressure to get two posts out a week is not conducive to deep thought either, as the rest of my life is proving quite active, even though I am now retired. These essays are longer (the first just under 2,500 words), and certainly more considered.

Both of the essays developed ideas that I have used in my blogging since. The first is that there is a natural limit to economic growth – which I am now convinced we are reaching. The second looks at trade, and especially that between developed and developing nations – and why this leads to gains that are then reversed in developed economies. A further feature of the essays is that they frame economic ideas in a historical, or evolutionary, context. One thing leads to another and society changes. This is a break from the idea of a static equilibrium that dominates much economic thought. Economists even try to give a static quality to dynamic concepts, like growth and productivity change, by treating them as constants. Sometimes they produce data series of 200 years and more, as if to suggest that nothing really changes.

I wrote the essays just after I finished my degree in Economics at UCL as a mature student. But it was before the collapse of Lehman Brothers precipitated what we now understand as the Financial Crash, though it had been clear from 2007 that the world’s financial system was teetering on the brink.

I have edited the essays (a job not yet finished for the second one) so as to correct mistakes and clarify language – but I have avoided a rewrite, even though I would write differently now. Partly this is to preserve authenticity; mainly because a rewrite would take much longer. What you read is how I saw things then. I will use the covering blog post to offer any new insights.

So what of the first essay: Wealth, wellbeing and growth? This explores the idea that economic growth might come to a end simply through the freely made choices of the people. This is not a line of thinking that I can remember any modern economist trying to develop, although it was foreshadowed, as so much in modern economics is, by Maynard Keynes.

This idea follows from four observations: that consumption for personal needs will reach saturation; that productivity gains allow increased consumption of things, but cannot change human content, and so make their products less attractive; that leisure holds a compelling attraction to those who can afford it; and that the quest for status is a zero-sum game.

Increasingly we want things that economic growth cannot deliver in greater quantities: land, leisure and fame. Technology change is not necessarily leading to increased productivity, while still delivering things that we want. Wellbeing may advance without growth. Though many in our society clearly need to consume more than they do – we still have poverty – that does not imply that increased consumption for everybody, even as an average, is the way forward people will choose. Economists are quite unready for this.

So what has changed since 2008? The crash may suggest the unsustainability of ever increasing consumption, especially if it fuelled by debt. I hint at this idea without developing it. Since then growth has become a political obsession – so the idea that it might not be considered to be an outright good has even less currency. The Greens have dropped their low growth rhetoric and replaced it with something that is quite ambiguous. The left has chosen “austerity” as top of their most hated abstract nouns, on the grounds that it is an attack on growth, though also on grounds of another abstract idea: “social justice”.

So we have a long way to go before my idea will get any political traction. And yet the idea of secular stagnation, is gaining ground. This is seen as a Bad Thing, of course, but its roots can be traced to as far back as the 1990s. This is the idea that there is a structural excess of savings over investment in developed economies, which undermines growth – which is only sustained, by ever increasing cycles of debt growth and asset price bubbles. I think the ideas that I am suggesting in the essay are part, even most, of the explanation for secular stagnation.

There are some twists, though. Inequality may be an important factor in the process of saturation of consumption – a growing share of income is going to a rich elite, who are unable to spend it. This may imply that a more efficient distribution of wealth would increase consumption and lead to growth. But only up to a point, surely.

There clearly is a dark side to my idea. Demand for tax-funded services is voracious (hence the anger of some against “austerity”) – but what is to be taxed in a low-growth world? And the addiction of our economies to debt requires growth to feed it; it will not be broken without a lot of social stress.

But that is the way the world is heading – and it is as well that we think the implications through.

Why do governments follow austerity when orthodox economists advise against it?

It’s by turns annoying and amusing: the way people on the left complain that orthodox economics has gone off the rails, and that we need fresh thinking to inform government policies. Apart from coming up with a lot of age-old tropes that economic models do not mimic real behaviour, or take account of information asymmetries, the main item of evidence is the persistance of austerity policies in the developed world.

But the main critics of austerity turn out to be…. orthodox economists. People like Joe Stiglitz, Paul Krugman and Martin Wolf. And newspapers struggle to find economists to make the case for the defence. The Financial Times often resorts to Niall Ferguson, who is a historian, not an economist, and no match for a Nobel laureate like Mr Krugman. The British Labour party is even roping in economics professors to bolster its economic credibility.

In fact there is a brand of orthodox pro-austerity economists. These are the old “supply-siders” from such institutions as the Chicago Business School, who developed a line of “neoclassical” economics, and rebelled against what was once the Keynesian orthodoxy. This branch of thinking grew out to the economic crisis of the 1970s, but proved utterly useless when the crisis of 2007/08 hit. Neoclassical economists pipe up here and there in America, but are mostly silent, their credibility shot-through. That leaves the field nearly unchallenged for the neo-Keynesians – at least far as the public debate in newspaper columns is concerned, in Britain, anyway.

Which leaves us with a mystery. Why are governments, from Europe to America (though not Japan, interestingly), ignoring the orthodox economists? Two explanations are usually offered by their critics. One is rank incompetence or wilful blindness. The other is a political agenda that austerity plays to, usually involving making the rich richer. Neither explanation stands up to close examination.

I am wary of accusations of incompetence, especially when made about clearly intelligent people, such as most politicians and technocrats involved in government finance. This is something I learnt as a history undergraduate (I studied both science and history in my original undergraduate incarnation, long before my study of economics as a mature student). Such accusations are bandied about freely down the ages, but never stand up to scrutiny. Mostly the wilful blindness comes from the people making the accusation, who cannot entertain the idea that there is a rival point of view to their own. Modern economic policy is no exception.

The political agenda is a bit more plausible. Perhaps governments are in hoc to big business interests and those of the wealthy? But if the last 150 years of history has taught us anything, it is that if poorer members of society are prospering, the rich will prosper also, and be left in peace. This is even more true of big corporate interests than anybody else. It is harder to make money in a stagnant economy. Those malign influences are there in politics, but their effects are altogether more subtle than doing down poor people to help line the pockets of the rich.

Sensing that these explanations don’t work, many on the left build up an idea of “neoliberalism”. This is a philosophy based on the old supply-side or neoclassical economics that may be waning in academic economics, but still holds a grip on the lesser mortals who staff finance ministries and banks, and other parts of the “elite”. But this too is inadequate as an explanation. Certainly it is possible to identify a series of beliefs and biases amongst policymakers that equate to economic liberalism. But they do not explain austerity as a macroeconomic policy. And besides, we need to understand why the hold of these beliefs is so strong. Clearly some on the left think that an outdated economic orthodoxy is to blame. But surely such theoretical constructs cannot by themselves have such a grip on so many intelligent and practical minds?

Instead of a conflict between different types of theory, what is really going on is a conflict between theory and practice. The theoreticians may be gung-ho about fiscal and monetary stimulus, but the people who implement policy are acutely aware of the practical problems and risks. There are three particular practical issues about which the theoreticians are dismissive, but which weigh heavily on the practical types: economic efficiency; public investment; and financial markets.

First take economic efficiency. Pretty much everybody agrees that, ultimately, living standards depend on economic efficiency, or productivity. This piece of orthodoxy could be challenged, but that is not what most on the left mean (traditional Greens being the exception, along with liberal voices in the wilderness like mine) when they call for fresh thinking. They see slow economic growth as a sign of failure as much as any conservative does; and that ultimately is based on productivity. But economic efficiency is hard work politically. Both businesses and workers like to protect their patches with taxes, government agencies and regulations that keep the winds of change at bay. This is especially the case in Europe and Japan. And yet, in order to achieve long-term growth, these vested interested must be tackled, and reforms enacted. This has been shown in countless contexts in both developed and developing world. Mostly reforms have an economically liberal character – but only because this approach genuinely unlocks long-term efficiency. Far-sighted politicians and officials want to use every possible chance to advance reforms. That includes the pressures created by economic hard times. Theoretical economists might suggest that boom years are the best time to push through reforms, or that reforms can be covered by macroeconomic leniency. Politicians know that the opposite is the case – it too difficult to muster the political imperative in easy times, or if short-term macroeconomic policies take the heat off.

Reform and austerity are not necessarily the same thing, but they almost always are. This debate, of course, dominates discourse in the Euro zone, where economic hardship is concentrated in less efficient economies. Critics of austerity there offer no way forward for improved efficiency, beyond the hope that public infrastructure investment will deliver the growth they seek.

Which brings us to the difficulties of public investment. To theoretical economists this is the magic bullet. Public investment in infrastructure both yields gains to long-term efficiency, and a short term fiscal stimulus. The economists are exasperated that so few governments seem to follow their advice. And yet public investment is a graveyard of roads to nowhere and white elephants. When the imperative to invest is political, the choice of project becomes political too. It is very hard to make sensible choices. China was much lauded for its infrastructure investment programme following the crash. This has now turned into a major headache, as so much of the money was wasted on empty cities and useless infrastructure. Something similar happened in Japan in the 1990s. Finance ministry officials are rightly wary.

And then there are the financial markets. If I’ve heard one economist here in Britain suggest that now is a fabulous time for the government to borrow, or even “print”, money, I’ve heard it from a hundred. With so much demand for government bonds in the markets, and inflation looking mortally wounded, just what are you worrying about? But none of these economists work at the sharp end of government finance. If they did, such sanguinity would remind them of the sort of thinking that got the world’s banks into the disaster in the first place: a reckless confidence that markets would behave in future as they do now.

Alas life is much more complicated than that. Grounds for confidence in the financial markets is stronger in some places than others. Japan has a massive export industry that sees to all its foreign currency needs, so that the state can borrow and even print the Yen with reasonable confidence. Which is what it has been doing, in prodigious quantities, for the last two decades, although to little apparent effect. The US is another country that can feel reasonably secure, even though its balance of trade is less benign than Japan’s. The dollar is the world’s de facto reserve currency. The United Kingdom, however, shares neither of these strengths. It needs to draw on overseas institutions and businesses, and its own private sector, in order to finance its significant current account and trade imbalances. This is not a problem that printing the Pound can help with. The state has been extraordinarily adept at handling this risk over the last few decades. But that is because of the conservatism that is currently attracting so much criticism.

To me the theoretical economists, the practical policymakers, and most of their leftist critics are all trapped by an orthodox way of looking at the world through economic aggregate statistics. This means that they are failing to take on the deeper problems that society faces: economic and environmental sustainability, alienation, and the gravitation of wealth to successful people and places. That has very little to do with the politics of austerity. People on the left who call for fresh thinking should be careful what they wish for.