Paul Krugman – Page 2 – thinking liberal

Why Paul Krugman is wrong

In today’s FT the economists Paul Krugman and Richard Layard (of the LSE, famous for his work on the economics of happiness) publish an article A manifesto for economic sense calling for looser fiscal policy around the world. Being in the FT it’s behind a paywall (though I have shared the article on Facebook). But the simplicity and clarity of their argument make it a particularly good pace to discuss the difficult issues of economic policy as the economic crisis rumbles on.

Back in 2005 I was contemplating taking an Economics degree, with little formal background in the subject. I asked a tutor at the university (UCL) on their advice for background reading and he said “Anything by Paul Krugman”. The Professor at Princeton, who subsequently won the Nobel Prize, was famous for the clarity of his writing on economics. I also discovered, as I devoured anything by him I could find, that he was not a shrinking violet on the subject of US politics – passionately attacking the Republican regime of George Bush. Now he is a crusader against “austerity” – the focus of governments on healthy finances even as recession stalks the world. He recently visited London, and appeared on Newsnight. I didn’t see him, but I am told he made mincemeat of his opponents – and I’m not surprised.

As I took my degree at UCL I read more of Professor Krugman’s work, now in academic papers and discussions, rather than the more accessible stuff I read read before. The clarity remained – but he came over as a bit wild. I remember in particular one discussion where he became obsessed with the idea that Japan needed to stoke up inflation to get its economy out of the doldrums. His wild suggestions for doing so seemed to leave his fellow economists quite exasperated. Ever since I have viewed his opinions as entertaining, but liable to be impractical, and in the end very unhelpful. So it is this time.

The article (not very long) starts its main line of argument by talking about the causes of the crisis:

The causes. Many policy makers insist that the crisis was caused by irresponsible public borrowing. With very few exceptions – such as Greece – this is false. Instead, the conditions for the crisis were created by excessive private sector borrowing and lending, including by over-leveraged banks. The bursting of this bubble led to large falls in output and thus in tax revenue. Today’s government deficits are a consequence of the crisis, not a cause.

I think it is highly significant that the authors throw this in so early. It implies, without actually saying so, that pre-crisis government expenditure in most developed economies was perfectly sustainable, if that pesky crisis hadn’t caused a dip in tax revenues. It is perfectly true that government debt was not a major problem before the crisis, which was caused by excessive private sector debt. The trouble is that the boom years gave us false expectations as to what the sustainable levels of tax revenues were. A large part of the dip is permanent, not temporary. So substantial cuts will have to be made at some point to bring government debt under control. It isn’t just a question of waiting for the economy to bounce back (in the UK, US and southern Europe, anyway).

The authors then point out that the crisis is caused by a collapse in private demand – and that it makes sense to make up the shortfall in demand by extra government expenditure until private sector confidence returns. A failure to act means that unemployment becomes endemic and difficult to put right later. They point out that monetary policy cannot take up the strain. They say that there must be a medium term plan to bring government deficits under control – but that it must not be front-loaded. I have no disagreement with any of this. Quite a few people think that looser monetary policy would help – but I agree with the authors on this (which I will say more on in a future post).

Where I differ is that I think what they suggest is exactly what governments are now doing, in the UK and US anyway. In nominal terms government expenditure has not been cut. The private sector is slowly taking up the slack. Governments may be talking austerity, to prepare the ground for the real cuts that are absolutely necessary in the medium term, but they are not practising what they preach.

The article concludes by trying to debunk two typical counterarguments to further stimulus. First is that financial markets would lose confidence and refuse to keep funding government debt. They point out that there is no sign of this in the UK or the US, where government bonds are at record low yields. They also say that there is no actual evidence that budget cuts can generate growth. On the contrary, they suggest (though don’t quite spell out) that looser fiscal policy will help restore confidence and get the private sector moving again, which would allow the deficits to be brought under control. The trouble, of course, with using past evidence to prove a point is that the current situation is unprecedented. And the global financial markets are quite unstable; who is to say that UK and US bond markets aren’t in their very own bubble that could burst very suddenly. The absolute levels of deficit, and, increasingly, overall debt are becoming so alarming that anything is possible. And what if the private sector remained sceptical in face of government stimulus?

Finally they tackle the argument that stimulus cannot work because there are structural constraints. In other words, the pre crisis economy was so unbalanced that there is in fact little spare capacity – so that a stimulus would run into trouble very quickly, leading to inflation or a currency crisis. If this were so, they say, we would see more parts of the economy at full strength. Here there may be a difference between the UK and the US. In the UK there are indeed a few signs of trouble. Inflation has been much more persistent than predicted, though admittedly not through wage rises. Export businesses complain of a lack of suitably skilled staff.

Straws in the wind perhaps. But the pre-crisis economy clearly was unbalanced, especially in the UK. Public service employment was clearly too high, and cannot be afforded at its current strength on any realistic level of taxation. Also too much of the economy is spent taking care of ultra-rich bankers and foreign exiles – whose numbers and wealth we cannot or should not expect to grow. And we still need to adapt to a lower energy economy. I can’t prove that the authors are wrong – but there is enough reason for caution.

The authors make much of not repeating the mistakes of the 1930s. But that was a very different world for two important, and related, reasons. First there was a ready solution at hand: the expansion of manufacturing industry with an abundance of good low skilled jobs. It took the war to unlock this, with the manufacture of armaments and transport, but war production could be converted to civilian use with surprising ease – as there was massive untapped demand for cars, fridges and other manufactured goods. Second we were much poorer then. Starvation was a real problem for the unemployed and poor, and the destruction of wellbeing flowing from depression was horrific. Now we define poverty as lack of access to television and mobile phones. The hardship is much less – and there is less untapped demand. Technology has put paid to the number and quality of unskilled jobs.

That bespeaks caution – something that the manifesto economic sense disregards. There is a case for some sensible investment projects – including the right sort of housing in the UK. But temporary tax cuts would be reckless, and stopping public sector cuts irresponsible.

George Osborne, Ed Balls and the confidence fairy

Paul Krugman, the economics Nobel laureate and New York Times columnist, likes to talk of the “confidence fairy”. It is a critique of right-wing “supply side” economists, who advocate cutting back on taxes and public expenditure and reducing government regulation. These counter the criticism that such policies suck demand out of the economy and cause unemployment with the idea that confidence in the soundness of the government’s policies would boost business investment and consumption, and so create jobs. But such beliefs have no more substance that a belief in fairies.

Mr Krugman believes in solid government management of aggregate demand of a type that is often called “Keynesianism”. He was bitterly critical of the Obama government for not trying to enact a much bigger stimulus programme in 2008, at a time when the usual criticism was that he was spending to much. These same arguments are emerging in the UK between the Chancellor of the Exchequer George Osborne and his Labour Shadow Ed Balls.

To be fair, Mr Osborne and his supporters, especially the Lib Dem ones, never made much use of the confidence fairy in the sense that Professor Krugman uses it. The confidence they that they had in mind in supporting austerity was that of investors in government bonds, and the scary consequences of losing it. But ultimately Mr Osborne does believe that business and consumer confidence will provide the economic growth and employment he seeks. But what fewer people understand is that the policies advocated by Mr Balls and Professor Krugman require the confidence fairy too.

Let us consider the logic of the “Keynesian” stimulus. Cut VAT as Mr Balls suggests and put this money in consumers’ pockets, who go out and spend it, creating jobs, which create further demand. The Keynesian multiplier (no need for quotation marks here) does its stuff and £10bn of government stimulus might increase total demand in the economy by perhaps £20bn in a year. But then what? The extra demand has helped offset the cost (so the £10bn direct cost has been reduced to perhaps £6bn), but the national debt has still gone up. But growth drops back to zero (or worse) unless there is yet another stimulus package of yet more tax cuts or government spending programmes. To the extent that these measures are temporary (such as the temporary tax cuts advocated by Mr Balls, or the job programmes and extensions to unemployment benefit favoured by Professor Krugman) then the whole process goes into reverse, multiplier and all. And if the programmes aren’t temporary, the government structural deficit has just got a lot bigger. Unless the confidence fairy waves her magic wand.

And it is this boost in confidence that lies behind the case for government stimulus. It is reinforced by the metaphors used to describe it, such as “kick-start”, “getting the economy moving” or the word “stimulus” itself. A catalyst that improves confidence and hence gets businesses to invest and consumers spending more and saving less. And the results would indeed be magical. By spending and borrowing more you would reduce borrowings in the medium term by more than a strategy based on austerity. But without the fairy it works no more than the supply-side policies do. The problem is deferred and made worse, not solved.

So can such a stimulus boost confidence? In the right circumstances it certainly could, such as those induced by a temporary external shock, perhaps literally as in an earthquake (one of the reasons why earthquakes seem to do such little damage to an advanced economy). And here there is a genuine divergence of view. Mr Balls, who perfectly literate economically, does not believe that the British economy pre crisis was fundamentally unsustainable, and so thinks that it should be relatively easy to recover the lost ground. In economist-speak the British economy has plenty of spare capacity. A number of professional economists, including the FT’s Samuel Brittan, one of my heroes, seem to agree. But government economists and many others, apparently including the independent Office for Budget Responsibility, disagree. The previous economy was over dependent on debt spending by consumers and government and cheap imports, sustained by an overvalued exchange rate and financial support from abroad that can no longer be counted on. Mr Brittan thinks that the lower capacity of the economy is a self-fulfilling prophesy (i.e the longer the economy is depressed, the more difficult the recovery), but personally I think that the 2007 economy was in a very bad place, and was always going to take a long time to sort out.

But even if you don’t accept this, there is another problem. The extra confidence induced by a stimulus package can be overwhelmed by outside events, such as the Euro crisis. The UK economy, much more than the US one, is dependent on the world economy and is open to such shocks. Right now looks the wrong time to bet on a calm world economy.

Time for Plan B?

Predictably, the heat is mounting on the British government to soften its fiscal policy in light of weak economic growth. Today the new IMF chief Christine Lagarde seems to be adding to the pressure, even if she wasn’t explicit. The code for changing this policy is referred to by political types as “Plan B”. I am now convinced that some sort of Plan B may now be a good idea – but it would not take the form that a lot of Plan B advocates, especially the Labour opposition propose.

First, why? I have been progressively convinced by the FT’s economics editor Martin Wolf. I have found him to be easily the most cogent commentator on the current economic situation, better than any number of economics Nobel Laureates or former members of the Bank of England monetary policy committee, who seem to think that their past glories can compensate for the shallowness of their analysis. Paul Krugman, Ken Rogoff, Joseph Stiglitz, to name a few, have disappointed somebody that has respected their weightier works; David Blanchflower has turned downright silly in order to widen his audience. Mr Wolf has been consistent, logical, and has gone further than most to try and understand all facets of the arguments.

The problem in the UK economy is not lack of consumer demand, since consumers are right to pay down debt as a priority right now. The problem is lack of business investment, and a weak world economy, and hence potential export markets. And excessively tight fiscal policy may send investment into a doom-loop, since so much depends on confidence. Add to that the fact that current levels of public expenditure are unsustainable, and the massive size of the public deficit, and you will understand that most versions of Plan B are unconvincing. Reducing the cuts simply creates problems for later, and builds up a false confidence in what this nation can afford. Cutting VAT temporarily, as advocated by Labour, addresses the wrong problem.

The answer must be to promote investment. As Mr Wolf points out (here but behind the FT paywall), there is a golden opportunity for the government to do so because its borrowing costs are so low. The trick is finding projects that deliver a convincing financial return; borrowing against such projects does not undermine the country’s finances. Unfortunately this is easier said than done. A lot of public projects make extravagant claims about their worth, but are in reality wasteful prestige initiatives – think of the Building Schools for the Future programme. Or else they turn out to be so badly managed that promised returns are never delivered – think of NHS IT, or Edinburgh trams, or anything undertaken by the Ministry of Defence.

There is no doubt some scope for increasing funding to standard public projects. But actually what needs to be done is to provide more support for medium sized and small businesses, especially growing ones. The banks are not stepping up to the plate, demanding ludicrous returns for their efforts. Surely there is scope for the government to beef up regional development funds and increase funding for institutions such as the Green Investment Bank. This will not open the floodgates to usher in an era of rapid growth. But surely it would help.

A brief guide to Keynesianism and the economic crisis

Hardly a day goes by without the dead British economist John Maynard Keynes being invoked, such as this article from this morning’s Independent. Generally it is the critics of austerity that use his name, although this article is more nuanced, blaming George Bush and Gordon Brown for getting us into this mess by ignoring Keynes’s prescriptions. And many more economists, including big names like Paul Krugman, use ideas that most people understand as “Keynesianism” even if they do not evoke the great man directly, rightly thinking it is better to appeal to logic and evidence rather than dead men, however great. Inevitably a lot get taken for granted in these arguments. For the benefit of amateur economists like me, in this long posting I want to explain and re-examine Keynesianism, in order to assess its relevance to the current crisis, especially here in the UK.

What do we mean by “Keynesianism”? It is the idea that government fiscal policy, public expenditure and taxes, should be used to counteract a deficiency in demand in the total economy. It originated with the insights of the great economist, and his reflections on the Great Depression of the 1930s. Its starting point is that a whole economy does not work like a household budget. It may be very sensible for a household to choose to spend less than it earns, but a whole economy cannot do this. Supply must equal demand; you cannot store more than a trivial amount of production from one period to the next. If across a whole economy more people want to spend less than they earn, in other words to save, then there isn’t enough demand to meet supply and the economy must shrink; people are put out of jobs and so on.

Not so fast. Things balance out of the net saving can be channelled into investment. Investment, in economics, refers to production for future benefit. This usually refers to business investment (machines to make future production more efficient) but can also refer things like building houses which are “consumed” over a long time period . But if savings are not matched by investment there is trouble.

The possibility of trading with another economy complicates the picture, of course. Net saving can be balanced out by net exports. But net exports across the world economy are zero, so this option isn’t available to everybody.

In classical economics there is no lasting mismatch between savings and investment, because markets balance the two out. If there is too much saving, then this stimulates the supply of investment opportunities, for example by reducing the rate of interest. Keynes’s great insight was to see that often this market mechanism doesn’t function properly, leading to prolonged unemployment. And unemployment is a waste; production lost forever. Much better to use this surplus labour inefficiently than not at all.

Extra spice is added to this logic by the idea of the multiplier effect. If, for example, you stimulated the economy by paying extra benefits, then the recipients of the benefit would go out and spend them, and the people receiving this spending will spend more in turn, creating further demand and so creating more work. The same logic applies in reverse; austerity tends to multiply itself too. This effect is probably what students remember best about Keynesianism. It gives the idea of Keynesian stimulus gravity defying properties – so that government spending on stimulus can pay for itself in extra taxes generated by multiplied demand (and the reverse, of course, with cuts being self-defeating).

Keynesians point to the Great Depression as an example of how things can go wrong, where excessive austerity turned a setback into a disaster, only rescued by the War (and what could be more wasteful than fighting a war?). Critics of this view, incidentally, point out that the primitive state of the world’s banking systems had a lot to with this disaster, and so you can’t really compare it to now.

After the war, demand management by governments using fiscal policy became pretty much the orthodoxy. But this went wrong in the 1970s, when a Keynesian response to the oil crisis simply led to rampant inflation, rather than reduced unemployment. What are the problems?

First of all, Keynesian stimulus can’t push an economy beyond the limits of its economic infrastructure. To do so simply creates inflation. After the oil crisis disaster, economists modified their ideas to take account of this, bringing in such ideas a as a “natural” level of unemployment, and giving a major role to monetary policy alongside fiscal policy. This set of ideas became “neo-Keynesianism” and the orthodoxy of the 2000s. It was what I was taught in my macro-economics course in 2005-08 at UCL.

A more subtle criticism is that fiscal stimulus is undermined by human behaviour. If people respond to extra money in their pockets by saving more, the stimulus effect evaporates. An idea of “Ricardian equivalence” has been developed to postulate that extra government spending would always be offset by extra saving, because people know it would lead to more tax, for which they must save. Responding to this, proponents tend to suggest stimulus to areas where this is less of a risk. For example, benefits to the hard up, rather than tax-breaks for the rich.

Another idea, in floating exchange rate economies like Britain’s, is known as the Mundell-Fleming effect, which predicts that fiscal stimulus simply causes the exchange rate to appreciate and crowds out exports (or is lost in imports). This idea is quite difficult to get a grip on, and anything to do with predicting exchange rates turns out to be impossible to prove. But it does offer an explanation of why the pound appreciated after British government’s stimulus programme following 2001. And the basic idea that fixed exchange rates undermine monetary policy while floating ones undermine fiscal policy has the undoubted merit of symmetry. So British austerity should be offset by a lower pound which stimulates exports. The first part of this prediction seems to be working, but the second is slow to come about, not least because so many of our usual trading partners are in crisis too.

But the strongest objections to Keynesians come from the so-called “Austrian” school, because its more famous advocates (Schumpeter and Hayek in particular) were born in Austria. This sees unemployment as a essential to a process of creative destruction, as inefficient and unwanted businesses go to the wall, to be replaced by better ones. Keynesian stimulus interferes with this process, in particular by leading to wasteful investment; any temporary relief is offset by longer term problems.

From within the neo-Keynesian camp there are also those who advocate the use of monetary policy to manage the business cycle, as being much more efficient and effective that fiscal policy. These seem to include the British Chancellor of the Exchequer, George Osborne.

So how to apply to the current economic crisis, and in particular to Britain? The first point is that the pre-crisis economy was built on false premises, with unsustainable borrowing and a property boom. It cannot be recreated by applying stimulus. Not everybody accepts this, but almost everybody without a political axe to grind does. The serious Keynesian argument is not about stimulus, but about the effects of austerity. Austerity policies are reducing demand, setting up a multiplier effect and causing pointless unemployment before the replacement jobs can be created.

It helps the Keynesians that there does not seem to be a big risk of inflation – or not wage inflation, anyway, which is the critical issue. This seems to be held in check by strong market forces, in the developed world at least. High price inflation in Britain is not matched by pay inflation, and it is much more about forcing Britons to accept a lower standard of living as a result of a lower pound and shortages of key raw materials.

Advocates of monetary policy are also in a weak position. It simply does not seem to be all that effective. Interest rates are rock bottom, and all quantitative easing seems to do is to keep asset prices at unrealistic levels.

Would extra saving undermine a looser fiscal policy? Britons are heavily indebted, after the borrowing binge. That might encourage them to save any stimulus money – but it also suggests that they can’t respond to lower income by borrowing more. Since we are talking about simply slowing a downward trajectory, the latter is the more relevant argument.

For me the most persuasive case for some kind of Keynesian influence on policy is made by the Financial Times’s Martin Wolf (behind the FT paywall). This goes back to first principles. Consumers are over indebted and need to spend more than they consume. Business confidence is low, which means that it is difficult to persuade businesses to invest. The potential for more exports (or less imports) is certainly there, but is limited because to many other economies are trying to play the same game. So we are exactly in danger of the doom loop of excess saving that Keynes worried about. The government’s massive deficit offsets these problems to a great extent, but reducing it too fast could well lead to excess unemployment.

But we don’t know. Austerity policies are stronger in rhetoric than practice. We can’t avoid major cuts to government services, so there is something to be said for getting them over with as quickly as practical. But there is also something to be said for having a “plan B” should unemployment start to escalate. But if the government had one, they wouldn’t tell us.

Cutting VAT is one idea, advocated by Labour Shadow Chancellor Ed Balls, since it is quite likely that it will stimulate some extra expenditure – though it is very unclear by how much. That is probably too much of a humiliating U-turn for the government. But it is a better idea than cutting the top rate of tax, advocated by some Conservatives, since that is unlikely to have much immediate effect on demand, even if it does have longer term benefits. Another idea is to ramp up investment projects – but it is very difficult to do this efficiently in the sort of quantities that would have a major impact on the overall economy. Personally I would favour a go-slow on benefit reform, which is where a lot of the cuts are focused, since mostly benefits get spent. Given how tricky this programme is already, it might happen anyway.

It would not be surprising if the government missed its deficit reduction target over the five year term. What will not be clear is whether this happens because Keynesian policies were applied (i.e. by slowing the pace of austerity) or because they weren’t (i.e. austerity strangling the economy at large). That won’t stop people being firmly on one side of the argument or the other.

Are the cuts necessary?

In the latest issue of Liberator magazine there is a letter from Peter Wrigley, a retired economics teacher who blogs as KeynesianLiberal. It’s actually about a review of David Laws’s book, but it contains a wonderful statement that summarises why some people think the the government’s strategy of cuts is wrong-headed. It is deeply flawed, but it strikes me how very little attempt is made to explain the UK’s economic plight beyond shallow sound bites. I will try make a small contribution to correcting this. But first, the quote from Mr Wrigley’s letter:

Distinguished economists and commentators, including David Blanchflower, Martin Wolf, Jospeh Stiglitz, Paul Krugman and William Keegan, have all pointed out that Britain’s debts are not historically high (in fact the debt-to-GDP ratio is quite modest by comparison with many similar economies); that Labour’s expenditure was reasonably prudent up to 2008, the year of the crisis; and that the current deficit is a result of falling revenues arising from the recession rather than profligate expenditure. Above all, we are not Greece, are not and never have been in danger from “the markets”, which are, after all, largely institutions within our own economy, including many pension funds, lending to their own government. Clearly, the “savage cuts” are far from a matter of necessity but are ideologically driven.

The interesting thing is that the facts cited in the statement are not widely out, if you separate them from the opinions. But the last sentence is a glaring non-sequitur. Of the various people he cites in support, all are critics of the government’s policy, but I have only followed the writings of two: Martin Wolf (of the FT) and Paul Krugman (Nobel Laureate and New York Times columnist). Mr Krugman has not made any commentary on the British economy to anything like the detail that Mr Wrigley implies, or not that I have seen – but he does seem to come to the same conclusion – that Britain’s austerity is madness and not an example for the US to follow. But it is the US that is his interest. Mr Wolf has given some excellent, clear analysis (such as this article, behind the paywall I am afraid). I don’t think he would describe Labour’s expenditure up to 2008 as “reasonably prudent”. He actually says of the deficit before the crisis struck:

The deficit was surely too large for that stage of the cycle, even on what was then thought about prospects. But it was not a disaster.

A quibble, perhaps, since coalition politicians certainly imply it was a disaster.

Britain’s debts are indeed not frighteningly large. Yet. But the same cannot be said about the deficit – i.e. the rate at which we are adding to the debt. Over 10% per annum will soon take the debt up to the 90% level where most commentators suggest it really starts to weigh the economy down. The frightening element is the estimate that 8% of the deficit is structural; in other words such a deficit won’t disappear as the economy bounces back. This is the point that Mr Wrigley appears not to have understood, or perhaps not to have accepted.

That 8% number is truly astonishing because it suggests that much of the economy pre-crisis was built on air, and has been lost never to return. We can’t just bounce back. Remarkable, but it isn’t seriously disputed. Certainly not by Labour’s last Chancellor, Alistair Darling, and not Mr Wolf either. I can’t speak for the other commentators. In a later post I will return to how this situation arose.

It will be necessary to close this deficit – and nobody denies that either. A lot of people are suggesting that the government is doing so too quickly and too aggressively (and I’m sure that goes for all the distinguished names cited). It hardly follows that the cuts “are far from a matter of necessity”. To understand the problem it is necessary to put aside the timing issue, and to ask how will the finances be put straight when they are eventually addressed. There are three ways: growth, taxes and cuts.

Let’s think about growth first. To claw back 8%, the economy has to grow by at least 16% (though 20% is probably more realistic). If we can get the economy to grow by about 4-5%pa this looks reasonably feasible, perhaps. But if you accept the view that there is not a lot of spare capacity, then a growth rate of 2.5% is more realistic, and this, or close to it, is already built into the government’s plans. The government can’t stimulate such high growth rates by increasing the deficit – because ultimately this growth must come from the productive part of the economy. The argument about austerity is about the government not making things worse, not about stimulating a boom.

So how about higher taxes? Many on the left hope that the UK can move to a more Scandinavian style of economy with perhaps 50% of income taken in taxes, rather than the typical 40% odd typical of the British economy. Many hope this can be done by just taxing the rich more. Actually it is hard to see how this last can be done, beyond what the government already has. Not much money can be made from corporate taxes, contrary to popular belief, because there just aren’t enough taxable profits around. The various soft targets postulated don’t look so soft closer up, and wouldn’t make enough difference anyway. It is a game of diminishing returns: the more you tax, the less incremental revenue you get – and there are costs to the wider economy. It gets worse, since if you actually succeed you become over-dependent on rich people and big corporations to fund government. There is clearly a problem that companies are making too much money, and that a lot of people are being paid too much; but taxing this inequality even further not a sustainable solution to the country’s fiscal problems – even if you think it is right to do anyway. To raise taxes sustainably you have to aim lower. At the “squeezed middle”. There are two problems. First that this may be economically inefficient, by reducing incentives to work; so you keep having to raise the bar. Second, and more certain, it is politically toxic. To say the least we do not have the necessary political consent across society.

Which leaves cuts as carrying the main burden. This seems to be what the last Labour government concluded. And if you are going to make big cuts, to public services, and to benefits, there is a lot to be said for getting on with it to let people get used to it and move on – rather than leave the Sword of Damocles dangling – and especially with public services.

But what if you think the government is cutting the deficit too quickly? The best thing to have done would have been to delay the increase to VAT. The second thing would be to delay cuts to benefits. But benefit cuts have been pretty limited so far, and may yet take place slower than planned. Perhaps other tax cuts might be considered. The logic of the public service cuts is powerful, I am afraid.

Which leaves with two questions. How did we get into this mess? And is the government right to move so quickly? More of that another day.