Thursday, 24 June 2010

Canada or Japan...?

A fascinating piece of journalism on the budget by Paul Mason and Jeremy Paxman on Newsnight last night.

Paul Mason showed a Treasury pie-chart of the factors producing growth in the economy for the last ten years, and then the same pie chart as a forecast for the budget period. In the budget forecast, the piece of the “pie” that previously represented “housing” is magically doubled to 20%, “investment” triples and, most bizarrely of all, the piece that represented “government spending” (about 25% of overall growth) has been replaced by a category called “exports”.

it’s here, at 25mins in to the programme;

In other words, the UK will grow by a growth in the housing market that is not yet evident in the figures or predictions, an investment boom (when banks are not lending and companies are not borrowing for investmemnt) and an export miracle that is not even a gren shoot in any economic model other than the governments.  There is absolutely no indication in any budget documents of how these changes will be achieved. And they are based on massive assumptions of changes in behaviour by individuals, companies and banks. Paul Mason made no attempt to explain it beyond saying that the government believed that Canada had used a similar model to get out of recession in the ’90s, but he looked as puzzled as I was watching him describe it……

The rest of the piece was a Paxman interview with a Japanese economist who said we were making exactly the same mistake they did in the 80s and they are only now coming out of recession…..”you don’t cut government spending when the private sector is deleveraging” were his words, and that is exactly what we are proposing to do…. he also mentioned an "economy in tailspin"...

TBH, it was quite frightening ....


  1. ”you don’t cut government spending when the private sector is deleveraging” were his words"

    He might be correct, but sadly nobody knows. Our dilemma is that either (i) we believe the neo-Keynesians, don't cut public expenditure, and risk a gilt strike combined with stagflation, or (ii) we believe the neo-monetarists, cut public expenditure, but risk a nasty recession.

    I support (ii), but the danger of recession is certainly there. This dilemma isn't new, though. For example, the Americans tried (ii) after the Wall Street Crash, and the resultant deflation caused their Depression to be far worse than the UK's. The second example would be Germany, which tried to avoid recession in the early 1920s by quantitative easing, with the result being hyperinflation.

  2. It's not about either choice.

    Labour had already factored in £70 billions of cuts, which would, according to the OBR, have substantially reduced the deficit by 2015 ("substantially reduce" was the Tories formula duriing the election).

    The ConDems have added another £40 billion of cuts. That means;

    a. the risk you point out

    b. unnecessary cuts in public services.

    So that, even if we do not go into a double dip or even a depression, the public sector will be a lot smaller and weaker as a result.

    The £70 billion carried a risk. The £113 billion carries an even greater risk. In other words the motivation for taking such a big risk is ideoligical.

    I cannot for the life of me comprehend what the Lib Dems are thinking, never mind doing....

  3. PS read this

  4. G.O. seems to think that monetary policy {also stated to by D.C. today}, driven by falling long term interest rates will increase aggregate demand, by increases in:
    1. Autonomous consumption expenditure {driven by house prices increases and the Barro-Ricardo equivalence?}.
    2. Private investment {encouraged by incentives?} and,
    3. Net exports {the exchange rate will decline}.
    4. Induced consumption {national income increases}.
    Tables C2 and C3.

    For alternative view(s) see: