Author Archives: Duke.of.Url

Hutton & Stewart on the autumn statement and welfare hits + Addendum

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Both Will Hutton and Heather Stewart made swipes at Osborne’s approach to welfare in general and the benefit cuts in particular. Hutton’s attack centered around the notion of a social contract. He claims that Osborne’s autumn statement shredded that contract to pieces without entirely dismantling it. The notion of fairness is still a fundamental part of British life and can be crushed only with difficulty. As is known with certainty now, even our closest relatives, the common chimpanzee and the Bonobo have an understanding of fairness, ie., equitable distribution. Both humans and chimpanzees are able to depart from distributing resources equitably, but only humans can do so on such a grand scale and to such large sections of the community.

The fact is that the number of scroungers on benefit is a miniscule part of the population and nowhere near the size that Osborne would like the population to believe. Hence, the amount paid out by the government as a consequence of deception doesn’t amount to a hill of beans and will, in fact, cost more to retrieve than is spent. This is not sound economics.

Hutton says of Osborne that he is an economic illiterate. This certainly seems to be the case. In economic terms, virtually all of his economic policies have been pro-cyclical rather than counter-cyclical. In other words, if an economy is going into depression, government policies ought to be aimed at getting the economy going in the other direction. His policies have consistently made the economic situation worse rather than better. And pointing at external influences are at this juncture misdirection at best.

Stewart posits a hypothesis about why Balls flummoxed his rebuttal to Osborne, that he was surprised by the OBR figures. This may be true but there is I think a deeper mechanism at work in Balls’ case. And this is that he doesn’t really have an adequate understanding of how to fix the economic situation any more than Osborne does. What is good, however, about Balls’ position is that the government of which he would be a part would not engage in the slashing that Osborne seems to revel in.

Hutton thinks Osborne an economic illiterate. I am afraid that this charge also applies to Stewart. She asks the following questions. “And when Osborne puts some flesh on the bones of his latest austerity plans, in a spending review now planned for 2013, he will have a whole list of charges to chuck at Balls and his colleagues. Would they reverse the benefits cuts? Yes? Then what else would they cut instead, or what taxes would they raise to pay for it?”

The economic fact of the matter is that taxes are not needed to pay for any government program. That is not what taxes are for. Among other things, they forge a community together, thereby, in Huttonian terms, underwriting a community’s social contract, part of which cements us all together. It is this social cement that Osborne and part of his party is, in my view, perhaps unconsciously, trying his best to rip asunder. For support for this view from Robert Choate himself, watch his interview with Paxman where he almost admits this very point (but is apparently saving what he really thinks for his memoirs).

In short, the benefit cuts can be reversed without the need to raise taxes to pay for any such reversal. Related to this is Osborne’s fear that the country will lose its credit rating. The rating of credit agencies refers to the likelihood that the UK will go bankrupt. This is impossible, unlike the countries in the Eurozone who have given up their sovereign currency. He surely knows this, but if not, his fear can result from the City losing its foreign investment drawing power. Had the City not been allowed to become so central to Tory policy, this would be an irritation but nothing more. But this fear lies also in other false economic ideas held by the Chancellor. One of them is the one held by Heather Stewart, that taxation supports government spending. Balls has given every impression that he also is in thrall to this falsehood. Were he to divest himself of this unfounded idea, he would find himself in a better position to battle Osborne’s socially divisive, inequitable, iniquitous, and economically unsound policies.

Hutton:

http://www.guardian.co.uk/commentisfree/2012/dec/09/george-osborne-new-social-contract

Stewart:

http://www.guardian.co.uk/business/2012/dec/09/autumn-statement-compassionate-conservatism-officially-dead

Addendum: on balanced budgets

One item that I left out of the previous account of the welfare hits but which has been part of the coalition’s belief system for some time – balanced budgets. This government, as have governments before it, believe in balanced budgets and have reaching such a state as a policy goal. Bill Clinton actually achieved this.

The notion of a balanced budget is a goal of a political administration is a useless goal and a potentially destructive one. Stephanie has a terrific metaphor of deficit/surplus interaction between the public and private sectors. It is a see-saw – the kind you find in children’s playgrounds. What you find in this metaphor is that surpluses in the public and private sectors cycle around the balance point but never settle on it. They never settle on it because the economy is always in motion. As anyone who has ever used a see-saw knows, you have to keep the see-saw see-sawing back and forth passing through the middle, or balance, point. If you stop and get off, one or the other side will slide to the ground where it will stop.  A successful see-saw ride will be one where neither side will go too far in either direction, which will disturb the cycling equilibrium and be potentially dangerous for one or both of the children. The same is true of the economy.

Here are Kelton’s graphics illustrating the point. First, the see-saw in its simplest situation.

As you can see, if one sector is in deficit, the other is in surplus. The trick is not to let either sector become too extreme. In these graphics, G = government expenditure and T = Taxation Revenue.

Now, capital accounting is added. But this does not alter the way the mechanism works.

For further information, I recommend Kelton’s own posts.

What happens when government tightens its belt, as the coalition is presently doing.

http://neweconomicperspectives.org/2011/05/what-happens-when-government-tightens.html

US not broke and Clinton surplus destroyed the economy

http://neweconomicperspectives.org/category/stephanie-kelton/page/2

Kelton’s See-Saw version of the deficit-surplus interaction taking capital accounts into account, as it were.

http://neweconomicperspectives.org/category/stephanie-kelton/page/4

Osborne’s Autumn statement

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Well, many of you will have seen the budget and Balls’ response which began with a good deal of stuttering, widely reported by no explanation. If anyone has a hypothesis about why Balls began his retort by effectively stuttering, I would be glad to know. Even though he recovered after a few minutes, his response wasn’t very effective.

The primary reason for that I would argue for his ineffectiveness is that Balls, and Ed as well, has no well developed alternative to articulate. Effectively, he and others in the Labour Party assume as true the neoliberal economic theories that underpin Osborne’s major policies, though he slightly modified them in this statement. Policies guided by neoliberal economic principles have failed not only this time but every time they have been tried, either in western countries or in developing countries. This is fundamentally because they have no empirical relationship to the real world. They only work in toy economies.

They look correct to some people because the Keynesian position has been distorted and Keynes didn’t quite get all of it right. After the publication of the General Theory, he was already thinking about how to revise it. The theory should really be called the Keynes-Kalecki theory, as in a review of the General Theory the year following its publication, Kalecki corrected errors in Keynes’ theory of effective demand.

QE, which King is so fond of, is ineffective re job creation because it directs funds to banks who either hoard it or use it to pay down their toxic balance sheets. Osborne almost seemed to realize this when he proposed infrastructure projects. However, it looked a bit too little too late. And he doesn’t yet seem to have bitten the bullet. Besides, the money that has been put into the various QEs undertaken by certain sovereign governments is not enough to even make a dent in the banks’ toxic balance sheets, so great are their debts. Basically, it is money thrown away.

An interview with Robert Choate showed that Choate, while not being able to criticize Osborne due his present position, showed that he knows that credit ratings are meaningless for sovereign states with their own currency and that government doesn’t have to borrow, unless it decides to because the relevant interest rate is low. As for the basic interest rate, it can be kept low in perpetuity. Taxes should be used to control inflation by inhibiting spending and to direct spending into certain areas, as well as legitimating the sovereign currency. They should never be thought of as a basis for government spending, because government doesn’t need taxes to back their spending, something Choate knows only too well.  When pressed by Paxman in the interview, to explain his hints, he only said that we will have to wait to find out in his memoirs. However, no one, even Paxman, later picked up on Choate’s hints in the interview about what he really thinks of Osborne’s policies.

To rely on exports when every other country with whom you would do business is experiencing the same difficulty is incredibly stupid and shows that Osborne doesn’t quite know what he is doing. His comments about those on welfare were exceedingly ignorant. The stupidity of his position is that people who aren’t working don’t really want to would only be true were there jobs to go to. The basic fact is that there are fewer jobs than there are people looking for them. The jobs have to be there first to justify his basic assumptions about people’s motivations. History does not support Osborne’s ignorant comments.
In fact, Osborne’s social policies and comments directed to those on benefits, who are obviously not well off, is redolent of the ideas of the late 19th and early 20th century social Darwinists. For those of you interested in the way in which evolutionary biological ideas creep into discussions of the nature of human society, it may be of interest to those who do not read in this area that Darwin did not subscribe to the view of unbridled competition even for the Primates. It follows mutatis mutandis that Darwin’s view of chimpanzees applies to human social groupings. This view of unbridled competition may have seemed self evident in the late 19th and early 20th centuries, but seems rather dated now. Yet, the idea refuses to die. A number of Osborne’s social policies could have come right out of early 20th century social Darwinist tracts. One of social Darwinism’s greatest critics was Lester Ward. Alas, no commentator has yet made this connection. It seems so obvious to me. Am I missing something?

Now, one problem with the post by Pilkington is that it is rather technical. And it is a piece on the political economy of the financial sector rather than economics per se. That should make it easier to read, but for some it might not. Basically his message is that by putting the money back into banks, it acts as a feeder mechanism for financial speculation, which is what needs to be toned down rather than reinforced.

I have also included a piece from the Independent by David Blanchflower. His position is that Slasher Osborne’s jobs policies are guided, not by empirical evidence, but by ideology. We all know this, but is is salutary to see figures from the Department of Works and Pensions that reinforce this view. It is impossible to believe that millions of people are scroungers. It defies rational consideration.

Here are the links:

Blanchflower: http://www.independent.co.uk/news/business/comment/david-blanchflower/david-blanchflower-ideology-rules-the-coalitions-jobs-policies-8374461.html

Pilkington: http://www.nakedcapitalism.com/2012/12/philip-pilkington-monetary-policy-and-metaphysics-how-economists-try-to-naturalise-terrible-policies-and-disappear-into-their-own-theories.html

Post contributed by Larry Brownstein