The Guardian has reported that Angel GurrÃa, the OECD's secretary general, said last week that:
Global trade, which was already growing slowly over the past few years, appears to have stagnated. What happened in the past 50 years whenever there was such a slowdown in trade growth, it was a harbinger of a very sharp turn of the economy for the worse.
I have, for some time, been predicting such a turn of events. It was why, over the summer, I was talking about People's Quantitative Easing and many economists seemed to have no idea why, saying there was no need for such measures when the UK was growing. My response then was that they were wrong and that a downturn was coming. I think I was right.
What worries me about such a downturn when it hits the UK is, however, the consequences that will flow from it. As Barack Obama said on Friday, and as the OECD is saying now (see the same Guardian article), the right response to this downturn will be increased government spending. However, we have a government that has made balancing its books the highest goal of its economic policy. In that case when UK tax revenues decline, as is inevitable in a downturn, the likely outcome is the UK will reduce investment and not raise it. That will only exacerbate the impact of the recession may well be facing.
I could (and, I hope, will over the next week) deal with aspects of that economic policy but a wider issues concerns me now. And that is that if there is a downturn it will not just be investment that will be cut but other services too. The logic is, if I might paraphrase, that we cannot afford public sector health care unless the private sector sells enough handbags (or other fripperies) to pay the tax that is supposedly required to fund healthcare supply. Now, I should add when making this comment that I have no clue at all about the finer points of handbags, and am rather pleased to live with a women who seems equally ill-informed and is quite unable to see why so many people will part with hundreds of pounds (or more) for something so admittedly useful but where such expense seems wholly unnecessary. Handbag incomprehension has, as a result, become a common mechanism for our expressing bemusement about conspicuous consumption but there are many other products (from mega-sized televisions onwards) we could substitute.
In a downturn demand for these products is likely to fall. And if it does so will VAT revenues, and so sales revenues, and so employment, and so PAYE, and in turn profits, and so corporation tax, and so on. And if you think we have to raise tax before we can afford any public service then the outcome will be a political demand to cut services such as the NHS on the grounds that 'we can no longer afford it'. But that's not true. Just as it has, for a long time, been untrue that we can only afford to educate our young people if we have a City of London teeming with dodgy financial dealing.
It should be obvious that the demand for education, healthcare and other essential public services has almost no correlation with demand for handbags, flatscreen TVs and so many other items. I am not saying there is no relationship: I am suggesting the link is very small indeed. What is more, the skill set required to deliver healthcare, education and other such services does not heavily overlap with those required to meet marginal consumer demand. Again, I stress there must be some overlap, but it is limited, and if that is true then to cut the supply of essential public services because demand for tax abuse in the city or conspicuous consumption the High Street has fallen is simply perverse.
As a matter of fact it is simply not true that we cannot afford essential public services if there is a shortage of demand for wholly unconnected consumer spending. Very obviously, if we reduce the supply of public services because of a shortfall in private demand we are simply delivering a double whammy to the economy: it is as if we would wish to punish ourselves for not consuming excessively, and the sole us of the claim that we must have tax revenues to pay for public services, and that only the private sector can generate those tax revenues, is the justification for that economic imposition of harm.
The reality is that tax does not pay for public services. As I have argued in The Joy of Tax, historically governments always spent before they taxed, and the tax that they raised was used to repay the loans they took out to initially meet their costs. Since the time the governments have had central banks technically they have not even needed to borrow to meet their initial costs: they can just run central government deficits, although gilt sales have traditionally, and with good reason, been associated with those deficits. But, however it is looked at, the spend comes first and tax come second, and at a time when there is no risk of inflation (as now) but there is a high risk of under and unemployment (as now) and at a time when there is a high demand for government bonds (as now) then there is absolutely no reason why a shortfall in tax revenues should result in a cut in government spending. Just as there is almost no overlap in the demand for and supply of public services and the demand for supply of many more marginal consumer items, so is there almost no overlap between the ability of society to pay for those public services and the flow of taxes generated by marginal consumer spending, which is the most commonly forgone spending in the event of an economic downturn.
To put it another way, the supply of health care in this country is not dependent upon the number of handbags that we consume. Instead, the supply of that healthcare is entirely dependent upon our ability to pay those people who have the skills to supply it ( or education, defence, law and order, and all the other essential services, as well as benefit payments and social support). And, crucially, that ability to pay in a downturn, which may be coming our way, is not dependent upon a short-term capacity to tax but is instead dependent upon the government's ability to sell long-term debt, for which at present there appears to be considerable demand, with no sign of that changing. What is more, when that debt can be issued at such low cost, with almost no prospect that effective repayment will ever be demanded (as now) then to ignore that opportunity would be almost criminal.
I sincerely hope the Treasury understand this. I am not sure that they do.
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If the Atlee Government had followed the perverse logic of the current Government, not only would we have had no Welfare State, we would also never have dealt with the UK’s massive indebtedness, at 250% of GDP – dealt with by spending into the economy in the way you set out in this post, Richard, and leading to MacMillan’s 1959 “you’ve never it so good” boom – and would probably now be an even an more debt-burdened, impoverished Third World Disney theme park, where tourists would be surrounded by scruffy street urchins, begging for meagre hand-outs, with cries of “Baksheesh, baksheesh!”
That last bit sounds like a fair description of the Tory cabinet hanging around the Chinese premier.
@ Don’t call me Dave:-
“That last bit sounds like a fair description of the Tory cabinet hanging around the Chinese premier.”
And irony of ironies the Chinese don’t do let’s pretend our government should budget like a “household” they do Functional Finance because they have a very clear insight into the purpose of money and how modern fiat monetary systems really work!
I think that “almost” can be safely omitted from the penultimate sentence.
The Treasury does realise though, all of a sudden, that we can now afford more spies – another couple of thousand of them, I understand.
But muddled thinking is evident as they seem to be going to be directly employed. Since the budget is – naturally – so tight surely they could be contracted out to save money? I suggest Serco because they have both knowledge of employing people on the minimum wage and of the requisite dodgy dealing. I know they’ve never run spying before but then that has never previously prevented them from bidding for contracts of which they have no experience at all. And their record speaks for itself…
On the basis of your previous blog on Andy Haldane’s presentation to the TUC I’d certainly hope he understands it, Richard. I know he’s not at the Treasury, but given the BoE and Treasury are inherently linked and interelated in what they do I’d certainly hope he has Treasury colleagues who do.
More likely, I suspect, is that anyone at the Treasury who does understand what you outline here also knows that career wise they need to keep their mouth shut, and continue with the austerity Groupthink that emanates from Osborne and co. As there’s no sign that Osborne is loosing his authority within government (even with the tax credit cuts setback) and that the economy still does just enough for him, the government and the Tory press to claim that everything in the garden’s rosy, then I don’t see that culture changing anytime soon.
Then again, as you note here, a downturn (from growth of almost nothing) may well be on the way. And I also noted over the weekend some pretty alarming balance of payments (trade) information that’s largely been ignored so far. So, who knows. Personally, I stick with my pre election prediction that mid 2016 onward signals the beginning of some very tough times for the Tories, both economically and across a very broad range of domestic policy areas, ranging from health to energy and environment. Given their unswerving belief in the one “true” neoliberal way it’s going to be entertaining to watch them try to steer their way through it, even with the help of a largely supportive and supine media.
Trade is a nightmare right now
And I think you’re right re 2016
I’m with Lady Bracknell on handbags, the economic guru of her age.
So go out and buy lots of stuff to help the economy, Christmas just around the corner. What gall, Shirley Williams writing about the health service with all the wisdom she can muster, she a signatory to the 2012 act along with Nick Clegg. Of course her health insurance when it cometh will pass muster, for others it may not. Yes many countries do not have a publicly funded health service and accept market forces.
Turn it on its head, are they all right and we are wrong holding on to something that started in 1948 from a deeply humanitarian ethos and is for everyone regardless of ability to pay. TKMAXX sell bargain designer bags, check it out.
Trouble is my man bag has some considerable life left in it yet
But I did get a new phoen 10 days ago – my iphone was shattered on the way back from Montreal – I know not how
But I did not buy another iphone – I realise I simply do not need one
Sylvia, I too nearly retched reading the article on the NHS by Shirley Williams. But then again, being selective with your memory and not being able or willing to admit past mistakes, must be a necessary feature of being a long time politician.
An ahem ‘friend’ of mine recently did some translation work for a UK fashion matching company wanting to place adverts in German auto and apparel related facebook feeds. The company in question will source and deliver a matching manbag, punting coat and loafers to go with the colour of your car ( also available in partnership with a UK car exporter ) . Yes, there really are European men this vain they’d part with the cost of a short holiday for a bit of personal attention to their requirements.
Next time I see her I’ll tell her she has done nothing for the NHS, even if the buyer makes medical instruments.
” And, crucially, that ability to pay in a downturn, which may be coming our way, is not dependent upon a short-term capacity to tax but is instead dependent upon the government’s ability to sell long-term debt….”
I agree with the article, of course, except I might just point out that this sentence isn’t at all consistent with your support of PQE.
Suppose the government couldn’t “sell long-term debt”. What then? Do we have to go back to “selling handbags” to get the money to pay the doctors and nurses?
Of course we don’t. But we do need to make sure our economy is functioning as well as possible, with our productive capacity (which might well include handbags) running close to its maximum capability, so that when the doctors and nurses spend their PQE created money there is actually something to spend it on.
Otherwise we’ll have too much inflation.
But there will be
Housing for a start
And the output of a lot of newly funded businesses
All able to work on the basis of new infrastructure
Am I mistaken or does that sounds very similar to a Job’s Guarantee albeit for skilled medical workers and their ancillaries? I’m very much in favour of the suggestion for the NHS and in general… but I believe that you have some concerns about such a generalised approach or is it the OMF part?
My concern goes far beyond the NHS
And it’s a not a job’s guarantee, per se. It’s a supply guarantee. Jobs must flow from need
So all the nurses and doctors should just work for free – and not have any reward for all their efforts, in the form of handbags and, ye know, other nice stuff that makes life not just about brutish survival?
In fact, I’m willing to bet all the nurses and doctors will leave and move to places that allow the unregulated sale of handbags. You got free healthcare in the Soviet Union, but few hand bags, and big walls to keep you in.
As classic misreadings go that’s a good one