Britain's economy

Austerity, or something else?

What does Britain lack now that it possessed when its economy was galloping along - you rememmber - under the Blair/Brown regime that banished boom-bust for ever?

Answer : a credit binge.

Economies grow when banks create loans and when they stop creating them economies stagnate or recede.

You are saying that Krugman is not up to the task of analysing the complex dynamic of the UK economy with his simplistic models. Though his exposition is usually the soul of simplicity his economic diagnosis, I find, to be usually subtle, prescient & multi-faceted (linking sociology,economics & politics).

The question can be summed up not in the difference between glass half-full or half-empty divide but more importantly is the glass filling up or emptying.This is where I find Krugmans assessments usually reliable. I think he has been proven right in the case of the UK economy.

The risk that the UK would be hit like Greece is one that looms large in Tory memories & imaginations. This fear caused them to embark on austerity to stave off the "Bond Vigilantes". This is the key to the Osborne & Cameron psyche. Unsuitable general measures to prevent an unlikely specific event. Now the glass is clearly emptying the question is where will end?

Taking in austerity is to finishing the course of anti-biotic to clear away all the debt viruses. There is way to get well if the country opts for half-measure.

Cameron's incompetence makes George Bush look like King Solomon.

DId it occur to anybody that an artificially overvalued Pound, even when weak (USD$1.40 = 1Pound) is also an important factor in determining the root causes for this cursed recession? British goods and services - just ask any American tourist - are among the most expensive in Europe! Britain has maxed out its credit, and the only way of resuscitating British industries would be to make its goods more affordable to the world. I'd love to visit London with my family one day, but spending the equivalent of $150- on an average lunch for 4 would murder my bank account, just like Margaret Thatcher did to lots of other people and their futures in her days of riding high. Any country that has riots, deaths and destruction over the lack of jobs, opportunities and housing for their young people, while its banks are overflowing with foreign money and militarily involves itself in every foreign crisis "in the name of freedom and democracy", cannot possibly be called a "rich" country as this infallible publication likes to crow about every change they get.

The Bank of England is concerned, however, about whether its monetary policy is being transmitted appropriately. And what both Mr Krugman and Mr Sumner miss is the trouble in British bank lending. In a speech last year Adam Posen, a member of the Bank's Monetary Policy Committee, pointed out the need for programmes to ensure that monetary easing translated into lending growth to British firms.

The issue doesn’t get along with the quantity theory of money, which either overlooks or makes light of the amount of money held by speculative-motives, that monetarism presumes. Instead, a task that should really be desired above is to work on long-run determinants of interest rates based on the liquidity-preference theory in order to shift the money supply or credit creation from the amount of money held by speculative-motives to the amount of money held by transactions- and precautionary-motives.

The governments’ role, therefore, is essential to the task – neither in the monetarist way nor the mainstream New Keynesian way. It is not about directly boosting the aggregate demand but about improving the schedule of the marginal efficiency of capital.

Its not tax cuts that the UK needs, that will just largely suck in imports. Instead the Government should impliment a major building programme. For example building a large number of student hall of residence places, say 200,000 for around £10 Bn could have a number of major benefits.
First of course the government can gets its money back. Much of it quickly by the tax and National Insurance of those variously engaged in the programme will pay immediately but also the extra VAT and "second level" tax when they spend their money on goods and services. Secondly the government can share the rents with the universities, say taking £1000 per room per year for the next 25 years.
Of course the majority of students currently live in low cost city centre accomodation. As the students then move out to the new halls this vacates a large amount of just the accomodation the country is short of. And of course it would be spread across every major city in the country. Its not like a major local road or rail project where just one region benefits.
Additionally the universities also benefit by getting some additional long term funding to keep the cost of fees under control. It may also improve the attraction of UK universities to high fee paying oversees students as accomodation will be seen to be available and more secure than some appears now.

Why else does this work? Well effectively this is the transfer of the huge amount of rent that students pay private sector landlords back to what is essentialy a public sector activity. Then because it radically increases the available low cost places in the private sector it may also reduce the costs that local authorities pay to house many homeless families.

Surely something like this is better than just using QE to buy bonds or even tax cuts to buy more foreign goods?

Banks will lend more into a growing economy just as businesses will employ more people if demand and order books are growing.

If government spending and employment had stayed steady whilst cutting jobs and sales taxes demand would be far more robust.

I'm mystified by this belief that simply by issuing an edict, banks can lend more to small businesses.

Surely the news that personal borrowing fell by a record amount in December tells the other side of the story... small businesses, like their consumer brethren, are deleveraging!

Banks can't lend to those who don't want to borrow!

Sometimes, there are no good answers. A variety of options are being tried out around the world: fiscal stimulus was tried in America, however, there is a gigantic deficit and a day of reckoning looms large in the middle distance. Harsh austerity has been tried in Ireland and Greece, which is crushing their economies to death. Perhaps a middling, muddling outcome is the best that we can hope for here in the UK.

cameron should maybe focus on working instead of endlessly criticizing the others leaders!

Cameron may sell his story as 'the austerity we need to put the finances straight since Labour had overspent so much' but I'd say he is using the opportunity to make large medium term cuts to the size of the British state. He is sacrificing near term growth for a small state. When private sector demand is very low due to the crisis, it is an awkward time to slash the size of the state as well. The private sector cannot swell to fill the space. It may be an opportunistic use of timing because Cameron can blame the other side for the pain (for a while), but its a bad time for the country and its people and will likely create a lot of misery.

The new Eurosclerosis? I thought the BofE had been pretty liberal, no?

The amount of time spent arguing obscures a more basic point: if any of these ideas, heck if all of these ideas were tested scientifically - if that were possible - all of them would fail a double-blind test. There is a weird belief that one idea is better than another. It often isn't true: the differences are marginal enough that the real causative processes are far more important than whatever policy / economic ideas happen at the margin.

The arguments are made as if there is a big difference between systems. There is a big difference between capitalism and state socialism where the means of production are owned by the state or with a dictatorship and its inherent inefficiencies. But the US and Britain, France, etc. are all relatively free market economies. They all do relatively the same, given whatever social differences exist and how social decisions affect things like vacation time, medical spending, education spending, etc. Some in the US may try to label anything they don't like as "socialism" but that doesn't make the actual US economy socialist in the sense of a system so different that it generates radically different results.

That all said, austerity's measuring point is not whether it's been a disaster or not but whether it has delivered the promises made for it. It hasn't. It promised expansionary contraction and that hasn't happened. The question is then: is it worth keeping it up? Is that stubbornness or a good thing or what? Is it worth the social costs? Radical programs make promises and they should be evaluated on those promises.