French lessons for Miliband and Balls

“Take it from me mate, don’t…”

“Bliss was it in that dawn to be alive” wrote Wordsworth in middle age, reflecting on the euphoria his younger self felt at the French Revolution. Ed Miliband felt a similar sense of elation when François Hollande was elected President of France in May 2012 albeit expressed in slightly more prosaic terms.

Mr Miliband said that President Hollande’s campaign “has shown that the centre-left can offer hope and win elections with a vision of a better, more equal and just world”. Mr Miliband declared “This new leadership is sorely needed as Europe seeks to escape from austerity” and assured us that “I know from our conversations in London earlier this year and from [Mr Hollande’s] victory speech tonight of his determination to help create a Europe of growth and jobs”

Alas, since he spoke of President Hollande’s “determination to help create a Europe of growth and jobs” French unemployment has risen from 10.2% to 10.9% and Britain’s has fallen from 8% to 7.1%. The French economy has averaged growth of 0.13% per year while Britain’s has averaged 0.16% a year.

Mr Hollande’s strategy was to tax and spend France back to prosperity. A raft of new taxes, most notoriously a 75% top rate of income tax, would pay for the hiring of 60,000 new teachers, the creation of 150,000 subsidised jobs, and a reduction in the retirement age. This strategy has failed. Like Louis XIV’s revocation of the Edict of Nantes in 1685 which flooded east London with entrepreneurial Huguenots, Mr Hollande has simply driven the French men and women who can afford to leave out of the country. Those who can’t are left stuck with unemployment and stagnation, Mr Miliband’s “better, more equal and just world”.

Yet, just as Mr Hollande abandons this strategy in favour of a €30 billion payroll tax cut and €50 billion worth of spending cuts in the next two years, ‘austerity’ if you like, Ed Miliband’s Labour Party are committing themselves to it afresh. Last Friday Shadow Chancellor Ed Balls made one of his increasingly rare appearances and committed a post-2015 Labour government to eliminating the deficit by 2020. The tool with which he intends to achieve this is a reintroduced 50 per cent top rate of income tax.

Mr Balls apparently needs to learn the lesson so painfully learned by France; that as per the Laffer Curve, beyond a certain level increasing tax rates ≠ increasing tax revenues. Indeed, in the last two years of the 50 per cent rate, 2011/2012 and 2012/2013, top rate taxpayers paid £41.3bn and £41.6bn in tax respectively. Under the 45 per cent rate that amount has risen to £49.36bn. Ed Balls was immediately in the unusual position of having to explain how he would fund a tax rise.

This presents the Conservatives with an opportunity. David Cameron and George Osborne should be pointing across the Channel and saying that Hollande’s abandoned France of high taxes, high government spending, rising unemployment, and falling growth, is Miliband’s Britain.

Ultimately the high ideals of the French Revolution were drowned in the blood of the Terror, replaced by the dictatorship of Napoleon, and a disillusioned Wordsworth retired to the Lake District and Romantic poetry. What will it take to educate Mr Miliband?

Deficit and debt: Does anyone know the difference?

“OK, so there’s the water in the tub…”

In a recent conversation, a Labour Party member told me that the coalition was “borrowing more than we did in power”. I pointed out that this was wrong, that the deficit, what we are “borrowing”, is, in fact, down by a third under this government. He replied: “The deficit may be but the current government is still borrowing more money than the last government.”

You could write this off as simply the pig-headed economic illiteracy of a paid-up member of the party that helped us into the current mess. After all, Ed Balls, Labour’s man on the economy, can stand up in front of Parliament and say “The national deficit is not rising…er…is rising, not falling” (he was right the first time). But then you hear Nick Clegg say that the coalition is working to “wipe the slate clean for our children and our grandchildren”. Even David Cameron himself announced that “We’re paying down Britain’s debts”.

You begin to wonder if anyone knows what they are talking about. I’ve addressed the issue of what exactly is happening to the British government’s finances before but it seems it needs repeating.

We have two concepts here: a stock and a flow. Think of it like a bathtub. The stock is the water in the bathtub, the flow is the water either flowing in or out of the tub through the taps or plughole.

In this analogy the debt is the stock, the water in the tub; the deficit is the flow, the water pouring in from the tap (if our government was running a budget surplus water would be flowing out through the plughole but we’re some way off worrying about that). In other words, the deficit (flow) is the amount by which the debt (stock) is increasing.

Thus, it is possible to have a situation like we have now where the debt is increasing while the deficit is decreasing (imagine yourself turning off the tap and seeing the flow of water dwindle – water is still flowing into the tub). Borrowing is down, what has been borrowed is up.

In the final year of the last Labour government Alistair Darling borrowed £156 billion. In 2012 George Osborne borrowed £99 billion. The deficit had fallen but while ever there is any deficit at all debt will be rising. Another way of putting it is to say that in his last year Darling increased the debt by £156 billion and last year Osborne increased it by £99 billion.

This is why you can have a chart like this…

showing falling deficits coexisting with a chart like this…

showing rising debt.

This might all sound a rather long-winded way of stating the obvious but a ComRes poll late last year found that 49 percent of people wrongly think “The Coalition Government is planning to REDUCE the national debt by around £600 billion between 2010 and the end of this Parliament in 2015”. The correct answer, that “The Coalition Government is planning to INCREASE the national debt by around £600 billion between 2010 and the end of this Parliament in 2015”, was given by just 6 percent.

The British government’s out of control spending is the central issue in British politics today yet there is mass ignorance as to what is really going on with it. In large part this can be attributed to the misleading statements pumped out by the sloppy Cameron and Clegg and the dishonest Balls.

What actually is happening to the British government’s finances under Cameron and Clegg is that the debt is growing and will continue to grow but the pace at which it grows, the deficit, is declining. This is simple stuff even if our politicians struggle with it.

This article originally appeared at The Commentator

Labour and the public finances

The guilty men

The bad economic news which surrounded the budget yesterday seems to have given Ed Balls the confidence to tour the studios telling all and sundry that he has been ‘vindicated’. What’s worse, some intelligent people appear to be falling for this obvious rubbish.

To remember just how obvious and just how rubbish this is I’d refer to this previous blogpost. But I’d also refer you to this, an election briefing from 2010 from the Institute for Fiscal Studies. The whole thing is worth a read but I’ll quote the summary in full…

Total public spending is forecast to be 48.1% of national income in 2010−11, up by 8.2% of national income from the 39.9% Labour inherited from the Conservatives. This would be the highest level of public spending as a share of national income since 1982−83.

• Most industrial countries have increased public spending as a share of national income since 1997. But between 1997 and 2007 – prior to the financial crisis – the UK had the 2nd largest increase in spending as a share of national income out of 28 industrial countries for which we have comparable data. Over the period from 1997 to 2010 – including the crisis – the UK had the largest increase. This moved the UK from having the 22nd largest proportion of national income spent publicly in 1997 to having the 6th largest proportion spent publicly in 2010.

• Spending on public services has increased by an average of 4.4% a year in real terms under Labour, significantly faster than the 0.7% a year average seen under the Conservatives from 1979 to 1997. This is largely due to increases in spending on the NHS, education and transport. Since 2000–01 public investment spending has increased particularly sharply and is now at levels not seen since the mid to late 1970s. Despite large increases in the generosity of benefits for lower income families with children and lower income pensioners social security spending has grown less quickly than it did under the Conservatives.

• Estimates from the Office for National Statistics suggest that public services have improved considerably over the period from 1997 to 2007 with measured outputs suggesting a one third increase in the quantity and quality of public services. But this increase in measured public service outputs is less than the increase in inputs over the same period; in other words productivity has fallen. The relative price of these inputs has also risen, so we find that the “bang for each buck” that we get from spending on public services (output per pound spent, adjusted for whole economy inflation) has fallen more than productivity.

• If the Government had managed to maintain the “bang for each buck” at the level it inherited in 1997, it would have been able to deliver the quantity and quality of public services it delivered in 2007 for £42.5 billion less. Alternatively, it could have improved the quality and quantity of public services by a further 16% for the same cost. But perhaps service quality has improved in ways not captured by the ONS’s measures. Or perhaps we were to bound to see diminishing returns to additional spending when it was increasing so rapidly. To the extent that additional spending boosts output fully only with a lag, we may not yet have seen the full benefit.

How can you say the people responsible for that have been ‘vindicated’?

When stimulus fails to stimulate

Beats him

Last week’s news that US GDP had shrunk by 0.1 percent presented some with a problem. The United States, with its apparently indefinite commitment to trillion dollar deficits, has been held up by Ed Balls among others as the Keynesian poster boy in comparison to the ‘austerity’ which, it is claimed, is ravaging Europe’s economies.

In December, John Cassidy of the New Yorker wrote: “It’s official: Austerity doesn’t work”, contrasting the growth in US GDP with the miserable stagnation of Britain’s. And here it was shrinking.

Duncan Weldon, the TUC’s resident economist, took to Twitter to explain that the “Primary reason for US GDP fall is govt spending cuts…This enhances rather than disproves case for stimulus.” Does it?

The first thing to note is that GDP is a measure of spending which is used as a proxy for measuring the much more elusive concept of economic wellbeing. As such, getting it to rise or fall is child’s play; a fool could do it as Gordon Brown proved. As Cassidy writes:

“Before the last election there, which took place in May, 2010, the U.K.’s economy appeared to be slowly recovering from the deep slump of 2008-09 that followed the housing bust and global financial crisis. Just like the Bush Administration (2008) and the Obama Administration (2009), Gordon Brown’s Labour government had introduced a fiscal stimulus to help turn the economy around. G.D.P. was growing at an annual rate of about 2.5 per cent.”

Indeed, but that was achieved simply by the spending of 160 billion borrowed pounds in one year. To repeat, if you borrow and spend lots of money you will see an increase in a measure of spending, GDP. This is not rocket science.

And just as this should be obvious, so it should also be obvious that such a strategy has limitations. Governments cannot keep adding to their debts indefinitely especially when, as the Labour government did in Britain, they were doing so during the growth years as well.

Secondly, let us ask what the point of ‘stimulus’ is. It is, as obviously as anything else, to stimulate economic growth, as measured by rises in GDP. Think of it like stabilisers on a child’s bike, they exist to keep the economy upright until such time as it can cycle off on its own.

But what if stimulus doesn’t actually stimulate anything?  What if, even after years riding his bike with stabilisers, your kid still can’t keep his balance unaided?

That is what the US GDP figures showed. Four years of unprecedented trillion dollar deficits have boosted GDP, an effect a sufficient level of spending is guaranteed to have on a measure of spending. But reduce government spending and GDP drops. The economy is still incapable of standing on its own two feet. The stimulus has failed to stimulate.

This suggests two things. First, the extra six and a bit trillion dollars of debt the Democrats have gleefully piled on their kids has failed to achieve its stated aim. Second, those Europeans with their ‘austerity’ might not be as daft as people like Cassidy say. After all, what’s the point in stimulus if it doesn’t stimulate?

This article originally appeared at The Commentator

Time for an economic Nuremberg for the last Labour government

The guilty men

ike an iceberg, the extent of the damage wrought by the last Labour government is still becoming apparent.

One of the wheezes Labour used to camouflage its vast spending spree was the Private Finance Initiative. These had been brought in by John Major’s Conservatives (to criticism from the then Labour opposition) and involved a private sector entity building something and then selling it or leasing back to the government over a number of years, usually decades.

Upon winning the election in 1997 however, Labour performed a volte face and embraced PFIs. They appealed to Gordon Brown because the liabilities taken on under PFIs would not show up on the government’s balance sheet. In other words, they wouldn’t be included in the national debt figure.

Labour signed up to an estimated £229 billion of PFI projects. That’s almost two and a half times the entire projected budget deficit for 2012 – 2013, or 16 percent of GDP.

And all of it was off the books. This enables Labour supporters to argue that “Public sector net debt (as a percentage of GDP) FELL from the start of Labour’s time in government until the beginning of the global financial crisis”. But, if you include the PFI liabilities the Labour government signed us up to, any fiscal improvement during their time in office vanishes and this already thin argument does likewise.

Perhaps Brown was stupid and/or hubristic enough to believe he really had banished “Tory boom and bust”. Perhaps he calculated that he would be long gone before the bills for PFI landed on the mat. Either way, while in the long run Brown is (thankfully) politically dead, we taxpayers are not.

Last week it emerged that six NHS trusts were facing bankruptcy thanks to the PFI deals struck by the Labour government. As the Telegraph reported

“The total value of the NHS buildings built by Labour under the scheme is £11.4bn. But the bill, which will also include fees for maintenance, cleaning and portering, will come to more than £70bn on current projections and will not be paid off until 2049…Some trusts are spending up to a fifth of their budget servicing the mortgages…Across the public sector, taxpayers are committed to paying £229bn for hospitals, schools, roads and other projects with a capital value of £56bn”

Indeed, like the cat who leaves little ‘presents’ around the house for you to discover when you return from holiday, the Labour government of 1997 to 2010 is the gift that keeps on crapping on your carpet. We will be discovering fiscal turds left by Labour for literally decades to come.

If you were being charitable you would ascribe the fiscal incontinence of the Blair/Brown governments to some sort of Keynesian economic theory, though that fails to explain why they applied fiscal ‘stimulus’ for seven years to an already growing economy.

If you were being slightly less charitable you might ascribe it to incompetence of a quite staggering degree. The last Labour government, after all, were probably the biggest set of mediocre idiots ever to govern this country.

And, if you were being even less charitable, you might ascribe it to something more sinister – Brown poisoning the wells when he heard opposition tanks at the end of his strasse.

The architects of this national disaster have moved on. Blair is swanning around the globe earning millions. Brown is off brooding somewhere and probably enjoying it. Ed Balls, Brown’s right hand man through all this, is now, incredibly, Labour’s shadow minister for the economy!

We will have to live with the consequences of their mismanagement for years, why should they get away scot free? When we look at the continuing harm the Blair/Brown governments did to Britain shouldn’t we consider some sort of economic Nuremberg for these people? To punish them, Blair, Brown, and Balls, for the harm they have done to the British public?

Of course, you could argue that the electorate is responsible for electing these dangerous cretins. After all, every single majority Labour government in history has left office (in 1931, 1951, 1970, 1979, and 2010) with the economy in meltdown. Assuming that Labour voters aren’t so stupid that they don’t know this you have to conclude that they simply don’t care if the economy collapses.

In the wake of the Barclays rate fixing scandal, Ed Miliband has called for a full public inquiry into the banking industry, saying, “If you go out and nick £50 from Tesco, you are punished, at least we hope that you are punished – if you fiddle, lie, cheat to the tune of millions of pounds, you should also have the full force of the law brought against you.”

As Britain’s economy continues to smoulder isn’t it time for Miliband’s former colleagues in the wretched Labour government of 1997 to 2010, Tony Blair, Gordon Brown, and Ed Balls, to face a reckoning for the continuing damage they wrought upon the nation?

 

The truth about cuts and austerity

Your wish is Osborne’s command…

Economics editor Larry Elliott spouts far less drivel than most Guardian hacks but he put in a solid effort this week. Responding to the announcement that ratings agency Moody’s had put Britain on negative outlook Elliott wrote that Shadow Chancellor Ed Balls “has now been vindicated”

It might seem odd, as governments around Europe totter under the weight of their debts, that Elliott might consider Balls, a man whose sole economic idea in any situation is to borrow money and spend it, to be anything other than utterly deluded.

Elliott bases his bizarre claim on the Moody’s report blaming the shift to a negative outlook on a “weaker macroeconomic environment, which will challenge the government’s efforts to place its debt burden on a downward trajectory over the coming years” This, in Elliott’s eyes, is down to Chancellor George Osborne cutting spending “too far too fast” against the advice of Balls.

This is an outrageous case of picking the facts that suit. Moody’s report actually gives the reasons for the change and they list “The increased uncertainty regarding the pace of fiscal consolidation in the UK due to materially weaker growth prospects over the next few years” and “the high risk of further shocks (economic, financial, or political) within the (European) currency union”

Balls and Elliott would argue that these “materially weaker growth prospects” are a result of government spending cuts. They would be wrong. They are the obvious result of an economy buoyed on debt having to readjust its spending to something more sustainable. Moody’s itself list the challenges as “reflecting the combined effect of a commodity price driven hit to real incomes, the confidence shock from the euro area and a reassessment of the lasting effects of the financial crisis on potential output”

And Moody’s hammer a final nail into Elliott and Balls’ coffin saying that “reduced political commitment to fiscal consolidation, including discretionary fiscal loosening”, following Balls’ advice, could prompt a downgrade. So much for vindication.

But then the coalition’s attempts to get Britain’s ruinous borrowing under control are proving a rich source of hysteria. They prompt otherwise intelligent people to make nonsensical, easily refutable arguments that spending cuts are wrecking our economy and plunging us into some Dickensian dark age. Worse, these obviously erroneous things are said with such zealous, wild eyed passion that the terrifying prospect presents itself that these people actually believe them.

These arguments don’t survive even a brief encounter with some figures. In Labour’s last year in office government spending was £660.6 billion. In the fiscal year ending in April 2011, the coalition’s first in office, government spending came in at £683.4 billion. On current projections when the government closes the books on this fiscal year in April it will record spending of £703.4 billion.

This upward trend in government spending is projected to continue. In the fiscal year ending in April 2015 the government is currently projected to spend £760.5 billion.

We have nominal rises in government spending every single year. But what does inflation do to this?

The table below shows the percentage increase in government spending each year, inflation (actual and predicted) for each year, and the effect this has on the percentage increase in nominal spending.

 

	% increase in nominal spending on previous year	Inflation	Difference
2010	6.3	2.4	3.9
2011	3.4	4.9	-1.5
2012	2.9	4.6*	-1.7
2013	2.7	2**	0.7
2014	2.5	2**	0.5
2015	2.7	2**	0.7

 

* Estimate based on figures for May 2011 to January 2012

**Estimate based on Bank of England projections

Only in two years, 2011 and 2012, do we see the ravages of inflation outweighing the effect of the nominal spending rises to produce real cuts in government spending. And any private sector enterprise could make the cuts we do see, 1.5 percent and 1.7 percent, simply by switching to cheaper toilet paper. Anyone who thinks that these cuts are either wrecking the economy or destroying the social fabric of the nation needs to find a dark room and stay there for a while.

Strangely enough these hysterics might actually be helping George Osborne. The only reason Britain with its Greek sized deficits has German level interest rates is because Osborne promises to get rid of the deficits. The low rates the Treasury can borrow at are, we are told, a reward for fiscal discipline.

But how long would these low interest rates last if the impression got about that Osborne isn’t actually cutting spending very much? The sound and fury omitted by those opposed to deficit reduction might actually be having the effect of making Osborne’s austerity appear tougher than it really is. The reward has been Osborne’s; those low interest rates which have kept a PIIGS style crisis at bay.

This is the truth about the so-called cuts and austerity: there isn’t much of it going on despite what Larry Elliott and others say. Just don’t let the bond markets find out.

This article originally appeared at The Commentator

What’s holding the British economy back? Debt, debt, and more debt

Maxed out

Last week the coalition government was hit with a combination punch of bad economic news. On the same day unemployment was up and the Bank of England’s growth forecasts were down.

Labour were quick to point the finger. Shadow Chancellor Ed Balls said “The British economic recovery was choked off well before the instability in the last few months in the eurozone…The government is cutting too far and too fast and it’s pushing borrowing and unemployment up at the same time”

You have to wonder whether Balls actually believes any of this. In Labour’s last year in office government spending was £660 billion. This financial year it is forecast to be £703 billion. Only in the weird world of Labour party economic policy could a rise in spending of 6.5 percent be described as “cutting too far and too fast”

In other words, for all the sound and fury about ‘heartless’ ‘Con-Dem’ cuts, there actually aren’t any. And non existent cuts obviously cannot be harming the economy.

But while we might have come to expect Ed Balls to say stupid things about the economy the coalition isn’t being totally honest either.

“These figures show just how much our economy is being affected by the crisis in the eurozone” was Employment Minister Chris Grayling’s reaction. Slightly more circumspect, Chancellor George Osborne has said“There’s no doubt that growth in Britain, jobs in Britain, have been hit by what’s going on in theeurozone”

Pinning the blame for Britain’s sluggish growth on the euro crisis has left the government open to charges of hypocrisy. In opposition didn’t they scorn Labour for its claims that Britain’s ruinous finances were all the fault of exogenous economic shocks beyond our control? Well no, they didn’t. They blamedLabour for increasing debt when the economy was growing in the years before the crash; the global nature of the crisis was always understood.

And unlike Balls’ nonsensical claims about the effect of phantom cuts there is a grain of truth to what Osborne and Grayling say. The very real possibility that the monetary system of our biggest trading partner could collapse is bound to have an effect on British business.

But this still misses the heart of Britain’s economic problem; debt. In the years leading up to the credit crunch, debt, both public and private, exploded in Britain. By 2008 household debt in Britain stood at 173 percent of household incomes, higher even than in Japan in 1990 on the eve of the bursting of its property bubble and ensuing 15 years of stagnation.

British households are now trying to repay that debt, reduce the amount they owe, or, to use the technical term, deleverage. That is why their spending has slumped.

The standard Keynesian remedy would be for government to step in and take up the slack, replacing the vanished spending of households with government spending. But, thanks to the lunatic profligacy of the Labour government, we don’t have that option.

Desperate to shed the image for financial mismanagement which had cost it the 1992 election, Labour, in 1997, committed to stick to Conservative party spending plans if elected. They were and they did. The national debt fell from 42 percent of GDP to under 30 percent. As fantastic as it may seem now, Chancellor Gordon Brown’s nickname ‘Prudence’ was well earned.

Then, in 2001, Labour won a second big electoral majority. Hubris set in and the spending sluice gates were opened. At a time when Britain’s economy was growing and, according to the simplified Keynesian theory, we should have been running budget surpluses, Labour began running deficits. This was in 2002; five years before the first banker came rattling the begging bowl. Labour applied its stimulus to an already growing economy.

The sorry story can be seen in the graph below.

Under Labour’s splurge national debt rose from around 30 percent to around 35 percent on the eve of the crash. That might not sound like much but consider two things; first, that is a percentage of what was, then, a growing economy. Second, where would we have been without it?

If we look at the trend of debt when Labour were adhering to Conservative spending plans and continue that we could have been heading into this crisis with a national debt of around ten percent of GDP, just think how much more room that would have left for government stimulus.

Either way the upshot of this massive private and public borrowing binge is simple; we have had a period of overconsumption which will now be followed by a period of underconsumption. As long as the dead weight of this debt is pressing down on the British economy the best we can hope for is the sluggish growth we have had.

We can forget the delusional sniping of the ridiculous Balls. The real problem for the coalition is that by blaming the crisis on the eurozone for Britain’s economic ills they convey the impression that the solution might be other than it is.

David Cameron made a start on disabusing the public of this notion this week when he said “High levels of public and private debt are proving to be a drag on growth, which in turn makes it more difficult to deal with those debts”.

The coalition thus has a tricky tightrope to walk. On the one hand they risk being accused of talking down the economy if they tell the grim truth on debt. On the other they risk being punished for the dashing of false hopes conjured up by deflections.

Yet as we’ve seen, it is not non-existent cuts which are holding the British economy back nor even, yet, the meltdown of the euro. It is Britain’s suffocating debt burden. Until that has been dealt with we will not see recovery.

This article originally appeared at The Commentator

Things will only get worse for Labour until they discuss voters’ inflation concerns

Hands up if you’re being screwed by inflation

AS LABOUR gathered in Liverpool for its party conference this week, one of their top priorities was to fashion a message on the dominant issue in British politics today: the economy. They failed.

FISCAL FAILURE

On the fiscal side, the shadow chancellor Ed Balls, unveiled an economic recovery package that seemed like it had been drawn up by a right-wing blogger taking the mick; it simply amounted to borrowing and spending more money. He refused to apologise for Labour’s borrowing – even when the economy was growing – to spend on its public sector client state. But considering that the beneficiaries of that largesse are Labour’s core vote and paymasters his hands are pretty much tied.

To continue reading click here

Ed Balls and Irish austerity: what you didn’t hear at party conference

May the growth rise to meet you

Ed Balls used to cite Ireland as exhibit A in his argument that ‘austerity’ would cripple the British economy.

A year ago, when Ireland’s economy had just shrunk by 1.2% Balls, then making his unsuccessful run for Labour leader, said

“These figures are a stark warning to governments across Europe including our own. An austerity programme of deep cuts now, when our economic recovery is not secure, risks lower growth and higher unemployment”

Perhaps he was busy drawing up his plan for British economic recovery which he announced at the Labour conference this week (easily summed up: spend more money) or maybe he was keeping his head down following poll numbers from ComRes which showed just 27% of voters thinking he would make a better Chancellor than George Osborne with 43% disagreeing.

Either way we were denied his reaction to the latest set of figures from Ireland; second quarter GDP figures showing growth of a healthy 1.6%.

A lively (in economic terms anyway) debate has kicked off over what these figures mean.

Free market economist Tyler Cowen led by claiming that such growth following such cuts disproved the Keynesian theory. Paul Krugman responded for the Keynesians arguing that Keynes always said this would happen, it was just question of how much damage was done in the meantime and how long it took. In the long run we are all dead, after all.

There is much truth in what Krugman says. The problem in Ireland, as in Greece and elsewhere, lies mostly on the monetary side of the economy. As Patrick Honohan, a former Trinity College academic now governor of Ireland’s central bank, wrote

“Until about 2000, the growth had been on a secure export-led basis, underpinned by wage restraint. However, from about 2000 the character of the growth changed: a property price and construction bubble took hold. This boom sustained employment and output growth until 2007 despite a loss of wage competitiveness”

A slump in interest rates when Ireland joined the euro saw a borrowing boom which bid up prices and wages. As a result, given that Irish prices are now relatively high, Ireland will be unable to export. It will need to get its prices down to a level approximating those of its competitors. This devaluation can be internal or external.

An external devaluation works by inflating the money supply so that prices rise and the real wage (the amount of goods and services the money wage can purchase) falls that way. Britain has eagerly pursued this course and sterling has lost about 25% of its value since 2007. This was not an option open to Ireland. As a member of the euro the money supply of the Irish Republic is controlled in Frankfurt.

This left the option of internal devaluation where prices and wages are reduced to competitive levels by simple cuts in nominal wages and, thus, the real wage.

There are two things to note.

First, both internal and external devaluation are different paths to the same destination, devaluation. Both entail a fall in the real wage and a decline in living standards. The difference is that if it is not possible to reduce nominal wages (if they are ‘sticky’ in the odd Keynesian parlance), say because of trade union opposition, then any attempt at internal devaluation will only succeed at the price of great unrest and unemployment; as falling prices depress companies’ incomes they will reduce their wage bill with layoffs if they cannot cut wages.

Secondly, it should be clear that Ireland’s problem was a monetary one not a fiscal one. For Ed Balls to point to Irish austerity as a warning for Britain is either breathtaking cynicism or economic ignorance. Take your pick.

This article originally appeared at The Commentator

What’s a guy to blog about?

Ed Miliband channels the The Temptations’ Melvin Franklin

Its been a few days now since my last post. That’s not because nothing has happened, quite a lot has and is, its just that I feel like Ive written about it all before. That’s not because of any great predictive powers on my part. Its just that the political and economic policymakers I write about most seem stuck in the same ruts.

Take the euro. A little over a week ago the European Union agreed to a second bailout of Greece on the questionable logic that if a cure has failed the best thing to do is try it again. Markets rallied and the crisis seemed to have passed.

Except it hadn’t. As Ive written again and again and again and again the euro is a project with fundamental economic flaws, a fact which no amount of wishful political thinking or borrowed cash will change. To prove the point the last few days have seen rising yields on Spanish and Italian bonds and fresh crisis, the very outcome we were told the most recent bailout would avert.

Opposite the Scylla of the eurozone crisis we had the Charybdis of the near default of the United States. President Obama has been blamed by the right for the ballooning spending but, as Ive said before, the Bush administration kicked off the current orgy of debt. This, as I have also written previously, shows up how empty all the rhetoric about ‘change’ was. The only ‘change’ is that Obama borrows more than Bush did.

What do we see domestically? The economy continues to be sluggish but given the extent of deleveraging going on this is only to be expected. Indeed, I have previously expected it to lead back into double dip towards the end of this year. There isn’t much George Osborne could do to avoid this and despite what Ed Balls says he would only make it worse. On the bright(er) side, the economy wont pick up properly until this happens.

So we come to the one area where perhaps there is room for me to, not only say something new, but do it in between mouthfuls of humble pie; the renaissance of Ed Miliband as leader of the Labour party. I’ve mocked Miliband though I’m hardly the only one, and he does make it so easy when he turns up at marches comparing himself to Martin Luther King or giving the funniest interview of all time. Indeed, Ed’s comedy antics saw him getting an ‘excellent’ rating from just 22% of Labour members while 53% thought he had been “Poor or Very Poor”.

Then came ‘Hackgate’ and all was changed, changed utterly. Labour supporters hailed “The emergence of Ed Miliband Mark II” or crowed that “his courage in putting his neck on the line to take on News International has vindicated the trust that I and a majority of Labour’s Electoral College put in him last September”

But a week, a famously long time in politics, is an eternity in the Labour party. Today saw reports that Miliband wants to weaken the power the trade unions have over Labour party policy. A sensible enough idea (though those are no more fashionable in the Labour party now than they ever were) but one that sees those won over so recently warning darkly that “Ed is playing a dangerous game” All is changed, changed utterly. Again.

But, again, there isn’t much for me to write about here as I’ve already said that “Ed Miliband was an incompetent party leader before ‘Hackgate’ and ‘Hackgate’ hasn’t changed that. After its done Ed Miliband will still be an incompetent party leader”

This isn’t to say I told you so or to claim the power of second sight but simply to reflect on how our leaders insist on repeating their obvious mistakes. Whenever they do something daft you find they did exactly the same thing fairly recently and that it was just as daft then whether it be bailing out busted Mediterranean countries, running another trillion dollar deficit, or changing your mind about Ed Miliband.

Marx said that history repeats itself “the first time as tragedy, the second time as farce” He was doubly wrong. You don’t have to wait for something dumb to become shrouded in the fog of history for someone to repeat it and it can be worse than farce; it can be a dull Sunday afternoon repeat of Poirot. Personally I think The Temptations had it more right than Marx

Air pollution, revolution, gun control,
Sound of soul
Shootin’ rockets to the moon
Kids growin’ up too soon
Politicians say more taxes will
Solve everything
And the band played on
So round ‘n’ round ‘n’ round we go
Where the world’s headed, nobody knows
Just a Ball of Confusion
Oh yea, that’s what the wold is today