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

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In defence of Reinhart and Rogoff

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Facepalm, as they say

Academic economic papers rarely receive the sort of mass reception that brings coverage in the Guardian and the Telegraph so by the standards of its field ‘Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff was something of a blockbuster.

The eponymous Carmen Reinhart and Kenneth Rogoff are economists who, in a 2010 paper,  ‘Growth In a Time of Debt‘ found that “whereas the link between growth and debt seems relatively weak at ‘normal’ debt levels, median growth rates for countries with public debt over roughly 90 percent of GDP are about one percent lower than otherwise; (mean) growth rates are several percent lower.”

These results, fleshed out to book length for the successful ‘This Time Is Different’, have been quoted by George Osborne, Paul Ryan, and Olli Rehn in support of their measures to get spiralling government debts under control.

Last week’s paper by Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts Amherst claimed to have proved this wrong. They had recreated Reinhart and Rogoff’s results and found that the pair had reached their figure of a GDP ‘growth’ rate of -0.1 percent per annum for economies with government debt of over 90 percent of GDP thanks to “coding errors, selective exclusion of available data, and unconventional weighting of summary statistics.” Most embarrassingly, the ‘coding error’ was a proper schoolboy error; Reinhart and Rogoff missed some of the numbers out of their calculations.

In truth the idea that there was an Iron Law such that an economy would shrink as soon as it’s government debt hit 90 percent of GDP, the ‘strong form’ of Reinhart and Rogoff (pushed more by the political practitioners than them it ought to be said), was always iffy. It smacks of the sort of bogus causation derived from correlation which is the basis for much modern macroeconomics.

There are, for example, different types of debt. Advocates of higher spending often point to the 260 percent of GDP the British government owed in 1816, the 180 percent it owed in 1919, or the 220 percent it owed in 1945. This, they tell you, proves that Britain’s economy can bear an even greater burden of debt than the 70 percent of GDP it has doubled to in the last five years.

But you don’t have to be David Starkey to know that in 1816, 1919, and 1945 Britain had run up that debt to pay the cost of defeating a tyrant and as soon as that was done we stopped. It was an expense we had to meet and defray over time, the wartime borrowing was classic ‘consumption smoothing’.

To put it another way, when the British government started spending heavily in 1792, 1914, or 1939 there was a definite endgame for this spending: the restoration of the Bourbon monarchy, the defeat of the Kaiser, the overthrow of Hitler. The very moment those goals were accomplished spending would fall rapidly.

Our current level of government spending, by contrast, is not being undertaken to safeguard this country and its neighbours from conquest but to maintain a public sector and welfare state grown fat on borrowing and tax revenue from an unsustainable bubble in the absence of that bubble and those tax revenues. We are not smoothing consumption, we are sucking it out of tomorrow. And, unlike Pitt the Younger, Herbert Asquith, or Neville Chamberlain, present day advocates of higher spending cannot give an endgame for their proposed accrual of debt.

The point of this for evaluating Reinhart and Rogoff’s work is to note that one load of debt is not necessarily the same as another. There ought to be a little nuance to the picture, there are no magic numbers.

But even with that said it can still be argued that Reinhart and Rogoff have been hard done to this last week. They are, as they say in ‘This Time Is Different’, involved in the on-going process of growing their data set (which, rather unwisely, they have been quite proprietary about) and since 2010 they have revised their conclusions in the light of new data which Herndon, Ash, and Pollin had access to.

As Reinhart and Rogoff wrote in the Wall Street Journal, in a 2012 paper with Vincent Reinhart they found GDP growth rates of 2.4 percent for economies with government debt over 90 percent of GDP, pretty close to the 2.2 percent calculated by Herndon, Ash, and Pollin.

Indeed, and despite what some excitable commentators have proclaimed, Herndon, Ash, and Pollin have not found no correlation between high debt and low growth. They have found a weaker one than Reinhart and Rogoff in 2010 and about the same as they found in 2012, but they have still found one.

As page 21 of their paper states: if debt is below 30 percent GDP growth comes in at 4.2 percent, if debt is between 30 percent and 60 percent of GDP growth comes in at 3.1 percent, if debt is between 60 percent and 90 percent of GDP growth comes in at 3.2 percent, and if debt is over 90 percent of GDP growth comes in at 2.2 percent. Even on Herndon, Ash, and Pollin’s figures higher debt is correlated with lower GDP growth.

And there is perhaps a more profound point to note. Reinhart and Rogoff have fessed up to the coding error but the “selective exclusion of available data, and unconventional weighting of summary statistics” which Herndon, Ash, and Pollin accuse them of is, in fact, the very stuff of modern macroeconomics.

The ‘facts’ which dominate and guide our economic lives such as GDP, the CPI, or even unemployment, are not objectively given but are constructed using just such subjective methods, a prime example are the nonsensical unemployment figures of the United States. If this furore provokes a little scepticism so much the better, but it should spread much further than one paper.

This article originally appeared at The Commentator

UK’s downgrade: Only spending cuts left to try

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Draw an X on Britain’s economy and win a Mini Metro*

The central, simple fact of British economic and political life is its government’s deficit of £119 billion, about 8 percent of GDP. As I wrote recently, “That works out at about £326 million pounds added to Britain’s national debt every single day, £13.6 million every single hour, £226,000 every single minute, or £3,766 every single second of fiscal year 2012/2013.”

Yet, so far, we have been able to finance this growing mountain of debt incredibly cheaply. As this debt has multiplied, yields on British gilts, the interest rate the government pays to borrow, have been hitting record lows.

There are broadly two schools of thought on this paradox. One, roughly Keynesian, says that these low yields reflect a strong appetite for British government debt in preference to investment in business or spending on consumption. The outlook of investors is, on this view, so pessimistic that they want to stash their wealth in the safe haven of gilts and it is the British government’s job to spend these savings via deficits so as to avoid a collapse of aggregate demand.

Another school of thought is more sceptical. It sees the source of the strong demand for gilts as the Bank of England, which bought up £375 billion worth of them (about a third of the national debt) under its Quantitative Easing program. On this view such fiscal wriggle room comes at the expense of monetary manipulation which would, if continued, lead to even higher inflation.

As esoteric as this might sound it is a debate that matters for all of us. The British government is accumulating so much debt that even with record low interest rates the amount it spent on debt interest increased by 8.7 percent in 2011/2012 to £48.2 billion, more than it spends on defence. Just imagine what would happen to that figure if gilt yields were to rise.

This is not a problem say some, many, though not all, from the Keynesian tradition. The British government never has to worry about whether it can pay back debt denominated in sterling, they say, because it can just get the Bank of England to produce as much new sterling as it needs to cover it.

The idea of George Osborne and Mark Carney running the printing presses to pay their bills might fill you with worries about inflation. Nonsense, the ‘Keynesians’ reply, if anyone thought inflation would be a problem this would be reflected in rising gilt yields and, as we’ve seen, yields are low.

When the coalition came to power in 2010 it rejected the Keynesian thinking and applied four tools to reduce the deficit; First there would be some tax rises; second, some spending cuts (while talking a lot about ‘austerity’ and ‘tough choices’); third, monetary policy, it was tacitly agreed with the Bank of England, would remain exceptionally easy.

But, fourth, most of the heavy lifting would be done by economic growth. In March 2012 the Office of Budget Responsibility predicted that growth would be chugging along at 0.7 percent for 2012 and 2 percent in 2013. George Osborne claimed that low yields on British gilts reflect the bond markets faith in this strategy.

And yet Britain’s economy has stubbornly refused to grow. In December the OBR downgraded its growth forecasts to -0.1 percent for 2012 and 1.2 percent for 2013. This has blown a hole in the coalition’s economic strategy.

The deficit, originally slated for extinction by 2015, will, on revised predictions, be with us until at least 2017. It looks likely that borrowing for 2012/2013 could turn out to be even higher than it was in 2011/2012.

And since the New Year this news, coupled with the Bank of England’s persistent failure to deal with above target inflation, seems to be causing some investors to reconsider Britain’s credit worthiness. Sterling has slumped to its lowest level since summer 2010. In the last six months yields on 10-year index-linked gilts have risen from 2.4 percent to 3.2 percent. The only surprise about Moody’s downgrade on Friday was that they waited this long.

In their bid to stave off the nightmare scenario of soaring yields, policymakers increasingly find their hands tied. Taxes cannot be raised, the failure of the 50p tax rate shows that our heads are bumping up against the Laffer Curve already. Spending to boost growth, which some are, incredibly, still advocating, simply risks immediate disaster. And with inflation stubbornly stuck above target Osborne cannot expect much help from Mervyn King or Mark Carney.

This just leaves spending cuts which have barely been tried so far. Osborne and King have run out of short term fiscal and monetary sticking plasters. Radical surgery cannot be postponed. Just under a year ago I wrote that “The British economy is walking a tightrope. On the one hand it has deficits the size of Greece; on the other it has interest rates as low as Germany.” We might be about to find out which it is that goes.

This article originally appeared at The Commentator

* Not legally binding

What killed Blockbuster

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No-one’s buying

Around 1989 my local video shop changed its name from Video World to Video and Pizza World. Mr Papandreou who ran the shop had twigged that a full set of Police Academy films and half a dozen copies of Big Trouble in Little China weren’t going to attract the local entertainment spend anymore. So he put an oven in the stock room and started selling pizzas. You could get a Hawaiian and an overnight rental for £4.

That’s how business works; you stand still and you die. Even so, esteemed (by no one more than himself) economist David Blanchflower recently tweeted: “Blockbuster now amazing all these firms in trouble right now nothing to do with govt policy and lack of spending & confidence of course”.

Well no Dave, it isn’t. A business works by taking inputs (land, labour, capital), doing something with them (adding value), and selling outputs for more than they paid for the inputs. By taking inputs that consumers valued at X and selling them for something consumers value at X+, the enterprise has increased the utility of society. That is why profits, earned from productive enterprise, are good things; they are a big neon sign flashing to the rest of the economy: “COME AND DO MORE OF WHAT THIS ENTERPRISE IS DOING!!!”

The flipside is that an enterprise which takes inputs which consumers value at Y and sells them Y- is destroying utility. That is why losses are also a big flashing sign screaming: “STOP DOING WHAT YOU’RE DOING AND NOBODY ELSE START!!!”

That is what companies like Blockbuster, Jessops, and HMV have been doing. Thanks to Amazon or iTunes consumers now value the goods and services provided by HMV at less than its costs HMV to provide them. Thanks to digital cameras consumers now value the service provided by Jessops at less than it costs Jessops to provide it. Thanks to LOVEFiLM and Netflix consumers now value the goods and services provided by Blockbuster at less than it costs Blockbuster to provide them. Unlike Mr Papandreou they stood still and they died.

Back during the boom years these companies could make up the deficit between what their inputs costs and what their outputs sold for by borrowing. HMV ran up debts of £176 million (£765,217 per store). Jessops ran up debts of £60 million. Blockbuster ran up debts of £23 million.

Now, the credit that was keeping these zombie, social-utility-destroying companies going has gone as it was always bound to. Warren Buffett wrote of downturns: “only when the tide goes out do you discover who’s been swimming naked.” The tide of credit receded and these companies were caught skinny dipping.

And, painful as that will be for the staff and creditors of these companies, in the wider and longer perspective this is a good thing for society. As I wrote recently:

“This is an excellent example of how the market process enables individuals to work to increase the prosperity of society. To the consumer, the CD purchased from HMV for £7 yields no more satisfaction than the same CD which, thanks to a leaner business model made possible by advances in technology, Amazon can sell you for £3.99. The consumer’s enjoyment of the CD is exactly the same but he or she has money left over that they wouldn’t have had if they had bought the CD from HMV. With this they can buy something else they also enjoy, good or service X or Y. Their total utility, to use the jargon, is increased.

If Amazon or iTunes are able to put Bob Dylan on your turntable or Fritz Lang on your screen with fewer resources than HMV can – the buildings, the staff, and everything that went into producing them – then those resources are freed up to produce something else to increase our enjoyment beyond Blonde on Blonde and Metropolis; good or service X or Y.

This is how the market process enables us to live better and better. Joseph Schumpeter called the market process “creative destruction”. HMV was destroyed but Amazon was created.”

It is utterly foolish to think, as Blanchflower appears to, that these companies have collapsed because of a lack of aggregate demand. Thanks to Amazon, iTunes, digital cameras, LOVEFiLM, and Netflix, there was no demand for these companies’ products and services in the first place, that’s why they were racking up debts.

Blockbuster was killed by economic progress, not George Osborne.

This article originally appeared at The Commentator

Silly Lily

This picture has become popular among the anti cuts crowd

There’s just one problem; it’s bobbins. Let’s see how…

1 – Are Cornish pasties a ‘working class food’?

2 – There is a tax on Polo mallets, VAT at 20%.

3 – No on was voted in, that’s why we ended up with a coalition.

4 – He ‘Seriously’ wants to see David Cameron and George Osborne beheaded. Seriously? Get a grip.

5 – Sadly most of what the bankers did was perfectly legal and was encouraged by the Labour government who showered the tax receipts of the property boom the bankers created on its clients in the welfare state and public sector.

6 – The working classes are not portrayed as rioters. The working classes were too busy working to go out rioting. It was elements of the permanently unemployed (and probably unemployable) underclass that went ram-raiding for new shoes.

Paul O’Grady is a funny bloke. A political sage he is not.

Cheering? For Gordon Brown?

Boo who?

Paralympians work hard for years to overcome incredible obstacles. The Paralympic Games is their moment of glory, the payoff for their amazing effort. So it was sad when three Paralympians had their moment spoiled last week when a boorish crowd decided that booing George Osborne was more important than honouring the athletes.

But what elevated this sad, selfish incident into the realms of the bizarre was that Osborne’s predecessor, one Gordon Brown, was cheered by another Paralympic crowd the very same day.

I have written the following or variations of it so often over the past couple of years that it’s depressing that it needs saying again. But the behaviour of the Paralympic crowds indicates that it does. We must hope that if truth doesn’t blast away ignorance like dynamite it may erode it like water, one drop at a time.

When Labour took office with Gordon Brown as Chancellor in 1997 they inherited the most benign set of economic circumstances since before World War One. When they left office in 2010 they bequeathed the worst set of economic circumstances since World War Two.

In 1997 Labour had committed themselves to Conservative spending plans, so ruined was their reputation for economic management. A budget deficit which had fallen from £51 billion in 1993 to £29 billion in 1996 continued to fall and surpluses were recorded in each of the years from 1998 to 2001. Government debt fell from 42 percent of GDP in 1996/1997 to 30 percent of GDP in 2001/2002. And all this happened as unemployment fell from 3 million in 1993 to 1.5 million in 2001.

So far, so good for Brown, even if he had been following Conservative policies. But when re-election was secured in 2001 hubris set in and Brown began going round telling anyone who would listen that we’d seen an end to “Tory boom and bust”. Worse, he actually seemed to believe this and embarked on a historic spending spree.

Between 2001 and 2007 government spending increased by 54 percent in real terms. The economy was booming, tax receipts rose by 40 percent, but this was still not enough to cover Labour’s mammoth spending binge.

In every year from 2001 until 2008, before the first banker was bailed out, the Labour government spent more than it received, applying fiscal stimulus to an already growing economy. In these years of economic growth Gordon Brown added over £200 billion to British government debt which increased from 30 percent of GDP to 35 percent on the eve of the crisis.

If this doesn’t sound like much consider that, if Brown had maintained the downward trend of his ‘conservative’ years, government debt would actually have been below 20 percent of GDP when the crash came.

It came in 2008 with the biggest bust since the 1930s despite what Brown had been telling us all those years. Faced with collapsing tax revenues and feeling the need to engage in some (highly dubious) stimulus spending with an election due, the deficit rocketed from £35 billion in 2007 to a peacetime record £153 billion in 2009.

This unprecedented binge of borrowing and spending generated growth of 1 percent of GDP. It wasn’t enough to save Brown from richly deserved defeat in May 2010.

This was the coalition government’s inheritance courtesy of the Labour Party. British government debt was increasing at the rate of £420 million per day, or £5,000 per second, on its way to a projected figure of almost 80 percent of GDP, a figure not seen for fifty years as Britain paid off the costs of World War Two.

The coalition does not, in fact, propose to bring this debt down. Instead it is simply reducing the deficit, the amount by which the debt increases each year. In fact, by the end of this parliament the national debt will actually be 60 percent higher than when the coalition took office.

Despite what you may have heard, there is no austerity. Since taking office the coalition has cut spending by just 1 percent in real terms. True, we have seen cuts to departmental budgets and we will see more. But this is not because government spending is falling but because government is having to reallocate more and more money to debt repayments as our debt rises.

During the boom years of 2001 to 2008 British government debt payments rose from £21 billion a year to £31 billion as Brown piled up debt. Since the crash they have shot up to £48 billion a year, more than on defence or law and order. By 2015 this is projected to have reached £70 billion a year. And this, remember, is with record low interest rates on British government debt. Imagine what would happen if those interest rates rose.

To meet these rising costs spending is being switched away from nurses, teachers, and welfare recipients, and towards holders of British government gilts.

Increasing interest payments are the inevitable, unavoidable consequence of increasing debt and so, equally obviously, are cuts in spending elsewhere. So if people want to boo someone about ‘cuts’ they should boo the guy who ran up the debts. And while they’re at it, boo the people who voted for him.

It has now become de rigueur to roll one’s eyes, maybe groan a little, and profess boredom when told that Labour and Gordon Brown are to blame for our current dire mess. But it’s true. And it doesn’t become less true because someone is bored of hearing it.

A joke was quickly going around about the Osborne incident;

Q) Why did 80,000 people boo George Osborne?

A) Because that’s the capacity of the Olympic Stadium.

It would have been more accurate to say

A) Because they are utterly ignorant of public finance.

This article originally appeared at The Commentator

The polarization of politics: Let’s mingle more

My captain, my captain

As a Trekkie I was keen to watch Patrick Stewart, late of the Starship Enterprise, boldly going on the BBC’s Hardtalk. Stewart is a man I greatly admire not only for pulling off the impossible and filling Captain Kirk’s seat, but for an acting career that spans Sejanus in I, Claudius and a hypersexed version of himself in Extras.

So it was disappointing to actually see Stewart in action. I knew he was a Labour supporter; he’s a Yorkshireman and luvvie after all. But he went further. He said he actually feels “uncomfortable” around Conservatives. This was yet another manifestation of a depressing trend. People are increasingly unable to tolerate anyone whose politics aren’t just like theirs.

The trend is further developed in the United States than in Britain. In the US the tone of political debate is frequently poisonous. From the right you have ‘conservatives’ accusing ‘liberals’ of wanting to destroy America. From the left you get ‘liberals’ accusing ‘conservatives’ of wanting to grind everyone else into poverty. To each their opponents are not merely wrong, not simply possessed of a different philosophy, but are actually evil. Neither side recognises any common ground at all with the other.

We have not been free of this in Britain. In 1945 Winston Churchill warned that if Labour won the election Clement Atlee would usher in a British “Gestapo” and opposition to Margaret Thatcher frequently scaled quite epic heights of demented lunacy. It still does.

But this was the exception in Britain, perhaps because figures like Harold Wilson, Edward Heath, John Major, or Tony Blair drew most of their flack from their supposed supporters. Enoch Powell could disagree utterly with both Tony Benn and Michael Foot yet maintain warmer personal relations with either than Foot and Benn could manage with each other.

This has been changing. As the coalition undertakes to slow the growth in government debt so that it only doubles in five years, some on the Left have reacted as though civilization is about to end. Worse, they attribute it, as in America, not merely to error or possession of a different philosophy, but to evil itself.

Polly Toynbee, a trail blazer for the New Nastiness in British political discourse, described the popular proposal to cap Housing Benefit to a still pretty generous £400 a week for a four-bedroom property and £250 a week for a two-bedroom home as the Tories’ “final solution for the poor”, seeing in the cuddly Grant Shapps the echo of Heydrich and Himmler.

I am quite sure that someone of a left wing persuasion reading this will respond that the Right does plenty of it too. No doubt the Daily Mail and Peter Hitchens will be mentioned. And they may well be right. I concede the distinct possibility that both sides are as bad as each other but I shan’t find any comfort in it.

The rhetoric of someone like Toynbee and her counterparts on the Right is harmful. If, for example, you are a Guardian reader who accepts Toynbee’s view of the world then, by extension, you must consider people like me, as an occasional supporter of the Conservative Party, a crypto-Nazi.

If this sounds as ridiculous as it ought to then stick Toynbee in the bin. If, however, you do accept her world view that the coalition is evil and acting out of spite then you can understand why someone like Patrick Stewart would feel uncomfortable around Conservatives, even ones like me who wear plastic pointed ears from time to time. We’re Nazis, after all.

This matters. Democracies work because every few years, at election time, the losing party hands power to the winning party on the understanding that, at the next election, power will be handed back to them if they are successful. This is only possible because the parties consider themselves part of the same polity. If they don’t, if they see no common ground, then the basis for electoral democracy breaks down. In many places around the world elections are accompanied by fraud or violence precisely because this common polity doesn’t exist.

This also gives some clue as to where this bitterness comes from. Governments are now, increasingly, mechanisms by which wealth is transferred around society. Unlike wealth creation, which can generate wealth which didn’t previously exist and make everyone better off, wealth transfer is always a zero sum game; one party can only benefit to the extent that some else loses. Wealth creation creates winners. Wealth transfer creates losers as well.

And, as governments grow, so does their role as wealth transferors, increasing the number of both winners and losers in the zero sum game of government. Bitterness grows alongside.

I have a great many friends who would describe themselves as being of a left wing persuasion so I can see what people like Stewart are missing out on. Because I know lefties personally and not solely from the pages of the Mail I know that they don’t all want to put me in a Gulag run by Harriet Harman. And I hope that, from knowing me, they realise that not all ‘right wingers’ want to feast on the carcasses of the poor. Each of us thinks the other is wrong; neither thinks the other is evil.

What is under threat in Britain, and almost dead in America, is this sense of commonality, of being part of a shared polity with people we disagree with, but who are, for the most part, just as sincere and well-motivated as we are. And we won’t keep it if, like Patrick Stewart, we seal ourselves off from those we disagree with.

We need to mingle more, not less. Unless you think Picard was a better captain than Kirk, then I really will never talk to you again.

This article originally appeared at The Commentator

Overrated: Paul Krugman

“Snake oil, £14.99!”

When Friedrich von Hayek became a Nobel Laureate in economics in 1974 he said: “The Nobel Prize confers on an individual an authority which in economics no man ought to possess.” The truth of this is demonstrated daily by the case of Paul Krugman.

Krugman and his supporters whip out his Nobel Memorial Prize in Economic Sciences like a Top Trump of Diego Maradona. It is awarded annually — so why the special fuss about a prize Krugman won four years ago? His Nobel is being used to intimidate opponents. Any opposition to Krugman with his Nobel Prize is opposition to science itself.

Why Krugman generates so much opposition isn’t hard to fathom. From his perch in the New York Times he says one ridiculous thing after another. In the British context Krugman’s risible thesis is that the economy is struggling because the government isn’t spending enough money, that austerity is driving us back into recession, and that the solution to our debt crisis is to borrow and spend even more money.

But there is no austerity. British government spending has fallen from record highs by only about 1 per cent since the coalition took office. This has tipped us back into recession? Most private sector companies could save that by switching to cheaper copier paper.

Krugman argues that we need vast government spending to get us out of the recession. But Britain is running a budget deficit of more than 8 per cent of GDP, one of the highest in the developed world. The government is spending more than 400 million borrowed pounds every day; the national debt is increasing by more than £5,000 every second.

And yet, with all this extra borrowing and all this spending Britain’s economy is still tanking. Perhaps this suggests that massive deficit spending isn’t the answer. That’s one interpretation. Not for Krugman. To him the problem is that even the record levels of borrowing which will see Britain’s national debt increase by 60 per cent, from £1 trillion to £1.6 trillion, by the next election, are not enough. We need to borrow more. That, he claims, would solve our debt crisis.

Krugman’s new book (its recommended retail price an aggregate demand boosting £14.99) is called End This Depression Now! (Norton) as though that hadn’t previously occurred to anyone else. Indeed, it’s possible that if George Osborne decided to increase borrowing to 10 or 12 per cent of GDP we might have a quarter or two of growth. Labour managed to boost GDP growth to 1 per cent by dumping £160 billion of borrowed money into the economy.

But after that? Don’t ask Krugman. He follows John Maynard Keynes who, accurately but none too helpfully, observed: “In the long run we are all dead.” Actually, if you did ask Krugman, you might get a response like the one he gave when the dot com bubble burst: “To fight this recession the Fed needs . . . soaring household spending to offset moribund business investment . . . Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”

That worked out fine, didn’t it? Well yes, in Krugman’s terms it did. Sure, we are now living with the effects of the bursting of that bubble but we did get a few good years of rocketing property prices which made us all feel as though we were getting richer just by sitting in our homes. And now that bubble has burst we just inflate a new one somewhere else. And when that bursts we inflate a new one. And when that bursts . . .

This is where the Keynesian ignorance of the long run demonstrated by Krugman leads you: lurching from one catastrophe to the next with a series of increasingly expensive quick fixes of ever shorter duration which do nothing to address the underlying problems.

The economic problems of Greece, Spain, and Britain are not that the deficits of 7 per cent, 7 per cent and 8 per cent their governments are respectively running are not high enough. Greek labour costs are higher than elsewhere and Greece doesn’t export very much. Spain has unemployment of 24 per cent thanks to a labour market which makes job creation almost impossible. Britain is  already one of the most indebted nations on the planet.

These fundamental problems are ignored by Krugman and his followers. In his 1994 book Peddling Prosperity Krugman accused the supply-side economists of the 1980s of being “cranks” selling “snake oil” because, he said, they offered politically expedient economic non-remedies with no   basis in fact. Hypocrisy, thy name is Krugman.

As for that Nobel Prize, Paul Krugman won it for his work on international trade patterns, not his crackpot Keynesianism. Sir Paul McCartney won an Ivor Novello award for writing “Yesterday”. That doesn’t mean sentimental schlock like “Mull of Kintyre” is worth listening to.

This article originally appeared in Standpoint

If you are looking for useful insights into the behaviour of homo economicus, don’t look to the left

UK Uncut – Where RAG Week never ends

Few subjects currently arouse the political passions quite like that of tax avoidance. Such is the subjects’ flammability that the antics of glorified Rag Week pranksters like UK Uncut have, none too indirectly, prompted government action. And, predictably, action with such pitiful inspiration has blown up in the government’s face.

It might be wondered why tax avoidance generates such emotion. It’s a perfectly legal activity after all, even though some people seem incapable of (or unwilling to) understand the difference between tax avoidance and criminal tax evasion.

Indeed, most of us are tax avoiders. If you have ever modified your behaviour because of taxation, say by taking the train to Edinburgh rather than the plane, quitting smoking, or buying a little less of something because VAT has gone up, you are a tax avoider.

To illustrate the scale of this common or garden tax avoidance, here, literally, are some back of a fag packet calculations. There are 10 million ex smokers in the UK. The average smoker smokes 13.5 cigarettes a day (13 for women, 14 for men) so that is 135 million cigarettes these people are not smoking everyday. Now, with the each tab generating 26p in tax that is a whopping loss to the Exchequer of over £35 million per day because these people stopped smoking. Can we expect to see the guilt ridden middle class poseurs of UK Uncut chasing ex smokers down the street, throwing fags at them and demanding that they continue to puff for the public sector?

In fact, whole areas of public policy rely on us being tax avoiders. Government raises taxes on smoking and drinking (ostensibly) to get us to smoke and drink less. They put all manner of green taxes on carbon consumption because they want us to consume less carbon. To assume these measures will have any effect you have to assume first that most people are responsive to tax changes; that they are tax avoiders, in other words.

Recognising perhaps that government would have very few policy tools left if there were no such thing as tax elasticity, George Osborne has lately been trying to distinguish between this widespread fact-of-human-nature tax avoidance and what he calls “aggressive tax avoidance” which he finds “morally repugnant”. As you might have expected, policy based on such a non-existent distinction has come a cropper.

You will know the details by now: rich people are giving money to charities and offsetting this against tax liabilities. This has the effect of reducing the newly popular but entirely bogus‘effective’ tax rate paid by the rich. To prevent this, the government announced plans to cap the tax relief on charitable donations.

All hell broke loose. Apparently it came as a shock to Osborne and David Cameron to find that if you effectively tax charitable donations, charitable donations might actually decline. That they should have been so stunned is quite bizarre. As we’ve seen, swathes of public policy depend on us being tax avoiders. And, in the very same budget, Osborne announced the reduction of the top rate of tax from 50p to 45p citing exactly those incentive effects that he dismissed when applied to charities.  The eminently avoidable fiasco looks likely to end in a clumsily executed U turn.

You could have known all of this, in fact, before it happened. That is because, to repeat, people are generally tax avoiders. Individuals generally think that they have the most right and are the best qualified to spend the money they earn on satisfying their wants and needs.

This is not to say that the tax avoidance bandwagon does not have some support. But when you ask people which taxes they think should be increased or whose avoidance should be clamped down upon the answer is always the same: “Somebody else’s”.

This natural self interest is something the left has always struggled with, as demonstrated by their renaming it ‘selfishness’. It is a key tenet of left wing belief that state spending is good (not entirely coincidentally very many on the left receive large amounts of their income from state spending). This is why you heard people supporting the retention of a 50p tax rate which actually saw the rich pay less in tax. This arose because, if you hold to the idea that state spending is good, then if your taxes increase you will simply keep on working or giving to charity as before and taxes will rise proportionally. And, by extension, if the goodness of state spending is so self-evident, then everyone will think like this.

But they don’t, as common sense and a wealth of history attest. Instead people have some idea of what they should fairly be paying in tax and any attempt to raise the tax take much beyond this is doomed. Obviously, with a raft of lawyers and accountants on the payroll, the opportunities for the rich to skip out of any increase are greater than for others.

If you are looking for useful insights into the behaviour of homo economicus don’t look to the left. The effective raising of tax on charitable giving was always going to lead to less charitable giving because the levying and raising of tax on anything generally leads to less of whatever is being taxed. The government has waded into this avoidable mess because it has been led in the search for the limit of what people will hand over to the state by people who don’t believe such a limit exists.

This article originally appeared at The Commentator