Brexit and the waning days of the United Kingdom

[The Minsky Moment]

This seems not to have been the usual case when the Irish and Spanish real estate bubbles popped.

Correct - they don't issue their own currency.  In a currency union the distinctions between monetary and fiscal are always clear and hard.

[Admiral Yi]

Or you can say this is practically speaking a real obligation that already exists.  And hey look, right now we can fund it at 0.5% - is it really going to be much better some other time?

Or you could always raise taxes, or cut other spending.

[The Minsky Moment]

Or you can say this is practically speaking a real obligation that already exists.  And hey look, right now we can fund it at 0.5% - is it really going to be much better some other time?

Or you could always raise taxes, or cut other spending.

Correct, the decisions are distinct and separable.
But would I raise taxes now, with the Brexit uncertainty hitting business investment?  I would tend against.

[Berkut]

My point is the same that I've been making, well, forever.

I don't have a problem with government spending, or taxes, or whatever.

I just find it interesting that there is a huge part of the population for which the answer is "more government spending" no matter what the question is, or what the context of that question is, and more importantly, there is no question, ever, for which the answer is "We should decrease spending".

That suggests rather strongly to me that the spending is in and of itself the goal, not whether or not the trains need X dollars or 2X dollars per year.

I know what their answer will be - 2X. And if we spend 2X, next year the answer is 2X that number.

If the economy is good, we can afford to spend more, and if the economy is bad, we cannot possibly afford to spend less.

[The Minsky Moment]

I just find it interesting that there is a huge part of the population for which the answer is "more government spending" no matter what the question is, or what the context of that question is, and more importantly, there is no question, ever, for which the answer is "We should decrease spending".

I can't speak for the population.  My position is that spending is based on need and what can be more effectively provided through the government.  So the question isn't really about "spending" as a totality.  Each spending item should be evaluated on its own merit or lack of merit.

Fiscal policy as an instrument of economic policy is a separate matter.  Under standard Keynsian theory there certainly are conditions where the answer is to reduce the deficit.  In the UK specifically, though, the austerity argument is really historical - namely, Osborne's decision to react to the financial collapse back in 2010 by pursuing "expansionary austerity".  That was economic mumbo-jumbo but for some reason it is the critics of that policy who have been painted as unreasonable.

[Admiral Yi]

Correct - they don't issue their own currency.  In a currency union the distinctions between monetary and fiscal are always clear and hard.

And by implication countries that issue their own currency, like Argentina, Venezuela, and like Zimbabwe used to do is thinking about doing so again, don't experience the same distinction?

[The Minsky Moment]

Correct - they don't issue their own currency.  In a currency union the distinctions between monetary and fiscal are always clear and hard.

And by implication countries that issue their own currency, like Argentina, Venezuela, and like Zimbabwe used to do is thinking about doing so again, don't experience the same distinction?

They are actually pretty good examples of the lack of such distinction as overspending on the fiscal side lead to large inflations or hyperinflations on the monetary side.   With some complications in the Argentine case due to the existence of US law dollar debt.

[Sheilbh]

One in five Labour voters believe MI5 is behind some of the online criticism of Jeremy Corbyn. Let's just shut up shop

[The Brain]

Hard to find a party where the wackiest 20% of its voters aren't completely bonkers.

[Sheilbh]

Latest total year deficit I could find was a crippling, draconian, Spartan, inhumane, unreasonable 4% of GDP.  Meanwhile the economy is growing at 2.1%.  So, duh, debt/GDP is growing during "austerity."

Okay but looking at a deficit or surplus doesn't tell you anything about austerity.

And it's entirely common and expected for austerity to have a dampening effect on GDP growth, inequality, unemployment which then have other negative effects for not very clear gains, from the IMF:

Size of the state
Curbing the size of the state is another aspect of the neoliberal agenda. Privatization of some government functions is one way to achieve this. Another is to constrain government spending through limits on the size of fiscal deficits and on the ability of governments to accumulate debt. The economic history of recent decades offers many examples of such curbs, such as the limit of 60 percent of GDP set for countries to join the euro area (one of the so-called Maastricht criteria).­

Economic theory provides little guidance on the optimal public debt target. Some theories justify higher levels of debt (since taxation is distortionary) and others point to lower—or even negative—levels (since adverse shocks call for precautionary saving). In some of its fiscal policy advice, the IMF has been concerned mainly with the pace at which governments reduce deficits and debt levels following the buildup of debt in advanced economies induced by the global financial crisis: too slow would unnerve markets; too fast would derail recovery. But the IMF has also argued for paying down debt ratios in the medium term in a broad mix of advanced and emerging market countries, mainly as insurance against future shocks.­

But is there really a defensible case for countries like Germany, the United Kingdom, or the United States to pay down the public debt? Two arguments are usually made in support of paying down the debt in countries with ample fiscal space—that is, in countries where there is little real prospect of a fiscal crisis. The first is that, although large adverse shocks such as the Great Depression of the 1930s or the global financial crisis of the past decade occur rarely, when they do, it is helpful to have used the quiet times to pay down the debt. The second argument rests on the notion that high debt is bad for growth—and, therefore, to lay a firm foundation for growth, paying down the debt is essential.­

It is surely the case that many countries (such as those in southern Europe) have little choice but to engage in fiscal consolidation, because markets will not allow them to continue borrowing. But the need for consolidation in some countries does not mean all countries—at least in this case, caution about "one size fits all" seems completely warranted. Markets generally attach very low probabilities of a debt crisis to countries that have a strong record of being fiscally responsible (Mendoza and Ostry, 2007). Such a track record gives them latitude to decide not to raise taxes or cut productive spending when the debt level is high (Ostry and others, 2010; Ghosh and others, 2013). And for countries with a strong track record, the benefit of debt reduction, in terms of insurance against a future fiscal crisis, turns out to be remarkably small, even at very high levels of debt to GDP. For example, moving from a debt ratio of 120 percent of GDP to 100 percent of GDP over a few years buys the country very little in terms of reduced crisis risk (Baldacci and others, 2011).­

But even if the insurance benefit is small, it may still be worth incurring if the cost is sufficiently low. It turns out, however, that the cost could be large—much larger than the benefit. The reason is that, to get to a lower debt level, taxes that distort economic behavior need to be raised temporarily or productive spending needs to be cut—or both. The costs of the tax increases or expenditure cuts required to bring down the debt may be much larger than the reduced crisis risk engendered by the lower debt (Ostry, Ghosh, and Espinoza, 2015). This is not to deny that high debt is bad for growth and welfare. It is. But the key point is that the welfare cost from the higher debt (the so-called burden of the debt) is one that has already been incurred and cannot be recovered; it is a sunk cost. Faced with a choice between living with the higher debt—allowing the debt ratio to decline organically through growth—or deliberately running budgetary surpluses to reduce the debt, governments with ample fiscal space will do better by living with the debt.­

Austerity policies not only generate substantial welfare costs due to supply-side channels, they also hurt demand—and thus worsen employment and unemployment. The notion that fiscal consolidations can be expansionary (that is, raise output and employment), in part by raising private sector confidence and investment, has been championed by, among others, Harvard economist Alberto Alesina in the academic world and by former European Central Bank President Jean-Claude Trichet in the policy arena. However, in practice, episodes of fiscal consolidation have been followed, on average, by drops rather than by expansions in output. On average, a consolidation of 1 percent of GDP increases the long-term unemployment rate by 0.6 percentage point and raises by 1.5 percent within five years the Gini measure of income inequality (Ball and others, 2013).­

[...]

In the case of fiscal consolidation, the short-run costs in terms of lower output and welfare and higher unemployment have been underplayed, and the desirability for countries with ample fiscal space of simply living with high debt and allowing debt ratios to decline organically through growth is underappreciated.

So anyone who is "anti-austerity" wants to grow the debt during a time of positive, sustained growth and low unemployment. 

First of all I think this needs British context. The past two governments have instituted a 'triple lock' on pension that means they rise by the highest of either inflation, wages or 2.5%. They have also guaranteed that the NHS will continue to get higher spending in real terms (though minimally) and have protected 'frontline' spending on education - in addition, though in comparison with those three measures this is marginal, they have guaranteed international aid at the UN target of 0.7%. The cumulative effect of those political choices is that a huge chunk of the budget cannot be cut. The areas they have cut have been initially capital spending (Osborne somewhat went back on this which is part of the reason growth improved after 2012) and then overwhelmingly the rest of the budget for all other services. So for example my borough in London has had its budget cut by 40% since 2010 - it's a relatively poor borough and the council has a range of statutory responsibilities. The other area of the budget that's been cut most is benefits for the unemployed and disabled because that's the only real meat on the bones you've left. So austerity in the UK isn't just a broad concept it's the political choice made by the last two governments to disproportionately cut spending that goes to the poor and the young - ie. to people who don't vote and certainly don't vote Tory.

In addition Osborne also made the political choice to set himself very ambitious targets for deficit cutting - if they'd succeeded it would've been the largest and quickest fiscal consolidation in record in a major economy. So for the first two years he took those steps very quickly and the economy went from one of the fastest recovering to a recession. From 2012 onwards he basically adopted what was Labour's plan in 2010 but the damage was done.

Edit: Incidentally Osborne did also cut the top rate of tax during his early most austere phase when the big catchphrase was 'we're all in it together'.

In terms of the current position I would like to see those policies changed and rebalanced. Personally I think the whole state needs reconsideration but I think those areas of the budget that were protected for political reasons - and that Labour, with the exception of the NHS, never matched - should be equally open for austerity measures.

Also I think there's an argument for fiscal stimulus. Part of the argument for investment in infrastructure especially is I think unrelated and more to do with what Osborne was talking about in rebalancing the economy to the North where infrastructure is lagging behind. I think the argument for stimulus is that there are plenty of indicators that growth is contracting pretty sharply post-Brexit.

But I follow Duncan Weldon in that I would actually like old-fashioned fiscal stimulus where we know the risks and have past experience of how it works instead of relying on ever-increasing unconventional monetary policy. At the moment we are still trapped in a reasonably low growth, low interest rate environment (unemployment is the only distinction with the Eurozone). We don't know what the long-term effects are of this. Also if there is secular stagnation then monetary policy may not help, fiscal stimulus normally leads to higher interest rates, capital flowing in etc.

Part of the reason I want fiscal stimulus is because I want the BofE to be able to step back and for the state to step in. We've had 8 years of interest rates that are at historic lows and QE. That's enormously helped after the state stepped back in 2010 but I'm worried that it is becoming the new normal and think we have to try and increase growth, increase the number of safe assets and stop the BofE from running out of ammo next time we face a recession.

I remember some very valid criticisms made during the Great Financial Crisis about the endemic deficits run during boom times by the Blair government, which had the effect of reducing the UK's ability to engage in pump priming.  Any of that seem relevant now?

Endemic deficits?

"Austerity" is not a fashion choice.

No, but it is a political one.

[Admiral Yi]

Okay but looking at a deficit or surplus doesn't tell you anything about austerity.

What are you supposed to look at then?

No, but it is a political one.

It's a political choice divorced from economic reality.

[Sheilbh]

Okay but looking at a deficit or surplus doesn't tell you anything about austerity.

What are you supposed to look at then?

I'd say it's the reduction in the structural deficit - or potentially increase in a structural surplus.

So a 4.1% deficit doesn't tell you anything. A 4.1% deficit a year after a 6.5% deficit suggests that that country's been following austerity policies. A 4.1% deficit after a 2% deficit suggests it hasn't. However the key is, as is possible and understanding this will be contentious, what the course of the structural deficit is. But even those annual figures don't necessarily tell you much as it is possible that the deficit could rise in the context of an economic collapse despite (or partially because of) austerity and it's equally possible that despite the economy booming and your deficit shrinking that you may be increasing to the structural deficit so there isn't an austerity policy in place.

And, contra Berk, it isn't just about spending but also tax policy. In my view we didn't keep the stimulus cut to VAT nearly long enough under Darling and its subsequent rise under Osborne was a mistake. It's also probably the single policy in Greece that I think is most counter-productive.

[Admiral Yi]

So to take the Greek example, if they had followed their 19% deficit with an 18% deficit, that would have been "austere?"  And someone opposed to austerity would have argued for a deficit greater than 18%?

[Sheilbh]

I think you get really hung up on the word austerity and austere. As I say in the UK it was embraced by Cameron who described us as entering 'an age of austerity' in 2009 when he was running for office - combined with the 'we're all in it together' line it was clearly trying to sort of invoke the spirit of wartime and post-war austerity. I could be wrong but I'd guess that period is its first use in the economic sense. Now it's probably tarnished by association like 'the third way' but it certainly hasn't always had negative slogan-istic connotations.

It should be a neutral word (obviously Cameron was trying to summon one memory of it, lefties tend to be driven mad by its mention) that, in my view, describes a set of policies - tax rises/spending cuts that reduce a structural deficit. As I say the deficit figure tells you nothing - in that scenario the economy could have grown and the Greeks could have actually increased their structural deficit which is the opposite of austerity. If Greece cut their structural deficit from 19% to 18% then they've been following austerity policies. Now whether you think they're right depends on other things - and frankly your view on the policy mix may vary: is it based too much on cutting expenditure/raising taxes for example. Also a lot of the argument over austerity is really to do with pace (and in the case of IMF program countries sequences of reforms) and cutting of capital expenditure which cuts the headline deficit, and growth, but isn't - in my view - an austerity measure.

In Greece and the UK I think all sorts of policies have been lumped together under the banner of 'austerity' by their opponents that aren't necessarily austerity measures. So someone who's opposed to 'austerity' may actually be mainly angry about the reorganisation of the NHS or trade union reforms or labour reforms which had nothing to do with it but has, wrongly, become bracketed under austerity.

As I say what's quite frustrating is that Osborne and Cameron campaigned on 2010 on the grounds that we were the next Greece and needed radical austerity measures - as Cameron said, 'an age of austerity' that would leave 'no household untouched'. What happened actually didn't affect every household. But it also caused a recession and ultimately Cameron and Osborne ended up following Labour's dangerous, Grecian policy of austerity but slower. Before that recession we had one of the best recoveries in the developed world. In my view Darling was too austere - it should have been 2011 at least before temporary stimulus measures like the VAT cut were withdrawn far less austerity measures started - but at least his pace was realistic and when followed by Osborne from 2012 onwards did lead to higher growth.

At the last election Ed Miliband campaigned for a chunk of investment in infrastructure and a new 'fiscal pledge' that Labour would balance the current/structural spending in the course of that Parliament and run a current/structural surplus - to an extent this wasn't a million miles from Osborne but he was exempting lots of the state from cuts. Jeremy Corbyn has won on staunchly anti-austerity rhetoric. The only economic policies he's announced so far (bearing in mind his feted council of economic advisers all resigned after a year saying they had no faith in him, hadn't actually had any meetings and had seen no policy proposals from him) have been to invest in infrastructure and to run a structural balanced budget. It's the thing that really angers me is that Labour's getting all of the stick for being an ultra-radical, left-wing party with none of the actual policy ideas or, you know, useful intellectual content. He's running with anti-austerity the slogan not any actual policies.

[Admiral Yi]

I'm hung on the word austerity because I think it's ridiculous to describe a budget deficit of 18% of GDP as austere and I think for a person to state that they are "anti-austerity" is a ridiculous position to take.

Deficits greater than nominal growth increase national debt.  That's not a political position, or a fashion statement, it's basic math.  Now either increased national debt leads to lowered credit ratings/higher interest paid on debt service, or it doesn't.  If you acknowledge it does, then to be "anti-austerity" means you either (a) are willing to sacrifice a future default for the sake of current consumption, or at (b) you are willing to sacrifice the ability of future generations to deficit spend in the event of an *actual* crisis.

If you think the total national debt is irrelevant, then why stop at a few percentage points of increased spending?  Why not kick out the jams and throw a continuous Mardi Gras party?