With apologies to George Carlin. A couple of weeks ago, I was closing my post on how to counter Chinese industrial policy with a bit of a rant about German carmakers.
This goes to the problem of politicians continuously preferring current expenditure to investment expenditure. Why? To paraphrase James Carville, „It‘s the politics, stupid.“
However, let’s be honest with ourselves. There is a tradeoff. If one would not have gotten to grips with the debt, what would the bond markets have done? To counter this, Central banks would have had to expand their balance sheets even more than what they did to start with, surely. This would have stimulated the valuation of assets even more than what it did and the differential between asset valuation and real GDP would have been even greater leading to greater financial risk as a consequence.
I don't think your analysis is wrong. I think what we learned over the last 15 years, however, is that austerity need not have been that extreme. there are lots of studies that show that all kinds of countries from the US to continental European countries could get away with higher debt levels and less austerity. The Truss episode in the UK was clearly too far, but a lot of it had to do with unfunded tax cuts, rather than deficits being too large.
Deficits can be larger (and bond markets will forgive you for larger deficits), if there is a clear path to lowering them in the future. This means, you can increase deficits for government investments, but not for government consumption.
This is why I find the UK's fiscal rules too strict. At the moment, the debt/GDP-level has to decline within five years. I would prefer a fiscal rule that say you cannot spend more on consumption than you take in in taxes, but you can increase the debt/GDP-ratio via investments.
Ironic that inflation has caused a backlash against investing in something which is deflationary and would protect us against reliance on fossil fuels and their inherent price volatility
'They feared that this debt would reduce future growth, a belief largely driven by faulty and since debunked research'
Although we all of course celebrate the debunking of supposedly settled science ('no more snow in the UK by 2009!' etc etc etc - and then some) but in this case i would say that a study with some missing data does not let you discard the basic theory.
Generally, too much debt is still considered bad by most.
And when missing data was added the conclusion was still (as per your source):
'They find that high levels of debt are still correlated with lower growth - but the most spectacular results from the Reinhart and Rogoff paper disappear. High debt is correlated with somewhat lower growth, but the relationship is much gentler and there are lots of exceptions to the rule'.
Those spectacular results disappeared after data was added from nations with a traditionally more or less sound debt policy: Austria, Norway etc. With only Belgium as a somewhat 'southern European oriented' (good cooking starts there) outlier.
'First, economists are increasingly convinced that the pain of austerity was worse than the eventual gains in the form of lower debt/GDP-ratios'
No doubt, in a low redistribution nation like the UK.
But 'pain' has been a highly politicized concept for economists and almost everybody else. Because one's economic understanding / pov has become equated to one's moral make up since progressives began to dominate labour and green parties in the seventies. And a little later media, education and academics.
Plus, you have austerity, reasonable debt, and too much debt. If a nation with traditionally more or less sound debt policies enters what looks like a massive recession, i can understand that the suggestion to fight that with what could end up as adding massive debt is instinctively a bit much. Just like gov's overreacted in the early stages of the covid pandemic (and then found it hard to change course because covid, like economics, was quickly politicized as well, with progressives as 'the caring side' and (some) centrists and conservatives as irresponsible science deniers...).
Then you have the discussion of what 'stimulus' means. Massive welfare support for the growing number of unemployed? Or stimulating the economy though huge infrastructure projects? (And leaving welfare as it is).
How have infrastructure projects 'stimulated' the Italian economy historically? How were the EU covid
funds for Italy (not) applied to build actual STUFF? (Some of the 'Italian' money is now put into a 'Bauhaus for Europe' project because Bauhaus is V/d Leyens favorite architecture...). FDR is lauded for his 1930s projects (massives heatwaves back then btw, typically left out of todays alarming charts since they mute the results so much) but he didn't kill the recession or unemployment. WW2 did that.
'helped drive the surge in populism'
Nonsense, just more evidence of economics-as-modern-morals for progressives. Who are always looking for theories explaining why not everybody votes for them - since they don't have a political but instead a religious pov but they just don't realize it (they equate religion to abortion ect so they can't possibly be religious). Italy and the Netherlands pioneered populism in the 1990s as traditional parties had collapsed in Italy, and in the Netherlands had replaced worker's priorities with the plight of the immigrants (labor- and housing competitors of native workers), the Climate (boing, amen) and expressions of General Liberal Decency (i'm a better person than you) which meant nothing.
Add rising crime, not seldomly with immigrant perpetrators and native victims. Wanting to discuss for instance Moroccans' enthusiasm for robbing 70 yo women was considered racist, while the fact that they only robbed old white women was, hilariously, the one true 'racist' item in the (non) discussion. Moroccans have since progressed to the summit of Dutch crime, both in volume and in seriousness.
Populism is about not being heard. Period. If someone wants to tie economics to democracy's outcomes...James Goldsmith already did it in 1994, only then most weren't paying attention:
Clip: Sir James Goldsmith Presciently Explaining Globalization in 1994
'But austerity also was bad for the climate and household finances as a case study by Immanuel Feld and Thiemo Fetzer indicates'
Pull in 'climate' (or 'gender') and increase the acceptance of your study significantly and at the same time increase your next project's funding chances. Why physicist Sabine Hossenfelder left academia:
Energy 'transitions', the poor, austerity, and subsidies.
You forgot to mention that every nation (or US state like California) with high renewables penetration has seen its elec prices rise massively. As for gov subsidies to 'save the planet': they typically end up on the roofs of the middle classes in the shape of solar panels - which also saw them sell back surplus energy at fixed prices to the utilities - and in the hands of those same middle classes in the form of EVs. While Dutch local authorities build what they officially call 'smulbossen' and which i can only translate as 'yummy forests' (infantilization is gov policy these days). The yummy forests are simply some new (all green is new in the NL) tiny patches of apple- & pear trees, cherry bushes etc.
The same middle classes so fortunately at the receiving end of gov largesse are the ones who per capita produce a lot more CO2 * than the fossil hoi polloi they're so disgusted with - now that there are solid populist parties that threaten the monopoly-of-the-decent-people you can safely be publicly disgusted with plebeians. The past year in the NL progressive pundits and celebreties openly asked for LESS democracy when new conservative parties won provincial and later national elections.
Our new 'populist' PM is now the former head of the secret service. Sic. Since the populists and conservatives had to sacrifice some whishes on the altar of progressive hysteria whose media killed off the previous PM candidate over a bogus accusation (a former labour micro-biologist who supposedly had made a fortune selling a cancer drug - he hadn't). So this middle of the road spook type was chosen. In the end, despite all the hysteria, we ended up with a centrist gov. We're even keeping the gender policies (for children) of the previous gov in place.
Finally, i recommend you for pulling in the BBC as your economics witness.
* It's the holidays which once again bring us handwringing progressives who look at their 'vliegschaamte' i.e. 'flying-shame' from all angles ín newspaper columns (that's how modern secular religious people confess) and then admit that they're once again not exactly going to holiday in the Netherlands' version of Blackpool.
JK argues that borrowing to finance “Investment” can rise, but not to finance consumption. I can see this if “Investment” means in capital assets which will reduce revenue expenditure in the future. However, politicians can arbitrarily define “Investment”.
That still leaves growing government Debt. Is there a limit to this? Ultimately it can lead to the insanity of Modern Monetary Theory with devalued GBP£ and high Interest Rates.
Whatever the problem and cause, Britain is in a bad position. The new government is right to point out this. With Taxes at a long term high we cannot tax much more. Yet there is a need to address Climate Change starting now, for which private capital must be attracted. Other matters e.g. NHS must be addressed by radical reform, not ever more money. The decades long scandal of Public Procurement likewise.
Is the harsh truth that we are boxed into a corner, and face 10 years+ of low growth and static incomes?
I don't think politicians can arbitrarily define investments. In fact, what is considered investments and what is not is part of the handbook for GDP measurement etc. Plus, if politicians try to sell something as growth enhancing 'investment' when it really isn't, the bond market will do what it did to Liz Truss who tried to sell tax cuts as growth enhancing.
We've had 30 years to prepare for renewable transition and in the words of Thunberg 'blah, blah, blah'. Sadly, it will take more people in the 'developed' world to lose their homes and lives due to climate catastrophe before anything meaningful will happen and then it will be too late.
This goes to the problem of politicians continuously preferring current expenditure to investment expenditure. Why? To paraphrase James Carville, „It‘s the politics, stupid.“
However, let’s be honest with ourselves. There is a tradeoff. If one would not have gotten to grips with the debt, what would the bond markets have done? To counter this, Central banks would have had to expand their balance sheets even more than what they did to start with, surely. This would have stimulated the valuation of assets even more than what it did and the differential between asset valuation and real GDP would have been even greater leading to greater financial risk as a consequence.
Am I delusional in my analysis?
I don't think your analysis is wrong. I think what we learned over the last 15 years, however, is that austerity need not have been that extreme. there are lots of studies that show that all kinds of countries from the US to continental European countries could get away with higher debt levels and less austerity. The Truss episode in the UK was clearly too far, but a lot of it had to do with unfunded tax cuts, rather than deficits being too large.
Deficits can be larger (and bond markets will forgive you for larger deficits), if there is a clear path to lowering them in the future. This means, you can increase deficits for government investments, but not for government consumption.
This is why I find the UK's fiscal rules too strict. At the moment, the debt/GDP-level has to decline within five years. I would prefer a fiscal rule that say you cannot spend more on consumption than you take in in taxes, but you can increase the debt/GDP-ratio via investments.
Agreed. Around 90% of housing in Singapore is public-owned, as far as I know. That kind of investment does not worry the bond market.
Is it populist to deplore the withering of social capital, eg confidence in the Police?
No it's not. We live in an era of eroding trust in all kinds of institutions, not just police. Same goes for teachers, doctors, journalists, etc.
Ironic that inflation has caused a backlash against investing in something which is deflationary and would protect us against reliance on fossil fuels and their inherent price volatility
'They feared that this debt would reduce future growth, a belief largely driven by faulty and since debunked research'
Although we all of course celebrate the debunking of supposedly settled science ('no more snow in the UK by 2009!' etc etc etc - and then some) but in this case i would say that a study with some missing data does not let you discard the basic theory.
Generally, too much debt is still considered bad by most.
And when missing data was added the conclusion was still (as per your source):
'They find that high levels of debt are still correlated with lower growth - but the most spectacular results from the Reinhart and Rogoff paper disappear. High debt is correlated with somewhat lower growth, but the relationship is much gentler and there are lots of exceptions to the rule'.
Those spectacular results disappeared after data was added from nations with a traditionally more or less sound debt policy: Austria, Norway etc. With only Belgium as a somewhat 'southern European oriented' (good cooking starts there) outlier.
'First, economists are increasingly convinced that the pain of austerity was worse than the eventual gains in the form of lower debt/GDP-ratios'
No doubt, in a low redistribution nation like the UK.
But 'pain' has been a highly politicized concept for economists and almost everybody else. Because one's economic understanding / pov has become equated to one's moral make up since progressives began to dominate labour and green parties in the seventies. And a little later media, education and academics.
Plus, you have austerity, reasonable debt, and too much debt. If a nation with traditionally more or less sound debt policies enters what looks like a massive recession, i can understand that the suggestion to fight that with what could end up as adding massive debt is instinctively a bit much. Just like gov's overreacted in the early stages of the covid pandemic (and then found it hard to change course because covid, like economics, was quickly politicized as well, with progressives as 'the caring side' and (some) centrists and conservatives as irresponsible science deniers...).
Then you have the discussion of what 'stimulus' means. Massive welfare support for the growing number of unemployed? Or stimulating the economy though huge infrastructure projects? (And leaving welfare as it is).
How have infrastructure projects 'stimulated' the Italian economy historically? How were the EU covid
funds for Italy (not) applied to build actual STUFF? (Some of the 'Italian' money is now put into a 'Bauhaus for Europe' project because Bauhaus is V/d Leyens favorite architecture...). FDR is lauded for his 1930s projects (massives heatwaves back then btw, typically left out of todays alarming charts since they mute the results so much) but he didn't kill the recession or unemployment. WW2 did that.
'helped drive the surge in populism'
Nonsense, just more evidence of economics-as-modern-morals for progressives. Who are always looking for theories explaining why not everybody votes for them - since they don't have a political but instead a religious pov but they just don't realize it (they equate religion to abortion ect so they can't possibly be religious). Italy and the Netherlands pioneered populism in the 1990s as traditional parties had collapsed in Italy, and in the Netherlands had replaced worker's priorities with the plight of the immigrants (labor- and housing competitors of native workers), the Climate (boing, amen) and expressions of General Liberal Decency (i'm a better person than you) which meant nothing.
Add rising crime, not seldomly with immigrant perpetrators and native victims. Wanting to discuss for instance Moroccans' enthusiasm for robbing 70 yo women was considered racist, while the fact that they only robbed old white women was, hilariously, the one true 'racist' item in the (non) discussion. Moroccans have since progressed to the summit of Dutch crime, both in volume and in seriousness.
Populism is about not being heard. Period. If someone wants to tie economics to democracy's outcomes...James Goldsmith already did it in 1994, only then most weren't paying attention:
Clip: Sir James Goldsmith Presciently Explaining Globalization in 1994
https://www.youtube.com/watch?v=UKe38mVpHgk
'But austerity also was bad for the climate and household finances as a case study by Immanuel Feld and Thiemo Fetzer indicates'
Pull in 'climate' (or 'gender') and increase the acceptance of your study significantly and at the same time increase your next project's funding chances. Why physicist Sabine Hossenfelder left academia:
My dream died, and now I'm here
https://youtu.be/LKiBlGDfRU8?t=188
Energy 'transitions', the poor, austerity, and subsidies.
You forgot to mention that every nation (or US state like California) with high renewables penetration has seen its elec prices rise massively. As for gov subsidies to 'save the planet': they typically end up on the roofs of the middle classes in the shape of solar panels - which also saw them sell back surplus energy at fixed prices to the utilities - and in the hands of those same middle classes in the form of EVs. While Dutch local authorities build what they officially call 'smulbossen' and which i can only translate as 'yummy forests' (infantilization is gov policy these days). The yummy forests are simply some new (all green is new in the NL) tiny patches of apple- & pear trees, cherry bushes etc.
The same middle classes so fortunately at the receiving end of gov largesse are the ones who per capita produce a lot more CO2 * than the fossil hoi polloi they're so disgusted with - now that there are solid populist parties that threaten the monopoly-of-the-decent-people you can safely be publicly disgusted with plebeians. The past year in the NL progressive pundits and celebreties openly asked for LESS democracy when new conservative parties won provincial and later national elections.
Our new 'populist' PM is now the former head of the secret service. Sic. Since the populists and conservatives had to sacrifice some whishes on the altar of progressive hysteria whose media killed off the previous PM candidate over a bogus accusation (a former labour micro-biologist who supposedly had made a fortune selling a cancer drug - he hadn't). So this middle of the road spook type was chosen. In the end, despite all the hysteria, we ended up with a centrist gov. We're even keeping the gender policies (for children) of the previous gov in place.
Finally, i recommend you for pulling in the BBC as your economics witness.
* It's the holidays which once again bring us handwringing progressives who look at their 'vliegschaamte' i.e. 'flying-shame' from all angles ín newspaper columns (that's how modern secular religious people confess) and then admit that they're once again not exactly going to holiday in the Netherlands' version of Blackpool.
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JK argues that borrowing to finance “Investment” can rise, but not to finance consumption. I can see this if “Investment” means in capital assets which will reduce revenue expenditure in the future. However, politicians can arbitrarily define “Investment”.
That still leaves growing government Debt. Is there a limit to this? Ultimately it can lead to the insanity of Modern Monetary Theory with devalued GBP£ and high Interest Rates.
Whatever the problem and cause, Britain is in a bad position. The new government is right to point out this. With Taxes at a long term high we cannot tax much more. Yet there is a need to address Climate Change starting now, for which private capital must be attracted. Other matters e.g. NHS must be addressed by radical reform, not ever more money. The decades long scandal of Public Procurement likewise.
Is the harsh truth that we are boxed into a corner, and face 10 years+ of low growth and static incomes?
I don't think politicians can arbitrarily define investments. In fact, what is considered investments and what is not is part of the handbook for GDP measurement etc. Plus, if politicians try to sell something as growth enhancing 'investment' when it really isn't, the bond market will do what it did to Liz Truss who tried to sell tax cuts as growth enhancing.
We've had 30 years to prepare for renewable transition and in the words of Thunberg 'blah, blah, blah'. Sadly, it will take more people in the 'developed' world to lose their homes and lives due to climate catastrophe before anything meaningful will happen and then it will be too late.