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
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
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.