The economic consequences of Mr Dale

Contrary to what you may have read on Iain Dale’s diary, I have not lost my economic marbles. Indeed, it is Mr Dale who shows a clear lack of economic understanding.

Dale writes today:

“I did a short turn on Sky News yesterday alongside Will Straw of Left Foot Forward. Incredibly, he seemed to be advocating that far from cutting public expenditure, we should be borrowing and spending more. He reckoned there was some sort of ‘slush fund’ available to pump money into various sectors because unemployment hadn’t reached the heights many people thought it might. So just because the government hadn’t spent money on unemployment benefit, it could now spend this money on other, as yet undefined, things.

“And there you have the difference between the left and the right. If it were me, I’d use the money to reduce borrowing, whereas Will would spend, spend, spend. And we all know where that gets us.”

Yes, we do, Iain. The economic stimulus of autumn 2008 – opposed by the Tories – has dampened the worst impact of the recession, particularly on the labour market. And yet, the British economy “remains very depressed” according to the National Institute of Economic and Social Research.

And far from Dale’s claim, I was at pains to suggest that there wasn’t a “slush fund” (Martin Stanford’s words) and that any additional economic stimulus should be spent on essential investments. The point here is not to borrow further but to ensure that money not spent on unemployment benefits is used for investment – a point on which I was happy to co-sign a letter in today’s Guardian organised by Colin Burgon MP. For the record, here’s what I said on Sky:

Straw: And of course because the impact of the recession has been less severe on unemployment than previous recessions, there is some money that’s been saved and that can be used for really important projects like infrastructure investments and so on, particularly in green industries.

Sandford: So there’s a slush fund essentially to try and woo the voters?

Straw: No I don’t think we should see it as a slush fund to woo the voters. I think economic times are much, much, much too serious for that. If this money emerges, it should be used for investment purposes for the good of the country.

As for Dale he appears to be in cloud cuckoo-land on a number of fronts. On Sky he said:

“I’ve never expected massive cuts in the first year. So I think it’s a convenient scare tactic for Labour to say that there will be massive cuts which will lead to unemployment and all the rest of it. But I think it’s a false argument.

“I think the more interesting argument is whether this is going to be Gordon Brown’s budget or is it going to be Alistair Darling’s? Because I think Alistair Darling actually understands the seriousness of the situation. He himself has predicted a deficit of £178 billion this year. But we see from tax revenues which are plummeting that it could be much more than that. So any govermment which comes after May 6th will have to make clear what their plans for cutting the deficit are going to be.

Three questions for Iain Dale (I won’t hold my breath):

1. Why do you think cuts in 2010-11 are necessary when they are opposed by the 67 economists who wrote to the Financial Times, the Confederation of British Industry, the Institute for Fiscal Studies, and the IMF?

2. Why is it a Labour scare tactic to fear the pace of cuts from an incoming Tory government when David Cameron has accused the Government of “moral cowardice” by failing to promise immediate public spending cuts?

3. Which economic report have you read which suggests that the deficit will be above £178 billion?

33 Responses to “The economic consequences of Mr Dale”

  1. Political Scrapbook

    RT @leftfootfwd: The economic consequences of Mr. Dale //cli.gs/QGNa2 @iaindale

  2. Ellie Gellard

    I'd be shocked if @iaindale answered @wdjstraw 's 3 questions. Will he surprise us? //tinyurl.com/yhdt3pr

  3. Josh

    As usual, Mr Foot advocates voodoo economics whilst forgettinga about the real world. I shall repeat again…

    In 1933, the fiscal deficit was 4.5% of GDP in America. During the first 4 years of New Deal, the deficit averaged 5.1%. That is a 60 basis point difference. Are you really suggesting that this means the difference between depression and recovery? If so, why did America not tip back into depression when a deficit of 21.5% of GDP was turned into a surplus of 1.9% of GDP two years later, a swing of 2,320 basis points?

    You suffer from the ‘confirmation bias.’ You search out the economists who vindicate your opinion and ignore the other side of the argument, something you once accused me of, yet I ignore all mainstream economists and stick to the heteredox schools who are not funded by government grants and big business e.g. the Keynesians and the Monetarists.

    The problem with stimulating using borrowed money is that it must come from somewhere. Since we didn’t have a surplus to utilise (as Keynes advocated*), we had to borrow it, and I’m sure you’ve heard of Ricardian Equivalence. Well, as predicted, the savings rate has exploded from negative rates to nearly 9%. And the empirical evidence suggests fiscal stimulus through spending is about as useful as a one legged man in an arse kicking contest. Hugh Hendry, who unlike academic economists has to work in the bearpit of the marketplace, has an excellent piece in the Telegraph today. I prefer to listen to those with experience in practicing what they preach, unlike the academics in ivory towers who spread doubt and fear with regards to tackling our explosion of debt. As Lucio once remarked, ”Our doubts are traitors, and make us lose the good we oft might we by fearing to attempt.”

  4. Josh

    *One final remark, Keynes advocated low public spending (below 20% of GDP according to Skidelsky’s latest book) during boom periods and high taxation in order to build a budget surplus. We had a very large deficit. Why do you always forget 50% of Keynesian theory? Is it the only way to justify the other 50%?

  5. J H Holloway

    So what will you do when the money markets either stop lending to your party, or massively increase the interest rate for doing so?

    The pound sterling is not a pdf file that sits on Gordon’s desktop, ready to be printed off. There is a limit to borrowing.

    Moreover, because Gordo spent more than he collected in taxes at the top of a boom and spends way, way more than he collects at the bottom of a recession, under what circumstance would Labour either spend slightly less or actually only spend what they have?

  6. Tim Ireland

    RT @leftfootfwd: The economic consequences of Mr. Dale //cli.gs/bpbWt @iaindale

  7. Tim Ireland

    RT @BevaniteEllie: I'd be shocked if @iaindale answered @wdjstraw 's 3 questions. Will he surprise us? //tinyurl.com/yhdt3pr

  8. Iain Dale

    So essentially, you confirm what I alleged. You think money “saved” from not paying unemployment benefit should be spent on something as yet undefined, but it should be spent anyway. To answer your three questions…

    1. 1. Why do you think cuts in 2010-11 are necessary when they are opposed by the 67 economists who wrote to the Financial Times, the Confederation of British Industry, the Institute for Fiscal Studies, and the IMF?

    None of those bodies oppose cuts full stop. They just oppose what Nick Clegg refers to as “savage cuts”. Of course cuts should be made (as the 20 economists who wrote to The Times suggested) as soon as possible, which don’t endanger a recovery. Who could possibly object to that. What you are saying is that really, you don’t think any form of cuts are necessary. Ever. Which would at least be a consistent, if mad, position to adopt.

    2. Why is it a Labour scare tactic to fear the pace of cuts from an incoming Tory government when David Cameron has accused the Government of “moral cowardice” by failing to promise immediate public spending cuts?

    Accusing Tories of massive cuts is a favourite Labour scare tactic and always has been. The two assertions you make are not mutually exclusive. There will be some immediate cuts that can be made through waste which has already been identified, and quangos which can be abolished. But in practical terms, George Osborne wont see the books till May, wont have a budget until July and most of the spending plans for 2010-11 will be difficult to undo.

    3. Which economic report have you read which suggests that the deficit will be above £178 billion?

    I don’t need to read “economic reports”. Just look at this from The Times a couple of weeks ago.

    //business.timesonline.co.uk/tol/business/markets/article7032870.ece

    I don’t often bet, but I’d happily bet you that the deficit will indeed exceed £178 billion this year.

  9. Duncan Stott

    It’s been a while since I’ve seen Tim Ireland and Iain Dale appearing on the same comments thread…

  10. Andy

    So you’re like every failed labour chancellor .. you advocate policies that end inevitably in running out other people’s money. Don’t believe me? Take any measure you like – GDP growth, unemployment, the FTSE, the deficit, debt -and compare these when labour govs of the past came to power against when they were booted out – you’re a total econcomic f**kwit like the party you support

  11. Bill Kristol-Balls

    @ Andy

    FTSE 100 May 1997 – 4621

    FTSE 100 Today – 5617

    I make that + 17.73% since Labour took office and substantially more if you’ve been a good boy and re-invested your dividends.

    Not great performance but not disastrous considering the bursting of the tech and banking / property bubbles during that time.

  12. Tim Ireland

    “It’s been a while since I’ve seen Tim Ireland and Iain Dale appearing on the same comments thread…”

    Only by way of an RT or two :o)

    You’ll never see it happen for real for as long as Dale refuses to discuss [self-censored so I don’t unfairly prevent Iain Dale from returning to this thread].

  13. Richard Blogger

    Iain, hasn’t Osborne heard of ONS, or NAO? Or indeed, any of the public documents published by all of the government departments. Every time anyone asks about Osborne’s cuts you lot bring up these mythical “books”. If Osborne does not have a clue about the economy, why the hell does he want to be Chancellor?

  14. Bill Quango MP

    You know, what you are proposing was what Heath proposed in 1971.
    It worked.
    Right up to the point that it stopped working and spun the country into the worst financial crisis ever.
    Up till now.

  15. Grumpy Old Man

    “Which economic report have you read which suggests that the deficit will be above £178 billion?”
    How about adding the bill for PFI after it’s been de-enroned and bought onto the Treasury Books as Government debt?
    @ Richard Blogger. Gordon didn’t have any economics qualification at all, unless you call an article on how to spend a night at a party drinking on other people’s money a demonstration of economic prowess.

  16. FCAblog » The economic consequences of Left Foot Forward

    […] That Straw fellow over at Left Foot Forward claims, in reference to himself, "I have not lost my economic marbles." […]

  17. Billy Blofeld

    The more Labour spend, spend, spend…….. the harder the poor will be hit when the day of financial reckoning comes.

    If you are poor, then soon you are going to get poorer and get hit harder. You will be able to thank Gordon Brown for that.

    ….I’ll forgive the deadbeats and Labour groupies who signed the original letter. They are just too slavishly loyal, star struck and damp knickered to realise otherwise.

    Oh well.

    P.S. The letter would have been complete if dear old Viv Nicholson had signed up too………

  18. Matt Sellwood

    Dear Lord, we must stop agreeing like this! You’re absolutely right, it is economic madness to enter into a round of swingeing cuts, particularly when there are areas of vast public good (housing being just one) which are crying out for investment.

  19. El Sid

    I don’t know whether the government should spend £178bn more than it earns, or £150bn or £200bn. I’m not that clever. But I do know that the wrong way to work out government spending is to say “We budgeted x, we’ve only overspent by y, therefore we can spend x-y on bread and circuses”. That’s how you manage a stationery cupboard, not an economy.

    The only thing that should determine the level of spending is the long-term good of the economy. Keep your eyes on that distant target, not the short-term preoccupations of this year’s budget.

    Keeping an eye on the long term is critical, because there ain’t no free lunches. If there were, we could increase the deficit to £300bn, £400bn, whatever it takes to get the country back up to trend growth of 2.7% or so. We can’t, because to spend today, we have to reduce growth tomorrow. And if it’s not done cleverly, the reduction in growth tomorrow is much greater than the short-term boost of borrowing today.

    For instance, you may have seen the Oxford Economics analysis at //www.spectator.co.uk/coffeehouse/3303481/howbrowns-stimulus-will-destroy-jobs.thtml – they reckon that the PBR08 stimulus kept 35k people off the dole in 2009, but all bar 5k will return to unemployment in 2010. So it’s a pretty fleeting stimulus for all but the 5k. However you’re stuck with the £12bn cost of the stimulus for ever. OE estimate that the increased taxes needed to pay interest on that loan will cost 170k jobs in 2012-13.

    OK, you can argue the numbers. I’m not qualified to gainsay professional economists, but there’s obviously a subjective element to this stuff. But you get a feel for the argument – when we look back in four years time, will we think that the short-term benefit of those 35k jobs for a year in 2009 was worth losing 170k jobs for?

    That equation in itself suggests that we’re reaching the limits of what a government can do to stimulate the economy efficiently. Having said that, I don’t think that cutting VAT on plasma TVs was a particularly clever way of spending that cash, the benefits could have been much greater. I’d have rather it was spent in ways that would have benefited UK plc in the long-term as well as the short-term, such as reducing gas imports by making the housing stock more energy efficient.

    Look at this another way. Let’s say that this “slush fund”/”extra-money-from-skilful-economic-management” amounts to £5bn over 4 years, which seems to be the order of magnitude quoted in the press.

    There are two extremes to the argument, forgive me if the labels sound personal. Take the Straw (Brown?) option and spend £1.25bn in each of the next four years, but you’re borrowing the money (at 4.59% for long-term gilts currently) so that come 2015 you’ve added £230m cost to every year’s interest bill, less whatever benefits you get from the long-term effects of the stimulus.

    Take the Dale (Darling?) option and you get no short-term stimulus, but you have an extra £230m to spend in every Budget in perpetuity. That’s an extra £230m to spend on teachers, tax cuts or say government R&D in low-carbon technologies. Even better, use it for tax credits and you’ll get a 3-4x multiplier effect on every £ spent.

    So Will – your challenge is to find a way of spending £5bn over the next 4 years that will benefit the UK as much as an extra £800m spent every year in perpetuity on cleantech R&D.

    That’s what the deficit debate boils down to.

  20. Fony Blair

    Any money the govt spends is at present increasing the debt (or deficit if it’s SPENT rather than invested in structual programmes).

    By the way didn’t Thatcher have over 200 economists lambasting her over the economy with none supporting her….I think post ’79 things picked up somewhat. Sometimes so called academic experts really have no idea about the real world. If the answer isn;lt in a text book they’re stumped!

    Low tax economies are growth economies (even less unemployment benefot to pay!)

    Keep up the doodling!

    Fony Blair

  21. uberVU - social comments

    Social comments and analytics for this post…

    This post was mentioned on Twitter by psbook: RT @leftfootfwd: The economic consequences of Mr. Dale //cli.gs/QGNa2 @iaindale…

  22. John77

    3 We don’t need to read any economist, just look at the past record. For the first three years when Brown was enjoying the the lingering benefits of Ken Clarke’s policies he always understated the expected performance of the economy and the budget surplus so that the ignorant would think he had created a benefit. Since the Ken Clarke effect was overwhelmed by the Brown effect he has always published forecasts that were better-than-reality. So the natural result is that everyone expects that the deficit will be greater than Darling’s forecast (yes, I do mean everyone including Darling and you).
    Richard Blogger writes academic papers so he expects everything published to be accurate and referenced in triplicate. ONS can only analyse the data that is produced and does not forecast the future; the NAO only looks at the past. Neither of them has access to the numbers hidden by the Treasury including unpublished spending commitments.
    The vital point is that you seem to believe that the government and the country can continue spending other people’s money at an accelerating rate and no-one will ever ask for it back. That is probably because you are a spoilt brat with a rich father. No, bad credit risks have to pay interest at increasingly high rates and if we don’t have plans to reduce debt instead of (as Darling and Osborne propose) slowing down the rate of increase in our debt, other countries will stop lending us money and demand their money back on the nail. Now THAT would tip us over into a Ramsay MacDonald-type slump! Only Scargill and his cronies want that.

  23. ManicBeancounter

    The question of whether to cut now or later may not be at the discretion of the British Government (Labour or Conservative) for much longer, as there are a number of risks that may cause things to worsen. Last years’ budget five-year forecast relied on low stable interest rates and strong growth rates to keep government debt rising beyond 100% of GBP. That was with massive real (but hidden) cuts in public expenditure.
    If interest rates rise, or the impact of the fiscal stimulus (and QE) wears off, or if there is a secondary slump elsewhere, or if public sector pay settlements outstrip inflation, or defence spending is maintained, or if we are have firm policies to tackle climate change, then the economy could tip quickly from its current knife-edge. Then any government will have to slash essential services.
    On the other hand, whilst interest rates are kept artificially low, the returns to my private sector pension are low, like millions of others. So whilst the Government delays the inevitable with by low interest rates, I have the choice of reducing my living standards now, or see the compound impact on my retirement in a couple of decades.
    The lack of maneuver at present is due to pretending that boom and bust had been abolished. As a consequence, at the top of the cycle we had a large deficit when there should have been a small surplus. Now the majority of the £178bn deficit is structural (i.e. not recession-related). We either start cutting now, or cut more later on. The longer we leave that decision, the lower will be living standards in the decades to come.
    On this basis, to justify investment now, it should be properly costed and future benefits heavily discounted. Loose political rhetoric as justification is dangerous.

  24. Tyler

    The thing I find most amusing about the Left’s position on the budget deficit is the way they think that having the largest budget deficit in the world is somehow not a problem, and won’t scare off investors (clue: foreign investors have been selling Gilts hard, reinvesting into equities). More rightening though, is the way they also think that the deficit will just halve between 2011 and 2014 – we’ll still be left with a massive deficit, but Labour aren’t willnig to tell us how we are even going to get to that point. And no, we can’t grow our way out – the deficit is simply too big for that.

    What they fail to realise though, is that they will simply not be given a choice. If the next government doesn’t take serious measures to curb spending and cut the deficit, the Gilt markets will do it for them, the hard way.

  25. Daniel Arlt

    The economic consequences of Mr Dale | Left Foot Forward: And far from Dale's claim, I was at pains to suggest th… //bit.ly/aP0kY6

  26. Will Straw

    Thanks very much for all the comments, particularly from Mr Dale for answering the questions so quickly. Could I just remind a couple of people (John77 and Andy in particular) that you can make your points without reverting to personal insults. It might be OK on Comment is Free but it’s not on here.

    Iain – (1) Of course there will be cuts and, when they come, they will be painful. But the Conservative dogma to start the cutting in 2010-11 has very little economic support; (2) Fair enough if it works out that way but Cameron should stop saying the Government is guilty of “moral cowardice” if his the Tory plans are so similar; (3) The CBI think it will be £163bn and the IFS also think it will come down so I’ll take you up on your bet.

    Fony – comparisons with the 1980s are spurious as Martin Wolf makes clear in today’s FT: “More serious, in my view, is the assumption made by Mr Osborne that, in current circumstances, a sharper tightening of the structural deficit than the government plans would be expansionary. He is seduced by irrelevant parallels with the fiscal tightening of 1981, when there was also room to slash interest rates. In current circumstances, monetary policy is unlikely to be an adequate offset.”

    El Sid – I think you’re on to something. Given that we’ve had a banking crisis as well as a budget crisis, we desperately need to broaden the base of the economy in order to ensure a higher trend rate of growth. Unless you have a 100% belief in Ricardian Equivalence (I don’t) then we need the public sector to help prime the pump in these circumstances. My fear is that a process of budget consolidation now would leave us with a lower trend rate of growth because there would be no support for investment (which has fallen off a cliff). But I completely see that the decision is fundamentally a trade off and judgment call.

    All the best,

    Will

  27. chaplain

    Will Straw. What’s your background? Have you ever had a real job? Have you ever been responsible for anything or anybody? Why are you just recycling garbage. What are you hoping to get out of it?

  28. El Sid

    It might have been clearer if I’d said in my previous post :

    I do know that the wrong way to work out government spending is to say “We budgeted _to overspend by_ x, we’ve only overspent by y, therefore we can spend x-y on bread and circuses”.

    I’ve been thinking on this some more overnight. Will, you mentioned Ricardo. I too don’t believe in a literal equivalence, but I think you can view the OE analysis as framing the debate as trying to beat Ricardo. We’re looking for short-term spending with benefits that outweigh the long-term costs. We lost that game when we paid for a short-term VAT cut with perpetual taxes on unemployment. That was dumb.

    I think my favourite “stimulus” was the deal that effectively extended the payment terms for corporate taxes. Not sexy or votewinning, but it was a lifesaver for the cashflow of many small businesses. It was a perfect response to tide them through a 6-month period in which demand fell off a cliff and bank lending was non-existent. Thus a large amount of economic capacity was saved at a relatively low cost – we beat Ricardo.

    Maintaining our industrial base is critical, as long as the recipients are a good long-term base. Looking back in history, saving Rolls-Royce was a great deal, they had made huge investments in new technology that would lead the way out of recession, whereas bailing out the organisation responsible for the Marina and the Allegro was a bad idea. I’d highlight the APT as a cut too far in the early 80s – the technology got sold to the Italians who then sold it back to us in the form of the Pendolino trains, and the loss of that industrial base has probably led to our trade deficit being made even worse by importing the Javelins from Hitachi etc.

    So we need to be smart, and avoid cutting that kind of project that could deliver long-term benefits. I have a feeling that a lot of capital projects in the defence industry come into that category – being brutal about it, they act as a subsidy to maintain a technological base in an industry where we are a world-leading exporter. We need to look after such industries as we haven’t got many of them left and they are our way out of this mess, however icky we may feel about arms sales.

    It’s a mistake to suddenly start thinking about stimuli just because the GDP stat goes from +0.1% to -0.1%. If a scheme beats Ricardo at any time, then we should do it, if it doesn’t we don’t. However, it will be much harder to find quick wins like the tax delay from now on. Solutions to a long, grinding malaise are very different to the solutions to a six-month credit crunch – the two dips have very different characters. Which in turn makes me wonder if the correct response to the first dip was more Keynesian, the response to the second dip should be more Austrian. I understand that is an awkward stance for some of the more yah-boo political types to cope with. :-))))

    You can obviously argue about the specifics but let’s say that on average, every bp at which you borrow £1bn, costs 100 jobs in perpetuity. Thus if you borrow £10bn at current rates, that costs the country 45,900 jobs forever. You’ve just put the entire working population of Blackburn on the dole – so you better have a laser-like focus on using that £10bn to generate at least 45,901 new, long-term jobs.

    Concentrates the mind a bit, no? :-)))

    It actually gets worse than that, because by the end of this debt cycle we’ll be paying 8% or 10% on gilts rather than a mere 4.59%. So the marginal cost of that £10bn is actually Blackburn plus Oldham or Burnley. Translate that to the whole deficit and it gets mindboggling. Borrow £178bn and you’re condemning the West Midlands to unemployment. Borrow £178bn two years running and you’ve just put the whole of Scotland or Yorkshire on the dole. And so on – there is nothing progressive about running a deficit unless you have that relentless focus on beating Ricardo.

    In turn that makes the whole language of cuts a bit meaningless, you’re defining the debate in terms of organisational inertia. What matters is doing deals that beat Ricardo.

    It’s not about what you do with that final £3bn that takes you up to £178bn deficit. If you can find £278bn of deals that win the game, you do that. If you can only find £78bn of deals that win the game, that’s what you borrow. What you borrowed last year is irrelevant.

    Obviously a basic problem with this framework is you can never be sure at the time that you’re doing a good deal. But at least it allows you to dump the obviously stupid spending. I’ve no idea of the scale – I can imagine that there’s maybe £20bn of game-winning expenditure that the government could do that isn’t happening at present. A potential £20bn stimulus if you like. But at the same time you’ve got to eliminate current spending that is losing the game – I’ve no idea how much that is. People seem to talk of a structural deficit of £60-90bn. Presumably that is the part of the deficit that we can’t afford long-term, which I think means that in my language, that’s £60-90bn that is losing the game. We should stop spending it, in our own interests.

    Look at it another way, for as long as we are running a deficit, every £218k spent by government loses a Briton their job for life. If that £218k does not generate at least one new job in perpetuity, it should not be spent. I certainly would not like to be the politician that has to explain to that Briton why they don’t have a job any more.

    The deficit is a moral issue, not a number on a balance sheet.

    Apologies for rambling on, but thanks Will and Iain, as I feel I’ve now found a framework for thinking about this stuff which crystallises things I only had fuzzy feelings about before.

  29. El Sid

    Ga. Of course I meant

    “We lost that game when we paid for a short-term VAT cut with perpetual taxes on _employment_. That was dumb.”

  30. Roger Thornhill

    Was going to comment on hatstand economic ideas at LFF //cli.gs/bpbWt but seems others have had a go.

  31. Richard Angell

    RT @wdjstraw: Britain borrowed £163bn in 2009-10. Look forward to @iaindale paying up – he bet it would be >£178bn //bit.ly/cTbHdJ

  32. Will Straw

    Britain borrowed £163bn in 2009-10. Look forward to @iaindale paying up – he bet it would be >£178bn //bit.ly/cTbHdJ

  33. Ben Cooper

    RT @wdjstraw: Britain borrowed £163bn in 2009-10. Look forward to @iaindale paying up – he bet it would be >£178bn //bit.ly/cTbHdJ

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