Tory right, obsessed with cuts, still deaf to the lessons of the thirties

The Tory right, obsessed with shrinking the state, appears entirely deaf to the lessons of the US in 1937, or of Greece and Ireland today, writes George Irvin.

George Irvin is a retired professor of economics and is currently (honorary)
Professorial Research Fellow in Development Studies at the University of London, SOAS; he is author of “Super Rich: the rise of inequality in Britain and the US”

The Centre for Policy Studies (the original Thatcherite think-tank) has issued a short pamphlet entitled “Pain Aversion: addictive, but no basis for medium-term economic policy”, written by the venture capitalist, Jon Moulton.

The main theme of the pamphlet is that Britain’s debt is still growing and that in consequence the coalition government must cut public spending even more harshly; ie, the state must be shrunk more vigorously and more private firms must be allowed to fail (ie, unemployment must rise). Right-wing Tories are fighting to prevent a u-turn by the coalition.

There are at least four points about which this pamphlet is either misleading or wrong:

• The nature of Britain’s debt and how to reduce it;

• That the recession has caused remarkably little pain;

• That Britain’s large State is stifling growth; and

• That unless we pay off today’s debt, the next generation will bear the burden.

Moulton, who has no formal economics training, repeats the old chestnut that while net UK government debt (excluding interventions) is 59% of GDP, if one adds the purchase of bank assets, the ratio rises to 155%. Indeed, he argues, adding total PFI commitments and public pensions, the total is more like 250%.

In his words:

“Only a couple of Western nations – Ireland and Iceland – managed to increase their debt relative to GDP faster than the UK in the last three years.”

These assertions about UK debt are misleading for two reasons. First, the ONS has made it clear that the 59% figure (excluding interventions) is preferred because it is:“used by HM Treasury … [and for forecasting by] the Office for Budget Responsibility”. Secondly, quite unlike Ireland and Iceland, most UK borrowing is from the UK non-bank public. When fund managers or even ordinary citizens hold UK government bonds, they are an asset; in Britain at least, most UK public debt is offset by UK private assets.

The second argument, “no pain, no gain”, is almost entirely rhetorical. Yes, libertarians may believe in Schumpeterian “creative destruction”, but that does not make it any more palatable. If UK corporate failure and unemployment are not higher than during the 1991 recession, it is because Labour quickly introduced an economic stimulus package. Had the economy been left to its own devices and the banking sector allowed to collapse, we would indeed have gone into a spiral of debt-deflation with many more firms collapsing. Youth unemployment, currently 20%, would have been double that rate

Is Britain’s large state stifling growth? Again, Moulton asserts this on the basis of an implicit “crowding out” type argument; e.g., large government = high interest rates = less private investment. But there is no evidence for financial crowding out; indeed, one would have to show that “full crowding out” is taking place for the argument to hold. Crucially, many EU economies with a larger state than ours (e.g., Germany, France, the Nordic countries) are growing more rapidly.

Intellectually, Moulton’s right-wing arguments are threadbare. The difficulty is that because George Osborne has no Plan B, he will be tempted to listen to this nonsense and redouble his efforts at budget cutting. Cutting back the state will not stimulate private growth. Fiercer cuts will lower growth, raise unemployment and widen the deficit. The next generation will inherit a Britain far poorer than it might have been.

The Tory right, obsessed with shrinking the state, appears entirely deaf to the lessons of the US in 1937, or of Greece and Ireland today.

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23 Responses to “Tory right, obsessed with cuts, still deaf to the lessons of the thirties”

  1. Ma

    RT @leftfootfwd: Tory right, obsessed with cuts, still deaf to the lessons of the thirties: http://bit.ly/dXx96J

  2. simpkins83

    RT @leftfootfwd: Tory right, obsessed with cuts, still deaf to the lessons of the thirties: http://bit.ly/dXx96J

  3. Shahbaz Husain

    RT @leftfootfwd: Tory right, obsessed with cuts, still deaf to the lessons of the thirties: http://bit.ly/dXx96J

  4. Extradition Game

    RT @leftfootfwd: Tory right, obsessed with cuts, still deaf to the lessons of the thirties: http://bit.ly/dXx96J

  5. Trakgalvis

    RT @ExtraditionGame: RT @leftfootfwd: Tory right, obsessed with cuts, still deaf to the lessons of the thirties: http://bit.ly/dXx96J

  6. Stew Wilson

    ♺ @leftfootfwd: Tory right, obsessed with cuts, still deaf to the lessons of the thirties: http://bit.ly/dXx96J

  7. Jordan Hall

    RT @leftfootfwd: Tory right, obsessed with cuts, still deaf to the lessons of the thirties http://bit.ly/eX9uVq

  8. bee hive

    RT @ExtraditionGame: RT @leftfootfwd: Tory right, obsessed with cuts, still deaf to the lessons of the thirties: http://bit.ly/dXx96J

  9. Mark Stevo

    Moultin’s views are one thing, but the constant criticism of not having formal economics training is wearing a bit thin. There was no shortage of formally trained people who got us into this mess.

  10. michael burke

    Moulton makes it clear that unemployment and corporate bankruptcies haven’t risen enough- because of Labour’s spending to support the economy prevented it.

    He wants both to rise. As befits a man who makes money out of vulture capitalism, feeding off the carcasses of failing firms and asset-stripping them.

  11. Peter Maxwell

    RT @ExtraditionGame: RT @leftfootfwd: Tory right, obsessed with cuts, still deaf to the lessons of the thirties: http://bit.ly/dXx96J

  12. Grumpy Elector

    RT @ExtraditionGame: RT @leftfootfwd: Tory right, obsessed with cuts, still deaf to the lessons of the thirties: http://bit.ly/dXx96J

  13. Les

    RT @leftfootfwd: Tory right, obsessed with cuts, still deaf to the lessons of the thirties: http://bit.ly/dXx96J

  14. Sean

    Can the author or any reader give me a 100% iron-clad guarantee that there will always be someone to lend money to the UK government at rock-bottom prices for the foreseeable future?

    If not, then be cautious and not presume that people will lend to the British government out of the goodness of their hearts.

  15. Len Junier

    RT @leftfootfwd: Tory right, obsessed with cuts, still deaf to the lessons of the thirties: http://bit.ly/dXx96J

  16. Pat

    RT @leftfootfwd: Tory right, obsessed with cuts, still deaf to the lessons of the thirties: http://bit.ly/dXx96J

  17. Kevin Richards

    "Tory think tank – unemployment must rise" – Tory right, obsessed with cuts, still deaf to the lessons of the thirties http://bit.ly/eX9uVq

  18. False Economy

    And one more great @leftfootfwd RT: Tory right, obsessed with cuts, still deaf to the lessons of the thirties: http://bit.ly/dXx96J

  19. Mr. Sensible

    I think it would help if the Tory right learnt the lessons of Q4 2010…

  20. Mike O'Brien

    RT @leftfootfwd: Tory right, obsessed with cuts, still deaf to the lessons of the thirties: http://bit.ly/dXx96J

  21. Carolyn Anderson

    RT @leftfootfwd: Tory right, obsessed with cuts, still deaf to the lessons of the thirties http://bit.ly/eX9uVq

  22. Guido Fawkes

    Just because HMT and OBR use a figure it doesn’t make it the right or most meaningful figure. They could use chocolate buttons to account for the debt. Government debt has been hidden in a manner that would if it were done in a listed private company would be criminal.

    That government debt is an asset for the holders is self-evident, it is however a liability for the government and thus taxpayers. Since the government presumably does not intend to default the liability to British bondholders is no less because they are not foreign.

  23. jt

    Tory right, obsessed with cuts, still deaf to the lessons of the …: Intellectually, Moulton's right-wing argum… http://bit.ly/f97Gdt

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