I took a couple of weeks off my endless Quantitative Easing Journey to have a quick look at the UK’s growth record, the record of some of our close national competitors, and the future prospects for the economy.

It’s here: http://www.centreforum.org/publications/slash-and-grow.html.

If you want to go straight to the pdf, here it is (about 400kb):  http://www.centreforum.org/assets/pubs/slash-and-grow.pdf

Here is an exerpt from the conclusion:

It may seem odd to urge a future government to care about economic growth. But the
Conservative’s extreme aversion to public debt risks producing policies that prioritize
deficit reduction over all other objectives. Public debts have risen largely to allow
private indebtedness to fall without producing catastrophic consequences for the
economy. The prior rise in private indebtedness passed unnoticed by the same
Conservative opposition that is now almost hysterically worried about a similar rise in
public debt. This makes no sense; if the past few years tell us anything, it is that
Britain’s macro-economy can be at far greater risk to private debts than public. . . .

If the next government is to take economic growth as seriously as the deficit, it should
consider taking an economic path that allows for slightly more consumption. Japan’s
experience during its long struggle against deflation is highly pertinent; twice (in 1997
and 2001) it introduced fiscal reforms to tackle the deficit, and twice achieved the
precise opposite.27 Despite being an export-champion, its last fifteen years have been
dire. If the next British government proceeds upon the basis of deficit reduction before
growth, it risks achieving neither.

There are tons of graphs: this one shows where our growth has come from (excluding government) since 1971:


and a helpful spreadsheet that I am constantly updating to show the various scenarios in action, the consequences for the savings ratio, public debt, and so on: it is very crude but will get sharpened over time.


The more I read about Japan, in particular the cannot-be-rated-high-enough Richard Koo’s Holy Grail of Macroeconomics, the more convinced I am that delaying the fiscal murder till we are sustainably growing is the right answer.  Read that book (Hat-tip to Aditya Chakraborrty of the Guardian for whose recommendation I am in debt).

More later: I may try to get an opEd done now


11 thoughts on “It’s out: Slash and Grow? or Can Osborne’s route to growth work?

  1. Dear Giles

    Hurrah times three!

    You write, “If the next British government proceeds upon the basis of deficit reduction before growth, it risks achieving neither.” And later, “The more I read about Japan … the more convinced I am that delaying the fiscal murder till we are sustainably growing is the right answer.”

    I hope Messers (literally) Clegg and Cable (and Clegg’s entourage) read this and take note. I made similar comments back July here http://www.libdemvoice.org/opinion-a-fresh-start-is-the-most-vacuous-suicide-note-in-history-15750.html when they took the tactical decision to be hawks on spending whilst demand was still far too weak.

    Respected people such as yourself have a responsibility to use your influence where that influence can have effect – from freethinking to free campaigning. I know that you value objectivity and political impartiality but my call here is to use that influence on any audience, but you will have a greater impact among the Liberal Democrat leadership for these reasons.

    It is now one year on from the first announcements of a Stimulus Package in the UK, but I see no evidence of any action. Where are the new social housing projects either built from scratch or bought in from struggling developers? Where are the increased numbers of shared equity home owners? Where are the tram projects? Where are the waste to fuel (via gasification not burning) and recycling plants? Where are the tidal power projects? Where are the skills projects that pay firms to take on apprentices so that they can learn from today’s practitioners in the world of work and not from old fossils off-site in colleges? Etc..

    As you say we have gone someway to replace lost investment but with the wrong kind and low utility public investment. In this transitional and atypical period (before payback time) we need not just to maintain demand but to direct demand into transformational spending.

    What was and still isneeded was a National Programme for Reconstruction – I use capitals because it needed to be as much about a campaign for renewal – a movement – as much as a set of economic initiatives. We needed to approach this on a war footing.

    We needed a big goal of transformation, a vision if you will, and dynamic, creative, confident leadership in the face of this threat.

    As this is not coming from the Government and is clearly counter to the Conservative ‘tactics’ for winning an election, it is down to those Liberal Democrats.

    Use that influence today.

    Sorry this is so long,

    Have a good day,


  2. Hi Bill

    I’m (fairly) sure that Nick and Vince read my stuff – even more sure that there is not much that I know that Vince doesn’t. I am not sure about the war footing rhetoric though; we have had a one year fall in consumption and investment, not a national disaster, and if I’d lived through 10 years of war, rationing and conscription, I’d be a bit annoyed about politicians stealing the language.

    But I think we broadly agree – we need more investments. However we don’t need them to be utterly willy-nilly – our capacity shortfall is 5% not 20%, and inefficiency still has its costs. We can’t turn this into “Everything a spend happy social democrat has ever dreamed of” – otherwise we’ll end up having to repeat the pain again.

    The FT leader is right. we DO need a plan for fiscal retrenchment. We just should not “implement on day one”. we need a chancellor who is able to take the economic temperature first.

  3. Thanks for taking the trouble to reply so carefully and clearly, Giles.

    I got out of my business two years ago because I worried about where things were going. I also managed to liquidate some property at about the same time. I find it difficult to explain anything technically. All I can say is that I sensed it and I also ‘sensed’ an experience echoing that of Japan … and that is still my worry.

    Maybe not ten years of war, then, but the human cost of say ten or more years of deflation, stagnation, negative equity (not just in housing) and unemployment with its effect of inter-community strife, health, employability, lost opportunity and, for too many, a miserable isolated and excluded existence fills me with horror. That requires a concerted, all consuming and united approach that countries often find when they realise the challenge they face.

    As I have said elsewhere (maybe it’s another war metaphor) I think we need a person of the stature of Lloyd George to make things happen as he did when he took over from a discredited establishment in 1916 … or a leader in the FDR mould.

    As a country we have wasted a year. We used some arcane bankery means to increase the money supply that, if it has worked, has done so in an unintended bubbly way; instead of using direct (PSBR funded) Government Expenditure which would have both created demand and increased the money supply, and which could have funded the kind of transformation and capacity building that we needed anyway to change Britain, but which are now more essential than ever. Making us more and not less able to later to change our relationship to Government from dependency and to pay down the debt.

    Normally it is difficult to win support for such atypical action, but with public confidence in the political and financial establishment in tatters, there has been a unique opportunity for radical, anti-establishment policy.

    Lloyd George would have relished this time as one of opportunity.


  4. Giles,

    With you. Nice paper. Augustinian policy makes sense for all the deficit countries of the world until the surplus countries manage to persuade their consumers to spend more. (The FDP’s effect on the future Germen fiscal stance seems very useful.)

    If you want ot think about and work through further the constraints that where we are now place on policy , I strongly recommend the stock-flow conditioned model format developed by Wynne Godley and his team. The basic reference is the book Monetary Economics by Godley and Lavoie http://www.palgrave.com/products/title.aspx?is=0230500552 . This is the macro-model that Dirk Bezemer cites as having got it right before the current crisis. The team’s past commentaries on the US situation are up at http://www.levy.org

  5. Hi David

    That looks really useful, thanks. Would you recommend the book for general use? Was it something that was used in government when you were there?



  6. Monetary Economics by Godley and Levine is creeping into use – even for undergraduate teaching. The concepts in the book have been my macro-model of reference back to about 2004 – a moment when I had to start thinking again about macro economics after a period away from it – and the model seemed clearly the best framework on offer. In 2004, the published expositions of the model were much less complete.

    I retired from the Government Economic Service in 1993; the SFC model was not developed then. In those days, I used my own basically patchwork Keynesian plus monetarist framework. Wynne Godley I had met and come to greatly respect in government. That is why in 2004 I looked out what he was doing.

  7. Giles,

    Have you done any work on where the UK’s income/growth since 1979 has come from? (Obviously treating debt draw-down as ‘income’ for this purpose with the family home in the role of ATM).

    The reason I ask is that I have an uncomfortable feeling that a too big share has come from oil until the early/mid 90s, then from increasing debt as the oil bonanza faltered. Since both of these are, for their own reasons, wholly unsustainable they would, if significant, imply a desperate output gap going forward.

    Incidentally, if you don’t already know it I think you would enjoy Steve Keen’s Debtwatch blog. He is one of the dozen economists credited by DIrk Bezemer (see David’s comment above) with warning of the crisis ahead of time.


  8. Hi Liberal Eye

    No – I haven’t done that work – it is a logical extension of this one. I have a feeling that oil is nowhere near as significant as it once was though. I’ll have to retrain seriously to get up to scratch

    Good blog – thanks for pointing that one out


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