Bolitics The New Condem Government

[blandy]

2 50 year old planes are decommisioned.

Not true.

MR4 is essentially brand new - replacing the MR2 which came in at the start of the 80s. Some parts are re-used but they are to all intents and purposed new.

Harrier first came into servie in 1969, 41 years ago, but the ones they are decommissioning are not those Harriers, they are much newer (1990), though they are at the end of their fatigue lives, in part due to Afghanistan operations - something (Afghan) that is ongoing, though GR4 Tornados are now being used, due to the Harriers being shagged. But the capability could be used right now, were it available.

As I said earlier, from the point of view of them being knackered, it makes sense ot withdraw them, but the fact that they were until very recenetly fullfilling an active and useful role tends to point to the lack of wisdom in pervious times (labour gov't) of getting replacements ready. The tory/lib gov't is compounding things with cost driven changes dressed up as a strategic review.

Both Nimrod and Harrier type capability is something we need, either as a "World power" or just for a smaller role - Germany for example, without much of a coast, and without the sme World role has Maritime Patrol aircraft. Spain, India, Thailand and the USA still use Harrier variants, despite their varying roles in the World.

[C4rvillan]

The Nimrod is a 50 year old air frame design. It was based on the comet airliner and still looks like a comet airliner. Plus there are much cheaper types of aircraft that do the same job.

I do agree that it is sad to see our military strength cut. As a boy, I wanted to be captain of HMS Invincible so it is sad to see this class being scrapped. But without Harriers (which in the modern era have certain deficiencies), they are useless. HMS Ocean carries out the role of being the platform for support helicopters plus HMS Albion and Bulwark and the RFA Bay Class ships have the capacity to carry helicopters too.

[snowychap]

Its a milestone, as Blandy rightly suggests, that we need to address.

I wouldn't necessarily see it as the kind of millstone that you do. I haven't said that it needn't be addressed, either.

I don’t think putting it into an historical context and saying it’s not that bad is a particular great argument for not addressing it.

I don't believe that I have said that it doesn't need to be dealt with (in and amongst dealing in a sensible way with all of the public finances), have I?

I have argued (as above) that it isn't the millstone that some claim it is.

Putting everything in to context (whether that be historical, in terms of the world's economy - especially our place in it - or looking at a figure in the context of other figures and economic indicators as the writer of the article on the previous but one page suggests) is, surely, the best place to start when trying to identify what has gone wrong and what might be the best course of action to take (depending upon what one wishes as an outcome).

Fixating on nominal figures really makes no sense.

[snowychap]

This is illogical

Illogical or just counterintuitive?

Though I'm not sure that the writer of that piece was suggesting what you said. It read to me that he was talking about a different approach to deficit reduction and planning deficit reduction (i.e. tying it to economic indicators and not to arbitrary calendar dates).

[blandy]

illogical.

I don't disagree with all of what he wrote, by a long chalk, but in the same way the writer approached what she/he picked "fault" with, I thought the part I quoted was not a logical standpoint that followed on with the rest - it was a leap of faith, where much of the rest of it seemed, to me, to follow logically.

It just stood out to my reading as something that didn't sit right with the rest of the argument made.

[blandy]

Its a milestone, as Blandy rightly suggests, that we need to address.

I wouldn't necessarily see it as the kind of millstone that you do. I haven't said that it needn't be addressed, either.

Explain that one, please snowychap - you don't necessarily see it as a milestone that we need to address and also you don't say it doesn't need to be addressed.

Other than addressing it, or not addressing it, what else can be done with it? There's no Blairite "third way" - or perhaps there is? - sell it to the markets? PFI it? pretend it isn't there and ignore it? blame it on AL-quaida, say it's got WMDs? say God told us it was OK?

Beats me, mate. - edit - juyst realised there's the "don't know what to do about it" option, sorry.

[JulieB]

One of the biggest things the government needs to do is put some kind of asset structure in place to fund Public Sector Pensions.

It's absolutely mind numblingly stupid to basically have a system of most final salary Public Sector Pensions having absolutely no "funds or investments" to back them up. Basically at the moment what you have is an IOU to the taxpayer going forward and statement from the Pension Trustees..with a promise of a lump sum and a Pension income when you retire under the scheme's criteria. This is a crazy crazy situation, that is simply unsustainable.

Why can't Public Sector Pension contributions go into some form of Trust fund that invests in the UK infra structure, sustainable & Bio energy etc, affordable sustainable housing or funds private ventures for a share of the Business like a Pension's Dragon's Den, which is being starved of Capital by the Banks. They don't need another Quango...they just need some imagination!!

No one seems to have a strategy.... they need to do some Financial Planning for the short & long term. Just handing out volumous IOUs, which become someone else's problem 30 years down the line is madness!

[peterms]

This is illogical - the writer proposes increasing structural (over) spending to remedy deficit problems. In other words to add to the deficit by over spending. Or to put it another way, to make things worse.

No. He's proposing that the larger part of the deficit is in fact cyclical, not structural; and that the remedy lies in adjusting cyclical factors to deal with it, especially trying to stimulate growth.

He is not proposing embarking on creating structural deficits to counter a cyclical problem.

The issue that the government needs to address, and sharpish (and which seems to have escaped the brilliant 35 fat cats who pleaded for more pain for others earlier this week) is how the economy will cope with the effects of taking a lot of demand out of the economy, reducing the tax base and increasing welfare payments, while at the same time making those who still have a job rein back their spending because of fear of what comes next. It is this which causes some to fear the "double dip", and I have still to hear a credible explanation of how the proposed measures will avoid an immediate slump in spending, with the consequences of cutting production, laying off staff, more welfare payments, less taxes, less demand, cutting production...

A bigger, longer-term question is about the sustainability of our economic model. It seems to be largely built on a house price bubble (telling ourselves and each other that our houses are somehow worth more than they were so that we can take some of that capital appreciation and spend it), combined with financial services, which are globally fickle and, as we've seen in the last two years, also largely built on smoke and mirrors.

[peterms]

One of the biggest things the government needs to do is put some kind of asset structure in place to fund Public Sector Pensions.

It's absolutely mind numblingly stupid to basically have a system of most final salary Public Sector Pensions having absolutely no "funds or investments" to back them up. Basically at the moment what you have is an IOU to the taxpayer going forward and statement from the Pension Trustees..with a promise of a lump sum and a Pension income when you retire under the scheme's criteria. This is a crazy crazy situation, that is simply unsustainable.

Why can't Public Sector Pension contributions go into some form of Trust fund that invests in the UK infra structure, sustainable & Bio energy etc, affordable sustainable housing or funds private ventures for a share of the Business like a Pension's Dragon's Den, which is being starved of Capital by the Banks. They don't need another Quango...they just need some imagination!!

No one seems to have a strategy.... they need to do some Financial Planning for the short & long term. Just handing out voluminous IOUs, which become someone else's problem 30 years down the line is madness!

Isn't the answer what Nye Bevan hinted at, when he said (something like) “The great secret about the National Insurance fund is that there ain’t no fund.”

In other words, having little (or big) ringfenced pots of money for specific purposes may seem intuitively sensible, but in fact it's not a very bright way to run an economy. It would tie up massive amounts of money. Better to adjust inflows and outflows according to the needs of the moment.

[peterms]

And a bit more sense being spoken here:

To choose austerity is to bet it all on the confidence fairy

The mystical belief is that a smaller deficit will lead to an investment boom. What Britain really needs now is another stimulus

Joseph Stiglitz

The Keynesian policies in the aftermath of the Lehman brothers bankruptcy were a triumph of economic theory. In Europe, the US and Asia, the stimulus packages worked. Those countries that had the largest (relative to the size of their economy) and best-designed packages did best. China, for instance, maintained growth at a rate in excess of 8%, despite a massive decline in exports. In the US the stimulus was both too small and poorly designed – 40% of it went on household tax cuts, which were known not to provide much bang for the buck – and yet unemployment was reduced from what it otherwise would have been – over 12% – to 10%.

The stimulus was always thought of as a stopgap measure until the private sector could recover. In some countries, such as the US, politics rather than economics drove the size and design, with the result that they were too small and less effective than they might have been. Still, they worked. Now, financial markets – the same shortsighted markets that created the crisis – are focusing on soaring deficits and debts.

We should be clear. Most of the increase is not due to the stimulus but to the downturns and the bank bailouts. Those in the financial market are egging on politicians to ask whether we can afford another stimulus. I argue that Britain, and the world, cannot afford not to have another stimulus. We cannot afford austerity. In a better world, we might rightfully debate the size of the public sector. Even now there should be a debate about how government spends its money. But today cutbacks in spending will weaken Britain, and even worsen its long-term fiscal position relative to well-designed government spending.

There is a shortage of aggregate demand – the demand for goods and services that generates jobs. Cutbacks in government spending will mean lower output and higher unemployment, unless something else fills the gap. Monetary policy won't. Short-term interest rates can't go any lower, and quantitative easing is not likely to substantially reduce the long-term interest rates government pays – and is even less likely to lead to substantial increases either in consumption or investment. If only one country does it, it might hope to gain an advantage through the weakening of its currency; but if anything the US is more likely to succeed in weakening its currency against sterling through its aggressive quantitative easing, worsening Britain's trade position.

Of course if Britain succeeds in getting the world to believe that its economic policies are among the worst – an admittedly fierce contest at the moment – its currency may decline, but this is hardly the road to a recovery. Besides, in the malaise into which the global economy is sinking, the challenge will be to maintain exports; they can't be relied on as a substitute for domestic demand. The few instances where small countries managed to grow in the face of austerity were those where their trading partners were experiencing a boom.

Lower aggregate demand will mean lower tax revenues. But cutbacks in investments in education, technology and infrastructure will be even more costly in future. For they will spell lower growth – and lower revenues. Indeed, higher unemployment itself, especially if it is persistent, will result in a deterioration of skills, in effect the destruction of human capital, a phenomena which Europe experienced in the eighties and which is called hysteresis. Lower tax revenues now and in the future combined with lower growth imply a higher national debt, and an even higher debt-to-GDP ratio.

Matters may be even worse if consumers and investors realise this. Advocates of austerity believe that mystically, as the deficits come down, confidence in the economy will be restored and investment will boom. For 75 years there has been a contest between this theory and Keynesian theory, which argued that spending more now, especially on public investments (or tax cuts designed to encourage private investment) was more likely to restore growth, even though it increased the deficit.

The two prescriptions could not have been more different. Thanks to the IMF, multiple experiments have been conducted – for instance, in east Asia in 1997-98 and a little later in Argentina – and almost all come to the same conclusion: the Keynesian prescription works. Austerity converts downturns into recessions, recessions into depressions. The confidence fairy that the austerity advocates claim will appear never does, partly perhaps because the downturns mean that the deficit reductions are always smaller than was hoped.

Consumers and investors, knowing this and seeing the deteriorating competitive position, the depreciation of human capital and infrastructure, the country's worsening balance sheet, increasing social tensions, and recognising the inevitability of future tax increases to make up for losses as the economy stagnates, may even cut back on their consumption and investment, worsening the downward spiral.

No business with a potential for making investments yielding high returns would pass up the opportunity to make these investments if it could get access to capital at very low interest rates. But this is what austerity means for the UK.

Critics say government won't spend the money well. To be sure, there will be waste – though not on the scale that the private sector in the US and Europe wasted money in the years before 2008. But even if money is not spent perfectly, if experience of the past is a guide to the future, the returns on government investments in education, technology and infrastructure are far higher than the government's cost of capital. Besides, the choices facing the country are bleak. If the government doesn't spend this money there will be massive waste of resources as its capital and human resources are under-utilised.

Britain is embarking on a highly risky experiment. More likely than not, it will add one more data point to the well- established result that austerity in the midst of a downturn lowers GDP and increases unemployment, and excessive austerity can have long-lasting effects.

If Britain were wealthier, or if the prospects of success were greater, it might be a risk worth taking. But it is a gamble with almost no potential upside. Austerity is a gamble which Britain can ill afford.

[peterms]

Oh yes, and on the point about whose fault it was (not that that's the main issue right now, a bit more sense being spoken:

...The coalition's case is that Labour behaved like the pools winners of yesteryear, showering tenners around like confetti. The 13 years of New Labour rule are recast as a binge whose golden rule was spend, spend, spend. Before that storyline takes hold for good – and it may already be too late – Labour needs to lay out a few facts.

The first should come in the form of a question. If Labour's spending was so wildly out of control, why did the Tories promise to match their plans, pound for pound, all the way until November 2008? Why didn't Osborne and Cameron howl in protest at the time?

Could it be because things were not actually that bad? A quick look at the figures confirms that, until the crash hit in September 2008, the levels of red ink were manageably low. The budget of 2007 estimated Britain's structural deficit – that chunk of the debt that won't be mopped up by growth – at 3% of gross domestic product. At the time, the revered Institute for Fiscal Studies accepted that two-thirds of that sum comprised borrowing for investment, leaving a black hole of just 1% of GDP. If the structural deficit today has rocketed close to 8%, all that proves is that most of it was racked up dealing with the banking crisis and subsequent slump – with only a fraction the result of supposed Labour profligacy. After all, even the Tories would have had to pay out unemployment benefit.

This is why Ed Balls was right to declare in his summer Bloomberg lecture – which remains Labour's most robust effort yet to redirect the finger of blame away from itself – that "it is a question of fact that we entered this financial crisis with low inflation, low interest rates, low unemployment and the lowest net debt of any large G7 country".

In other words, the position was relatively sound until the crash struck. The coalition would prefer voters forgot about that event; they mention it only rarely. But in this era of collective short-term memory loss, it is worth reminding people that the financial crisis was not limited to those territories ruled by Gordon Brown: it was global, it was systemic and it was caused by the larcenous greed of bankers...

[peterms]

I find it rich that the Tory supporters, and especially those who seemingly have a military background, will not admit that this Gvmt are clueless in what they are doing and are hitting far too deeply and far too quickly.

I don't think the government generally is clueless* but by ring fencing the NHS and DFID they've really limited their room for manouvere. The waste in the NHS (particularly middle management) is staggering, as evidenced on here by BillyS and formerly by Ahmed, and ditto with international aid Whydo we give billions of pounds to countries with nuclear weapons and space programes, and another that spends a lot of its energy training people to fight us in Afghan or bomb us at home? That's crazy really.

In terms of defence I don't agree with what they have done and believe they have left dangerously wide gaps in our capabilities, however the fact remains that Labour spent 10's of billions on unfunded defence PFI's and now it's come back to bite us in the ass.

A plague on all their houses.

*I do think Osborne is a chopper though.

Totally agree. While I believe in the basic principles of the NHS and wouldn't want to see health care privatised it is very obvious there are some huge savings that could be made through simply stopping some of the current waste.

I find it odd that this government is so eager to route out waste yet have ring fenced one of if not the largest area of waste.

May I suggest a potentially interesting area of research?

In which areas of NHS spending have costs risen most?

What is the connection between this and the profits of the private firms involved in supply in these areas?

What is the connection between these firms and members of the government?

Let's face it, the problem with NHS spending is not so much middle management, as drug companies and tech firms, and yet we keep hearing the same old stuff about "too many managers". Some of those managers, by the way, are supposed to be driving procurement savings by getting better deals out of the drug and tech companies who are making a killing out of the NHS. Now, who exactly would benefit if this sort of "bureaucracy" was cut...?

[peterms]

Oh, and there's even more...

...The real problem is that Britain has an economy with a seriously unbalanced structure; a fact, unfortunately, ignored for many years by New Labour, in its quest for an economic future based on financial services. Economic policy that focuses on squeezing the public sector will not help businesses dealing with a lack of demand and a dysfunctional and discredited banking sector, nor will it improve our inflation prospects and business and household confidence. As Chakrabortty notes, crowding out is a "busted idea". To stimulate the private sector we need an active industrial policy, together with a proper system of financial sector regulation. This will ensure banks serve the real needs of firms and households, and will ensure that resulting surpluses go into investment and exports, and not into excessive pay and bonuses.

If cuts in public spending tip the UK economy into a "double-dip" recession, then the market sector surplus for investment and exports will not increase. Labour and capital released from the public sector will just lie idle. The consequence will be greater demands on the public sector deficit, to which Osborne's only answer, presumably, will be to cut even more severely.

[snowychap]

Explain that one, please snowychap - you don't necessarily see it as a milestone that we need to address and also you don't say it doesn't need to be addressed.

:?

I wouldn't necessarily see it as the millstone that Ads does (suggesting that I don't attach as much importance to it - at least the bare figure, out of context - as he does).

In the light of the implication within Ads's post (both the bits which I quoted) that I was arguing for not addressing it, I had to point out that I wasn't doing that and hadn't (at least I don't think I have).

Does something need to be a millstone in order to be addressed (or dealt with or looked at, &c.)?

[peterms]

In shocking news, there's an outburst of common sense from the BoE: Mervyn King hints at fresh round of quantitative easing

Bank of England governor says strong case for pumping money into economy to spur growth and stop inflation falling below 2%

Bank of England governor Mervyn King signalled tonight that he was closer to embarking on a second round of quantitative easing after he said there was a strong case for pumping funds into the economy to spur growth and prevent inflation falling below its 2% target.

King warned the next decade would be bumpy and the UK would struggle to claw back the 10% of output it lost following the banking crash.

A lower exchange rate is expected to support a rise in exports and help rebalance the economy towards investment and exports.

King famously described the 10 years after the mid-1990s as the "nice" decade – an acronym for non-inflationary, consistently expansionary.

Speaking in Wolverhampton to an audience of business people, he said the next decade would need a new acronym. He called it the "sober" decade or "a decade of savings, orderly budgets, and equitable rebalancing".

King said a key role for monetary policy would be "smoothing the adjustment process by providing temporary stimulus to demand".

With interest rates already at the historic low of 0.5%, the bank's monetary policy committee has debated whether to increase the current £200bn programme of quantitative easing (QE). Under QE the bank buys government bonds using newly created electronic money, to depress long-term interest rates and encourage investment.

MPC member Andrew Sentance has argued the bank risks stoking inflationary pressures if it adopts a looser monetary policy and should increase interest rates to dampen demand.

Minutes of the last MPC meeting are expected to show Sentance called for a quarter point rise in interest rates.

However, King told the Black Country Chamber of Commerce that while inflation remained volatile, in the medium term the main risk lay in inflation dropping below its target.

"So not only can monetary policy play a role in smoothing the rebalancing process, it needs to do so if the outlook for inflation is to remain in line with the 2% target in the medium term," he said.

"It is dangerous to become fixated by the precise profile of quarterly growth rates. The sensible approach is to focus on the big picture. And the big picture is that total output is roughly 10% below where it would have been had the crisis not occurred.

"The conditions are in place to support a rebalancing at home: in particular the past depreciation of sterling will make UK-produced goods more competitive at home and abroad. But domestic spending has already fallen before a pickup in net exports.

"This highlights a key role for monetary policy: smoothing the adjustment process by providing temporary stimulus to demand while the rebalancing takes place, so reducing the risk of inflation falling below the target in the medium term."

[snowychap]

A bigger, longer-term question is about the sustainability of our economic model. It seems to be largely built on a house price bubble (telling ourselves and each other that our houses are somehow worth more than they were so that we can take some of that capital appreciation and spend it), combined with financial services, which are globally fickle and, as we've seen in the last two years, also largely built on smoke and mirrors.

I fear that the question is unlikely to cause much of a ripple outside the musings of academics, warring factions of schools of economics and economists, the odd radio four programme and bar room/message board amateur philosophers.

When we're in a crisis/recession/downturn then the concern is only how things can be returned to 'normal' (i.e. as close to the conditions just before we drove off the cliff); when we're out of it then we're told it's not the time to tinker with a 'winning formula'.

[leviramsey]

We are waking up to the reality that in Western Europe, defence isn’t a vote winner.

You're welcome.

Signed,

The United States of America & its taxpayers

[Awol]

In shocking news, there's an outburst of common sense from the BoE: Mervyn King hints at fresh round of quantitative easing

Bank of England governor says strong case for pumping money into economy to spur growth and stop inflation falling below 2%

Bank of England governor Mervyn King signalled tonight that he was closer to embarking on a second round of quantitative easing after he said there was a strong case for pumping funds into the economy to spur growth and prevent inflation falling below its 2% target.

King warned the next decade would be bumpy and the UK would struggle to claw back the 10% of output it lost following the banking crash.

A lower exchange rate is expected to support a rise in exports and help rebalance the economy towards investment and exports.

As evidenced by my posts on the economy I'm no expert but here's a few laymans' thoughts/questions anyway..

Devaluing Sterling through QE could do a number of things:

Lowers the cost of exports

Increases the cost of imports/Leads to inflation

Encourages people to inflate the next asset bubble with the excess cash instead of opting for slower but more sustainable growth - or - sit on the cash and pay down debt therefore giving no boost to the economy?

Potentially starts a devaluation trend that may be difficult to stop again?

By doing this would we not be trying to get ourselves back to a level of economic output of recent times that was essentially smoke and mirrors anyway?

Another thing is that we would not be devaluing in isolation (I've read Bernanke is thinking about another round in the US) so do we risk getting into an international race to the bottom and over time wiping out the value of individuals savings - beggaring a good proportion of the population in the process?

Following that route (potentially a la Weimar) seems like smearing ourselves in beef dripping then sticking our political and social collective into the lions chops tbh.

I know I've made a number of (unsubstantiated) leaps forward there but are they not plausable scenarios?

As much as it's going to hurt people who have done nothing wrong, there is a part of me that thinks we have no alternative now but to take our medicine and get through the hangover that has followed the binge. I'm not attributing political blame with that statement just trying to relfect the reality of where we are. There are no painless ways out that I can see.

Now, amateur economists of VT, let's tear that apart so I can try to understand what the feck is actually going on!

[Awol]

We are waking up to the reality that in Western Europe, defence isn’t a vote winner.

You're welcome.

Signed,

The United States of America & its taxpayers

*cringes* Yes, ta. :oops:

[JulieB]

Isn't the answer what Nye Bevan hinted at, when he said (something like) “The great secret about the National Insurance fund is that there ain’t no fund.”

In other words, having little (or big) ringfenced pots of money for specific purposes may seem intuitively sensible, but in fact it's not a very bright way to run an economy. It would tie up massive amounts of money. Better to adjust inflows and outflows according to the needs of the moment.

National Insurance is one thing but Public Sector Pensions is surely another....When the concept was dreamed up, I can accept that it may have worked because the contributor's & their contributions would have more than funded the retirees & their surviving spouses. At any time it would be envisaged that the +'s outweighed the - 's

However with an aging population and increasing mortalities not to mention the enormous burden these whopping Pensions sometimes paid out to people as young as 50 in the case of eg Bank of England employees.. who then go on to have 2nd careers and Pensions in HMRC & FSA for instance, at the taxpayers expense again!!......then surely it's time for a rethink!