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The wrong cure

What the experts say

David Blanchflower

David Blanchflower is a former member of the Bank of England's Monetary Policy Committee, and Professor of Economics at Dartmouth College, New Hampshire and professor at the University of Stirling.

“George Osborne’s Comprehensive Spending Review is the biggest – and riskiest – macroeconomic experiment undertaken by any advanced country in living memory.

“Everywhere I go around the world, I encoun­ter the same sense of astonishment among economists and policymakers (and I talk to many of them) that the UK government would ignore the risks and proceed to slash public spending and raise taxes during what is a once-in-a-hundred-years financial crisis.

“A Harvard economist said to me recently that the coalition government's fiscal deficit reduction programme is the biggest macroeconomic experiment in an advanced country in any of our lifetimes - and this was before the Comprehensive Spending Review on 20 October. He argued that no government, unless forced to, would be dumb enough to take such unnecessary risks with the well-being of the nation.

“Every other country will be watching, he said, to ensure they don't repeat the same mistake as George Osborne's wildly unnecessary, misguided, doctrinaire and potentially dangerous spending cuts. They've let the Chancellor jump off the cliff first.”

Source: New Statesman, 21/10/10

Christopher Pissarides

Christopher Pissarides is the most recent economics Nobel Prize winner and a Professor at the London School of Economics.

“We have just gone through a severe recession and there is still a lot of uncertainty about the housing market and the level of economic activity over next few years. Unemployment is high and job vacancies few. By taking the action that the Chancellor outlined in his statement, this situation might well become worse.

“The Chancellor is hitting areas that suffer most in recession. Several welfare benefits are to be cut. But they provide support when jobs are scarce and household incomes are falling.

“The cuts are projected to add another half to one million people to the dole. This will make it a lot more difficult for the unemployed to find jobs. It is situations like these that welfare benefits play their most valuable role.

“Capital spending is being cut too. Yet it creates jobs at a time when they are most needed. Overall, the Chancellor is putting the economy through some unnecessary risks because of his fear of sovereign risk, which does not appear justified. And his unwillingness to further tax the well off is inevitably necessitating more cuts to benefits just when the jobless will need them the most.”

Source: Mirror, 24/10/10

Paul Krugman

Paul Krugman is a US economist and a Nobel Prize winner.

“Both the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.

“The British government’s plan is bold, say the pundits – and so it is. But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers – the equivalent of almost three million layoffs in the United States – at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack.

“Why is the British government doing this? The real reason has a lot to do with ideology: the Tories are using the deficit as an excuse to downsize the welfare state. But the official rationale is that there is no alternative.”

Source: New York Times, 21/10/10

Sue Himmelweit

Sue Himmelweit is a professor of economics at the Open University and a member of the UK Women's Budget Group.

“The biggest overall cut is in local government at a cumulative 27% by 2014-5. Local government provides many of the essential personal services that women and their families need. Women are the ones most likely to make up the shortfall in these services by their own unpaid efforts in the home, in some cases reducing their own employment and income to make that possible. Women are 68% of those employed by local authorities so this cut is likely to impact disproportionately on women's employment too.”

Source: Women's Budget Group, 20/10/10

Joseph Stiglitz

Joseph Stiglitz is a US economist and Nobel Prize winner.

“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.

“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.”

Source: Guardian, 19/10/10

Lord (Robert) Skidelsky

Lord (Robert) Skidelsky is the biographer of Keynes and a former Conservative spokesman on the economy in the House of Lords.

“The truth is that it’s not the fear of government bankruptcy but governments’ determination to balance their books which lowers business confidence, by reducing expectations of employment, incomes, and orders. It’s not the hole in the budget but the hole in the economy which is the problem.”

Source: Robert Skidelsky, 13/8/10

“By not taking a principled stand of this kind, the last government lost the rhetorical battle. It couldn’t openly say ‘without a large deficit there will be no proper recovery’. It left the running to those who simply said that ‘you can’t spend money you haven’t got’ and there is ‘no more money in the kitty’. This is rubbish. The rise in the deficit and national debt is mainly a consequence of the shrinking of the economy: as the economy recovers – partly because of the stimulus afforded by deficit spending – both will shrink simultaneously as a proportion of national income. Here are some interesting figures. In 1919 the National Debt stood at 135% of GDP – as a result of heavy wartime borrowing. By 1920, after a year’s inflationary boom it was down to 130%. By 1922 it was up to 171%? Why? Because there had been a huge deflation and rise in unemployment in 1921. In the deflationary decade of the 1920s, the debt hardly reduced at all. Nothing could more clearly illustrate the fact that the debt falls when the economy rises and rises when the economy falls.

“There are other points which could have been made. Unlike households, governments don’t have to repay their debt. They can borrow almost without limit, especially from their own people. If interest rates go up, they can print more money to force them down again. Printing money won’t cause inflation to go up if there is a lot of unused capacity. Another myth is ‘the burden on future generations’. Provided the debt is mainly held by British citizens, there is no net loss of income from any debt repayment: it is a matter of future taxpayers repaying future bondholders.”

Source: Northern Ireland Economic Conference, 29/10/10

Ann Pettifor

Victoria Chick, professor of economics at University College London, and Ann Pettifor (pictured), co-founder, PRIME – Policy and Research in Macro Economics, and author of The Coming First World Debt Crisis (2006).

“The empirical evidence runs exactly counter to conventional thinking. Fiscal consolidations have not improved the public finances. This is true of all the episodes examined, except at the end of the consolidation after World War II, where action was taken to bolster private demand in parallel to public retrenchment…

“Fiscal consolidation increases rather than reduces the level of public debt as a share of GDP and is in general associated with adverse macroeconomic conditions.”

Source: The Economic Consquences of Mr Osborne, 6/6/10 (pdf)

Arjun Jayadev

Arjun Jayadev (pictured) and Mike Konczal, the Roosevelt Institute.

“When countries cut in a slump, it often results in lower growth and/or higher debt-to-GDP ratios. In very few circumstances are countries able to successfully cut during a slump, and this happens only when either interest rates and/or the exchange rates fall sharply.

“In our analysis, we find that there is no episode in which a country facing the same circumstances as the United States (recent recession, low interest rates, high unemployment) has cut its deficit and succeeded in reducing its debt through growth.”

Source: The Roosevelt Institute, 23/8/10 (pdf)

Martin Wolf

Martin Wolf is the chief economics writer of the Financial Times and is a consistent critic of government policy.

“Some argue that we have no right to bequeath higher debt to future generations. But why would it be wise to bequeath a smaller economy to posterity, instead?”

Source: Financial Times, 30/9/10

Carlota Perez

Carlota Perez is a research associate in CFAP/CERF at Cambridge University, and professor of technology and development at Tallinn University, Estonia.

“Ultimately, the length and depth of the global recession (perhaps depression) will depend, not on the financial rescue packages but, to a much greater extent, on whether the wider measures taken are capable of moving the world economy towards a viable investment route with high innovation potential. The technological transformation that occurred during the past few decades has already provided the means for unleashing a sustainable global golden age. The environmental threats offer an explicit directionality for using that creative potential across the globe in a viable manner. The major financial collapse has generated the political conditions to take full advantage of this unparalleled opportunity. It is everybody's responsibility to make sure this possibility is not missed.”

Source: openDemocracy, 5/3/09

Samuel Brittan

Samuel Brittan is a columnist on the Financial Times.

“Very near the beginning of his speech introducing the comprehensive spending review, George Osborne attempted to the frame the exercise in the simplest of terms: ‘We are going to ensure, like every solvent household in the country, that what we buy we can afford; that the bills we incur we have the income to meet.’ Either you accept the chancellor’s analogy or you do not. I do not. Of course the deficit matters. But it should be a policy variable rather than targeted to meet a dim accountant’s idea of balance.”

Source: Financial Times, 21/10/10

J. Bradford DeLong

J Bradford DeLong is a professor of economics at the University of California at Berkeley, chair of its political economy major, a research associate of the National Bureau of Economic Research, a visiting scholar at the Federal Reserve Bank of San Francisco, and was in the Clinton administration a deputy assistant secretary of the US Treasury.

“Shame on David Cameron. Shame on Nick Clegg. Shame on George Osborne.

“Their shame would not be quite so great if they had a theory about what elements of spending will grow to offset their 9% of GDP planned fiscal contraction. Is the pound supposed to collapse and are exports than to surge? Is the prospect of rising unemployment in the U.K. supposed to greatly enhance business confidence and trigger a surge of private-sector investment? Is the 30-year gilt yield supposed to fall from 4% to 1% and that reduction in the cost of capital cause a surge of capital formation throughout Britain?

“Cameron, Clegg, and Osborne don't tell us. They don't tell us because they are clueless dorks. They don't even have a theory about how the economy will avoid a double dip. They hope that – somehow, some way – Mervyn King will save them from themselves. But if they actually carry through with their policies, I don't see how he can.”

Source: J. Bradford DeLong, 21/10/10


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“Never in the field of financial endeavour has so much been owed by so few to so many” – Mervyn King, Bank of England governor

Cuts are not the cure
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