£1 trillion National Debt:. . . so what?

The media and political parties have made a meal of the fact that our National Debt has now reached £1 trillion. The Tories use the figure to "prove" that their public spending cuts are necessary and inevitable, Labour to show that the policy of public austerity is making matters worse rather than better, and the media like to sensationalise any allegedly significant "milestone" in order to attract attention, sell their papers and maximise their profits.

In fact the really significant fact about our National Debt is that it is still, at 64% of our GDP, only marginally above the accepted normal maximum of 60%, which is what is to be expected in a recession, still below those of Germany and France, and less than a third of that of Japan, (226% of GDP.)

The really serious fact about Britain's debts is that, adding together the debts of households, companies, the financial sector and the government the total comes to almost 500% of GDP. This makes the UK economy as a whole the most indebted of the big rich countries. (The total indebtedness of the US is around 280% of their GDP.)

Aggregate household debt is almost 100% of GDP, so all those households who criticise the government for having accumulated debts of 64% need to look to the beams in their own eyes. Company debt is around 110%of GDP and the debts of the financial sector over 200%.

In this scenario government debt is the least of our worries. Most of it is held internally and, if the Tories are really so desperately worried about it, it could be reduced very rapidly by a wealth tax and the closing of a few tax loopholes. I cannot, however, see any similar quick fix for the massive private-sector debts. These have to be reduced somehow and doing so must reduce aggregate demand which will in turn hamper growth and, under present arrangements, cause yet more unemployment and serious misery.

The answer must lie in more sharing, both of the work available and the incomes generated. This will mean more part-time working, more job-sharing, an end to double-income households, and more taxes to help the most adversely affected. As far as I can see, none of the three major parties is even beginning to tackle this problem. The Greens have perhaps made a start.

The alternative is to wipe out the debts by massive inflation, not a prospect which those of us with savings relish.

France v Britain in the relegation stakes.

The indignation of some of France's leaders that France rather than the UK should be singled out for possible downgrading by the ratings agencies has some justification, as figures published in last Saturday's Guardian (17th December, 2011) show. According to these figures France's current budget deficit for 2012 is predicted to be a "mere" 4.63% compared with the UK's 7.01%, and her total Debt/GDP ratio at 83.5%, is very comparable to the UK's 76.9%. France's inflation rate is predicted at 1.4% compared with the UK's 2.4%. (As a holder of savings I hope they're right and that the UK's inflation rate will come down, though I'd clearly be better off holding my modest wealth in France rather than the UK.)

Other figures, taken from the CIA's World Fact Book which I'm assured is reliable on these matters, throw up further interesting comparisons.

The level of investment, so very important for future growth and productivity, is 19.3% of GDP in France, compared with only 14.7% in the UK.

In spite of the fact that the UK has experienced a massive devaluation of the £ in the past few years, which the much-vaunted non-membership of the euro permits, our current balance of payments deficit is still slightly higher, at a dollar equivalent of $56.19bn, than that of France ($54.4bn), where the membership of the euro prevents such tactics.

Curiously, given France's boasted devotion to equality along with liberty and fraternity,their Gini co-efficient (a measurement of equality) of 32.7 is not much better than the UK's (34). However, only 6.2% of France's population live below the poverty line, compared with 14% in the UK. (I'm not quite sure how these two figures can be reconciled.)

So there's not all that much to chose between the performances of the French and British economies, although socially the French seem to do rather better. However, for me the "killer statistic" is that the French government takes 48.8% of GDP in taxation, (compared to 40.4% in the UK),with which it finances among other things, a health service with excess capacity, working fountains and beautiful municipal gardens in almost all towns and villages, and generous welfare payments to cushion the trauma experienced by unemployed people and others on benefits. Our monetarist mantra preaches that such a high tax take would be ruinous to innovation, growth and competitiveness, would drive all entrepreneurs out of the country and bring the economy to a virtual standstill. That little theory, like so much else of monetarist dogma, just doesn't seem to hold water.

I am genuinely puzzled as to why, given their gaffes on the credit-worthiness of Icelandic banks and the US sub-prime market, so much notice is taken of the assessments of these agencies. It has to be remembered that they are financed by the very organisations, primarily financial instructions, which they rate. These make their money by speculation. If markets are stable the opportunities for speculation are very limited. Hence it pays the agencies and their paymasters to throw as many spanners in the works as possible.

Surely the answer is to ignore these commercial agencies and replace them with an independent agency without a financial axe to grind, funded internationally through the UN.

100(?) Economists and Plan B (2)

As loyal follower Chris rightly points out (see his comment to "100 Economists and Plan B [1]"), the 100 may be a slight overstatement, as two of them, Prof Malcolm Sawyer of Leeds and Dr Pritam Singh of Oxford Brookes, appear on the list twice. However, as my former students and colleagues will acknowledge, I have never claimed that economics is all that precise a science: we look for trends and tendencies. The French, as usual, have a word for it,une centaine, which means "about a hundred."

The centaine make five specific proposals for their Plan B:

1. reversing public sector cuts:
2. directing quantitative easing to a green new deal;
3. increasing (welfare) benefits;
4. a British investment bank;
5. the introduction of a financial transactions tax.

I'm proud to say that, although I have never claimed to be a leading economist, all but the last of these appear in my own Plan B, posted on the 9th August. In a fit a absent-mindedness I seem to have failed to mention a financial transactions tax, but have advocated that on several other occasions so, though now retired, and never at the "cutting edge," I do feel reasonably "up to speed."

I do quarrel, however, with the leading economists' advocacy of quantitative easing, even if it is specifically directed at a green new deal. I should prefer direct government expenditure. Both that and quantitative easing risk fuelling inflation, but, of the two, direct expenditure is more subject to control.

It is heartening to see, in a letter to yesterday's Guardian, that a group of leading Liberal Democrats have also at last come to the conclusion that "enough is enough," that we should stop supporting the coalition's disastrous austerity programme and support the Compass Plan B.

Keynesianism alive and well in the White House

Regular readers, if such exist, will have noted few posts during August. This is because I have been juggling some time-consuming economics work with quite a lot of holidays. The end of the latter this week involved a four hour wait in the Gare du Nord in Paris. where, to pass the time, I picked up a free newspaper (20 Minutes, 08/09/10) and found the following short article:

OBAMA, UN PARI À 50 MILLIARDS.

Des grands travaux très coûteux pour relancer l’emploi. C’est l’ambitieux pari de Barack Obama en plein chute dans les sondages à deux mois des législatives. Le président américain a annoncé lundi qu’il allouerait 50 milliards de dollars à un plan de construction d’infrastructures routières, aériennes et ferroviaires. Ce plan ne « créera pas seulement des emplois immédiatement mais organisera mieux notre économie sur le long terme », a-t-il déclaré. « Même après la pire récession de notre vie, l’Amérique continue de maîtriser son destin. » Mais ce plan doit d’abord être voté au congrès où l’opposition risque d’être féroce.

For those whose French is rusty his means that President Obama is proposing a 50 billion dollar gamble of costly (public) works to create employment. These will involve construction in the road, rail and airways infrastructures which will not only create jobs now but will better prepare the economy for the long term - a classic classroom statement of the Keynesian position which an "A" level student with a modest E could understand and justify.

Why oh why does the British government cravenly follow the White House when it does stupid thing and ignore it when it proposes the correct course - especially when that course is based on the policies of a great Liberal and British economist? Liberal Democrats in government (and all Liberal Democrats in the coming conference) should be pressing Obama's example loudly and clearly.

With friends like these...

The futures market in bonds and sterling does not normally open until 8 o'clock in the morning, but, according to yesterday's Guardian (03/05/10: Sterling faces battering within hours of polling) Euronext Liffe, which runs the gilts and futures exchange, has arranged that on Friday, as the election results begin to come it, the market will open at 1a.m

As economist Hugo Radice has pointed out in a letter to the Guardian (27/04/10): "...bond purchasers have an interest in talking down the issue price of UK government debt in the short term... They are happy to exploit our electoral jitters safe in the knowledge that the price will rise as the recovery gathers pace, netting them an easy capital gain."

Many economists have long advocated a Tobin-type tax to curb speculation on the international currency markets. Surely it is time to impose a similar type of tax on all financial transactions to curb short-term speculation. As Keynes pointed out, the purpose of the money markets is to channel savings into useful purposes such as investment: not to provide a casino for gamblers (though I understand that did not stop him making a tidy packet on behalf of his college.)