UK: 2008 & 2010 Nobel laureates amongst scathing critics of axeman George Osborne’s economics Print E-mail


 London ~ Saturday 23 October 2010, page 32

Paul Krugman condemns coalition's spending review austerity as a 'fad'

Nobel-winning economist fears UK public will be 'fashion victims' of spending cuts that 'boldly go in exactly the wrong direction'

Phillip Inman and Edward Helmore in New York

Paul Krugma (Sipa Press / Rex Features)

The Nobel prizewinning American economist Paul Krugman launched a scathing attack today on chancellor George Osborne's spending cuts [scroll down to item #5 to read in full], just as a prominent member of the Bank of England's rate setting committee argued that the cuts paved the way for strong growth.

Krugman said the policy of government austerity was based on no more than economic "fashion", for which Britons would pay the price.

In his regular New York Times column he said the thinking behind the measures, rather than being based on careful analysis, was "more like a fad, something everyone professed to believe because that was what the in-crowd was saying."

He warned: "No widespread fad ever passes, however, without leaving some fashion victims in its wake. In this case, the victims are the people of Britain, who have the misfortune to be ruled by a government that took office at the height of the austerity fad and won't admit that it was wrong."

Krugman, who also advocates new stimulus measures in the US to ward off a long period of anaemic growth, double-dip recession or outright deflation, believes the Cameron government's measures are a fad that will fade "as evidence has accumulated that the lessons of the past remain relevant, that trying to balance budgets in the face of high unemployment and falling inflation is still a really bad idea". Moreover, he says, the idea that markets will be more confident under a budget-cutting government "has no basis in reality".

Krugman believes the government is using the financial crisis of 2008 as a cover for advancing an ideological programme to downsize the welfare state, saying the plan "boldly goes in exactly the wrong direction" and has been sold to the public with an unprecedented and unwarranted degree of fear-mongering.

The British plan, he wrote, appears to come straight from the desk of Andrew Mellon, the US treasury secretary who told President Herbert Hoover to fight the Great 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". As a result, the British government seems "determined to ignore the lessons of history".

But economist Andrew Sentance, who has gained notoriety as a member of the monetary policy committee for consistently voting for an interest-rate rise, said in the Sun: "Overall, I do not think the review will endanger our recovery.

"In some areas, such as the health service and schools, spending will rise. To make room for this, spending is being cut back more heavily elsewhere. Taking public spending as a whole, it will still rise in cash terms over the next few years but slightly below inflation."

Sentance wants to raise rates to bring down inflation, which he believes has remained above the Bank's 2% target for too long. Fellow committee member Adam Posen said this month that recent economic data pointed to a weakening of demand and a decline in inflation next year.

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 London ~ Sunday, 24 October 2010

Chancellor 'exaggerated sovereign risk' says Nobel laureate

By Gavin Cordon, PA

George Osborne was today accused by Britain's new Nobel Prize winning economist of having "exaggerated" the risk of a Greek-style debt crisis.

Professor Christopher Pissarides said that the prospects of a sovereign debt crisis hitting Britain - used by the Chancellor to justify his spending cuts - were "minimal".

In an article for the Sunday Mirror, he warned that Mr Osborne's swingeing cuts package, announced last week in the Commons, was taking "unnecessary risks" with the economy.

The Chancellor has said drastic action to tackle the deficit was necessary to avoid a Greek-style collapse in investor confidence, leaving Britain facing punitive interest rates to finance its borrowing.

However Prof Pissarides said he believed that the Chancellor had over-stated the dangers.

"It is important to avoid this 'sovereign risk'. But in my view Britain is a long way from such a threat, and the Chancellor has exaggerated the sovereign risks that are threatening the country," he said.

He said that Mr Osborne should have been more concerned about the current weakness of the UK economy.

"Unemployment is high and job vacancies few. By taking the action that the Chancellor outlined in his statement, this situation might well become worse," he said.

"These risks were not necessary at this point. He could have outlined a clear deficit-reduction plan over the next five years, postponing more of the cuts, until recovery became less fragile.

"The 'sovereign risk' would have been minimal."

His comments were echoed by Labour leaders Ed Miliband who accused the Government of driving through big cuts for ideological reasons.

"Of course the deficit is high and needs to be brought down. Our approach, based on halving it over four years, would bring it down every year," he said in an article for The Observer.

"But the idea that we are about to go bankrupt is pure political spin to justify a familiar ideological project of a smaller state."

In his latest podcast on the No 10 website, David Cameron acknowledged that the country faced a "hard road", but insisted that the measures to tackle the deficit were essential.

"I don't underestimate how difficult this will be. But we are doing what we are doing because it is the right thing to do - right by our economy, right for our country," he said.

"We had to bring some responsibility back to public spending because if we didn't, Britain was looking down the barrel of economic ruin."

The Prime Minister said he was committed to ensuring the cuts were administered in a way that was "fair" while at the same time focusing what resources were available on boosting entrepreneurship and wealth creation.

"We didn't just do the right thing, we did it the right way. We've gone about these spending cuts in a way that is fair and in a way that promotes economic growth and new jobs," he said.

"Fair because if you look at the figures, you'll see the highest earners aren't just paying more in cash, they are paying more as a percentage of their income. As we promised, those with broader shoulders are bearing a greater burden."

His comments reflect the acute sensitivity within the coalition to accusations that Mr Osborne's spending review, announced on Wednesday, would hit the poor hardest.

Analysis by the respected Institute for Fiscal Studies found that - apart from the richest 2%, who would be caught by tax rises announced under Labour - the burden of cuts would fall disproportionately on the poorest.
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 London ~ Tuesday 26 October 2010

Leading article: There is nothing pro-business about risking another slump

Mr Cameron seems to have missed the fact that small firms were critical of his deficit-cutting plans

It was a day when the world of politics came to pay tribute to the world of business. David Cameron, Ed Miliband, Vince Cable and Nick Clegg all made their way yesterday to the CBI's annual conference to speak of the importance of the private sector. And all these politicians sought to portray themselves as thoroughly "pro-business".

Yet this raises the question: what is the appropriate way for the state to promote the private sector? The Prime Minister made approving reference in his speech to the letter last week by 35 well-known businessmen in support of the Coalition's plans to wipe out the deficit over the course of the Parliament. But a danger lies in the assumption by ministers that the heads of large businesses speak for the entire private sector. Very often, they do not. Mr Cameron seems to have missed the fact that the Federation of Small Businesses was sharply critical of the Government's deficit cutting plans.

Large companies and smaller firms have had very different experiences since the recession began two years ago. Banks that made crippling losses in the credit bust drastically reduced their flows of lending as they sought to repair their balance sheets. Large firms have been able to tap finance from the bond markets directly. But smaller firms, which are mostly reliant on bank lending, have suffered much more during the ongoing credit crunch. There are other areas of divergence between the interests of large and small firms. The head of Topshop, Sir Philip Green, suggested in his recent review of Whitehall waste that the Government should delay paying its suppliers in order to save taxpayers' money. The impact of such a shift on firms with billion pound turnovers would be negligible, but it would be disastrous for many smaller companies with government contracts.

The Coalition is keen to promote British exports. But there seems to be an assumption in parts of the Government that this means promoting existing large firms abroad. Mr Cameron demonstrated this tendency when he packed his official plane to India this summer with the great and good of the British business establishment. Yet, historically, small firms are more likely to be a source of growth than large ones. Some of the biggest and most successful firms of today – such as Vodaphone and EasyJet – did not exist two decades ago. At times Mr Cameron seems to regard his function as being a cheerleader for large businesses, rather than a promoter of competition and a guarantor of a level playing field.

There is a split personality in the Coalition when it comes to business. The Prime Minister yesterday cited the £30bn of state investment in transport projects over the next four years. But capital spending is still being cut dramatically in real terms by the Coalition. And, as the Labour leader, Mr Miliband, pointed out, the Government is seeking to eradicate the budget on a recklessly short timetable. There is nothing "pro-business" about risking another recession by sucking public spending out of the economy in this fashion.

The Prime Minister talks the talk when it comes to the need to support smaller firms, telling the CBI "we've got to back the big business of tomorrow, not just the big businesses of today". Yet his actions often suggest a philosophy of supporting existing winners.

Meanwhile, the Business Secretary, Mr Cable, clearly understands the imperative of compelling the banks to lend to small firms, but has given his support to a needlessly draconian deficit reduction plan that could undermine, rather than encourage, the kind of long-term investment he wants to see. It is too soon to tell which of the two sides of the Coalition's approach to business will prevail. But if this confusion continues, there is a danger that the British economy will be left with the worst of all worlds.

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 London ~ Tuesday 26 October 2010, page 33

Benefits cut, rents up: this is Britain's housing time bomb

At last the Tories have a final solution for the poor – send them to distant dumping grounds where there are no jobs

By Polly Toynbee

Do they know what they are doing?
Are they incompetent bunglers or do they mean to clear low earners out of the country's prosperous districts? As some residents since time immemorial are driven away – with maybe a few picturesque pearly kings and queens among them – this will become a cut that brands this government. Perhaps they think nobody will notice the new ranks of rough sleepers. Or that housing benefit is too fiendishly complicated to understand. Few Conservative voters claim it, and the removals will be an invisible migration, not a mass exodus in special coaches. However, these cuts are so extreme and random as to who will be evicted that the political noise will rise to ear-splitting decibels.

Follow these numbers carefully and see how they multiply upon one another. This month people who lost their job have had their help with mortgage interest payments cut in half. Expect more arrears and repossessions. Next year housing association and council rents will rise from their present heavily subsidised rents to 80% of the market rent for new tenants – about £100 more a week. New social housing will no longer be available to the poorest, but only to those who can pay high rents.

People in private rented accommodation will see their benefits capped from April. From October only rents below the 30th percentile for the area will be eligible. The Department for Work and Pensions says families will pay an average £22 more a week, but evidence suggests in many places it will be far more. But that's only part of it. In a radical change to benefit philosophy, anyone out of work for more than a year will lose another 10% from their housing benefit. This is a departure into the realms of US welfarism, influenced by the architects of American time-limited welfare who have been visiting David Cameron. Conditionality now gives way to punishment, shadow DWP secretary Douglas Alexander points out, regardless of how hard someone tries to find work that isn't there. This arbitrary cut is the first step to an entirely new policy.

But that's not all. The sum paid towards the rent will fall every year, in perpetuity: it will no longer rise as average local rents rise but will be pegged to the consumer price index. If that had happened in the last decade most people would have been priced out: rents rose by 70%, but the CPI only rose 20%.

Now add in something more sinister. Council tax benefit, worth an average £16 a week, is to be cut by 10% and then handed over to each local authority to decide how much benefit to offer: if some councils want to push poor people out, they can pay virtually nothing to their residents. But hey, that's localism. Add up the cumulative effects and there is the biggest welfare cut ever attempted: even Margaret Thatcher was careful never to take benefits away from existing claimants. New claimants don't know what they are missing, but old claimants – especially pensioners – make very nasty headlines indeed.

Ministers know what will happen, since the housing minister has set aside £10m to £12m for "transition costs" – the cost of removing families and their belongings from London boroughs to places like Hastings, or Shoeburyness. London councils told the work and pensions committee that they are already block-booking bed and breakfast and cheap properties in far away places.

London will be hardest hit, but low earners in salubrious parts of the south-west, Bristol, Nottingham, Manchester and anywhere prosperous will also see rent rises that force removals. Those in new jobs will only be able to find homes in districts that are cheap because there is no work. Children will be taken out of their schools, however close to exams they may be. Who will do the cleaning, caring and catering in expensive places once low earners are cleared away?

Karen Buck, DWP shadow minister and MP for the poorer part of Westminster, will see many depart. The borough has 5,300 households living in private rented flats who draw housing benefit, with 6,000 children in Westminster schools. All will face huge rent rises, most will move. How will Iain Duncan Smith explain that his reforms are meant to make work pay when he is forcing people to move to cheap ghettos where there is least work? In his London constituency of Redbridge, 5,110 households in private rentals will lose heavily, 290 of them pensioners: that's the number in just one borough. A family in a Chingford two-bedroom flat will lose £624 a year. Add in another barrier – anyone wanting to work will lose 65p in housing benefit for every pound they earn.

What would Duncan Smith say to the caretaker Buck met? He lives in Brent, one of the third of housing benefit claimants who are in work, and he earns £12,000. But he will lose £80 a week, so he can't afford to stay. He will look for somewhere cheaper, and distant. That means losing his job with its 7am start: Duncan Smith and his " get on your bus" will not get him there in time. Another problem – will this caretaker qualify for jobseeker's allowance, or will the jobcentre say he made himself intentionally unemployed? And has he made himself "intentionally homeless" when he throws his family on the mercy of the council to be rehoused?

The great house price bubble helped cause the crash: US sub-prime loans to the poorest lit the fuse. Labour failed to build enough private or social housing while waiting lists grew. House prices doubled in the golden decade but that unearned windfall for the lucky generation went untaxed. Meanwhile housing benefit claims soared as lack of cheap council housing saw councils put people into expensive private housing instead. The crash meant new claimants among the unemployed and those whose hours and pay were cut. Councils put people into private rentals for lack of cheaper social housing, and of course the number of households is growing as people live longer. The shortage will get much worse with the housing budget halved.

Rent was always the glitch in the benefit system, and Beveridge never found a logical answer. Well, here at last is a final solution he never considered: put all poor people in distant dumping grounds where nobody wants to live because there is no work, then call them workless scroungers, lacking in aspiration for the children they have taken out of class to throw together in schools where nobody's parents work. Might we hear a little less sophistry about fairness from David Cameron and Nick Clegg
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 October 22, 2010, page A35

British Fashion Victims

By PAUL KRUGMAN

In the spring of 2010, fiscal austerity became fashionable. I use the term advisedly: the sudden consensus among Very Serious People that everyone must balance budgets now now now wasn’t based on any kind of careful analysis. It was more like a fad, something everyone professed to believe because that was what the in-crowd was saying.

And it’s a fad that has been fading lately, as evidence has accumulated that the lessons of the past remain relevant, that trying to balance budgets in the face of high unemployment and falling inflation is still a really bad idea. Most notably, the confidence fairy has been exposed as a myth. There have been widespread claims that deficit-cutting actually reduces unemployment because it reassures consumers and businesses; but multiple studies of historical record, including one by the International Monetary Fund, have shown that this claim has no basis in reality.

No widespread fad ever passes, however, without leaving some fashion victims in its wake. In this case, the victims are the people of Britain, who have the misfortune to be ruled by a government that took office at the height of the austerity fad and won’t admit that it was wrong.

Britain, like America, is suffering from the aftermath of a housing and debt bubble. Its problems are compounded by London’s role as an international financial center: Britain came to rely too much on profits from wheeling and dealing to drive its economy ­ and on financial-industry tax payments to pay for government programs.

Over-reliance on the financial industry largely explains why Britain, which came into the crisis with relatively low public debt, has seen its budget deficit soar to 11 percent of G.D.P. ­ slightly worse than the U.S. deficit. And there’s no question that Britain will eventually need to balance its books with spending cuts and tax increases.

The operative word here should, however, be “eventually.” Fiscal austerity will depress the economy further unless it can be offset by a fall in interest rates. Right now, interest rates in Britain, as in America, are already very low, with little room to fall further. The sensible thing, then, is to devise a plan for putting the nation’s fiscal house in order, while waiting until a solid economic recovery is under way before wielding the ax.

But trendy fashion, almost by definition, isn’t sensible ­ and the British government seems determined to ignore the lessons of history.

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.

Indeed, there has been a noticeable change in the rhetoric of the government of Prime Minister David Cameron over the past few weeks ­ a shift from hope to fear. In his speech announcing the budget plan, George Osborne, the chancellor of the Exchequer, seemed to have given up on the confidence fairy ­ that is, on claims that the plan would have positive effects on employment and growth.

Instead, it was all about the apocalypse looming if Britain failed to go down this route. Never mind that British debt as a percentage of national income is actually below its historical average; never mind that British interest rates stayed low even as the nation’s budget deficit soared, reflecting the belief of investors that the country can and will get its finances under control. Britain, declared Mr. Osborne, was on the “brink of bankruptcy.”

What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it.