Is the UK Broke? – the recent report by Reed & Clark April 26, 2013Posted by larry in economics, social policy.
This is the new report by Howard and Tom. Many of you know Howard and he has given talks at our conferences in the past. I think this is an excellent report. But I have some qualms about it. My fundamental problem about the report is that it fails to go deeply enough. This can be interpreted as me wishing that they had written a slightly different report.
As Howard and Tom argue and as anyone who knows anything about the new economics knows, not only is Britain not broke, it can’t go broke. Howard and Tom are clear about that and document that well. What they don’t clarify very well is why this is the case. A related myth they attack is the idea that a sovereign state is like a household. It is not. Paraphrasing Sylvia Nasar who is paraphrasing Keynes, the state is the spender of last resort while the central bank is the lender of last resort. Neither of these functions have been implemented properly due to the austerity program that has been in place. And neither of these functions is available to any household. And if you think the Bitcoin constitutes an exception, I suggest a look at Varoufakis’s analysis here: http://yanisvaroufakis.eu/2013/04/22/bitcoin-and-the-dangerous-fantasy-of-apolitical-money/.
A real gem is their Figure 2, which shows that the debt to GDP ratio has been historically higher than it is now and no internal disasters generated by economic crises with this as the cause took place. They also show that the UK has never defaulted on its debts in the past 250 years. And the reasons for thinking that it would now? Specious. They also show that interest rates are quite low. What they fail to clarify is why this was, and continues to be, so. What is missing is a theory of interest rates. The government sets the basic interest rate and, as Keynes noted, this could and should always be as low as possible.
They could have been clearer on the economic differences between the Eurozone and the UK and other non-Eurozone countries. The latter are, as they note, countries with their own sovereign currencies. Comparing members of the Eurozone and the UK macroeconomically is worse than comparing apples and oranges. At least in the latter, you are comparing the same kind of thing, fruit. Macroeconomically, the differences among the Eurozone countries and the UK are very much greater than their similarities. It is like comparing fruits (sovereign currency countries) and vegetables (non-sovereign currency countries -those in the Eurozone) while not knowing in which group to place tomatoes (the UK). [ck Oxford dict..]
I would also have liked them to have done more about what was going on from the end of WW2 until the Nixon pronouncement, which acted like an exogenous shock to the world economic system. What had been taken for granted was now as sand, virtually overnight. While this period was characterized as being Keynesian, it was not. Samuelson had the best term to describe this period – neoclassical synthesis Keynesianism. Joan Robinson called it bastard Keynesianism. The currency system during this period, while being a fiat currency system identical to the one operating today, was viewed as being akin to a system on the gold standard. This view influenced economic decisions more than was possibly realized at the time.
The upshot of this is that the stagflation that took place in the later sixties and early seventies can not be laid at the door of Keynes’ doctrines as they were non-operational for the most part during the preceding period. While Keynes’ doctrines were seen as being used, they were so watered down that it is a travesty to contend that the doctrines implemented were Keynesian.
Take arsenic. You are a physician and you prescribe it as a treatment for a patient. If you dilute it so much that hardly any arsenic is left, for the benefit of the patient of course, can it then be truly claimed that the patient received any arsenic at all? Moreover, if what is needed is for the patient to alter his/her behavior, prescribing what is effectively a placebo will surely not achieve that end. So, implementing non-Keynesian policies while calling them Keynesian will inevitably fail to bring about the desired result except under the most unlikely fortuitous circumstances. The consequence of the inevitable failure will likely lead to worse policies being implemented. Which is precisely what took place in the eighties in the US and the UK and what is taking place right now.