Wednesday, 5 October 2011

Cameron plummets new depths of economic illiteracy

The Conservative Party conference has, in many respects, been characterised by a flight from the real world of evidence and empiricism - a retreat into a fantasty tabloid world of economic benefits from higher speed limits, weekly bin collections and feline threats to human rights.  But there is perhaps no finer example of this that the comments that David Cameron is about to make about debt.

Cameron will, it is reported, argue that it is time for individuals to pay back debt.  The bad economics of this has been admirably dissected by the ever-excellent Richard Murphy:

But all that being said to have everyone throughout the economy at the same time seeking to reduce ther debt is an economic prescription straight from the mad house (or maybe Oxford; you choose).
Why is this so crazy? There are three main reasons. First, and most importantly, if everyone saves at the same time we very obviously get a recession. If people don’t spend what they earn, which is necessary if they are to save, then demand crashes. If demand crashes then very clearly employment crashes with it, businesses fail and recession follows. So that is what Cameron is calling for.
Secondly, if we have everyone repaying debt then the money supply also crashes – because debt is the basis for all money creation in the UK. Now we could get round that with QE, for example, but the government has given away responsibility for such issues and as such Cameron is calling for a cut in the money supply and a consequent liquidity crisis at the same time as he’s calling for recession. Smart move Dave.
Third, Dave really has not got his head around the fact some debt is really, really useful. Government debt is the most useful of all. We need vast amounts of it because the annuities that underpin almost all old age pensioners private pension income are based on the ownership of gilts – that is, government debt. Perhaps he doesn’t realise this, but if the government were to repay all it’s debt, which seems to be his fantasy, he’d destroy the entire logic of the private pension sector. It’s an interesting idea that this seems to be what he is setting out to do.
So universal debt reduction is a massively bad idea.
Cameron also ignores the fact that it is also basically not possible: it’s pretty much an accounting impossibility that we can all reduce debt together. Debt is owed to people. Unless those to whom money is owed agree to sit on massive piles of cash they will not spend or even save with a view to earning interest when debt is repaid to them then everyone repaying debt simply can’t occur. I agree the issue is a little more complex than this, but that’s the essence of it.
No need to add to any of that, as far as analysis goes (incidentally, Murphy wonders how Cameron could have got a first in a degree that includes economics - PPE at Oxford.  As I can testify from personal experience, you can get a first in PPE by doing very little economics indeed - and none beyond the first year course which is barely of A-level standard.  Cameron could quite easily have got a first while knowing no more economics than a middling A-level student).  But of course it's far worse than that - Cameron, a man who was born into extreme wealth, appears to have no understanding that in the long term real wages have fallen and that in many areas the cost of living is rising sharply - look at domestic energy costs or public transport fares.  

Moreover, the Government's own economic forecasts are predicated on the assumption that personal debt will increase over the lifetime of this Government

But it's worse than that.  Much of the famous record deficit is made up of the debts owed by bankers to the Government that bailed them out - but Cameron and Osborne are far from urging bankers to pay up.  It's not surprising when one reads that the Tory Party is largely bankrolled by the financial sector.

I think this has nothing to do with economics, and everything to do with politics.  It's the same as the idiot rhetoric we hear again and again from coalition Ministers about the nation's credit card - a desire to reduce economic problems which go way beyond their intellectual grasp and their framework of analysis to homely analogy.  It's the politics of obfuscation, designed to hide the fact that the Coalition has nothing to offer and nothing to say.

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