The Staggers

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Whisper it, but Osborne has embraced Keynesianism

The Chancellor has accepted the need for the state to underwrite investment.

By George Eaton Published 18 July 2012 9:25

Chancellor George Osborne. Photograph: Getty Images.

Chancellor George Osborne plans to guarantee up to £40bn of "nearly ready" infrastructure projects. Photograph: Getty Images.

The announcement by George Osborne that the government will underwrite £50bn of infrastructure investment is a belated admission that, in times of recession, the state must intervene to stimulate growth. The delusion that the coalition's spending cuts would increase consumer confidence and produce a self-sustaining private-sector-led recovery has been abandoned after Osborne's "expansionary fiscal contraction" turned out to be, well, contractionary. Whisper it, but Keynesianism is back.

Since the decision to guarantee loans will not, in theory at least, require the government to spend a penny more, Osborne will insist that this is not "plan B" or anything like it. As his sidekick, Danny Alexander, puts it, "This is not a direct call on the taxpayer. That would only happen if something went wrong with a project." And after the private sector's sterling performance over the last month, why should we doubt him?

But even if we assume that the taxpayer won't be forced to pick up the tab for any of the projects (the FT cites "the Thames tunnel, the Mersey Gateway toll bridge and the A14 road widening in Cambridge" as examples of those that might benefit), this remains a significant U-turn by Osborne. As the excellent Jonathan Portes points out on his blog, from an economic perspective, the difference between the government "borrowing from the private sector to finance investment spending, and the government guaranteeing the borrrowing of another entity" is is largely irrelevant. The Chancellor has accepted the need for counter-cyclical spending to boost aggregate demand - the essence of Keynesianism.

Now Osborne has performed a small U-turn he will find it harder to avoid a bigger one. The belief that, in times of recession, the state can and should stimulate growth through temporary tax cuts and infrastructure spending is based on decades of economic research. Once you accept this, it is hard to be a little heretical.

Since Osborne is so fond of boasting of the UK's "safe haven" status, the least he could do is take advantage of it. He should use the country's historically low bond yields to borrow to stimulate growth through higher infrastructure spending (the most effective stimulus, according to the Office for Budget Responsibility) and tax cuts. As the Nobel Prize-winning economist Christopher Pissarides argued in our "Plan B" special issue last October, "a small rise in gilt interest rates is a small price to pay for more jobs".

The Chancellor has finally accepted that there is an alternative to permanent stagnation (or worse). Now he needs the policies to match.

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39 comments

Thu, 2012-07-19 05:34 — Cortina

Oh I just saw this little gem...

Full employment for the sake of it is not necessarily a good thing.

If Austrians had their way we all be in full employment as serfs working for our aristocratic overlords. No choice if you want to eat.

Providing a job for every person who desires a job is a good thing. I don't believe in handouts, find people a real full time proper job that feeds their family, puts a warm roof over their heads and meets minimal societal expectations for recreation. If they can't work then they still need a decent basic income but also need social, psychological or medical care. If they won't work and there's nothing wrong with them they should get nothing...PROVIDED...there are appropriate paying jobs available. if productivity increases beyond our material needs, shorten working hours. This will never happen in a social Darwinist wonderland. That's what socialism is for.

Thu, 2012-07-19 13:45 — Trenchant1 (not verified)

As with your other post, you have misinterpreted what I said, I'm afraid. That is my fault for not being clear.

Would you agree that war is not a good thing, despite the fact that it might provide full employment? Is mutual destruction an acceptable price to pay for two countries to enjoy full employment? I guess you will say no. Therefore, full employment for the sake of it is not necessarily a good thing. It does not follow from this statement that I believe that we should all be in employment as serfs working for aristocratic overlords. I don't understand how you came to that conclusion.

There are many things that can cause short-term unemployment, from the closure of firms producing obsolete goods to natural disasters, but long-term, pernicious unemployment is commonly the result of government interference in the economy. Why are there so many young people unemployed now? One reason is the minimum wage. Economists of all hues agree on this but the government continues with it because it would be politically dangerous to get rid of it.

Thu, 2012-07-19 05:35 — Cortina

That comment was for my new bestie.... Trenchart.

Wed, 2012-07-18 23:39 — Agent (not verified)

So we have:

Plan B: what Ed Balls (who is now practically a surrogate Chancellor) would have done.

Plan A: what Osbourne was doing until he realised that instead of robbing Peter to pay Paul he could rob someone, else who was a bit like Peter, and pretend that to Pay Paul - or at least offer to do so on Peter's behalf should it be necessary.

Notice how instead of having Balls (Paul) we have George (Peter). So Peter has robbed paul of his job with the aid of Moses (?) who said 'though shalt be fooled into trusting the LibDems and be dammed for all eternity' (till the next election).

This may be absurd but it is so close to reality that I think there are more people who have 'serious questions to answer'.

Wed, 2012-07-18 22:17 — soapy (not verified)

From the Conservative viewpoint shouldn't this change of policy to "A++++, which is actually a plan B, be marked with a change of Chancellor?
Osborne's credibility is shot to pieces.
Cameron surely has to sack him.

Wed, 2012-07-18 17:12 — nourredine

Everythings we buy, we give a fraction to JP Morgan bank, after she mastered the credit swap default, Mrs Blythe Masters is now in charge of all commodities and between Goldman Sachs and the JP Morgan we are paying them a piece of whatever we put in ower plate every day.

Wed, 2012-07-18 16:50 — nourredine

Mainly for you @Trenchant1

Money printing or Quantitative Easing is mainly of benefit to two parties. Firstly, the Government, which is able to borrow more and borrow cheaper than it otherwise would have done. This is because QE money is used to buy bonds, forcing down yields.

The Government uses this money to finance both existing debt and an expansive welfare state which bribes large portions of the population to accept a life of hellish boredom and dribbling docility in exchange for £70 a week in dole money. Such payments are not a genuine transfer of the fruits of existing production within an economy; they are borrowed. They help governments electorally at the cost of the vigour of society.

At the top end, Quantitative Easing money goes directly to banks, who are able to sell their government bonds at a profit. In theory they may use this to even up their balance sheet. In reality they frequently use it as stake money at riskier tables.

In both cases, paper money has been stripped of meaning. It is no longer a reflection of production nor any of its components. It now simply exists of its own right – but it can survive as a measure only for so long as the government keeps such printing in small enough doses that the de-leveraging does not become apparent to workers.

And more here

The price of gold has been manipulated. This is more scandalous than Libor
By Thomas Pascoe

Wed, 2012-07-18 22:31 — Trenchant1 (not verified)

Thanks for that, from http://blogs.telegraph.co.uk/finance/thomaspascoe/100018574/the-price-of...
I think you forgot to put the link in.

This article supports what I have been saying. Thanks again for pointing me to it.

Wed, 2012-07-18 16:23 — nourredine

@Trenchant1 (not verified)

"Government borrowing costs are lower than any bank and they will never default. "

No, because they can always go and steal more money from the taxpayer.

Wrong again, coalition cannot put taxes up, otherwise it will be a revolution in the street of Britain, watch what is happening in Europe soon.

Wed, 2012-07-18 16:47 — Trenchant1 (not verified)

The income tax is not the only game in town. There is tax and duty on almost everything that we buy. The government raises them regularly. National Insurance is really an income tax, one which impinges more on the poor than on the rich.

There is no legal limit to how far the government can tax us, though in order to remain in power, governments try to keep the headline tax rates down. The fact that governments have a claim on our earnings and that they can change the tax rate at will is evidence that there is really no such thing as private property in this country. We are de facto slaves who are allowed to keep a proportion of our earnings by the slavemasters in government. It suits the government if we don't know this, of course.

Thu, 2012-07-19 05:50 — Cortina

Stop with all these silly contrived arguments. We all know you think it is better to have dukes and barons owning us than democratically elected Government stewardship on our behalf. You are naught but a hopeful lickspittle of a future aristocracy.

I won't disagree that Modern Government fails to act on the peoples behalf, they are beholden to corporations, financiers and to some extent feather their own nest. Better to put our hope in democracy than the charity of a king/emperor and his overlords.

Thu, 2012-07-19 13:08 — Trenchant1 (not verified)

I apologise for giving the wrong impression. I am not for any form of government. I find it amusing that you are a Keynesian. Keynes was an elitist who thought that a small group of people, including himself, of course, should be in charge of what we should all do. That sounds much more like an aristocracy than what I would propose, which is freedom. Here is a very interesting article comparing Keynes to Henry Hazlitt. http://www.lewrockwell.com/rockwell/hazlitt-and-keynes-167.html
Here is another article which shows what kind of man Keynes was
http://mises.org/etexts/keynestheman.pdf
Keynes was just the kind of man that you seem to despise.

Government, of any kind, is based upon violence or the threat of violence. Government forces us to do what we don't want to do and stops us from doing what we do want to do. Government steals money from the people and gives it to its favourites in banks and big business. It creates rules and regulations to prevent new businesses entering the market in certain areas, thus creating monopolies or near monopolies. Monopolies, the bogeymen of the left, can only be created and maintained by force of government. They cannot exist for any length of time in a free market. Government takes over education, not because of any desire to improve the lives of the people but in order to control what children are taught and to turn them into good, docile citizens. Only the rich have the resources to avoid this mind control.

The people are taught to believe that the state is the great benefactor, providing care from cradle to grave. Without the state, they are led to believe, there would be no education, no healthcare, no order. Of course, if we look at history, all of these services were provided before the government came along and took them over. There would not be chaos without government. The sky would not turn to fire and the rivers would not turn to blood. We would all carry on much as usual, except that we would be able to keep what we earn, save it and invest it in whatever we wanted. The world would be a much better place without the cancerous state eating our lives.

So, no, I have no desire to be part of any future aristocracy. I just want to be left alone to get on with my life and I would be happy to leave other people to get along with their lives. I hope that's clear.

Wed, 2012-07-18 15:01 — Cortina

The state underwriting private sector loans is the worst of both worlds.

The private sector banks use their privilege of credit creation to extract interest and enjoy any rent from successful projects.

If they thought they could make money from these projects they would have done it already. There is an obvious moral hazard. The Government absorbs all the risk and cost of failure. No doubt they will also be giving away state assets like land to ensure otherwise unprofitable endeavors will be profitable.

If a Government wishes to underwrite these projects for the public good. Fine so be it. Just bring out their unlimited cheque book and write the cheque themselves. Government borrowing costs are lower than any bank and they will never default. Expanding the Government balance sheet is no more unsustainable than expanding the private sector balance sheet. In fact it is far more sustainable.

Wed, 2012-07-18 15:39 — Trenchant1 (not verified)

"Government borrowing costs are lower than any bank and they will never default. "

No, because they can always go and steal more money from the taxpayer.

Thu, 2012-07-19 04:41 — Cortina

What are you talking about?

One minute they are printing their own money, then they are borrowing from the private sector, next they are stealing it from the taxpayer. You are not properly understanding how the monetary system works.

Look it's fairly simple, unless you are utterly convinced and deluded by the Von Mises institute.

A. Banks create demand by lending money for someone to spend. At the same time they create an accounting liability. No net financial assets are created.

B. Governments create demand by spending. At the same time they reduce demand by taxation. A net deficit increases demand, in exactly the same same as a net increase in private lending. Net financial assets are CREATED by Government and Government alone. Bonds are issued 1 to 1 in proportion to the deficit. These bonds can always be bought with the net increase in pounds spent into existence by the Government.

C. If the private sector saves more than they spend then demand is reduced.

D. If we import more than we export. The foriegn sector is forced to net save in our currency. You'll have to think about this. (Something foriegners obviously like to do for some reason).

All types of spending are equally inflationary or deflationary. A pound is a pound wherever it comes from.

In over simplistic terms

DEMAND > SUPPLY -> Price Inflation
SUPPLY < DEMAND -> Price deflation

High unemployment and excess industrial capacity means we can meet additional demand with EXTRA SUPPLY.

DEMAND today is too low therefore we need more spending. There is a right ammount of spending (from any sector) too much could lead to excessive inflation. At the aggregate level; spending, investment and saving patterns are fairly consistent and easily forecastable in the near term. Hence we can deficit spend to increase demand and set inflation targets within reason and with confidence.

Wed, 2012-07-18 12:27 — frances smith

i would want to see the small print on this one before agreeing.

the example of widening the A14 is interesting, as this seems more like a clever accounting trick rather genuine investment.

i hope this isn't another pfi scandal waiting to happen, as if the taxpayer isn't paying for the A14 road widening scheme then who is, and if the taxpayer is underwriting it, then that could get us into a bit of trouble.

lets check the small print first, before getting too excited.

Wed, 2012-07-18 12:27 — frances smith

i would want to see the small print on this one before agreeing.

the example of widening the A14 is interesting, as this seems more like a clever accounting trick rather genuine investment.

lets check the small print first, before getting too excited.

Wed, 2012-07-18 12:19 — Trenchant1 (not verified)

@Steve AM
No, it didn't work in the USA under FDR. It was the policies of FDR that extended the crash of 1929 into the Great Depression. There was a great depression in 1920-1921 but I'm sure that, like most people, and like me until a couple of years ago, you've never heard of it. (http://www.thefreemanonline.org/features/the-depression-youve-never-hear...) Why? Because the government didn't try to ameliorate the pains of the crash by keeping interest rates low and inflating the money supply, and didn't create thousands of make-work projects to keep people employed. The government stopped being such a burden on the economy by cutting back enormously and it raised interest rates hugely. It was painful for many people for a short time but it was over very quickly. The Great Depression went on for over a decade, reducing millions to abject poverty, largely the result of Keynesian economics.

More recently, Iceland allowed its banks to collapse after the crash in 2008 and was out of recession by the end of 2010. http://www.nytimes.com/2010/12/08/business/global/08icecon.html Compare that to the ever-deepening crisis in Greece, where billions of pounds of our money and billions of euros of other countries' money are being spent trying to prop it up. (In reality, of course, they are propping up the banks which the politicians consider to be 'too big to fail'. The people of Greece will still owe the money for generations to come.)

@nourredine
'Printing money' is shorthand for creating money out of nothing, which the government does with the help of the Bank of England and which banks do owing to the fractional reserve system of banking in this country. Whether the money is actually made of paper or is merely electronic blips makes no difference to its nature. It is still inflation of the money supply and it devalues the money that is already in the system. It eats away at the wealth of the people.

Increasing the money supply, whether physically or electronically is Inflation. The government acts as if inflation is something that just happens and something that it has to fight against. It isn't. It is created deliberately by government. Where will the £50 billion for the present scheme come from? It will be 'borrowed' from the future, in other words, created from thin air. An increase in money supply without an increase in production leads to increases in prices. The increases in prices are the result of inflation, not inflation itself.

One final note, the Great Depression was not ended by the Second World War. Destruction does not improve the economy. I suggest you read The Broken Window by Frederic Bastiat http://www.econlib.org/library/Bastiat/basEss1.html
Read the preamble and the first essay. This shows that destruction is, as the word implies, destructive. Some people will benefit from it, and that is what we see, but many people suffer, and that is what we do not see. The overall effect is negative.

Wed, 2012-07-18 14:38 — nourredine

Electronically money was sent to the banks not to people to spend that is why we have no inflation.
Mervin King is not daft, he is circulating the money in a circle, the banks borough at a .01% and lend it to the BOE at 3% so they can capitalise their This system is not good for people and will not create inflation it is only good for the banks.

Wed, 2012-07-18 13:39 — reasoninrevolt (not verified)

Comparing the recession of 1920 to the Depression is severely misplaced. It has become the talking point of internet Austrians in recent years, but it is irrelevant. See this article for a refutation of your argument: http://socialdemocracy21stcentury.blogspot.co.uk/2010/10/us-recession-of...

Note in particular that 1920 was not preceded by a consumer debt boom, in contrast to 1929 and 2008. This changes enormously the dynamics of the economic aftermath. The work of Minsky and Keen are crucial here.

On the success or failure of 'Keynesianism'...FDR did not prolong the Depression (though certain elements of the New Deal were unhelpful, and the whole project was often contradictory). But overall the government support - particularly public employment and deposit insurance - dramatically improved things, and in other countries where public spending wasn't too quickly cut - such as, infamously, Germany - unemployment fell into the single figures by 1936/7. If FDR had not sought to cut government spending in 37, the same would have happened there. Check out Richard Koo on balance sheet recessions.

Finally, money creation is not inherently inflationary. The dear Austrians have been predicting QE-caused hyperinflation for four years now. It hasn't happened. The reason for this is quite simple: while they are correct that rapid credit expansion causes booms and busts, they mistakenly ascribe this tendency to be the sole responsibility of the government/central bank. If only we could get them out of the picture, everything would be perfect. The problem with this theory is that it is rubbish - the money supply is to a great extent endogenous and cannot be controlled by central banks (hence the utter failure and quick abandonment of monetarism in the early 80s).

What we have now is the worst of all worlds: a speculative out of control private financial system backed up by a central bank who will act as lender of last resort. The Austrians are right that this creates moral hazard and makes the credit boom worse; they are wrong that the solution is to just get rid of the central bank. Even in the absence of government involvement, private finance will still create speculative bubbles - and has done many times before. The most stable period in modern financial history was the post-war social democratic consensus, where finance was highly regulated and the state stood willing to protect depositors and control interest. If this can be described as 'Keynesianism', it is certainly no failure.

Wed, 2012-07-18 14:46 — Cortina

The Austrians have a love of re-writing history because they have great difficulty finding any empirical evidence to back their faith based assertions.

FACT. In the USA the depression ended when the full force of a massive Keynesian stimulus was deployed to prepare the USA for war. The USA ran massive Government deficits. The spending was on tanks, guns and workers in military uniform, but that is irrelevant to the historic economic result. Full employment was created, real goods and services provided (even though they were violent services). If the same stimulus was spent on motor cars, houses, bridges, roads etc it would have been all the better.

How do we define the end of the depression.... FULL EMPLOYMENT

Did the USA suffer Zimbabwe like hyperinflation at the end of the war....NO
Was the massive deficit unsustainable .... NO... The USA sustained and sustained some more for the next 65 odd years. Austrian economists have been waiting all this time and longer for their pathetic prophesies of doom to come true. That's why they ate so keen to deny the historical facts.

Wed, 2012-07-18 16:39 — Trenchant1 (not verified)

Full employment is an obsession for Keynesians. The market is not run for workers. If it were, it would be simple just to get everyone to dig holes in the ground and fill them in again. That's one of the things that Keynes thought would solve economic problems.

So who is the market run for? Consumers. We are not all owners of capital, entrepreneurs or workers but we are all consumers. When you go shopping, you don't think 'Well, I don't really like this pair of shoes but I'll buy them anyway because the shoemaker needs to work and earn a living'. No, you buy them because you like them and you think they are good value for money. They are worth more to you than the money you pay for them. Conversely, the money you pay is worth more to the shoemaker than the shoes. Both parties to the trade make a profit from it. You don't buy goods simply to keep people in work. If a shoemaker makes shoes that nobody likes, he goes out of business, his capital goods are sold off to a better shoemaker and he finds a job that he's better at. The government, when it interferes in the market, wants to maintain full employment, so it subsidises the bad shoemaker, allowing him to charge less for his shoes so that some people find them now worth paying for. The money for the subsidy comes from efficient, profitable businesses. If they had been allowed to keep their money, they would have invested it in something else that was profitable, making things that people wanted to buy and were prepared to pay for. Everyone would benefit. We see the employment created by the government. We don't see the unemployment caused by its stealing of the money of wealth creators.

It is possible to have full employment. The USSR and China had full employment under communism, but it wasn't very nice. There was full employment during the Second World War but that wasn't very nice either. What would have happened if the war had continued for another thirty years and the earth had been so damaged that no crops could be grown and all the capital had been destroyed? There would still be full employment until the last man was standing. Would that be a desirable thing? No. War destroys wealth. It does not stimulate it. Investment in war is malinvestment. The USA saw great growth after the Second World War largely because the economies of its competitors in Europe had been so badly damaged. It had factories working at full tilt while ours were in ruins. Full employment for the sake of it is not necessarily a good thing.

You're right that we have been waiting a long time for the economies of the West to collapse as a result of Keynesian policies. The fact that it hasn't happened yet doesn't mean it won't. Here is an interesting video which offers some explanations as to why we're still waiting.
http://www.youtube.com/watch?v=OrWVWMFa0_0
It would be interesting to hear your criticisms of it.

Thu, 2012-07-19 11:49 — reasoninrevolt (not verified)

"Full employment is an obsession for Keynesians. The market is not run for workers. If it were, it would be simple just to get everyone to dig holes in the ground and fill them in again. That's one of the things that Keynes thought would solve economic problems.

So who is the market run for? Consumers. We are not all owners of capital, entrepreneurs or workers but we are all consumers."

This is all very well and good. I certainly don't think at this stage of economic development that we should be working forty hours a week. But I hear this refrain from rightists quite often: "It's not about jobs man, it's about production." Fine. But if the only way to have a decent life in society is to have a job, then full employment is rather bloody essential. It's really just a way for right-wingers to cover their back: these are the people who bitch and moan about the 'lazy' unemployed, yet turn round and say that creating jobs for the sake of a job is a bad idea. Now, if you want to change the fundamental property relations so that full-time employment is not necessary to survive, hey, I'm all ears. Until then, you should drop this nonsense logic.

Oh, and on your video...I'm one minute in and it's already terrible. So he admits the libertarian predictions have not come true...but then says "I don't believe libertarian theory is false, however, so we have to explain what has happened." In other words: even though our empirical predictions have not come true, I'm going to assume we were right anyway without any consideration of alternative economic theories. "And I'm gonna make the case using a metaphor, because metaphors are a heck of a lot easier than actual research..." How refreshingly, laughably honest. Are you sure this guy's not satirising you?

Thu, 2012-07-19 04:52 — Cortina

You managed to cherry pick history and parachute in a multitude of straw men.

So many things wrong with this argument.

1. From the end of the war to the 70's most developed countries UK, USA, Australia etc targeted and achieved full employment and stable currency with Keynseian demand side economic policy.

2. The shoemaker created the shoes not the entrepenuer trader marking up his prices or the financier that lent the money for the toolmaker to make the shoemakers tools. It was the toolmaker, financier, shoemaker and trader who bought and enjoyed the shoes. The shoemaker and toolmaker created all the wealth. The so called wealth creators are just WASTE using up surplus production.

I could go on but your arguments are too facile and puerile to bother with.

Wed, 2012-07-18 19:10 — Herbert (not verified)

And you really believe this?

Wed, 2012-07-18 22:18 — Trenchant1 (not verified)

Thanks for the sharp analysis.

Thu, 2012-07-19 05:21 — Cortina

You really have to stop making up ridiculous stories. So it took 65 years for Keynesian economic policies to collapse. Utter rubbish.

Keynseian policy stopped after supply side oil shocks in the 70's and the misguided linking of union pay demands to inflation. In the 80's Keynesian economics were discarded for Free Market, Friedmanite, Neo-classical economics and monetary theory (even after a disastrous flirtation with monetarist policy.) That's much closer to your Austrian Libertarian bunkum than Keynes.

In the 30 years since then economic growth was slower than the prior 30, unemployment and inequality are approaching all new highs.

Let's face it a stopped clock is accurate twice a day, which is a far better record than the Austrian, deficit, hyperinflation scare mongering.

Wed, 2012-07-18 13:20 — Bill Kruse (not verified)

Creating more money doesn't necessarily cause inflation. Create fiat money (like we use here since we came off the gold standard) and use it proportionately to increase the wealth of the nation (ie, don't create a billion quid to just build a solitary tea-shoppe in some obscure hamlet) then there's no inflation. Capiche?

Wed, 2012-07-18 14:00 — Trenchant1 (not verified)

I'm sorry Bill, but you are wrong. Creating money IS inflation. Unfortunately, the term has come to mean rising prices and this erroneous definition has found its way into the dictionaries. Inflating the money supply leads to increased prices because more money is chasing the same number of goods. If the money supply were fixed, prices would tend to fall as production increased. Money would be worth more over time. This was the situation for over a hundred years after the industrial revolution. It is still the case in high tech industries, like computer manufacture, that some goods manage to become cheaper as they improve, despite government created inflation.

Also, you cannot create wealth by creating fiat money. If it were possible to make everyone richer by creating more money, why doesn't the government simply print a few hundred trillion pounds and share it out among the people? Would it make us all rich? No, just like Germany in the Weimar republic and Zimbabwe recently, everyone would see that the value of the currency had fallen and we would need barrowloads of money to buy a loaf.

The only thing that can create wealth is production and not production per se but production of the goods and services that people actually want and are willing to pay for. When the government steals people's money and uses it to subsidise the production of things that people either don't want at all or are not prepared to pay for, it is making the economy less efficient. It is destroying wealth. The problem is, we see the jobs that have been 'created' by the government's activities but we don't see the jobs that have been prevented from being created because the money that would have been invested in creating them has been purloined by the government. We are fooled into thinking that the government is doing good when in fact, as always, it is doing harm.

Wed, 2012-07-18 14:30 — Cortina

NO you are wrong.

If the Government prints money and spends it to build a house for a homeless man wealth is created. Does the hours builder ask where the money came from..... Is that a private pound or a public pound sir?.....No! He just builds a house. If the builder has spare capacity there is NO increase in price. God knows there is so much surplus labour and industrial capacity in the economy right now.

What private wealth was destroyed? ....NONE......the private sector benefited.

Was the private sector deprived of an opportunity ..... NO ... They wouldn't give credit to a homeless man. No houses were going to be built by the private sector.

Now the man has a home and can get a job.... Maybe with the builder building new GOVERNMENT houses.

Try your fake economics on some other gullible fools.

Wed, 2012-07-18 15:32 — Trenchant1 (not verified)

To quote you, 'NO you are wrong'.

The government does not actually print money. It borrows money from the Bank of England and the Bank clicks a few buttons and creates it from nothing. The money that is borrowed has to be paid back with interest. The taxpayer has to pay the bill, eventually. That is the private wealth that is destroyed or stolen. The government has already borrowed so much that our grandchildren will be the ones who have to pay, not us. Is it morally acceptable to burden the unborn with debts that they did not agree to? I don't think so. You're right that the builder doesn't ask where the money comes from but perhaps he should.

You're right that there might be no immediate increase in price for the job of building the house but that proves nothing. An increase in the money supply does not imply that every product in the economy will experience a proportional increase in price. Some things will increase in price more than others. As I said in another post, some items continue to fall in price despite general inflation, simply because technology has improved so quickly that they are able to be produced more cheaply. Some things will increase in price more quickly. If the government restricted itself to building one house for a homeless man, it's unlikely that anyone would notice, but unfortunately, it doesn't. It borrows hundreds of billions of pounds and uses it wastefully. We all suffer as a result.

Just one question, why do you assume that the previously homeless man can get a job simply because he has been provided with a house? Most of the unemployed in this country are actually living in houses.

Yours are the fake economics, I'm afraid.

There are several questions raised by what you say. Why is the homeless man homeless and unemployed?
Why is the private sector not building houses?
Why is there surplus labour and industrial capacity in the economy?

Thu, 2012-07-19 05:07 — Cortina

Wrong again.

The Government does not borrow money. The Government issues term bonds 1 to 1 against defecit spending. I.E. In your terms it "prints" money and then issues term bonds to soak up excess liquidity. Net financial assets are created by Government.

Banks do not create money. When they make a loan they electronically print money YES. At the same time the electronically create a liability (a debt) in another account. No net financial assets are created.

I'll ignore your straw man arguments as at the aggregate level new supply is created as well as increased demand. in some sectors prices go up, some go down. Prices increase, wages increase too. That is not neccessarily a problem. A stable currency and the purchasing parity of labour vs price inflation is a political choice not financial constraint.

The homeless man and builder was just a hypothetical example. Obviously there is surplus capacity, the man is homeless and unemployed because the private sector cannot or does not want to build houses and employ them because SPENDING and DEMAND for their products and services is kept too low. because of misguided and ruthless economic theories like your own. The truth is exactly the opposite of Government spending too much.

Thu, 2012-07-19 11:39 — reasoninrevolt (not verified)

"The Government does not borrow money. The Government issues term bonds 1 to 1 against defecit spending. I.E. In your terms it "prints" money and then issues term bonds to soak up excess liquidity. Net financial assets are created by Government."

Spot on!

Wed, 2012-07-18 13:05 — Livers (not verified)

Austerity is self-defeating, the last 2 years are proof of that.

Wed, 2012-07-18 11:15 — nourredine

@Trenchant1
A little help, the government has not printed any money yet, it is all electronically done, just to put you on trac. That's why we have not had an inflation, if you print money, you put inflation up.

Get your facts right .

The pound has been devaluated by 30% so far and need probably to devaluate by another 30%.

Wed, 2012-07-18 11:02 — nourredine

Now Mr Osborne will have to appologise twice to Mr Balls.
@Trenchant1
I suggest you put your real name for the next general election.

Wed, 2012-07-18 10:54 — Trenchant1 (not verified)

It's true that Osborne has embraced Keynesianism. Was he ever really anything else but a Keynesian? The government has been printing money and devaluing the currency (the real 'essence of Keynesianism'), since it was elected.

Keynesianism has never worked and it never will work, yet it keeps raising its extremely ugly head because it is attractive to politicians. It gives them an excuse to interfere in all our lives. Where will the money come from to support the present venture? It will be stolen from the taxpayer. It will be diverted from successful, wealth-creating economic activity to less successful economic activity. And of course the government will create new non-jobs for bureaucrats to run the new scheme, which will be a complete waste of money.

I often wonder if those who espouse Keynesianism have ever actually read the The General Theory of Employment, Interest and Money. I suspect not. It is a garbled, self-contradictory pile of junk. What was true in it was not new and what was new was not true. If you have an open mind, I suggest you read Failure of the New Economics by Henry Hazlitt (available as a free download here http://mises.org/document/3655/Failure-of-the-New-Economics), which pulls Keynes's 'masterwork' to pieces. But I suspect that I am writing to the wrong audience. Keynesian policies will drag us deeper and deeper into the mire and the eventual collapse will be much greater as a result. There is nothing the government can do to stop it. It is not within the capacity of government to improve matters. Whatever actions it takes serve only to make matters worse.