Saturday, March 26, 2011

Budget & cuts: Wolf, Skidelsky,Blanchflower, Lanchester & Werner

UK Chancellor of the Exchequer George Osborne has just presented a Budget: a 'plan for growth' and the pundits are wary of agreeing that it will be such. 

Martin Wolf in the Financial Times on 24 March A canny way to make the best of a weak hand says 'how little we know about the performance of the economy.' And about 'whether these [budget] changes make  any significant contribution to underlying growth', he is sceptical. Also in the FT on 25 March in: How to avoid 20 lean years after 20 pretty fat ones:
'But growth is a complex process... it is extremely hard to manipulate, especially in high-income countries, where easy opportunities have, by definition, already been exploited. One should be extremely sceptical of any simple propositions that suggest otherwise'. 

However he does write that positive action for growth through better policy on education, or investment in infrastructure is badly needed but sadly neglected by UK governments.

In the New Statesman David Blanchflower (28 March): The Budget does nothing to dispel the dark clouds of my prophecy. Having been highly sceptical of Osborne's expectation of a newly thriving economy following a reduction in government size, he writes:
'that isn't happening and is unlikely to [thrive] while banks are not lending'. 

Also in the NS (28 March) Robert Skidelsky in The Osborne ultimatum writes similarly,  that the theory that cutting the public sector automatically leads to growth in the private sector is not working. He says that the current 'printing of money' schemes are not the same as the 'spending of money' that will have an impact on the economy. He closes with support for a national investment bank/ green bank to create investment for infrastructure which is in the UK  ' rated one of the poorest in the developed world'. 'The essence of banking is the ability to make loans several times the size of the initial capital' i.e. the key need for credit creation for growth.   

John Lanchester in his book Whoops! Why everyone owes everyone and no one can pay writes, p16: ' banks are central to the operation of a developed economy; in particular, they are central to the creation of credit, and credit is as important to the modern economy as oxygen is to us'

Professor Richard Werner's letter in the FT (24 Feb) gives the technical details on how a green investment bank should be set up. See this blog for 24 Feb 2011. In his book Princes of The Yen p262 he writes that what is essential to stimulate the economy is 'an expansion in net credit creation'. 

With a nationally owned investment/green bank, the banking profits through credit creation, usually going to private shareholders, would accrue to the public purse. What's not to like?
posted by Charles Bazlinton.  

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