16 Dec 2011

10 Myths about the causes of the recession + one more

Someone who calls themselves "mwhite" left a great comment on Simon Jenkins piece called "The cause of this recession? Economic Pundits ignoring history's voice", that appeared  in the Guardian this morning. Here's what he/she said

The cause of this recession? The 10 myths on which Tory economic policy is based
Myth 1: “Austerity will reduce debt.” Wrong. According to the OBR, having fallen between 2007 and 2010, household debt will increase by £531 billion in the next 4 years – which means that, in the unlikely event that Osborne meets his target of elminating the £142 billion budget deficit by 2015, this will be at the cost of transferring nearly 4 times this amount of debt from the government’s books to the credit cards and overdrafts of UK households.
Myth 2: “We can’t afford to increase borrowing” Wrong again. The national debt is now 60% of GDP. In 1945 it was 237%. Then, as now and always, it was financed by borrowing. All money is created by borrowing. Creating money as debt is just a way of mobilising business activity and investing in future wealth creation. Problems only arise when the money is used not to stimulate economic growth but to speculate, to fuel asset inflation and to pay bankers’ bonuses – and when more money has to be created to enable the repayment of interest, thus creating an endless debt spiral. The only solution is to nationalise the money supply and lend at low or zero interest rates – as in North Dakota, which is one of only two US states not drowning in debt.
Myth 3: “Labour spent all the money.” More nonsense. Even if you add 3% per year for the capital costs of PFI, public spending still averaged only 40% of GDP per annum in the years 1998-2008 and 41% in the years 1998-2010, compared with 40% in the years 1980-97. According to the Treasury Red Book, government spending increased no faster than income between 2002 and 2008.
Myth 4: “The national debt should have been reduced during the boom years.” Fact: Labour did reduce the national debt – from 42% of GDP in 1997 to 36% in 2008. The claim that it should have been paid off before the financial crisis is absurd – firstly because Labour had been elected to increase spending on neglected public services and secondly because the two countries which have required an IMF bailout, Iceland and Ireland, were both in surplus in 2007, as was Spain. Balanced budgets did nothing to prevent the crisis in these 3 countries nor would they have done in Britain.
Myth 5: “Labour is the party of high taxes.” No it isn’t and that’s what’s been the problem. The average annual tax take was the same under Blair and Brown as under Thatcher and Major (36% of GDP) and less than the 2010 EU average (40%).
Myth 6: “High taxes discourage enterprise.” Not true. In 2009 there were 8 European countries with a higher GDP per hour than the UK. These were Austria, Germany, Belgium, Holland, France, Norway, Sweden and Ireland. With the single exception of Ireland, the total tax burden as a % of GDP was higher in all these countries than in the UK.
Myth 7: “Regulation smothers entrepreneurship.” No it doesn’t. UK employees have less protection than almost anywhere else in the EU, whereas those countries with the strongest employment laws – Holland, Norway and Austria, for example – have lower unemployment and a higher GDP per capita. By contrast, in the US, the archetypal hire and fire economy, unemployment is running at nearly 10%.
Myth 8: “The economy is being crippled by massive welfare bills.” But in 1997 welfare spending as a % of GDP was 8%. In 2010 it was 7%. And unemployment benefits in the UK are amongst the lowest in Europe, having fallen from 17% of average earnings in 1976 to 10% in 2011. As for welfare sapping the will to work, unemployment was at its lowest in the 1950s, when unemployment benefits were at their highest in relation to pay.
Myth 9: “Labour left a legacy of massive welfare fraud.” Wrong again. Benefit fraud has been declining for years and accounts for less than 0.5% of the welfare budget (£1.1 billion). Compare this to the £16 billion of benefits which, go unclaimed every year, and the astronomical sums lost through tax avoidance and evasion.
Myth 10: “The best way to reduce the budget deficit is to cut spending.” Another lie. In April 2010 the budget deficit was £163 billion. By April 2011, it had fallen to £142 billion. Why? Because, from September 2009 to September 2010, increased spending led to a fall in unemployment and a £35 billion increase in tax revenues as the economy grew by 2.8%. According to the OBR, the budget deficit will be £130 billion by April 2012 – which means that it will have fallen by less during this financial year (£12 billion) than in 2010-11 (£21 billion), and at the cost of a slump in GDP growth to around 0.6%, representing a loss in output of about £30 billion.

So The Great Tory Debt Lie will be peddled ad nauseam by the right wing press as a passive electorate are brainwashed into believing that there is no alternative.

I thought it would be nice to add an 11th Myth. Here's what I suggested:
Myth 11: "A Financial Transaction Tax would be a disaster for the UK economy". On the contrary. With visible Financial Transactions in the UK running at around 1000 trillion a year (numbers in the BIS report), trivial levels of taxation could be used to abolish all the current taxes. For example, Income tax, which raises 134 billion a year - could be replaced with an FTT of 0.013%. National Insurance, which raises 94.8 billion a year, could be replaced with an FTT of 0.009%. VAT, which raises 67.2 billion a year, could be replaced by an FTT of 0.006%. Corporation tax, which raises 33.4 billion a year, could be replaced by an FTT of 0.003%. You could get rid of the whole lot with an FTT that is one third of the 0.1% rate proposed by the EC. There would probably be plenty left over for paying of the national debt, providing free university education, providing jobs or training for the million plus youth unemployed etc etc.


  1. Ah but then the greedy would rake in less - and we can't have that can we?

  2. Yes we can! I still think that we live in something that resembles a democracy. And if a political party said that they would take them on, put a modest FTT on all transactions and abolish all the other taxes, then I'm confident that nearly everyone would vote for it - except the 1% that do high-frequency trading and the like. But, except in the City of London, it's still people that vote, and not corporations.