9 Mar 2013

David Cameron gets it completely wrong - twice

David Cameron made a speech last Thursday in which he made two particularly bad errors. First, he claimed that his government's budget cuts were not responsible for the UK's economic woes. I quote:
"As the Independent Office for Budget Responsibility has made clear, growth has been depressed by the financial crisis, by the problems in the eurozone and a 60% rise in oil prices between August 2010 and April 2011. They are absolutely clear, and they are absolutely independent. They are absolutely clear that the deficit reduction plan is not responsible: in fact, quite the opposite."
The next day, Robert Chote, the head of the OBR wrote to Cameron to explain that this claim was untrue. In the letter, Chote says the following:
"To date our forecasts have used 'mulipliers' that imply that every £100 of fiscal consolidation measures reduce GDP in that year by around £100 for capital spending cuts, £60 for welfare and public services cuts, £35 for increases in the VAT rate, and £30 for income tax and National Insurance increases, with the impact diminishing thereafter....[ ]... applying these multipliers to the consolidations measures put in place by the previous and current governments would have been sufficient to reduce GDP in 2011-12 by around 1.4%"
Chote admits that the multiplier values are the subject of debate. But he neglects to mention that specifically, the IMF Chief Economist recently said that the value of 0.5 for the fiscal multiplier used by economists in their models was seriously understimated, and that the real value was probably between 0.9 and 1.7. If those numbers are used, one would expect the drop in GDP to be somewhere between 2.5% and 4.75%.

So, just look at the graph of UK GDP growth (or rather absence of growth) since the financial crisis, and imagine what it would look like without the governments pointless and counterproductive cuts. That graph could have been off the scale....

But the problem is that Cameron and Osbornes brilliant plan A for which "There Is No Altenative" (TINA) is not justified by a real desire to fix the economy. As economist Ha-Joon Chang put it in  in today's Guardian : 
"In reality, though, the coalition government isn't as stupid or stubborn as it appears. It is sticking to its plan A because spending cuts are not about deficits but about rolling back the welfare state. So no amount of evidence is going to change its position on cuts."
 The other point in David Cameron's speech where he got it completely wrong is when he said this:
"There are some people who think we don't have to take all these tough decisions to deal with our debts. They say that our focus on deficit reduction is damaging growth. And what we need to do is to spend more and borrow more. It's as if they think there's some magic money tree. Well, let me tell you a plain truth: there isn't." 
Well, as I pointed out in a comment to the Guardian, he's wrong there. 
"Actually, David, there are plenty of money trees around. There's the money tree at the Bank of England that has provided £375 billion in QE for the UK financial sector. There's the money tree at the ECB that Mario Draghi used to provide over €1 trillion for hundreds of European Banks in late 2011 and early 2012. There's the money tree at the Federal Reserve which has promised to provide $50 billion or more a month if needed - again to the financial sector. Those money trees are the direct cause of the booming stock markets.

And finally, there is the money tree that all commercial banks have which allows them to create money out of thin air in the form of interest bearing loans. Since 1983, the UK banking sector has been increasing the money supply by an average of 10% every year - even after inflation that still works out at an average of 7%. Your chums in the City have been using that particular money tree to pay themselves a total of £2.4 trillion in interest payments since 1987.

Yes, there are plenty of money trees. Unfortunately, they are all in the hands of your chums, and your friends have no intention of letting any governments use those money trees in the public interest."

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