All 7 entries tagged Austerity

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February 21, 2015

Austerity policies have cost £100billion in lost output

Writing about web page

A must read piece by Simon Wren-Lewis in the LRB on the false economics of austerity. He shows that trying to cut the deficit by austerity measures is counterproductive and damages the economy. He estimates that the cost to the UK economy in permanently lost output due to George Osborne's policies is at least £100billion or 5% of GDP.

September 29, 2012

Effects of QE and low interest rates on pensions worse than SAGA study shows

Writing about web page

Ros Altman (Pensioners billions of pounds out of pocket and Pensioners left £11.5bn worse off by economic policies, Guardian website, 14 September) underestimates the damage done to pensions as a result of low interest rates due to quantitative easing. The report she quotes only looked at money purchase (defined contribution) pensions.

But low interest rates are also playing havoc with defined benefit (mostly final salary) pensions. Although many employers have closed them to new members still about a third of members paying in to these schemes work in the private sector. We usually think of final salary pensions as secure and immune from the vagaries of market forces but that is no longer true.

There is increasing evidence, both from academic research and lived experience, that legislation enacted by the last government aimed at protecting private pensions is in fact having the opposite effect when combined with QE. This situation has led to calls for reform of the way pensions funding levels are calculated, from the National Association of Pension Funds and the CBI.

An unintended consequence of the reforms brought in in 2004 is that very low interest rates like we have now create an artificial deficit for many pension schemes. The reason is technical, to do with the way the liabilities must be evaluated. This makes pension funds appear to be in deficit even though in reality they have enough income to pay the pensions on a sustainable basis.

The legislation requires companies to make extra payments (through a ‘recovery plan’) which many of them cannot afford. So they decide pensions are unaffordable, cut retirement benefits that existing members will receive, and increasingly close the schemes to new members.

The extra payments (estimated last year to be worth £11.6billion for the FTSE100 companies alone) that companies have to make are taking funds away from investment, dividends and wages which not only affects the supply side of the economy but also reduces demand, worsening the recession.

June 28, 2012

Manifesto for Economic Sense

We are now four years into the recession that started with the 2008 banking crisis. Governments in the UK and other European countries are continuing with ill-thought-out policies that only serve to worsen the problem.

We as economists know from what we teach that this is repeating the mistakes that led to the 1930s depression with its terrible social and political consequences.

Paul Krugman and Richard Layard have issued a manifesto calling for a return to policies based on evidence, and asked that economists and others who agree should sign it.

As they say, "The whole world suffers when men and women are silent about what they know is wrong."

June 14, 2012

A larger state does not mean lower economic growth

Some commentators argue that there is an inverse relation between the size of the state and economic success: the way for a country to achieve higher growth is by lowering taxes and reducing government spending.

The fallacy of this has been shown recently by the Financial Times chief economics commentor Martin Wolf on his blog.

His evidence is the following diagram showing each country's growth rate against its average tax rate. There is a large amount of variation in tax rates from Japan at 30% of GDP to Denmark at 56%. Yet there is no relation with growth rates. High tax countries have grown just as fast or slowly as low tax countries.

Growth versus Taxation

The chart shows that there are countries with a small state and low growth (Japan, Switzerland) just as there are countries with a big state and relatively high growth (Finland, Sweden).

Wolf suggests that, in view of this pretty convincing evidence, those who call for tax cuts in present circumstances are not so much seeking to promote growth for the greater good of society, as they claim, but expressing a political choice in favour of a smaller state with fewer public goods, less social capital, greater inequality and lower taxes.

May 31, 2012

The case against austerity by Paul Krugman

Paul Krugman on Newsnight last night brilliantly argued the case for Keynesian stimulus against Newsnight regular austerians.

May 29, 2012

Dont believe the 'austerians': a fiscal stimulus is just what is needed

We know the coalition government's austerity policy is not working. The economy is not growing with output still 4% below its level before the crisis began in 2008. Output is estimated at a staggering 14% less than where it would have been had growth continued at the rate it was before the recession.

But we are told there is no plan B - that Keynesian fiscal stimulus is not available because it would have to be financed by more borrowing. This is economic nonsense that is doing immense damage to society.

All the evidence shows that cutting public spending in a recession simply makes things worse. And it does little - if anything at all - to reduce the deficit because other areas of government spending go up and tax revenues drop.

The deficit is a by-product of recession, not a cause. The only way to reduce the deficit is to promote economic growth which put unemployed people back to work. In the absence of any growth stimulus from the private sector, this means using government spending to provide the fiscal boost.

In my latest paper, published in the latest Royal Economic Society Newsletter, I have shown that a fiscal stimulus, aimed at pump priming the economy by getting the private sector growing again, is actually also good for fiscal solvency. The growth in output as a result of the operation of the Keynesian multiplier also means the debt to GDP ratio will come down. This happens even if the extra spending is funded by borrowing.

This result is true even under quite mild assumptions about the size of the fiscal multiplier. I assumed a multiplier of 1: that is, that an increase in government spending would induce an increase in GDP of the same amount. This is a very small effect. There is growing evidence that the effect will be much larger than this.

A similar case has recently been made in an important paper by Brad DeLong and Larry Summers.

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