Give it to the spenders, not the banks and businesses, Mr Osborne

Why is the government persisting in policies that strangle demand in the economy instead of boosting it?  Faced with a bad financial crisis, a paralytic economy and no growth, the coalition government’s immediate instincts are utterly predictable: print money and give it to the banks, and lend a bunch of tax or borrowed money to more banks and small businessmen.  Then scold the banks for not lending the money to the businessmen and scold the businessmen for not borrowing it to start up or expand projects that will employ some of the hundreds of thousands of public servants thrown out of work by the ‘deficit reduction’ programme of cuts in government spending.

Sure enough, that’s all the Chancellor of the Exchequer, George Osborne, can think of to get the economy moving.  Meanwhile the numbers of the unemployed, thanks to the remorseless cuts,  keeps growing, costing the government more and more in unemployment benefit, housing benefit for those who lose their homes as well as their jobs, and costs to the NHS, and reducing the government’s tax take, thus increasing the budget deficit and the need for more, not less, government borrowing.  Trouble at the Eurozone mill further aggravates the problem, although it manifestly didn’t cause it.

The truth, unpalatable as it may be to the Tories and embarrassing to their LibDem partners (some of whom may be presumed to know better: eh, Vince?), is that the root of the problem is lack of aggregate demand in the economy.  Too many people haven’t got enough money, and they are mostly getting worse off all the time. Not enough households or firms are spending or planning to spend enough money on goods and services to justify businesses in investing to produce more of either, or, therefore, to risk borrowing money for that investment.  Demand is so flat that business perfectly logically lays off its staff instead of recruiting new employees, thus further depressing demand as more of those made redundant join the dole queues.  The main reason for the banks’ failure to lend more for business expansion and start-ups is that business is unwilling, quite rationally, to risk taking out expensive or even cheap loans when there’s so little prospect of selling more goods and earning enough additional money to service and eventually repay the debt.  Pumping more and more money into the banks is not just irrelevant: it’s stupid, when the same money could be put to so much better use.

The government should be lavishing additional money on those who can be relied on to spend all of it, and at once.  These are not bankers and businessmen, who will save most of it, much of it in off-shore tax havens or on investments in the economically expanding countries of Asia and Latin America.  Those who would spend every extra penny here are the unemployed and the chronically sick, living on minimal and yet still shrinking benefits; pensioners whose pensions have been hit by the recession and cuts; those scraping by on the minimum wage;  and others on low incomes hit by 5% inflation and the savage increase in VAT: adding up to constant reductions in their living standards in real terms and the constant fear of redundancy which deters them from spending what money they have on anything but absolute essentials.   All these groups can be trusted to go out and spend every extra penny they get, thus raising levels of demand and restoring the confidence of business in the likely profitability of borrowing to invest and to employ more workers – giving a push to the now stalled virtuous circle.

So what does our dogged coalition government do to put more money in the pockets of the would-be spenders?  It raises VAT by a swingeing 2.5%;  it sacks huge numbers of public service workers, adding to unemployment and slashing their spending power (as well as ceasing to receive their taxes);  it systematically decimates social service benefits just when they are more than ever needed, and thus further flattens demand in the economy;  it sanctions more and more printing of money to bolster the banks (which don’t need it when demand is flat), thus adding to inflation and reducing the spending power of the whole population;  and it stubbornly goes on wasting billions of pounds on foreign military adventures and occupations in Afghanistan and Libya (and seemingly does some hopeful planning for more of the same in Iran).  It spends more billions on a nuclear weapon capability which is neither independent nor a deterrent and on ego trips such as the Olympic Games which will make whole areas of our country virtually uninhabitable by the natives for months at a time. It persists in wasting money on keeping tens of thousands of people in bursting prisons who ought not to be there and who could be more beneficially dealt with at a fraction of the cost in the community, all because of a cowardly terror of being labelled “soft on crime”.  All this squandered money could perfectly well be diverted into sharp reductions in taxation of the low-paid, in halving or even suspending VAT and employees’ National Insurance contributions, making special Recession Compensation payments of £200, £300 or more each to all unwaged with an income of less than (say) £15,000 a year, and just about any other kind of hand-out to the wannabe spenders in our unequal society.  It would actually be more sensible to drop bundles of five-pound notes from helicopters over the shopping malls and sink housing estates of our major cities than to go on shelling out millions a month on new unneeded aircraft carriers, drones, fighter-bombers and tank landing craft, and on generals, admirals and air marshals who in a sane world would have nothing to do, and who in most cases have nothing to do anyway, even in the insane world that we and they inhabit

The absurdity of loading the banks with money and then trying to bully them into lending it to those exalted ‘small businesses’ which were supposed to replace the public sector as the engine of expansion and growth is vividly illustrated by an inconspicuous article in the Financial Times of 26-27 November.  It begins:

Banks under constant fire for failing to lend to small business often complain that there are not enough suitable candidates, and a survey indicates they might have a point. The poll of 155 individuals taken during November’s Global Entrepreneurship week found a fifth of recent start-ups and 16 per cent of those aiming to launch a company did not intend to write a business plan and many did not understand basic concepts such as gross profit and turnover.

The poll shows that many would-be entrepreneurs had no understanding of such basic concepts as gross profit (47 per cent), turnover (31 per cent), margin (19 per cent) or even cash flow (16 per cent). Only 30 per cent could define all four.  Only just over half of those surveyed knew that the VAT threshold was £73,000, and 23 per cent couldn’t define VAT taxable turnover. (The article observes that failure to manage VAT, paid in arrears, is a big cause of cash flow problems and business failures.)  And these are the buffoons to whom Mr Osborne wants the banks to lend our money, or to lend the money we have given the banks with our guarantee, when not only a hefty minority of them are clearly incapable of setting up and managing a whelk stall, but also when there are so many people out there made unemployed by government policies that no-one can afford to buy whelks anyway, even from the most brilliantly funded and managed whelk stall.

The only possible explanation for this blindly obstinate pursuit of doomed, counter-productive and wrong-headed policies by the Tory-led coalition government is ideology. The global, or western world’s, financial crisis and credit crunch provide an unmissable opportunity to dismantle a welfare state that has never been loved by free market fundamentalists and apostles of unbridled capitalism.  For a Tory ideologue, anything smelling of redistribution is a no-no.  It goes against the grain to dish out money to the poor, beyond what is absolutely necessary to keep them from starving, on the principle that the only way to make the working class work is to force them into jobs by the threat of dismissal and penury, thus curing them of the deadly disease of ‘benefit dependency’, even when the jobs simply aren’t there. Conversely, in the traditional Tory book the best way to induce the bankers and the business-owning and  –managing classes to expand their activities is to bribe them with money from the taxes raised from those less fortunate than themselves, ‘subsidy dependency’ bearing no resemblance at all to dependence on state benefits.  Well, you’ve tried that now, George, and it’s only made matters worse.  Why not give the other thing a try?  You could start by suspending VAT, and call it Plan A+.


5 Responses

  1. Pete Kercher says:

    By and large, I agree with what you write here, Brian: certainly with your economic analysis and what to do about it, which ought to be as plain as the nose on his face to your Chancellor. In only one area do I disagree. It is where you write this:
    “And these are the buffoons…”
    Granted: fiscal systems are vastly more complicated here in Italy than anything you could conceive of in the UK, as well as sometimes giving the impression of being designed specifically to make life difficult and not being provided with any back-up of advice or help whatsoever from the tax offices (they never want to go on record with an interpretation of a tax law, for fear that they may have got it wrong and you may actually quote them). Even so, and as someone who has had to struggle to understand fiscal systems, I suggest that it is not fair to lay the blame for not being able to define such concepts as cashflow and turnover, or not knowing about the threshold for VAT registration and what it implies for a potential new SME, solely on the shoulders of these would-be entrepreneurs.
    If you have found that young people setting out in life as potential entrepreneurs do not know the basics, perhaps the education system would be well-advised to provide the necessary know-how. For all I know, it may already do so in the UK, though what you write implies otherwise. But the complexity of the systems we use certainly does discourage, rather than encourage. So I would go a little easier on those “buffoons”: at least they are trying to do something, albeit on flimsy foundations.
    Brian writes: Thank you for this, Pete. I agree that it’s an indictment of our education and training systems that such a high proportion of our would-be entrepreneurs apparently have so little grasp of the essentials of managing a business that they seem almost certain to go bust after a couple of months. But that doesn’t affect the fact that anyone seeking to borrow money to start a business without the faintest idea of how to set about it, in many cases without either a business plan or the smallest understanding of how to write one, is fairly described as a buffoon, even if any investment or high street banker agreeing to lend such an applicant so much as a fiver is an even bigger buffoon — especially if the loan of the fiver is guaranteed by George Osborne in our name! I wasn’t seeking to ascribe the blame for buffoonery to anyone in particular, just pointing out that trying to borrow money without knowing what to do with it (apart from losing it) is the action of a buffoon.

    But my basic point, with which I’m glad to see you apparently agree, is that if the applicant for a bank loan wants it to set up a factory producing widgets, when there’s no market out there for widgets because former widget-users are all out of work and bankrupt because of the cuts, and all the other widget producers have vast stocks of widgets that they can’t sell even at a loss, and the Ancient Guild of Widget-Makers’ assessment is that there’s no reason to expect a revival of demand for widgets for at least the next five years, once again the applicant for a loan, even if he knows all about cash flows and VAT threshholds, is another kind of buffoon — and the bank manager who approves a loan in such circumstances deserves to have his annual bonus reduced by 50% (to £2.5 million and not a penny more). So in that situation, scolding the bank for not lending to “a small business”, and giving the bank yet more public or Monopoly money to encourage it to make the loan, is not a very productive way of tackling the problem of a stagnant, apparently moribund economy.

  2. What Pete Kercher said reminded me of something long forgotten, that I, in my senior year of High School (USA, obviously) took two unexpected courses on top of my academic requirements, one in typing and the other in bookkeeping.  Both have stood me in good stead for all these years: typing because of computers, but bookkeeping, too, in forcing me to understand how business works even at the simplest level.  There’s much to be said for that.  For the rest, of course, you and PK are correct.

    Brian writes: Thank you for this, Judith. It really is extraordinary that there seems to be so little grasp of the fundamentals of economics out there. A distinguished economist friend of mine recently commented in a private message that he was being forced to the reluctant conclusion that our political masters just don’t understand economics. How has it come about that hardly any of our schools teach economics? We pay a terrible price for this ignorance.

  3. john miles says:

    “A distinguished economist..recently commented .. that he was being forced to the reluctant conclusion that our political masters just don’t understand economics. How has it come about that hardly any of our schools teach economics?”

    Oddly enough they tried to teach me economics when I was at school – very avant-garde for 1944!
    It left me with the impression that academic economics contains its fair share of windbaggery.
    Mainly because I earned high marks, together with golden opinions, by simply regurgitating other people’s ideas and opinions in my own words.
    Of the content of these ideas and opinions, I had no real idea – they meant little more to me than the proverbial Hindu chant.
    Perhaps it would have been better to teach us bookkeeping.
    There’ve been some brilliant exceptions, but academically qualified economists don’t always seem very good at handling money, running businesses or governing countries.:

    Who kmows what they did at school, but here’s what some of our political hotshots read at uni:
    Thatcher – Chemistry
    Howe – Law
    Lawson – PPE, got a first
    Lamont – Economics
    Major – didn’t go to uni.
    Blair – Law
    Brown – History
    Balls – PPE, got a first
    Cameron – PPE, got a first
    Osborne – History
    Cable – Economics
    Alexander – PPE
    Mervyn King – Economics, got a first

    Brian writes: Thank you for these interesting records. One of Cameron’s tutors at Oxford (Prof. Bogdanor) has been quoted as saying that he, Cameron, had been the most brilliant pupil he (Bogdanor) had ever taught — but Cameron focused on the ‘P’ (politics) of PPE, not the E, and it shows. Danny Alexander does speak and write as a graduate of “the dismal science“, as Thomas Carlyle called economics, but he gives the impression of having learned his economics long before Keynes first put pen to paper (which can’t of course be the case). I did an Oxford University economics course supposedly up to ordinary degree standard, but only years after leaving school and (the other) university. [Ooops: shouldn’t have said “the”!] But I’m not the prime minister or Chancellor of the Exchequer, and anyway they both have great herds of economists to advise and warn them, although you wouldn’t know it.

  4. john miles says:

    A couple more:
    Clegg – Social Anthropology
    Hutton – Law

    Brian writes: Thank you, John. These are interesting too. One more: according to Wikipedia, Vince Cable “went … to Cambridge University (Fitzwilliam College), where he initially studied Natural Sciences and later switched to Economics. He was the President of the Cambridge Union in 1965. …
    He later received a PhD in Economics from the University of Glasgow.” No wonder he looks so lugubrious.


  5. john miles says:

    Perhaps it’s worth adding that Maynard Keynes read Mathematics, in which of course he got a first.
    I doubt if any of our politicians have the brains or moral fibre to attack anything as tough as that.

    Brian writes: Thank you again. Not only do our politicians seem to lack the intellectual equipment to read mathematics (still less to get a First in it): on the evidence, few of them seem to have the intellectual equipment to read Keynes!