Letter in the Observer 30/10/2011 and my response

It is now clear that plan A isn’t working. Wave after wave of economic figures from HM Treasury, national and international economic institutions such as the OECD, the IFS and the IMF have all concluded that the British economy is faltering. The UK jobless total is now at its highest for more than 17 years, while growth has all but stalled.

We urge the government to adopt emergency and commonsense measures for a Plan B that can quickly save jobs and create new ones. A recovery plan could include reversing cuts to protect jobs in the public sector, directing quantitative easing to a green new deal to create thousands of new jobs, increasing benefits to put money into the pockets of those on lower and middle incomes and thus increase aggregate demand.

This could in part be paid for by the introduction of a financial transactions tax. The government could do far more to create the space for new and innovative industries and companies to flourish. One idea is a British investment bank, to leverage and back investment in low-carbon sectors such as housing, transport and renewable energy.

Doing nothing is not an option. We therefore call on the government to put the national interest first and hold an emergency budget that would instigate a Plan B for jobs, fairness and sustainability to rapidly get the economy moving again.

Dr Ha-Joon Chang, Faculty of Economics, University of Cambridge; Prof Sir Tony Atkinson, Nuffield College, Oxford; Howard Reed, Landman Economics; Chris Edwards, senior fellow, economics, University of East Anglia

Dr Mark G Hayes, fellow and director of studies in economics, Robinson College, Cambridge University; Prof Susan Himmelweit, professor of economics, Open University; Prof Mariana Mazzucato, chair in the economics of innovation, Open University; Prof Avner Offer, Chichele professor of economic history, University of Oxford, All Souls College; Dr Andrew Trigg, senior lecturer in economics, Open University; Dr David Hudson, senior lecturer in political economy, University College London; Prof Frances Stewart, Professor of development economics, University of Oxford; Dr Andrew Mearman, economics, UWE Bristol; Prof Ian Gough, professorial research fellow, LSE; Prof John Weeks, professor emeritus professor of economics, SOAS; Michael Burke, economist; Prof Peter Taylor-Gooby, University of Kent; Prof Diane Elson, University of Essex, chair UK Women’s Budget Group; Prof Richard Smith, professor of econometric theory and economic statistics, University of Cambridge; Prof Rick van der Ploeg, professor of economics, University of Oxford; Robin Murray, senior visiting fellow, LSE; Prof Malcolm Sawyer, professor of economics, University of Leeds; Marina Della Giusta, senior lecturer in economics, University of Reading; Prof William Brown, Montague Burton professor of industrial relations, University of Cambridge; Prof Christine Cooper, Strathclyde University, co-editor of Critical Perspectives on Accounting; Prof Martin Parker, Warwick Business School, University of Warwick; Prof Simon Mohun, emeritus professor of political economy, Queen Mary, University of London; Dr Christopher Bowdler, university lecturer in Economics and Fellow of Oriel College, University of Oxford; Dr Diego Sanchez-Ancochea, university lecturer in the political economy of Latin America, University of Oxford; Alan Freeman, economist, London Metropolitan University; Dr Andy Denis, director of undergraduate studies, economics department, City University London; Dr Bruce Philp, Nottingham Business School, coordinator, association for heterodox economics; Dr Chris Fuller, Royal Docks Business School, University of East London; Dr Christian Kellerman, economist; Dr Jamie Gough, department of town and regional planning, University of Sheffield; Dr Jan-Emmanuel De Neve, lecturer in political economy and behavioural science, UCL; Dr Jonathan Perraton, University of Sheffield; Dr Michael Dietrich, department of economics, University of Sheffield; Dr Michael Gasiorek, senior lecturer in economics, University of Sussex; Dr Molly Scott Cato, reader in green economics, Cardiff Metropolitan University; Dr Ozlem Onaran, senior lecturer in economics, University of Westminster; Dr Paul Segal, lecturer in economics, University of Sussex; Dr Peter Holmes, reader in economics, Sussex University; Dr Peter North, senior lecturer, school for environmental sciences, University of Liverpool; Dr Pritam Singh, reader in economics, Oxford Brookes University; Dr Stephanie Blankenburg, department of economics and CISD (centre for international studies & diplomacy), SOAS; Prof Geoffrey Hodgson, research professor of business studies, University of Hertfordshire; Ismail Erturk, Manchester Business School; James Meadway, senior economist, nef; Prof Jan Toporowski, professor of economics and finance, chair of the economics department, SOAS, University of London; Prof Janet Newman, emeritus professor, The Open University; Jerome de Henau, lecturer in economics, Open University; Michael Edwards, senior lecturer in the economics of planning, UCL; Prof Michael Lipton FBA, professor of economics, University of Sussex; Prof George Irvin, SOAS, University of London; Prof Gregor Gall, director of the Work and Employment Research Unit (WERU), University of Hertfordshire; Prof Hugh Willmott, Cardiff Business School; Prof Malcolm Sawyer, Leeds University Business School; Prof Prem Sikka, Essex Business School; Prof Alan Hallsworth, Staffordshire University; Prof Andrew Dobson, Keele University; Prof David Bailey, Coventry University Business School; Prof Matthew Watson, University of Warwick; Prof Miguel Martinez Lucio, Manchester Business School, University of Manchester; Prof Paul Thompson, Strathclyde Business School; Prof Simon Lilley, head of University of Leicester School of Management; Prof Tony Thirlwall, Department of Economics, University of Kent; Richard Murphy, Director, Tax Research UK; Stewart Lansley, research fellow, Bristol University; Dr. Olivier Ratle, University of the West of England, Bristol; Roberto Veneziani, senior lecturer in Economics, QML; John Christensen, economic adviser and director, Tax Justice Network, London; Prof Machiko Nissanke, professor of economics, SOAS, University of London; Dr Pritam Singh, reader in economics, Oxford Brookes University; Prof Victoria Chick, emeritus professor of economics, UCL; Dr Sally Ruane, De Montfort University, Leicester; Kitty Ussher, associate, Demos; Prof Richard Grayson, Goldsmiths, University of London; Prof Stefano Harney, School of Business and Management, Queen Mary, University of London; Tony Greenham, nef; Gez Sagar, head of strategy, economy communications centre, HM Treasury (2009-2010); Dr Anastasia Nesvetailova, director, MA in global political economy, department of international politics, City University London; Andrew Simms, nef; Anna Coote, nef; Prof David Held, Graham Wallas professor of political science, LSE; Dr David Hall-Matthews, senior lecturer in international development, University of Leeds; Prof Danny Dorling, University of Sheffield; Prof Jonathan Rutherford, Middlesex University; Prof Mary Kaldor, LSE; Prof the Baroness Ruth Lister of Burtersett, Loughborough University; Valentino Piana, director, Economics Web Institute; Dr Heather Savigny, University of East Anglia; Dr Stuart White, Jesus College, University of Oxford; Prof Dave Byrne, Durham University; Prof Alan Finlayson, University of East Anglia; Prof Ken Spours, Institute of Education; Dr Martin O’Neill, lecturer in political philosophy, York University; Prof David Purdy; Prof Stuart Holland, faculty of economics, University of Coimbra (& former MP for Vauxhall); Tim Jenkins, nef; Victor Anderson.

Dear Sir,

In response to your letter in the Observer signed by leading, or should I say misleading economists, I offer the following contrary argument.

Any career minded economist with one eye on the government`s gravy train will see an opportunity to use economic theory to support more government expenditure on projects that require a high number of advisors, more job creation in the public sector, more taxing of a mythical group (it was the rich but now it is usually something associated with financial services) and they will find popular, intuitive, and easy to digest analysis to support their case. Unfortunately their conclusion is for more of the same policies that caused the UK economy to become one of those faltering most in the current difficult economic climate.

However there is an argument based upon an alternative economic theory that is not populist, and is counter intuitive requiring some difficult decisions that may well lead to some economists (a euphemism for public sector) becoming unemployed as the economy re-balances.

The current UK problems are caused by two massive distortions that occurred in 2009 and have stopped the economy functioning efficiently and therefore caused growth to stall and unemployment to rise. Firstly an over-zealous Gordon Brown supported the G20 countries decision to pursue fiscal stimulus budgets to avoid the threat of deflation. In 2009/10 the government added £179b to UK debt which was followed by £140b in 2010/11 and despite a lot of talking down will probably grow by another £140b this fiscal year. It is not too far fetched to suggest that governments tend to spend money inefficiently and that for every job created in the public sector by government borrowing more than one job is lost in the private sector and therefore growth falters and unemployment rises. Secondly an over-zealous Bank of England responded to the Federal Reserve`s lead on quantitative easing (QE) and injected £200b of new money into the economy and because it was too much it is currently fuelling inflation at a rate well above target. Not only this but the Bank is currently adding a further £75b which will almost certainly keep inflation well above target for several more years. Inflation distorts price signals and at higher rates also adds to faltering growth and damages employment prospects. In addition to this official interest rates have been lowered to a rate where they have become disconnected from market rates and therefore ineffective.

The only way to deal with these distortions is the very opposite of what was suggested by the economists in Sunday`s Observer. It is necessary to make really deep cuts to government expenditure to release resources from the inefficient public sector to the more efficient private sector and to reverse the QE programme with a quantitative tightening programme that will bring the economy back towards its inflation target of 2%. On top of this it gets even more difficult to digest as the Bank`s base rate needs to be raised from 0.5% to about 4% as soon as possible. This will create a reconnection to market interest rates that reward the saver and discipline the borrower.

So who would support a policy like this? It will be unpopular, is counter intuitive and will not help anyone on to the gravy train. However after hopefully only a brief period of disruption it will cause economic growth and employment to rise and all we need to do is persuade the Bank of England to control inflation (the one thing it can do) and the Treasury to tighten fiscal policy with a view to balancing the budget over a three year cycle.

So there we have it the opposite point of view. Let the debate begin.

Sincerely yours,

John Hearn

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2 thoughts on “Letter in the Observer 30/10/2011 and my response

  1. I am fascinated about your articles, I can see the way of your thoughts. Arguing in proactive thinking outside the box and overseen problems/solutions from different angles. Politicians just are scare in implementing reforms that may damage their popularity. Instead politicians should be imposing long term views in resolving inefficient policies.

    Like

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