UK Economy Cries Out for Credible Rescue Plan

In this letter to the Sunday Times,  a group of economists call for a credible medium-term fiscal consolidation plan for the UK. 

The signatories are listed below:

Tim Besley, Sir Howard Davies, Charles Goodhart, Albert Marcet, Christopher Pissarides and Danny Quah, London School of Economics;
Meghnad Desai and Andrew Turnbull, House of Lords;
Orazio Attanasio and Costas Meghir, University College London;
Sir John Vickers, Oxford University;
John Muellbauer, Nuffield College, Oxford;
David Newbery and Hashem Pesaran, Cambridge University;
Ken Rogoff, Harvard University;
Thomas Sargent, New York University;
Anne Sibert, Birkbeck College, University of London;
Michael Wickens, University of York and Cardiff Business School;
Roger Bootle, Capital Economics;
Bridget Rosewell, GLA and Volterra Consulting

37 replies on “UK Economy Cries Out for Credible Rescue Plan”

@Philip Lane,

Despite, at the end, advancing a proposal very similar to one in your paper on Irish fiscal policy, this intervention is intensely “political”. The noises coming from off-stage suggest that the Chancellor is in hand-to-hand combat wth the PM. It appears Darling wants to “do the right thing”, but Brown doesn’t want to blow his flimsy chances of preventing the Cameroons gaining an overall Commons majority.

Despite Britain’s apparent insuciance about Greek (and EZ) travails, The Economist has an interesting piece on developed economies’ vulnerabilities:
http://www.economist.com/businessfinance/displaystory.cfm?story_id=15498265

Interesting perspective on who might be next in the line of fire.

LEts see if they have any more success than the “mitford” letter or indeed our own group efforts here.

@Zhou,

Yes, this is the proposal to which I referred at the beginning of my comment above – and I also added a reference to this letter in the ST on the thread to which you refer just before Philip posted.

It is unfortunate, but very likely, that this intervention will get mashed in the phoney war on fiscal consolidation in the run-up up to the general election in the UK. I suspect this tends to discourage economists from making interventions of this nature that are clearly in the public interest.

The manner in which the “NAMA forty-six” were treated has probably dampened the enthusiasm of those who might contemplate something similar here. We are probably left with individual efforts – such as Philip’s – which receive sage nods of agreement when presented and then disappear without trace as they fail to gain any traction with the political classes.

The political classes – both those in government and those aspiring to govern – have absolutely no interest in – indeed they are solidly opposed to – establishing mechanisms or procedures that will limit their room for political manoeuvre or increase scrutiny by, or accountability to, the Houses of the Oireacthas or the public.

It is only when those who have competence and influence, collectively, make the case and provide the necessary guidance that the public and the media might begin to exert the necessary pressure on the political classes. There appears to be increasing evidence that the public are becoming heartily fed up with the political, business and union games being played and there is an amount of individual media comment on the dyfunctionality of the current system of governance, but it hasn’t coalesced to form the critical mass required.

One can only live in hope.

The biggest heavyweight is probably is Rogoff. Whether you accord him any greater weight than Stiglitz or Krugman is a matter of judgement.

Krugman has described Tory economic policies as “just wrong”.
http://www.guardian.co.uk/politics/blog/2009/jan/30/paul-krugman-attacks-david-cameron

& Stiglitz has urged Brown to bost his reflationary measures,
http://www.independent.co.uk/news/uk/politics/forget-cuts-and-keep-spending-brown-told-1893307.html

@Aidan McGrath
One of the signatories Andrew (Lord) Turnbull is former cabinet secretary and head of the Home Civil Service. Presumably his experience gave him considerable insight – enough to make him a “heavyweight” in policy formulation and implementation.

In an FT piece last year, he called for a separation of powers in the UK
“Democracy would be better served by ministers who are less political and more expert but held to account by an independent, self-governing and self-confident parliament.”
http://www.ft.com/cms/s/0/73f524ca-4faa-11de-a692-00144feabdc0.html

The FT letter highlighted by Michael Burke, which preceded this latest offering by the 20 “heavyweights”, shows there is a considerable divergence of opinion within the economics profession. This type of exchange of volleys in the print media confuses the public and exposes the various riflepersons to manipulation by the political classes.

It would be far better if those with competence and influence in the realm of economic policy were to make the case for a reformed process of economic policy formulation, scrutiny, amendment, implementation and review prior to advancing a particular policy prescription. The basis for differences in policy prescriptions – which often reduce to diferences in timing and sequencing – could then be assessed in a transparent way in a reformed process and better policies would emerge.

Much of the critique of the Government’s economic policies on this blog is sometimes explicitly, but always implicitly, a critique of the way these policies are developed and implemented. There are always good grounds for debate about the merits/demerits of these policies, but can we not agree that the process is dysfunctional and needs major reform?

@ Donal

Turnbull is also the Chairman of Brevan Howard, Europe’s biggest hedge fund, so he can claim to be offering the market’s take on it all as well…

Isn’t the fiscal deficit only part of the UK problem? Isn’t the fact that the UK’s inflation chicken is now coming home to roost also going to be a problem? Most UK economists seem to be in denial of this.

During the recession the Bank of England has been extremely skilful at ensuring that real interest rates in the UK remained strongly negative, while strongly positive in the Eurozone. But, it can’t last. Throughout 2009, the UK HICP inflation rate was around 2%, considerably higher than in the Eurozone. Yet, the Bank of England set the minimum interest rate to 0.5%, compared with 1% in the Eurozone. However, as a result of the Bank of England’s devaluation of the pound sterling, inflation in the UK is set to soar. The Sunday Times yesterday forecast that figures out tomorrow would show UK HICP had risen to 4.2% in January (not sure how reliable the ST is). That is a full 3.2% higher than in the Eurozone (and 6.6% higher than in Ireland), yet the BOE still has interest rates set at 0.5%, compared with the ECB’s 1.0%. This is unsustainable. Eventually the UK will have to pay an interest rate price for debauching its currency and setting off inflation. The only real question is whether or not it can be postponed until after the election.

All this highlights that those people who transferred their money from Irish banks to UK banks, when the global crisis started in 2007, have turned out be mugs. In N. Ireland lots of people keep their savings in banks south of the border for political rather than economic reasons, myself among them. However, once the global crisis began in late 2007, and amid widespread media reporting that Ireland was about to go bust and would have to exit the euro and devalue by up to 50 per cent, lots of people in N. Ireland transferred their savings back to N. Ireland banks (which are, of course, all owned by UK banks). Safe haven and all that. I didn’t follow the mob in this respect, but I personally know quite a few who did. Their savings are now worth 25 per cent less than in 2007, while mine are intact. The next time Brian Cowen is north of the border, he should politely highlight this fact. Of course, some might say that there is still a risk of Ireland exiting the euro and devaluing. But, as each month goes by, and the differential between Ireland’s and the UK’s inflation rates widens, that risk diminishes.

The opening sentence is excellent —

It is now clear that the UK economy entered the recession with a large structural budget deficit.

The Gordon Brown “prudence”/golden rule was found out by the recession. The level of public saving needed to be far higher than the Treasury was ever able to implement.

@ JtO

Whilst inflation may be bad for savers it is not necessarily bad for borrowers. Did I read somewhaere that most of the UK sovereign debt is governed by domestic UK la and is denominated in STG? Certainly the vast amount of private debt in the UK is denominated in STG. Oh for some inflation and a negative real interest rate!

@JtO,

You make valid points about the UK’s time-hallowed tactic of using devaluation to avoid tackling fundamental economic problems – that eventually wreak damage. Gordon Brown’s famous “Five Tests” on joining the Euro were simply mumbo-jumbo to conceal the fact that successive Labour governments either couldn’t or wouldn’t confront the British people with the type of economic and fiscal discipline that Euro membership would require.

In contrast, Ireland, in company with the other PIIGS, joined but failed to apply this discipline. Ireland is now taking the medicine, but it’s not being administered equitably. This is storing up trouble which could have serious repercussions.

However, the volley in the British print media that initiated this thread demonstrates that the process of developing and implementing economic and fiscal policy in Britain is as dysfunctional as it is in Ireland. The writing of letters to editors of broadsheets by those ostensibly having competence and exercising some influence and authority is the ultimate confirmation of impotence. The process in Britain is as much in need of fundamental reform as, if not more than, Ireland’s.

@zhou_enlai

You are perfectly correct. It is good for borrowers. It would be lovely to have 25% inflation and borrow at 1%. And, if you know any lenders who’ll do that on an ongoing basis, send them my way. But, the point is, it is unsustainable. Basically, those lenders who have lent money to the UK government in recent years have been diddled by Brown/Darling’s debauchment of the currency. It will soon dawn on those lenders.

If, in mid 2007, someone in Germany, say, had lent five million euros to the Irish government and another five million euros to the British government, he’ll get back his five million euros plus (1% pa) interest from his Irish loan, but he’ll only get back 4 million euros plus (0.5% pa) interest from his British loan. Bully for Britain in that case. They’ve done well out of the deal. Del Boy would be proud of them. But, next time round, the German lender will want an interest premium for lending the British government money, lest the British Government repeat the same trick again.

@JtO

Currencies fluctuate. The UK’s currency has already devalued and they are still abe to borrow. The inflation statistic does not impact on that. The US$ also devalued and many are betting the Euro will devalue too. Has sterling really sinned so badly?

@Edgar,

This just cancels out the advantage the UK had 12 months previously. Ireland has had a series of adjustment measures which negatively impact on inflation as well, notably the feeding through to hospital/insurance charges of the way private beds are charged for in public hospitals, and in January dental charges etc. Still our overall prices have dropped.

Looking at UK food prices (which of course is important in itself as an export price for us) which are VAT free. In the UK over the last 2 years this has increased 12%, while Irish food prices have fallen 4%. Which for food exporters – assuming their costs track the overall HICP pretty closely – should mean they are back to equivalent to around 76p-in-the-euro.

Ken Rogoff recommends that central banks increase their inflation targets while an analysis by Morgan Stanley shows that inflation has been the main factor in bringing down the US public debt ratio since 1946.

Three factors which helped were: First, outlays were not closely linked to inflation. Second, bondholders were surprised by inflation both after the war and in the 1970s. Third, in the first post-War decade, the average maturity of the debt was – at more than 100 months – exceptionally high.

http://www.finfacts.ie/irishfinancenews/article_1019041.shtml

@All

Variations on a theme – 350 more economists – from Green Jersey to Green Tunic and the ‘Tobin Tax’

“For now, at least, neither the G20 leaders nor the IMF seems ready to don the green tunic of Robin Hood.”

Hundreds of economists call for tax on currency speculation

By Sean O’Grady, Economics Editor The Independent

http://www.independent.co.uk/news/business/news/hundreds-of-ecomomists-call-for-tax-on-currency-speculation-1899534.html

@zhou_enlai

“Has sterling really sinned so badly?”

Living roughly half of the time south of the border and half of the time north of the border and mainland UK, I wear two hats. My attitude to how ‘sinful’ is the devaluation of the Pound sterling depends on which hat I’m wearing.

Wearing my ‘south-of-the-border hat’:

A devaluation of 25 to 30 per cent is quite large. It is the UK’s largest-ever devaluation. However, I should make it quite clear that I am not objecting to the UK devaluing (at least while wearing my ‘south-of-the border hat’). I don’t consider it a sin. The UK is an independent country and is entitled to do what it likes with its currency. I am merely saying that countries which devalue and trigger inflation usually have to pay the price in terms of higher interest rates, and that the UK will probably pay that price later this year (after the election). Conversely, countries which show that they can weather the disadvantages of a strong currency by reducing costs, which Ireland is in the process of doing, although the process isn’t complete yet, are usually rewarded with low interest rates. We are getting near the point where Ireland will merit those rewards. Brian Cowen or Brian Lenihan should pen an article in the Financial Times in the near future highlighting the large inflation rate differential now opening up between Ireland and the UK (of which more details below), and point out how this reduces any pressure on Ireland to exit the euro.

Regarding your reference to the possibility of the Euro devaluing, that is always possible. Impossible to predict currency movements. I gave up years ago. However, were the euro to fall by 25 to 30 per cent, as the Pound sterling has, I don’t think ECB interest rates would be 0.5%. They’d be 4% or 5%. That’s the whole point.

Switching to wearing my ‘north-of-the-border hat’:

With this hat on, I certainly do object to the Brown/Darling debauchment of the currency on the grounds that it has sent the price of basic necessities skyrocketing and made them unaffordable by the most disadvantaged sections of the population. People south of the border think that these are cheap in the north. But, that is only because the currency north of the border has devalued by 25 to 30 per cent relative to the currency south of the border. To people north of the border, they are not cheap at all. They have become ruinously expensive. Ronnie O’Toole gave the comparison for food prices. Here are some more. All the figures are for price changes between August 2007 and December 2009. They’ll look even worse tomorrow when the UK figures for January 2010 come out, which will include the VAT increase on 1 January 2010.

price changes between Aug 2007 and Dec 2009:

food: Ireland: -1.4% , UK +18.0%
meat: Ireland: -2.2% , UK +18.1%
fruit: Ireland: -11.8% , UK +25.2%
vegetables: Ireland: -11.2% , UK +11.2%
sugar: Ireland: -0.6% , UK +16.4%
coffee/tea: Ireland: -3.4% , UK +13.6%
rents: Ireland: -16.2% , UK +5.1%
electricity: Ireland: -1.0% , UK +20.3%
gas: Ireland: -6.9% , UK +40.3%
solid fuel: Ireland: +15.3% , UK +44.8%
liquid fuel: Ireland: -6.3% , UK +18.5%
furniture: Ireland: -11.2% , UK +11.4%
postage stamps: Ireland: +1.1% , UK +17.1%

As can be seen, while the price of virtually every basic necessity south of the border has fallen since August 2007, the price of virtually every basic necessity north of the border has gone through the roof. These are 1980s-size price increases. During this period, social welfare benefits north of the border (and in the UK generally) have only gone up by 4 or 5 per cent. The fact that, because of the currency movements, prices north of the border still seem cheap to those south of the border (although less so every month), is no comfort to those living north of the border. Those economists south of the border, who are advocating Ireland leaving the Euro and devaluing by 30 to 50 per cent, should come clean and admit that this will trigger increases in the prices of basic necessities that will make those shown above for the UK seem very small.

@David O’Donnell
The number and weight of the signatories supporting the speculator tax is impressive.

“Some 350 prominent economists from all over the world have written to the leaders of the G20 calling on them to implement the so-called “Robin Hood tax” on the banks “as a matter of urgency”.

Two Nobel prizewinners, including the outspoken critic of the financial system Joseph Stiglitz, and scores of professors at universities from Harvard to Kyoto, are calling on G20 governments to back a financial transactions tax on speculative dealings in foreign currencies, shares and other securities of 0.05 per cent – say £500 on a £1m transaction.”

The Tanaiste recently gave a 20 minute interview to BBC News 24 on the Irish economy’s present and future. The website below does cover public life so avoid their commentary if you are just interested in the policy matters raised.

http://thestory.ie/2010/02/15/mary-coughlan-on-bbc-hardtalk/

Deckchairs Titanic. It is all in train. Very little can be changed now except those who acquaint themselves with economic history will have an advantage over the headless chickens who will be stripped of capital.

Sovereign debt is ballooning as they pick up selectively the debts of others. Kleptocracy. Then the governments will tax everyone to pay for it!

Competitive devaluations mean that raw materials cost more. Get out of fiat currencies, but how? Try the Ozzie $, stable pleasant country, ripping holes into itself to ship to China. And a massive source of food too. A continent with 22,000,000 pleasure seekers in it. Suckers!

Do the Math on the differential between the increase in the debt burden (destruction of money when paid down) and the decrease in aggregate economic activity (the ‘surplus’ you need to pay down the debt). Its a capsize.

Looks like the ‘economic community’ will need a new model – Anti-growth or something similar. When the cent drops and it becomes generally understood (the Boyze already know!) that it is not possible to pay down the existing debt burdens – ever! – that will trash the FIRE economy in short-order. Get a farm with its own fresh water supply, and some PMs.

The only ‘lightweight’ economists that you need to really pay heed to are the ones who understand our (humankind’s) absolute reliance on fossil fuels and the predicament we are in as the MRTS of these very dense energy resources inflect past the max. “Are we there yet?” Probably not, but I’d have some concerns.

B Peter

zhou_enlai

It is clear that you have no burden of economic study. Well done on avoiding it, as it is mostly crap. JTO is not someone from whom to learn. Finfacts is good.

Inflation will increase if a currency devalues. But it helps to cut down on imports for that reason. The real cause of inflation is creating too much “money” and devaluation is one way to create a lot of it. But always some bear more of the cost than others.

B P Woods
Fossil fuels will not run out for centuries. Read up on abiotic oil. These times may get much worse but it is all about funny money, not real value.

As you say, land has real value. Advising folks to buy land, unless it is in Australia, will cost them wealth. Advise them to rent land instead in Ireland. The funny money element is still vast. The whole problem is attitude. Many values are askew and will decline as others will increase due mainly to those pesky devaluations, do you agree?

@ JtO

In Krugman’s Return to Depression Economics, and elsewhere, he says that a Country can procure two of the following three desirable outcomes:
1. Monetary control in order to be able to combat recessions.
2. Fixed Exchange Rates with other countries.
3. Free capital movement.
http://www.slate.com/id/36764/

Krugman states that most countries have decided to sacrifice no. 2 in the interests of 1 and 3. Only those who try to achieve a fixed exchange rate can really be accused of deciding to devalue, e.g. Argentina and Ireland in the past.

Krugman points out that there have been many extreme fluctuations between currencies such as the US$ and the Yen over the last couple of decades while this policy has been pursued. He also showed how interest rates etc were not necessarily effective to control exchange rates.

As such, I find it hard to see how the UK has done anything which the international markets will puish them for. Indeed, the international markets seem to be most suspicious of the Euro which has been the “strongest” currency over the last couple of years and the Renminbi which has maintained its constant value at the expense of control over capital flows.

@All
More on Greece New York Times

Greece Pressed to Take Action on Economic Woes
“Whatever the rules, if you have clever enough financial advisers you can get round them in form if not substance,” said Philip R. Lane, an international macroeconomics professor at Trinity College in Dublin. “Ultimately, governments are responsible for their financial decisions.”

http://www.nytimes.com/2010/02/16/business/global/16euro.html?8au&emc=au

@Philip Lane
… and of course, ultimately, moderators are responsible for their editorial/moderation decisions (-;

@Oliver Vandt

Good link to the ‘hard_talk’ piece ……….. I recommend it. Note, in particular, Minister Coughlan’s references to the National Pension Reserve Fund – and read between the lines.

Me substantive comments are available by contacting Seven_of_9 somewhere on the holodeck.

@Karl Whelan

The corresponding figures for Ireland are:

Value of Ireland CPI in August 2007: 106.1
Value of Ireland CPI in January 2010: 105.0

So, while you triumphantly proclaim that inflation in the UK in that period has been only +7.4%, in Ireland it has been -1.0%. What is more, the trend is accelerating. There is obviously a time lag between devaluation and resultant inflation. In the past six months overall inflation in Ireland has averaged 0.5% per month less than in the UK, which annualises to 6%, which will eventually have to be reflected in interest rates. If you read the Daily Telegraph this morning, you’ll read about the outcry in the UK because savers there are being robbed blind, with negative interest rates of 3% to 4% resulting from their high and accelerating inflation rate. In addition, there is the fact that basic necessities in the UK have gone up by far more than the average CPI. The average CPI figures are not a true indication of inflation for the disadvantaged sections of the population. The following is more representative:

changes in price Aug 2007 to Dec 2009:

meat: Ireland: -2.2% , UK +18.1%
fruit: Ireland: -11.8% , UK +25.2%
vegetables: Ireland: -11.2% , UK +11.2%
sugar: Ireland: -0.6% , UK +16.4%
coffee/tea: Ireland: -3.4% , UK +13.6%
rents: Ireland: -16.2% , UK +5.1%
electricity: Ireland: -1.0% , UK +20.3%
gas: Ireland: -6.9% , UK +40.3%
solid fuel: Ireland: +15.3% , UK +44.8%
liquid fuel: Ireland: -6.3% , UK +18.5%
furniture: Ireland: -11.2% , UK +11.4%
postage stamps: Ireland: +1.1% , UK +17.1%

The average for these 12 items of basic necessity is:

Ireland: -4.5% , UK: +20.0%

Bear in mind also that, over this period, social welfare benefits haven’t increased in the UK by any more than in Ireland, even in nominal terms, yet the UK is supposed to have a caring socialist government, while Ireland, if we are to believe the media, is under the jackboot rule of a rapacious right-wing government intent on rubbing the noses of the poor into the ground. No wonder the recent SILC reports showed poverty levels falling rapidly in Ireland, while rising in the UK.

@All

Support for Philip Lane (-;
Greece Pressed to Take Action on Economic Woes
“Whatever the rules, if you have clever enough financial advisers you can get round them in form if not substance,” said Philip R. Lane, an international macroeconomics professor at Trinity College in Dublin. “Ultimately, governments are responsible for their financial decisions.”

http://www.nytimes.com/2010/02/16/business/global/16euro.html?8au&emc=au

Simply hire Goldman Sachs (-; ……….. this story is developing ………

Another must read: Bloomberg via NakedCapitalism

http://www.nakedcapitalism.com/2010/02/so-when-is-a-fraud-not-a-fraud-greece-goldman-edition.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29

Maybe GoldmanSachs diverting $20 billion in staff bonused to Greece as a gesture of ‘solidarity’ with the EuroZone not such a bad idea after all.

@ JTO

Ahhh. I’m sorry. I hadn’t realised that the appropriate measure of UK inflation for discussions of this nature was the “unweighted random stuff John decides should be counted” index.

I acknowledge your superior index-making skills and shall bow out gracefully from this discussion.

@Karl Whelan

You do yourself a disservice. I’m sure you know perfectly well that, when measuring inflation, different baskets of goods are more appropriate to different groups in society. There has been quite a lot of academic research on the matter in recent years. I’d say that, if you take a walk down the corridor of the UCD Economics Department, you’ll almost certainly bump into someone who has published some research on the matter. A basket consisting of meat, fruit, vegetables, sugar, tea, electricity, gas, fuel and furniture is harly random, but is actually the bulk of the necessities of life for the disadvantaged, especially pensioners.

http://www.50connect.co.uk/finance/pensions/inflation_hits_pensioners_hardest

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