Are Cameron’s Economic Policies Working?

Britain has returned to growth:

But compared even to the USA — which has huge problems of its own — Britain is still mired in the depths of a depression:

An Olympic bounce does not constitute a recovery. As I noted in March, Britain is under-performing the United States — in GDP and in unemployment. Although Cameron and Osborne keep claiming that they are deficit hawks who want to cut the government deficit, the debt keeps climbing.

Defenders of Cameron’s policies might claim that we are going through a necessary structural adjustment, and that lowered GDP and elevated unemployment is necessary for a time. I agree that a structural adjustment was necessary after the financial crisis of 2008, but I see little evidence of such a thing. The over-leveraged and corrupt financial sector is still dominated by the same large players as it was before. True, many unsustainable high street firms have gone out of business, but the most unsustainable firms that had  to be bailed out — the banks and financial firms who have caused the financial crisis — have avoided liquidation. The real story here is not a structural adjustment but the slow bleeding out of the welfare state via deep and reaching cuts.

Britain has become welfare-dependent. Britain’s welfare expenditure is now over 25% of its total GDP. Multi-billion pound cuts in that figure are going to (and have) hurt GDP.

I believe countries are better with small governments and a larger private sector. The private sector consists of many, many individuals acting out their subjective economic preferences. This dynamic is largely experimental; businesses come and go, survive, thrive and die based upon their ability to stay liquid and retain a market, and this competition for demand forces innovation. The government sector is centrally directed. Governments do not have to behave like a business, they do not have to innovate or compete, as they have the power to tax and compel. (The exception to this is when governments become overrun by the representatives of private industries and corporations, who then leverage the machinations of the state to benefit corporations. When this occurs and markets become rigged in the favour of certain well-connected competitors, it matters little whether we call such industries “private sector” or “public sector”).

So I am sympathetic to the idea that Britain ought to have a smaller welfare state, and fewer transfer payments than it presently does. But the current and historical data shows very clearly that now is not the time to make such an adjustment. The time to reduce the size of the welfare state is when the economy is booming. This is the time that there is work for welfare claimants to go to. Cutting into a depressed economy might create a strong incentive for the jobless to work, but if there is little or no job creation for the jobless to go to, then what use are cuts? To reduce government deficits? If that’s the case, then why are British government deficits rising even though spending is being reduced? (The answer, of course, is falling tax revenues).

An alternative policy that would reduce unemployment and raise GDP without increasing the size of government is to force bailed-out banks sitting on huge hoards of cash to offer loans to the jobless to start their own private businesses. The money would be transferred to those who could be out working and creating wealth, but who cannot get credit through conventional channels, unlike the too-big-to-fail megabanks who are flush with credit but refuse to increase lending to the wider public. Even if the majority of these businesses were to fail, this would ensure a large boost in spending and incomes in the short run, and the few new businesses that succeed would provide employment and tax revenues for years to come. Once there is a real recovery and solid growth in GDP and in unemployment, then the government can act to decrease its size and slash its debt. Indeed, with growing tax revenues it is probable we would find that the deficit would end up decreasing itself.

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42 thoughts on “Are Cameron’s Economic Policies Working?

  1. If the government coerced the banks to make loans to people wanting to start their own business, what penalty would the borrower face if they have nothing to offer as security?

    I like the idea, just wondering how it would work. The state also needs to cut back the regulations that prevent new businesses from operating. Retailing in the city centres would be rejuvenated if properties were not owned by the few…charging us rents not because they take risks and serve the community, but because they grew rich on the back of government handouts and bought up land and properties…so now they do not have to work or take any risks…they just get fed through the labour of others…by charging rents.

    William H. Gates Sr., former head of eugenics group Planned Parenthood
    Bill Gates’ father, William H. Gates Sr., has long been involved with the eugenics group Planned Parenthood, a rebranded organization birthed out of the American Eugenics Society. In a 2003 interview with PBS’ Bill Moyers, Bill Gates admitted that his father used to be the head of Planned Parenthood, which was founded on the concept that most human beings are just “reckless breeders” and “human weeds” in need of culling (http://www.pbs.org/now/transcript/transcript_gates.html).

    http://www.independent.co.uk/news/world/world-history/meet-mansa-musa-i-of-mali–the-richest-human-being-in-all-history-8213453.html

    Here’s the full list of the ‘26 richest people of all time’:
    1. Mansa Musa I, (Ruler of Malian Empire, 1280-1331) $400 billion
    2. Rothschild Family (banking dynasty, 1740- ) $350 billion
    3. John D Rockefeller (industrialist, 1839-1937) $340 billion
    4. Andrew Carnegie (industrialist, 1835-1919) $310 billion
    5. Tsar Nicholas II of Russia (last Emperor of Russia, 1868-1918) $300 billion
    6. Osman Ali Khan, Asaf Jah VII (last ruler of Hyderabad, 1886-1967) $236 billion
    7. William the Conqueror (King of England, 1028-1087) $229.5 billion
    8. Muammar Gaddafi (former Libyan leader, 1942-2011) $200 billion
    9. Henry Ford (Ford Motor Company founder, 1863-1947) $199 billion
    10. Cornelius Vanderbilt (industrialist, 1794-1877) $185 billion
    11. Alan Rufus (Fighting companion of William the Conqueror, 1040-1093) $178.65 billion
    12. Bill Gates (Founder of Microsoft, 1955- ) $136 billion
    13. William de Warenne, 1st Earl of Surrey (Norman nobleman, ??-1088) $146.13 billion
    14. John Jacob Astor (businessman, 1864-1912) $121 billion
    15. Richard Fitzalan, 10th Earl of Arundel (English nobleman, 1306-1376) £118.6 billion
    16. John of Gaunt (son of Edward III, 1330-1399) £110 billion
    17. Stephen Girard (shipping and banking mogul, 1750-1831) $105 billion
    18. Alexander Turney Stewart (entrepreneur, 1803-1876) $90 billion
    19. Henry, 1st Duke of Lancaster (English noble, 1310-1361) $85.1 billion
    20. Friedrich Weyerhaeuser (timber mogul, 1834-1914) $80 billion
    21. Jay Gould (railroad tycoon, 1836-1892) $71 billion
    22. Carlos Slim (business magnate, 1940- ) $68 billion
    23. Stephen Van Rensselaer (land owner, 1764- 1839) $68 billion
    24. Marshall Field (Marshall Field & Company founder, 1834-1906) $66 billion
    25. Sam Walton (Walmart founder, 1918-1992) $65billion
    26. Warren Buffett (investor, 1930- ) $64billion

    • If the government coerced the banks to make loans to people wanting to start their own business, what penalty would the borrower face if they have nothing to offer as security?

      None, but you would have to at least produce a serious business plan to be eligible. I am not suggesting doing this to all banks, just bailed-out ones sitting on high ratios of cash. They could freely pick the best unemployed applicants until their cash ratio falls to a pre-determined level (say, Basel III capital requirement).

      The state also needs to cut back the regulations that prevent new businesses from operating. Retailing in the city centres would be rejuvenated if properties were not owned by the few…charging us rents not because they take risks and serve the community, but because they grew rich on the back of government handouts and bought up land and properties…so now they do not have to work or take any risks…they just get fed through the labour of others…by charging rents.

      Agreed.

  2. John,

    In Australia the government offers the New Enterprise Incentive Scheme. Designed to get welfare recipients into businesses by funding them with regular fortnightly payments, So they don’t have to look for work but focus on building the business.

    http://www.deewr.gov.au/employment/jsa/employmentservices/pages/neis.aspx

    But I think this could be improved with ideas you suggest, as the average small business interest rate is well over 10%, and most banks require real estate collateral before they lend.

    • Yeah, there’s no reason that new small businesses should face punitively high rates, especially if bailed-out banks are sitting on piles of cash that they will lend to the government for 2% but to a small businessman for 10%+.

      Of course, Australia doesn’t have this problem….. yet.

  3. This is hilarious if you are in the EU, UK or USA but very concerning if you are Chinese

    http://investmentwatchblog.com/the-funniest-peter-schiff-clip-of-all-time-of-course-were-not-going-to-pay-back-the-chinese/#ciJw39dLUT7OebUE.99

    That is why I believe the USD and Treasury market for Bonds will collapse. It has go to the point it is a joke. The USA is a minority borrower and China is a predatory lender. The USA needs a loan modification program!

  4. “An alternative policy that would reduce unemployment and raise GDP without increasing the size of government is to use the government’s ability to borrow at record-low rates to force bailed-out banks offer loans to the jobless to start their own private businesses.”

    John, John, John. The only way business start-ups work is if you have your own capital [collateralized debt] on the line. The process of subsidization at any and every level adds in inefficiencies that are impossible to calculate, but are quite visible when you witness the tremendous failure rates of such activity.

    The only solution to a debt crisis is bankruptcy/forgiveness/write-offs/jubilee, etc. Adding additional dys-function through poor quality debt creation is like giving a patient with a very high fever another cup of hot tea.

    • Yeah I pretty much agree – “The only way business start-ups work is if you have your own capital [collateralized debt] on the line.”

    • John, John, John. The only way business start-ups work is if you have your own capital [collateralized debt] on the line. The process of subsidization at any and every level adds in inefficiencies that are impossible to calculate, but are quite visible when you witness the tremendous failure rates of such activity.

      The only solution to a debt crisis is bankruptcy/forgiveness/write-offs/jubilee, etc. Adding additional dys-function through poor quality debt creation is like giving a patient with a very high fever another cup of hot tea.

      Only is a very strong word. Some will work, some will not — that’s capitalism. Possibly a higher rate will fail than in a system with organic allocation (though that is a hypothetical proposition) but we left organic allocation behind long, long ago, and I have not heard any serious proposals for a return to organic allocation in the immediate-term. On the other hand, a whole generation of young unemployed people who could be working and creating wealth are festering on the scrapheap because of a fucked-up capital allocation system that has been gradually breaking for the last forty years.

      Under ideal circumstances, I believe in pure capitalism and liquidationism, but as the powers-that-be refuse to allow for nature to do its work and continue throwing money around so TBTF megabanks can make all the same mistakes again and again, we have to try and find ways to make things work in spite of this. This particular policy can achieve many of the effects of a writedown/jubilee without calling it that.

      • This is why you let this monstrosity fail, pick up the pieces and start-over. It is the history of human civilization.

        I also feel poorly for those who are the victims of this economic dys-function [most everybody], but other than providing a safety net, extending this mess will only make it more painful in the long run.

        • That’s what I would have done in 2008, but we didn’t do that — let the broken financial system fail in a controlled way and assist free society in building a new one. We didn’t do it. Central bankers have plenty of tools to keep this broken mess going — they’ve done it in Japan for over 20 years. Central banks won’t budge — they will keep the failed and broken system liquid. This is why I am looking at alternatives that can achieve some of the effects of a reset without actually having to call it that.

  5. I think it’s funny how everyone always points to how Keynes wanted more fiscal deficits in times of depression, but never points to how he also wanted the writing down of war debts and reparations across the world after World War I. Running deficits is helpful, but you can’t solve this problem by only running massive deficits. The wrong thing to do is to try and cut the deficit(austerity); the right thing to do is to find a way to systematically cancel the debt(ideally by converting debt to equity).

    The first thing that needs to be done is that these large banks must be dealt with. Either by breaking each large bank up into 10-15 banks or by nationalizing these banks and finding a way to shut them down.

  6. Does a civilised society recognise and act upon the fact that education is they key to progress? Or, does a civilised society threaten people with jail or monetary fines to finance teachers? The whole concept of public education is hopelessly outdated, in so many different ways. Cutting things like education, 100%, would be not only good for the economy but more importantly good for the society. You would actually have a function market for the learning of things. Imagine that…

    • I somewhat agree in in principle (I think that if a democracy wants public education then that is its prerogative, but others should be able to opt out, i.e. leave and go somewhere without public education) but ending public education right now during an economic depression would just mean more unemployed people competing for the same small pool of jobs, because the ability of new businesses to start and existing businesses to expand is being crushed by bailed-out banks sitting on hoards of cash and using it to trade and buy gov’t bonds, but not to finance business.

      • Also, it is important to note that historically austerity policies during depressions (think: Bruning) have tended to bring statist political parties to power.

      • A solution to the funding of small (micro) business start ups is tax advantages for investors putting forward equity to fund them. e.g. Could you imagine if a food stall vendor Home made packaged foods) at a country fair, could take his recipe mainstream, instead of selling to a small group of foodies in their geographic area?

        Current McCain “Microwave dinners” would be used as pet food as they should.

        You can extend this idea to clothing, shoe, or any other artisan product. At least the world will have a variety of products, instead of the homogenised product range we are heading too.

        And don’t forget a lot of high tech products started in a garage. Can you imagine if more people cold access “Connected” money.

  7. Imagine the online Mises school for engineering, or physics, or English. You do not even need physical schools. Sure, if you want that, that’s cool, but the point is it is the 21st century…

  8. If individuals are made sovereign, free and independent either through education or through trade and commerce….the billionaire rulers of the world would lose their power…oligarchs hate to lose their control and power they like to construct worlds in which they are in control.

    • I tend to focus on the idea of self-emancipation and independence from others’ fragility. Freeing the whole world is a greater task than any person can accomplish.

      • Self emancipation is tough task not everyone is up to it. Some people need a regular nominal payment to survive. They can’t work regular hours in a tough globally competitive business etc. These people were the street sweepers, ticket sellers and other menial task jobs that have been lost to technology. Instead of having regular meaningful work, they are structurally unemployed with little employment options. “Training” programs are a waste of resources. What they need is on the job training in a role that is not too onerous for their natural abilities.

        This is why I propose the system of a regular payment to all people via a Debit Card system (to make as efficient as possible, without bureaucratic and associated overhead costs)) which is “juiced” up to enable the money to filter from the bottom up. “Trickle up economics” so to speak. Business will invest to capture the money trickling up.

        • “Self emancipation is tough task not everyone is up to it.”

          BR, the moment your mother expels you into this cruel world, self-emancipation becomes ones ONLY goal. Whether you are “up to it” or not, is immaterial.

          It is exactly this argument, though, that allows all institutions to conceive their plots, enslaving vast populations in all kinds of assorted cloaks, be they religious, political, enlightenment [knowledge], or anything else people can conjure-up as sustenance for rationale to foster the omni-present process of separating people from their labor-value earned.

  9. Bearing in mind that you want a small state and a vibrant private sector..could we start with stripping out every oligopoly…banks, energy at both ends, food retailing, farming, cars, construction, pharmaceuticals…wait a minute is there any part of our economy worth mentioning that isn’t oligopolistic? You dislike transfer payments to those who are poor but these are the results of the failure of capitalism. The barriers to entry in many industries are often impossible and any new ‘industry’ very quickly consolidates within a very short time.
    You don’t even mention the complete waste of money that is our ‘beloved’ British army. No, you don’t believe in capitalism or a small state because you can’t…big business and big govt. are locked in an embrace that virtually guarantees a class of people who fall through society to a safety net that transfers money straight back to the oligopolists.
    Your idea of self-emancipation and independence from others’ fragility is totally meaningless or utterly heartless. I hope your parents are proud of how you’ve turned out.
    Judging by the comments left here you’re building quite a cult…but just all of you keep cheering on the neo-liberals in their project to ‘nudge’ the less well-off to pull themselves up by the boot-straps and watch the results…I can guarantee you won’t like them one bit.
    Happy hunting y’all…

    • “You dislike transfer payments to those who are poor but these are the results of the failure of capitalism.”

      Capitalism is an ideal, not something that can actually be put into practice. People who attach their wagon to all these -isms rationalize them by suggesting that, “if you have this, then you must have that.” Well, you didn’t have “this” in the first place.

      The organization of human society has always been the same, the Elite and the rest. How can it be any other way? All these different philosophies are created to sugar-coat that harsh reality.

      This is where, as I believe John intimates, that you must personalize existence in order to transcend the same, re-emerging in the world to help where you can.

    • see my comment above to Aziz. Agree with your posts, but John is definitely for the disadvantaged in society. Read his posts from the start and you will see John is for the little guy.

  10. Dear aziz
    my first posts so please bear with any typos, and i`ll try and keep it shortish
    I`ve been following you blog with interest for a while. Usually i`ve not got enough time to post, but I`ve a few spare minutes today . Mostly I agree with your comments and observations. On this topic I`d like to point out that it’s just not about banks’ lending to business but how they lend and in particular the costs of the borrowing. I`ve been a small business for 30 years now so have seen a lot of recessions come and go, this one is different, for all sorts of reasons. But one of them is this – the real cost of borrowing has become much higher, i.e. the difference between the rate of interest the lenders charge and the rate of inflation. For example when I took out my first overdraft the rate of interest was base plus 4% today its base plus 8%. The interest rate on credit cards is higher today than it was before the 2008 banking crash but again the base rate is lower. Sadly my conclusion is that the banks have used the resection to profiteer.
    The bigger issue is if existing business have to pay greater real interest on financing then less capital is left to invest in the business, further weakening any recovery. Perhaps one thing that could be done is to force banks to lower the interest rates they charge business`s, especially from the state owned/bailed out banks (when I was younger they would have been called nationalised)
    Thanks for reading

    • Robbie64, you might want to read Michael Hudson, who I believe explains the financialization process better than most. He worked at most of the primary money-center banks in N.Y.C. in the 60’s and 70’s calculating the amount of wealth created [over and above subsistence] for Central American countries, allowing these banks [through the IMF] to extract this wealth as interest. He is now a well-respected professor of economics in St. Louis, Missouri.

      http://www.michaelhudson.com

    • I agree with nationalised banks. In Australia we have 4 major banks which can not merge. They have antiquated IT and bloated admin with 4 CEO CFP CIO etc etc.

      Nationalise the 4, replace with new computers that can profile risk and then offer micro financing. The average interest rate for small busines is 12-14 even 20%( Credit Card and overdraft) with inflation (If you believe the government at 3% that up to 17% real cost of funds.

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