Monday, March 18, 2013

Growth in the UK?

I thought European "austerity," meaning mostly large increases in marginal tax rates on anyone daring  to work, save, invest, start a company or hire people, while spending stays north of 50% of GDP, was a pretty bad idea.

So I was glad to read the tiltle, when a friend sent me a link to the Telegraph, announcing Osborne to unleash raft of policies to kick-start growth. Great, I thought, after trying everything else, the British will finally try the one thing that will work.

The byline was only a bit disappointing
The Government is to reveal a series of major new measures to boost national and regional growth ahead of the Budget to show its “pro-business” strategy is working
Pro-business is usually a code word for protection and subsidy. But there are plenty of worse code words.

And then it all falls apart
The measures will include:

• Billions of pounds of central government funding directed at boosting regional growth and a backing for Michael Heseltine’s plans for new local spending powers;

• The planning go-ahead for the Hinkley Point C nuclear power station;

• Support for housebuilders and for first-time buyers trying to get mortgages;

• A push on major infrastructure projects, including the Merseyside Gateway and the “super-sewer” in London, and more government guarantees for such projects;

... The Bank of England could also be given a broader mandate to support growth.

...billions of pounds of central government funds should be made directly available to the regions and cities such as Birmingham...

Lord Heseltine’s report made far-reaching recommendations for stimulating economic growth. The Government will unveil plans enabling Local Enterprise Partnerships and businesses to bid regionally for money that is now allocated centrally.
It's not all bad. Allowing a nuclear power plant to operate is nice, and some plans to lower corporate taxes a bit. But the blossoming of free enterprise in the land of Adam Smith, alas, this is not. Keynes still rules.  


  1. It would be interesting to hear your thoughts on this:

    1. It seems to me that Stiglitz is describing a Singapore far less redistributionist than the US. He touts "four distinctive aspects of the Singaporean model": 1. compulsory saving through a provident fund; 2. progressive taxation; 3. government intervention on labor negotiations; and 4. investment in education.

      Consider the provident fund vs social security and medicare. Ours redistributes and theirs doesn't.

      Singapore's top marginal tax rate is 20%. Ours is nearly double that.

      He said the Singaporean government weighed in "gently" on the bargaining between workers and firms, so the effects were probably only modestly bad. Our government weighs in gently with a minimum wage, too, and then the unions are not so gentle. A quick google search for unions in Singapore turned up this article suggesting that unions are very weak in that country:

      And finally, regarding investment in education, check this out:

      According to that, our investment per pupil as a share of GDP per capita is almost double Singapore's.

      Is Stiglitz suggesting we slash education expenditure in half, slash top marginal tax rates in half, pass legislation that foils unions, and replace our entitlement programs with something like the provident fund?

    2. "Compulsory Saving" is very similar to a tax, although more efficient. But nevertheless, the workers do not have a choice about what to do with at least 30% of their money. Plus VAT of 8%.
      To ensure that all Singaporeans have access to medical care, Medifund helps the poor and needy to cover their medical bills.

      So yes, I think Stiglitz is saying that if you provide subsidized housing, healthcare and retirement for the poor and do that via what essentially amounts to a 35% savings tax + 8% vat, then marginal rates can be at 20%.

  2. "I thought European "austerity," meaning mostly large increases in marginal tax rates on anyone daring to work, save, invest, start a company or hire people, while spending stays north of 50% of GDP, was a pretty bad idea. "

    This is one of best descriptions of what is actually happening I read so far.

  3. Pro-business measures will only work if there is sufficient demand. If I own a business and get extra money from the Government, say through lower taxes, it will not be enough to expand and hire new employees. I have to reasonably expect that there will be enough demand to warrant additional investment. Otherwise, I will simply pocket the money. What will work is a stimulus targeted at the customers, not the businesses (cash grants, debt forgiveness,....). They will start spending and businesses, responding to demand increase, will expand. Government spending through investment should work too. Lowering corporate taxes will not work. There is no guarantee that the corporations will reinvest or spend the money. On the other side, the Government will spend it for sure.

    1. And yet, governments have been trying your prescription for a long time now and it has not worked at all.

    2. It has worked very well. Example: Germany. High taxes, big government, very regulated society. Result: the strongest economy in Europe, low unemployment (5.3%), excellent social programs (generous unemployment benefits), universal health care, low crime, low incarceration rate, low infant mortality... I could go on and on. Same for the Scandinavian countries, Australia, New Zealand. Name a country with small government, low taxes, and low regulation which can outperform one of the countries above. Want a country with small government, low taxes, little regulation? Here is an example: Pakistan. Want to move there?
      The ideas you believe in sound attractive, but that's about it. They do not work!

    3. Pakistan has neither low taxes, nor little regulation. It also has massive corruption, little rule of law, and a hundred other preconditions for growth.

    4. Yes, it does. I heard an interview with an American living in Pakistan on NPR. That's where I got it from. He said something like this (paraphrasing): "Want small government, almost no taxes, little regulation? Come to Pakistan." But you correctly pointed out corruption. Because of corruption, you do not have to worry about regulations. They will not be enforced even if exist. Same goes for taxes. In 2010 only 0.9 million out of a country of 170 million filed tax returns at all in Pakistan (Wikipedia). Countries with small governments often have "massive corruption, [and] little rule of law". Again, name a country with small government, low taxes, and little regulation with better economic/social indicators (health, poverty, crime, unemployment,...) than Germany, Norway, Australia, New Zealand.

    5. I guess it's just one small leap, but Pakistan? Please. For equal relevance, what about the moon?

  4. The items selected will make reports numbers look nice...
    and that's how they see the world, through reports and tally's...
    so, as in what my grandparents called the old country, their choices come from that 'reality'.

  5. Hi John,

    I was wondering about your comment "Keynes still rules". The UK government frequently attacks Keynesian ideas, which is a large part of the battle it is having with Labour. Are you suggesting that the Cameron government is secretly Keynesian? Maybe it's talking tough whilst not actually doing large cuts in government spending or taxes? I suppose this is what it might look like if you look at the infrastructure and credit support items you quote above. Is it the case that the government has not done that much real austerity so far? It certainly is projecting to cut the deficit in the very near future, which doesn't seem very Keynesian to me.

    This is my first comment, so also wanted to say that I enjoy your blog very much. Cheers, Tim.

    1. Thanks for the nice words.
      They can attack Keynesian ideas, but if they think they're going to spark growth by lots of government spending rather than just getting out of the way, they're acting Keynesian.

  6. Dear professor Cochrane, you should probably read before you write. The levels of taxation you talk about were true in Europe in the 1970s, when you were young. Fortunately, none of the two above positive (i.e. against normative) facts are true anymore.

    1. ?? Does or does not most of Europe have top income tax rates in the 40-50% range (75% in france), payroll taxes in the 30% range, and VAT in the 20% range? Just to start?

  7. Marginal rates have indeed gone down in some but not all European nations, but their rates are still pretty high, plus they have the VAT which, by itself, is a huge anchor on economic activity.

  8. Dear John

    Was glad you flagged up the uselessness of UK growth policies.

    The free-market movement here has come to realise that the so-called ‘deficit reduction plan’ just assumed sustainable growth would return – and in the face of it not returning, the government has no idea or intention to undertake the reforms we need or to cut spending sufficiently to raise medium-term growth, as we said in our reaction here:

    It’s so important not to let the UK be shown as somewhere where ‘austerity’ has failed – overall spending is up (only infrastructure spend has been cut so far) and taxes have been hiked considerably.


    1. Great link! Thanks for passing it on. Yes "austerity," what a malleable word. In Britain it once meant postwar socialism. Now it means high taxes.

      More from Ryan's link:

      "Our critique of the Coalition’s deficit plan remains the same: it is reliant on a return to fairly strong sustainable growth in future, but so far the OBR’s forecasts on our medium-term prospects have proven hopelessly optimistic again and again. [Does this sound like the US or what?] Whilst there were some welcome supply-side and tax changes today, [This does not sound like the US] and an understandable focus on living costs, these were largely dealing with the symptoms of stagnation rather than the root causes.

      What we need is an agenda to raise our potential growth rate – reducing the burden of spending and tax, and implementing robust supply-side and pro-competition reforms”.

  9. Did Keynes favor high marginal tax rates? Maybe you should call their policies "sub-Keynesian" or "dumber than Keynesianism".

  10. This is simply factually wrong. The Tories are anything but Keynesian, tax rates have dropped significantly in the entire Western world since the 70s, the UK is engaged in austerity and the results there as well as in Europe show that, as theory predicts, procyclical fiscal policy during a recession is indeed contractionary.


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