This just in from Johann Hari

When was the last time Britain\’s public spending was slashed by more than 20 per cent? Not in my mother\’s lifetime. Not even in my grandmother\’s lifetime. No, it was in 1918, when a Conservative-Liberal coalition said the best response to a global economic crisis was to rapidly pay off this country\’s debts.

Well, as we all know, public spending isn\’t going to be slashed by 20%. Nominal spending will rise, real spending shrink a little bit but not much. Certain departments have 20% cuts, to be sure, and others are getting real increases.

But much more fun is that reference to 1918. For yes, there were indeed large cuts to government expenditure starting in that year. You can see them here.

The total budget in 1918 was some £2,893 million. Of which fully £2,404 million was defence. By 1921, the budget was £1.671 million, of which £297 million was defence.

This in an economy of between £5,000 million and £6,000 million in the money of the time. Do note that the cut in the defence budget was larger than the cut in the total budget….meaning that spending on non-defence matters actually rose in this period.

I do wonder slightly at what anyone expected the government of the time to do really. After all, 1918 was the year that we stopped fighting a world war, wasn\’t it? You\’d think that that really would be an appropriate time to stop spending near 50% of the country\’s entire output on the military really.

Unemployment soared from 6 per cent to 19 per cent, and the country\’s economy collapsed so severely that they lost all ability to pay their bills and the debt actually rose from 114 per cent to 180 per cent.

Demobilisation of the near entire male population of fighting age could indeed have the effect of raising unemployment: and one of the dodgy things about GDP statistics is that we do indeed count manufacturing things to then blow them up as an increase in GDP. Something which perhaps we shouldn\’t, making comparison of war time economies with peace time ones something of a confusion.

When an economy falters, ordinary people – perfectly sensibly – cut back their spending and try to pay down their debts. This causes a further fall in demand, and makes the economy worse. If the government cuts back at the same time, then there is no demand at all, and the economy goes into freefall.

Gosh, that\’s an interesting theory. No demand at all? So, err, what the fuck is that £1.4 trillion of economic activity, that £1.4 trillion of demand, going on out there then?

That\’s why virtually every country in the world reacted to the Great Crash of 2008 – caused entirely by deregulated bankers –

An even more interesting theory. Entirely and purely deregulated bankers? Might be worth having a word with Dean Baker there Johann. For as he never tires of pointing out, there was a property bubble. $7 trillion in wealth disappearing from the American economy, around half of GDP (yes, be careful, wealth is a stock, GDP a flow) is going to cause a recession whatever happens to the banking system.

by increasing spending, funded by temporary debt.

Now we\’re getting into really interesting territory: it\’s worth pondering whether there is in fact debt which isn\’t temporary. Hmm, OK, Consols, so OK, there is such a thing as permanent debt.

Better a deficit we repay in the good times than an endless depression.

Yes, he\’s done it! Confused deficit with debt. We repay the debt created by the deficit in the good times: the deficit itself should have disappeared which is our definition of the good times.

Except when we\’ve got that monocular Scot spending the money of course, he carried on running a deficit at the peak of the longest running good times we\’ve had in over a century. An act which has made the current problems vastly greater: repaying then some of our by then accumulated debt would have left more room for maouvre now.

For the private sector to get all these people into work, as Osborne claims, there would have to be the most rapid business growth in my lifetime. Does anyone think that will happen?

I\’m not entirely convinced that we should be reading the economic tealeaves based upon the personal life experiences of a 31 year old really. Economic history might be a better guide: like, say, the explosive growth in the US economy as they demobilised in 1945/6.

This is absolutely fascinating:

The irrationality of this approach is perhaps plainest when you look at housing. We badly need more affordable housing in Britain. Some 4.5 million people are stuck on waiting lists, and the average age of a homebuyer is now 37. It\’s a cause of constant stress to the real middle class and despair for the poor. By a happy coincidence, house-building is one of the best stimulators of the economy: it employs a lot of people on average wages, who then spend their money quickly in a \”multiplier\” effect.

Yet Osborne has chosen the opposite. There will be on average one new home built per week in the whole of London and the south-east. That\’s one.

I fear that our Johann has fallen over his own rhetoric. Yes, it\’s true, we do indeed desire more affordable housing. And it\’s also true that \”affordable housing\” has become, in certain circles, a synonym for \”council or social landlord housing\”. But when using that synonym you do need to recall that there is also something called \”the private sector\”. And, yes, they too build houses.

It simply isn\’t true that the number of houses built in London and the SE is going to fall from 602 a week (the average in the second quarter of this year) to one. It simply ain\’t.

We\’re not in this together. Who isn\’t in it with us? Them, their friends, and their families. They were asked to pay nothing more in this CSR.

Perhaps someone could explain acronyms to Johann? a CSR is a \”comprehensive spending review\”. Spending, see that word? It\’s a review of where the money goes, not where the money is coming from. Where the money comes from is usually known as the \”budget\”.

To pluck a random example, one of the richest corporations in Britain, Vodafone, had an outstanding tax bill of £6bn – but Osborne simply cancelled it this year. If he had made them pay, he could have prevented nearly all the cuts to all the welfare recipients in Britain.

Err, no, they didn\’t. He didn\’t either. They settled the case for £1.25 billion: a case which had already lasted a decade.

There is one stark symbol of how unjust the response to this economic disaster caused by bankers is. They have just paid themselves £7bn in bonuses – much of it our money – to reward themselves for failure.

You what? In what manner are the gross profits of banks \”our money\”?

Did Ladybird ever publish a book on economics that we can send to Johann? Or statistics, logic or the overuse of rhetoric?

9 comments on “This just in from Johann Hari

  1. “Vodafone, had an outstanding tax bill of £6bn – but Osborne simply cancelled it”

    Is that legal or even possible?

  2. Very good fisk of his article.
    Although of course compared to his article about female israeli soldiers being killed (when they weren’t) – it was not a bad article by his very poor standards!

  3. Hari said: “house-building is one of the best stimulators of the economy: it employs a lot of people on average wages, who then spend their money quickly in a “multiplier” effect.”

    Where does he think this money is coming from? In order to fund this house building, there needs to be extra money coming in from taxation.

    Which means the people who are taxes have less to spend on goods and services, meaning the business that would have received their money have less in revenue, meaning that they have less to invest, and so on, creating a negative multiplier effect.

    This negative multiplier effect could be one of the reasons why £1 of government spending delivers a £1.10 decline in GDP.

  4. Is there something wrong with mainstream economic commentators and Civil Servants?

    They all seem to view paying off debt (and saving money) as throwing money into a black hole. It isn’t idle. Paying off debts puts money in the hands of bankers (booo, hisss) to spend or lend back into the economy.

    How has *everything* become Government ‘stuff’ and viewed from the Government perspective? Government spending. Government housing. Government employment. Do they not appreciate where Government gets the money from in the first place?

    On the specific issue of housing I have no truck with council houses. There isn’t a shortage of housing but there is a shortage of subsidised housing. Quite naturally too given the amounts of money being thrown at housing benefit and shared ownership schemes, same as if you pay people who are unemployed and pay them more and more you end up paying people to *be* unemployed.

    What matters is who is picking up the cost of the housing and in too many cases it is the taxpayer not the tenant. Loads more council houses would be great if built to good standards (rather than rabbit hutches made of cardboard) *so long as people in them are paying the rent and council tax themselves*, then they aren’t a burden on other taxpayers.

    Tim said: “Gosh, that’s an interesting theory. No demand at all? So, err, what the fuck is that £1.4 trillion of economic activity, that £1.4 trillion of demand, going on out there then?”

    Has economics become too focused on growth that many professionals and amateurs alike are myopic to the bigger picture? As you say that’s a pretty pile of demand. We see it in the discussion of the ‘cuts’ too – a reduction in expected growth somehow becomes a cut yet the spending is still going up and is still an enormous amount.(As Jeff Randall points out it has grown out of all proportion) They are concentrating on the rate of change too much.

    Again and again we see threats of deflation talked up. Recession is another trigger word for cold sweats. I guess when it all becomes unavoidable they will stop talking about deflation and recession and instead talk *up* the ‘correction’. Their only consistency is their inconsistency.

  5. I can’t think of a better description for this overpaid, overpublished, underedited cretin than the pejorative “teenage scribbler” phrase © Nigel Lawson, that he used about City analysts.

  6. Maybe he forgot his history and that a world war finished in 1918. May he just looked at the figures and made up some assumptions without actually researching the reasons. Either that or he’s being very disengenious and twisting facts to suit his own nefarious purposes.

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