Nope, it isn’t

So, George Osborne has confirmed his belief in expansionary fiscal contraction. This is the absurd assumption that if the state shrinks the private sector will automatically grow by more to
make up the difference.

That just isn’t what expansionary fiscal contraction is. that is, instead, the German View. EFC is instead that it is possible to have expansion at the same time as fiscal contraction through the use of large monetary stimulus via devaluation of the exchange rate.

You’ve got to get the diagnosis right in the first place for if you don’t you’ll be a Murphaloon, won’t you?

Osborne is also wrong to assume a government can cut its way to budget balance. As has been proven time and again across Europe over the last few years, this is not true. The assumption presumes that the economy works like a household or company. For either of them if costs are cut (for example, by cutting employment) then, in effect, someone else (the sacked employee or the government) picks up the bill and the company does not. But at the level of the national economy any cutting in government spending is identical to a reduction in someone else’s income unless the economy is at full capacity and close to inflation, neither of which is true in the UK right now. In the situation we are actually in then such cuts in spending simply reduce the size of the economy. Cuts shrink our growth, our incomes and so our tax revenues and as a consequence the chance that any if George Osborne’s objectives will actually be achieved. Cutting right now is the exact opposite of what this country needs.

Go look at the UK in 1931/2 and 1945-8.

Cuts in government spending, economic growth.

31 thoughts on “Nope, it isn’t”

  1. Murphy is claiming that growth cannot happen without government expenditure. And if cuts cannot reduce a budget deficit, then why the hell didn’t Brown’s profligacy produce a budget surplus?

  2. But at the level of the national economy any cutting in government spending is identical to a reduction in someone else’s income unless the economy is at full capacity and close to inflation,

    And if we cut the overseas aid budget?

    I suppose an city block-full of overpaid administrators would lose their jobs.

  3. “For Murphy, simplicity means a system that applies the principle of the law rather than getting bogged down in the letter of the law. It means not getting lost in bureaucracy due to mutual mistrust.”

    http://thebogotapost.com/2015/11/24/taxing-times/

    At least John McDonnell only red from Mao’s Little Red Book. It could have been worse, it could have been The Tax of Joy!

  4. A visit to Murphy’s blog these days sees it for the self-indulgent circle jerk Murphy no doubt always wanted. I’ve given up posting there as I am sure have others.

    Preening pompous prat.

  5. Rob Beat me to it – he doesn’t have a sense of irony – his post on 21,000 reads is, if anything, arguably even more hilarious than his attempted adaptation of the Martin Niemoller poem – and to think he turned down a job from John Mcdonnell on the grounds he wasn’t being paid enough – what a deeply sad individual…..

  6. He’s gone full on when it comes to apocalyptic predictions on the state of the UK and it’s economy at the moment. I wonder what he’ll say when his predictions don’t come to pass – much as they didn’t five years ago….

  7. “In the situation we are actually in then such cuts in spending simply reduce the size of the economy. Cuts shrink our growth, our incomes ”

    Are there any actual cuts in total spending planned between now and 2020, in cash terms? Any in real terms? Or are we talking about the Left’s usual meta-cuts – the ones where the State spends more and more each year, but less than the Left would want to spend, hence ‘cuts’?

  8. there is also an idea that if firms and households are sufficiently worried about a public finance crisis then averting that crisis may have a positive impact which offsets the negative impact of cuts.

    Jim, in the presence of population growth, per capita cuts are real cuts even not absolute. Same goes for health spending in the presence of an ageing society.

  9. Tyler
    Events and data that do not confirm the Murphatollah’s predictions do not penetrate the carapace of his ego. In this respect, he is very similar to those eco-doomsters who assert that environmental catastrophe is just around the corner. Doomsterism is a strange phenomenon. It’s almost a post-millennial cult. Its various proponents seem to rejoice in the prospect of the apocalypse – when this corrupt and sinful world will be destroyed by an angry Gaia or Spirit of Socialism.

  10. Bloke in North Dorset

    ” Daniel Lanyi ‏@TradingTyler 3h3 hours ago

    @RichardJMurphy @CityAM @davidmcw 0.2 professor at City doesn’t make you an economist Richard. Formal training does.”

    That caused me to splutter lunch all overt my iPad. Worth the effort of cleaning it up though.

  11. Andrew C

    I don’t think Murphy ever wanted merely a circle jerk, though he enjoys it. Such is his absurd vanity and egotism that he believes he should be at the centre of economic debate. I think he is rather crestfallen that Jezzbollah didn’t shower him with honour, acclaim and position.

  12. “in the presence of population growth, per capita cuts are real cuts even not absolute. Same goes for health spending in the presence of an ageing society.”

    So you’re saying that if your population is growing, and State spending stays constant (ie declining in per capita terms) then your economy can’t grow?

    I’m no more of an economist that RM (I do at least have an A level in it) but that seems to be bollocks to me.

  13. “In the situation we are actually in then such cuts in spending simply reduce the size of the economy. Cuts shrink our growth, our incomes ”
    So therefore we need to spend more and more to get richer and richer?

  14. So you’re saying that if your population is growing, and State spending stays constant (ie declining in per capita terms) then your economy can’t grow?

    er no, I just meant that it can make sense to talk of cuts even if spending is growing in absolute terms.

    what the impact of those cuts is on the economy depends on a whole bunch of other stuff, although your baseline expectation should probably be that cuts reduce GDP and raise unemployment (relative to the counter factual, not necessarily in absolute terms)

    see

    https://www.imf.org/external/pubs/ft/weo/2010/02/pdf/c3.pdf

  15. There’s a glimmer of hope in him yet. His latest post is about how awkward, expensive, and time-consuming it is to submit tax returns four times a year rather than just once. He effectively says that this is an unreasonable burden imposed by an over-ambitious government on the already downtrodden worker bee. What’s more, it’s an opinion formed based on his actual experience as an accountant.

    That’s a far cry from his usual message of “we should crush the neoliberal tax-dodgers 365 times a year and the courageous state should nationalise everything”.

  16. @Andrew M “What’s more, it’s an opinion formed based on [Murphy’s] actual experience as an accountant.”

    Murphy’s last real worldl tax planning experience was suggesting to his clients that they brick up their windows.

  17. n.b from IFS briefing today “Cumulative cuts in real term recurrent spending for some departments since 2010 will be in the region of 70 per cent (DfT; local government grants) and 40+ per cent (BIS, Justice; Defra).”

  18. Luis E,
    I very much agree that using absolute rather than relative figures is a sin, and it happens all the time.

    However, there are other assumptions that need to be challenged.

    – An ageing population and new treatments will add cost.
    – But what of other changes? Washing machines have to do more than they did 20 years ago, and they have to be much cheaper. These things are not exclusive.
    – Measuring output by money spent is always wrong, and creates a massive conflict of interest.

    Were it desired by NHS staff, 5% could be knocked off the budget without anyone noticing (though a by-product of that would be better service).

  19. This is the absurd assumption that if the state shrinks the private sector will automatically grow by more to
    make up the difference.

    I’m going to have to agree here, because if the difference is either non-jobs, low productivity, or basic government incompetence and inefficiency, there is no difference to make up.

    Where the private sector will grow is from more people and resources freed up to do something more production, it just wont be on the stuff that the public sector was doing.

  20. Rob

    sorry that was cut and pasted from notes taken by colleague who attended briefing.

    I think it just means recurrent spending in real terms (inflation adjusted) and I think recurrent means stripping out capital investment

  21. ” Daniel Lanyi ‏@TradingTyler 3h3 hours ago

    @RichardJMurphy @CityAM @davidmcw 0.2 professor at City doesn’t make you an economist Richard. Formal training does.”

    Funny thing is he’s listed as a professor of practice and he usually skips the last bit unless giving the full title and doesn’t explain what it means.
    The only definitions I found were that these are typically professionals and not academics who are employed to teach and don’t usually take part in or aren’t expected to take part in research.
    So it seems the professor title is a courtesy rather than anything else.

  22. @BniC “So it seems the professor title is a courtesy rather than anything else”

    To some extent the title ‘Professor’ always has been a courtesy. It used to be that the head of university departments were awarded the title or occasionally it was awarded by a university for distinguished lifetime achievement.

    To say that the likes of City university handing out the title to all and sundry and worse has devalued it is an understatement.

    Only a pompous twat could take any pride in such a title. Most sane people would be embarrassed by it in such circumstances and turn it down or not use it.

    Murphy is a part-time lecturer of undergraduates. He teaches one module for fuck’s sake.

    I don’t know how many hours that is or even if he has started. Anyone?

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