Are we running a deficit in politicians

Not a lot has been made of the quick turnabout in policy. Philip Hammond presented a budget with lots of facts and figures and within a week, the key economic policy – being sensible – is out of the window and the budget has a £2bn hole in it.

This is not the first time this has happened with a “fiscally responsible” conservative government. George Osborne – the man who can hold down any number of full-time jobs – has had to reverse key policies within days – he was the man who decided a £4.4bn cut in benefits was not acceptable (in 2016). And he presided over the “omnishambles” budget of 2012 when various VAT changes (including the pasty tax) were later scrapped.

The problem is not limited to conservative politicians, with Gordon Brown announcing in 2007 he was “cutting” the 10p tax rate – which meant a hike in taxes, which he had to balance by national insurance changes of his own.

But the real problem seems to be the deficit in reality. When chancellors talk about “reducing the debt” what they seem to mean is “not borrowing quite as much as last year.” When ordinary people and businesses talk about “reducing debt” they mean paying some of it back.

When recent conservative chancellors talk about being fiscally responsible, they seem to ignore the numbers and try to claim that labour chancellors borrowed irresponsibly when borrowing under 40% of GDP (2005 to 2009 on average) when in recent years borrowing is only now coming back down to that level of GDP.

The idea of actually paying some of the debt back is still a dream. The “red book” which has all the forecasts in it still shows the government borrowing more money every year to 2021-22.

The problem with mortgages

A recent article in the Times “New funding rules force builders to apply brakes” (I read the print edition from Saturday 14 February) highlights one of the problems of commercial debt

In my white paper I explain that having debt in an economy creates problems. It allows the economy to overheat when things are going well (debt financed growth) and then makes the recession worse when things are going badly (debt repayments mean that the total fall in GDP is bigger than any underlying reduction in real production).

So the mortgage market in the UK has pushed house prices up, because we think nothing of borrowing large amounts of money over long terms to buy houses. The debt means that more houses can be “afforded” and therefore increases the number of houses bought. This in turn means that more houses are built and the house builders are very happy. Economists are happy because house building contributes to GDP and everything looks great.

And then along comes financial regulation – last year (2014), the Financial Conduct Authority carried out a review of the mortgage market and came up with some new guidelines, which have meant that mortgage lenders are looking at mortgage applications more carefully and as a result reducing the amounts they are willing to lend. And this is what the Times article was complaining about – house builders are reducing the number of houses they build because these rule changes mean fewer houses are being bought.

This supports my view that the mortgage market – commercial lending – has affected the housing market and pushed prices up.

If my suggestion of outlawing commercial lending is followed through, then the housing market will not have the support of mortgage lending and house prices will fall (relative to earnings). This would be a good thing in that house prices would no longer be buoyed up when the economy is strong and sink when the economy falls, but will remain more stable.

Sadly there is another side to all this – which is the effect of withdrawing commercial lending on the economy as a whole. As the Times article indicates, house builders are building fewer houses because buyers are finding it more difficult to get mortgages. And the same is likely to be true of many other areas of the economy – by restricting lending, economic activity will be lower (as measured by the GDP measure economists use).

Are the benefits of a more stable economy and freedom from some of the other adverse effects of debt worth paying the price of lower levels of GDP? I would say yes.

A new way of looking at economics?

I have been thinking recently.  It is a difficult and sometimes painful process I would prefer to avoid.

I have been thinking about how we measure economies and whether GDP is helpful or not.  One issue with GDP is that everything is measured in terms of finance and that does not always give reliable results.  For example I know I am well off because my house is warmer than the house I grew up in – because of improvements in insulation and heating, not because I have more finance than my parents.

And then I heard something on the news this morning.  As a result of the Ebola crisis, they (I cannot remember who was talking) think that Sierra Leone’s economy will shrink this year, whereas its GDP had been projected to rise by 11%.

Would 11% growth in GDP have been a real measure of the countries economic strength?  We know from frequent news reports that the country does not have anything like the health care that we (in an ailing economy which cannot manage 3% GDP growth) take for granted.

So do we really want to compare GDPs or are there better measures available?  Should we care about these financial measures at all, or would it be better to measure happiness (as they do in Bhutan) or what should we measure.

Perhaps we could look at some social measures – education, employment, quality of housing stock, health care – but these might be difficult to quantify.

But if we are going to look at financial measures, we need to get away from GDP.  Economic analysis says that another way of looking at GDP is that most of it comes from  bank lending and government deficits (government borrowing).  See my previous post Steve Keen visits solvent land (2) for more detail on this.

Some may say that this is fine, but recent experience of debt shows us that some, if not a lot of, debt is an illusion – it cannot be repaid and is therefore of no value.  As a result we have written off debts of countries (under the HIPC initiatives);  we have bailed out banks who lent too much to people who could not pay.  So if neither bank borrowing nor government borrowing are secure, GDP, the main economic measure we use, is overstated.

So let’s look for something which better reflects what is important – and the size of our mortgages – personally or as a country – is not the right place to start.

Growth without debt

In my post Steve Keen in Solvent Land (2), I mentioned that I thought Steve Keen’s analysis may be incomplete in that it ignores

increasing our capital goods (such as housing)

Let me be clear that I am not criticising his analysis, since he has created a model aimed at understanding the importance of debt in our economy whereas I am looking at eliminating debt.

And because I am looking at an economy with no debt, I need to look at whether this means an economy with no growth.

What are we trying to measure?

There was a lovely article on the news recently which said that the Italians were now including sex and drugs in their GDP figures.  I am afraid the only reference I can find at present is to an article in Bloomberg of 21 May.  But the point seems to be confirmed.  And indeed the UK GDP figures may also need to include whatever we can measure of prostitution and illegal drug sales.

This has made me wonder why this is something we are so keen to measure and get so excited about (when it goes up) or depressed with (when it goes down).  And why do we compare GDP and borrowing so much as a way of seeing if the borrowings are affordable.