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30 May 2012


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Howard des Forges

Niall Ferguson was equally dismissive of Krugman on Radio 4 on Tuesday morning


That money hasn't found its way into real economy so who has it!? Seems like perhaps the banks are benefiting from quantitative easing rather than the rest of us. As for the deficit, does our make sense to spend the taxpayers money paying someone who isn't working, or use the money - or debt - to provide work for then which they get paid for and then spend their money and boost the economy. I think businesses call it investment?

Have you got a chart showing tax rates and GDP, because the low tax always presented as no-brain obviousness that you'd expect the evidence to be rock solid.

keith price

If you mean all government salaries (teachers, civil service, police and the good old doctors and nurses) should go back to their level of 10 years ago I dont think it would work. ( I assume salaries are the main item of government expenditure )

John Healy

Although I think that there is room in a 'Plan B' for some judicious growth promotion spending I understand your argumernt and logic and agree with the premise. Certainly if it is true that the Govt is spending more than 120 years ago it is valid to assume that if we managed to live without such Govt spending then then those additional expenditures(or most of them)should be top candidate for cuts.There seems to be a fair amount of respect for your often controversial and opposing economic/fiscal logic. So, where and who is joining you and lobbying in the corridors of power to change the minds of the political movers and shakers? Surely you must have quite a network of like minded thinkers? If indeed you are a voice in the wilderness, shouldn't the publicity you have had over the last months have earned you the right to bend their ears?

John Goose

What's needed if we are to cut Government spending by a third is a leader with Balls. Someone like Maggie Thatcher would do, but definitely not Ed!

Ken Charman

Spot on. I would like to offer free training to coalition ministers so that they start all media questions with the following standard response.

"Due to its sovereign debt crisis, the UK is running at the extreme limit of deficit financing. We are sustained because markets believe our rhetoric about austerity. Lenders are at the limit of their tolerance. There is no source of funds for plan B. One false move from here and we are Greece North.


I would be interested in Terry's view of Krugman v Moult on Newsnight. Pity there was not enough time for Moulton to land a body blow.


Jon Moulton and Andrea Leadsom more than held their own against Krugman on BBC Newsnight. The more I see of Ms Leadsom the more I wish she was a Treasury minister. As for Mr Moulton, I wish he would spend more time on his day job as boss of Better Capital, and less time pontificating about how to run the UK economy.


Cut backs on local and national Government spending are long overdue, the question is where does one start?

How about cutting the number of MPs by say 300? Given that we are controlled by unelected bureaucrats in Brussels why do we need so many of them? The savings on their salaries, gold plated pensions, lavish expenses, which do not even require receipts would be a welcome beginning.
We could then follow up or even simultaneously, prepare for withdrawal from the EU thus making MEPs redundant at even greater savings, not to mention what we would save from constantly having to contribute to a corrupt organisation and the prolific, wasteful, and totally unnecessary spending, of our money that they appear to relish in.

We could then begin a cull of the vast, increasing, and unnecessary, number of civil servants, many of whom enjoy even larger salaries than our MPs, incredible perks, exceptionally generous expenses and index linked pensions.

As part of the strategy to reduce public spending, every employee in our town halls earning over £50,000 a year should be offered the choice of a 5% reduction in salary, or redundancy. Whilst I'm not an accountant, I'd be willing to wager that the subsequent savings in salaries and pension contributions, would eliminate the need to cut back on welfare services for the genuinely disabled, mentally handicapped, the aged and other vulnerable members of society.

Whether or not one would regard any of the above as radical is not in dispute. Implementation of any of them would require considerable moral fibre, therein lies the real problem since we do not appear to have sufficient leaders in the coalition with that particular quality. It seems that they prefer to attack more vulnerable targets such as the elderly and the infirm. Just two examples of how they do that can be seen be the huge reduction in the winter fuel allowance at the same time as fuel prices were increased by 20%. This was followed by the sleight of hand conjuring with the 'Granny tax', the legal right of imposition of which, appears to have gone unchallenged. Of course in the interim period the gutless wonders, who claim to be statesmen, have crumbled under the opposition of big business, wealthy and influential charity donors, who might, just coincidently, donate generously to political parties and be happy to pay to have dinner with our so called leaders How else can one truly explain how our chancellor, who vehemently insisted that both the pasty and charity taxes were "fair and essential" has done huge U turns both?

Chris Eagle

Take a look at Krugman's chart in his blog today about Estonia, heralded by Mr Moulton as a recent austerity success story within the European Union. Would be interested in your thoughts.

Terry Smith


That partial recovery in Estonia may look quite good compared with what is going to happen in the Eurozone countries which have mostly tried to avoid austerity despite the amount of wailing and hand wringing about it. One point I think I should make is that I too can see the need for a stimulus but it is impossible to apply it through further deficit spending when your government is already unable to obtain funding in the bond markets at any bearable rate, or indeed at all. I would suggest that then the only viable route is austerity in the sense of reductions in government spending which are sufficient to allow the stimulus of tax cuts.

I don’t know if you saw my comment earlier today but I cited three other pieces of research which suggest that the larger the proportion of government spending, the lower economic growth will be. 1.The 2011 paper by Davide Furceri and Ricardo Sousa who studied 145 countries over 47-years and found that every one per cent of GDP rise in government spending reduces private consumption and private investment by 1.9 per cent; 2. The 2008 study by Asa Johansson and colleagues of 21 OECD countries over a 35-year period found that every one per cent rise in tax as a share of GDP is associated with a 0.14-0.27 per cent fall in GDP; and 3. The 2009 study of 15 EU member states by Mihai Mutascu and Marius Milos which found that the optimal public spending share of GDP was 30 per cent?

We have tried ever increasing deficit spending and QE. Time to observe the rule for what to do when in a hole: stop digging.

Chris Eagle

Thanks for that response Terry. I did see your post but I will make sure that I take a good look at that research again. I suppose what is worrying is that there are an ever increasing panel of experts with wildly opposing views who can call upon research to back up their viewpoint. Nobody can be certain, because as Soros reminded people again this week Economics will always be a social science. Three months to save the euro apparently and on a separate note I was disappointed not to see your name or those working for Tullett Prebon in the shortlist of the Wolfson prize.

Terry Smith

Chris Eagle: I think commonsense is much under-rated. I’m not sure why there are three months to save the Euro given that the Eurozone crisis was two years old in May. And I wonder why you would want to save; it has produced some dire consequences so far.

Ian Leslie

"The only way out is to cut state spending back to where it was 10 years ago-in the UK that’s a reduction of one third. What is it that the government didn’t provide 10 years ago that you can’t live without? Nothing."

Cut spending by a third - hey, why didn't we think of that before?

With respect, this is as inane as claiming we just need to borrow and spend our way out of this hole.

Actually there are, literally, quite a few things not available ten years ago that we now can't live without. The UK population is ageing and living longer, and at the same time, healthcare costs are rising as new treatments become available. This constitutes a massive and fundamental upward pressure on state spending.

Spending needs to be restrained, yes. But cutting the public sector by a third is just not a serious proposal.

(I hesitate to say it but I suspect you can only make such a suggestion blithely if you don't have to think very hard about what you'd miss.)

I recommend The Pinch, by David Willetts, for a really first-class, lucid exposition of Britain's demographic trends and the consequent long-term policy issues for any government.

Terry Smith

Ian Leslie: Perhaps if you weren’t so keen to think up insulting descriptions for my views you would have thought of it. And I assure you that it is a serious proposal. To begin with, even if half of all pensions, health and welfare spending increases over the past decade have been age related, that would still leave about two thirds of the spending increase which was not. The fact that some portion of the increase over the past ten years has been caused by the aging of the population and the associated improvements in healthcare which have helped to promote longevity does not make these items of government expenditure increase irreversible. For one thing, it is not at all clear that the government should be or is the best the provider of these services. To quote P J O’Rourke ‘If you think health care is expensive now, wait until you see what it costs when it’s free.’ The automatic willingness to regard the NHS spend as sacred is obscuring some of the decisions which are indeed necessary as a result. The fact is that we do put a price on life and we need to, but that price is obscured when someone else is paying or we are paying collectively. Nor is the NHS the only item of spending which is demographically driven and which requires radical overhaul and reduction. State and public sector pensions are as unsustainable. We cannot continue to provide unfunded index linked pensions or at a substantial proportion of final salary for a growing retired population. You correctly point to the pressures which Britain’s demographic trends cause, but they do not automatically lead to policy issues for government. Where possible the choices which are involved should be left to the individual. If the route which is taken is to assume that the government must just allow spending on health, pensions and welfare to rise to accommodate demographic changes, its taxation and borrowing needs will surely stifle the private sector which is the only source of funds. I don’t blithely make these suggestions because of my own circumstances so I am glad you at least hesitated before suggesting it. I grew up in a level of poverty which I think rivals any in the developed world and I believe I have considerable empathy with those in that situation for obvious reasons. But many of the beneficiaries of the state’s unrestrained growth in spending are in that position because of the decisions they made about their provision for retirement, healthcare and their children and/or their decisions on consumption, housing and borrowing. In any event whatever may be the moral justification for the position I take, it is neither socialist nor kind to promise assistance which we cannot deliver, and the fact is that unlimited quality healthcare free at source and index linked and/or defined benefit pensions which are payable for decades before the recipients expire are simply unsupportable whatever the moral case may be.

John Goose

Terry, as a student of history I recommend you read A Short History of Progress by Ronald Wright.

Terry Smith

John Goose: Thank you for the recommendation. Looks interesting. I will order a copy.

John Doran

Terry hi.
I'd be interested in your comments on "A Blueprint for Survival".
The opening line is: "The principal defect of the industrial way of life with its ethos of expansion is that it is not sustainable."
First published as Vol.2,No.1 of The Ecologist 1972.
I have the Penguin Special paperback.
John Doran.

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