Liberal Vision

Greece Is The Word

How to solve a problem like Greece? Former queen of daytime chat Fern Britton was flummoxed on the BBC’s Question Time on Thursday night. And like David Mitchell, I don’t really know either. However, on the wider issue of the durability and endurance of the European Single Currency – and to evoke that quote widely attributed to Mark Twain – some obituaries are prematurely written. Even as early as the turn of the Millennium, the late Milton Friedman prophesied its demise.

But claims of the Euro’s death have been greatly exaggerated. The current membership may change slightly with the most damaged economies perhaps opting to revert to their former national currencies, or in another scenario we could see the emergence of two monetary unions: a ‘Debtor €’ comprising the Med countries and a ‘Creditor €’ including Germany and other low-inflation states.

Personally, I’ve felt largely ambivalent on Euro membership. The fanatics for and against frequently bore me and the whole debate is couched using hyperbolic language. Nonetheless, I don’t think the Euro per se is intrinsically flawed or irredeemable. In the case of Greece, Europe would have been a lot better off if it had stuck rigidly to the rules set out at Maastricht, thus avoiding premature or inclusive membership.

Greece consistently breached the 3% deficit limit even prior to the current crisis and went unpunished despite the legal duty to comply with convergence criteria. Their unreformed public sector and high and unstable rates of inflation should have raised eyebrows prior to Eurozone accession. It is widely recognised that they were economical with the actualité and massaged the figures in order to meet entry requirements, something acknowledged by the former ECB Chief Economist Otmar Issing:

“When I worked for the ECB, I suffered every time countries didn’t meet the criteria. Greece cheated to get in, and it’s difficult to know how we should deal with cheaters…There should have been better monitoring, better scrutiny and more sanctioning. This crisis wasn’t unavoidable.”

As in any other private members club, individuals are obliged to abide by the rules. Accepting EMU rules, devaluation or inflationary monetary policy were no longer avenues the Greeks could go down. They did nothing to lower their public debt but instead went on a spending binge. It does not seem fair or just that taxpayers’ money is being moved from countries who stuck (by and large) to the respective criteria to those who did not.

European leaders should not use the Greek crisis purely as a catalyst for more integration which would only further embitter sceptical national populations but rather to end the slack monitoring of the fundamental rules of the club.

Other Member States should not end up with a hangover for a party they did not attend.

Labour VAT move is half right

Shadow Labour Chancellor Ed Ball’s call for a permanent or temporary VAT cut puts him half into the same camp as liberal think tanks who opposed the VAT rise in January. Philip Booth, Programme Director at the Institute of the IEA wrote 

“Today’s VAT rise is simply bad economics… If the government insists on increasing taxes, there are better candidates than a general VAT rise.”

 Where Balls and Booth part company however is on the flipside of the balance sheet. Booth writing:

“Today’s news should be a wake-up call that the spending cuts are insufficient. If the government wishes to prevent growth from stalling, it will cut spending further, not burden the population with an unnecessary tax rise.”

Balls, a Keynesian of sorts, remains convinced stimulating demand alone can restore growth.

Economic growth fundamentally is based on doing new things and more commonly doing old things more efficiently. It is a supply-side issue.  If you increase the money supply without improving productivity you just increase inflation. Interest rates rise, we are all worse off.

Two important element of Keynesianism are also missing from the Shadow Chancellor’s analysis . Firat that the last government, of which he was a leading player, should have been running a surplus during the long boom in the last decade. Not a deficit in every year since 2001. The surplus would have taken some heat out of the boom, and provided a fighting fund for the crash.  

Second Keynes did not confuse government spending with government investment. Investing in infrastructure such as roads, or development such as scientific research is clearly a very different growth proposition to spending on welfare and public sector pensions.

In that regard Balls is not a very good student of his own economic philosophy, Keynes did not advocate profligacy. A VAT cut without corresponding reductions in unproductive spending would be just that.

How to introduce a minimum wage without raising unemployment

Whenever discussions of the minimum wage come up, supporters of a legal price floor are quick to point out that the introduction of the minimum wage in the UK was not accompanied by rising unemployment, as economic theory would suggest.

What explains the labour market’s seeming resilience in the face of what should be a very bad policy?

Over at the IEA blog, I discuss three reasons why unemployment may have appeared to have been unaffected by the introduction of the minimum wage. Please take a look and feel free to comment on their discussion thread.

The moral case for liberalism

When liberals make the case for liberalism they tend to focus on the importance of individuals running their own lives.  They also tend to get bogged down in explaining why markets work.

Their opponents focus on what will happen to the poor if markets were unregulated or introduced into public services.

In that debate it is easy to fall back on technical arguments and miss the bigger picture.

While some liberals will make a moral case for liberalism it is not done in a consistent manner.

Perhaps it is time to start talking far more about how a more liberal world would mean less poverty, how inflation and debt create more poverty by trapping those who are already poor and dragging others into poverty.

The Observer fails to fact check its front page pro-Balls set piece

Ed Balls’ spin doctor, Alex Belardinelli, sent out an excited press release on Saturday revealing that the Observer was to “splash” on a predicted rise in household debts.

“These figures underline Ed Miliband’s warning about the cost of living crisis facing families in the squeezed middle,” it said.

Of course, this wasn’t the Observer’s splash, but Balls’ man was right that his story would appear on the Observer’s front page the next day.

Unfortunately, the second paragraph of this story got its facts wrong.

“The Office for Budget Responsibility has raised its prediction of total household debt in 2015 by a staggering £303bn since late last year,” it says.

Not true. In the OBR’s forecasts “late last year” (ie. November), debts were forecast at a revised £2,113bn. The latest forecasts are for £2,126bn.

This is an increase of £13bn, or 0.6%.

It is not an increase of £303bn, which would be a 14.3% jump.

A big hat-tip to David Smith [@dsmitheconomics], economics editor at the Sunday Times, for pointing out the error.

What the Observer meant to say, Smith calculates, was that the figure has increased by £303bn since last summer.

At that time, last summer, inflation was at 3.1% (CPI), while now it’s at 4.4%. Spiralling inflation might just have something to do with the rise in the figure.

The Observer article is packed with quotations from and citations of Ed Balls (funny, that), Labour MP Chuka Umunna, the Labour-leaning IPPR, and the socialist-Keynesian’s favourite economist, Paul Krugman.

It is bylined, incidentally, by the Observer’s political editor and policy editor – not the economics team.

The OBR’s March report, which the story is based on, also revealed that government sector debt net will break through 70 per cent of British GDP by 2013-14.

The UK’s net debt (note to Balls – this is different to the “deficit”) hit £875.8bn in February, while government spending has increased since Osborne arrived at Number 11.

Central government spending alone is up over £30bn compared to the same time in Labour’s last fiscal year.

And yet it’s “cuts” that are responsible for our economic plight? The Observer and its pals needs to get its facts right.