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Plan B is crazy

By Tom Papworth
November 2nd, 2011 at 8:00 am | 3 Comments | Posted in Uncategorized

On Monday, a handful of Lib Dems wrote a letter to The Guardian (itself hardly newsworthy!) expressing “broad support for the Compass Plan B proposals reported in the Observer” the day before. Notwithstanding the fact that these are the “usual suspects”, Lib Dems that have proved very keen to cozy up to the Labour Party, the question remains, does Compass Plan B have anything to say about how we might resolve our economic woes?

Let’s first consider the Compass proposals:

What would Plan B entail in the short term?

  • The cuts would be reversed until the economy is growing strongly.
  • A new round of Quantitative Easing (money created by the central bank) would be directed to a Green New Deal, to insulate and prepare large numbers of buildings to generate renewable energy.
  • Increasing some benefits for the poorest who are then likely to spend any extra income, this would help get the economy moving again.

Let’s look at those first three points in turn:

Reversing the cuts would be a disaster. Firstly, it would send a clear message to the markets that the UK has even less fiscal rectitude than Greece. At least they are implementing an austerity budget, albeit half-heartedly. If we now reverse our cuts, we the markets will panic and our borrowing costs will sky-rocket. And for all those anti-market fundamentalists out there who may want to dismiss “The markets”, in this context “the markets” are all the people who are actually able to lend us money; without them, we will need to find another £150 billion of savings TODAY!

Furthermore, as even the devout Orange-booker Gareth Epps knows, ripping up a budget mid-year and telling the entire public sector to go back to the spending-drawing board would be massively disruptive. It’s not easy to turn the tanker around: in many cases, departments and even whole organisations have been abolished, and staff have already been let go. But in addition workers will be left in an upsetting limbo, unsure of whether their jobs have a future or whether they are only being kept on for as long as the government remains in panic mode.

And is Compass really saying that all the cuts are bad? Has nothing been abolioshed that was not a waste of money?

Frankly, the government would be better off looking for extra unnecesary expenditure and cutting that too, using the tens or even hundreds of billions saved to cut taxes. That really would stimulate demand.

The proposal to reverse the cuts is economic genius compared with the proposal to use a new round of Quantitative Easing (money created by the central bank) to fund a Green New Deal. At this point, a little distinction is worth noting. While QE is inherently dangerous and inevitably inflationary, so far the QE that we have experienced has been used to re-capitalise the banks and encourage them to start lending more. This isn’t good, but it’s not the Weimar Repblic. Credit Easing – making money to lend directly to companies, is probably even more risky. But neither of these are what Compass is suggesting.

No. Compass is suggesting that the government print money to fund government spending. And that, dear reader, is the Weimar Republic. Using QE to pay for a Green New Deal would repeat the greatest mistake in the history of government, which was pithily summed up by an economist, usually referred to fondly among Compass-leaning Lib Dems and even Labour chancellors:

“…Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.”

A 50,000,000 mark note from 1923. By the end of the year the highest denomination note was 100,000,000,000,000 marks.

What about increasing benefits for the poorest so that they spend extra? Would this really help get the economy moving again? Firstly, one has to consider where the money is coming from. If it comes from taxes, it’s simply robbing Peter to pay Paul: there is no increase in “aggregate demand”, just a shift of demand from those who earned the money to those who did not. Whatever your enthusiasm for redistribution, don’t pretend that you can re-distribute something bigger!

What if it is funded by borrowing? Well, it may seem superficially attractive if you ignore the points about markets above, but unfortunately, the evidence suggests that people respond by saving more in anticipation of the higher taxes to come, thus killing off any extra growth. No dice, I’m afraid. It’s a non-starter.

Actually, Compass do seem willing to fund some of their spending through increased taxation:

  • It would cancel Private Finance Initiative debts, saving the nation £200bn in debt repayments.
  • By Introducing a Financial Transaction (Robin Hood) tax on the banks
  • The £70 billion in yearly uncollected tax would be closed.

The third is too ludicrous not to brush aside first. The idea that any government is simply ignoring £70 billion in yearly uncollected tax is absurd fantasy. Either it’s made-up fantasy-tax (like the £6 billion that Vodaphone don’t owe the British taxpayer) or there are very good reasons why it’s not being collected, and a Compass-led government would find it no easier to collect that the current one (or the last one!).

Cancelling all PFIs is nothign more than populism. Indeed, it would be illegal without (and possibly even with) legislation. Effectively, PFIs are a loan – a private contractor gives something to the government (say, a new hospital) in return for a revenue-stream that repays the loan. If HMG starts passing laws repudiating their loans, then it will be treated as a default and Britain will be declared bankrupt. What is more, it will shatter the confidence of investors and prevent the UK ever getting help financing capital projects again.

Finally there’s the Tobin Tax (Robin Hood, it is worth remembering, fought against tax-raising government officials!). There simply isn’t space enough here for this one. Suffice to say that it will simply make it more expensive to lend and borrown money, and so there will be less of it, which means a less efficient economy. There’s much more to say, but where to begin? (Well, maybe that imposing it unilaterally in the UK will simply destroy one of our biggest industries to the benefit of the French and the Americans).

According to Compass,

Plan B would mean that the Government pays down the deficit through growth and spending adjustments only when the economy is in good enough shape to

which is a little like saying that we can’t thrown the ballast out of the hot air balloon until we’ve got the damned thing off the ground!

In summary, then, Compass’s Plan B is, in reality, Plan Crazy. It would massively destabalise the UK economy in both the short and long terms, and cause untonld damage. It is rather a shame, therefore, that a handful of Lib Dem malcontents felt the need to so publically support it!

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Bunch of disgruntled Lib Dems resort to plan B

By Angela Harbutt
November 1st, 2011 at 3:49 pm | 14 Comments | Posted in Liberal Democrats

The Guardian reports today that “Economic plan failing, grassroots Lib Dems say in first sign of revolt” . Well, hardly. It’s a letter in the Guardian stating that a handful of  Lib Dems back the somewhat flawed Compass Plan B. (Hardly Lib Dem 2010 manifesto btw).

Still, the Guardian letter does have some impressive signatures….. “a group of senior Lib Dem figures and former parliamentary candidates”… hmm…Prof Richard Grayson, Ruth Bright, Linda Jack,  Margaret Phelps, Nick Rijke,  Prof Stephen Haseler, Simon Hebditch, Dr Jo Ingold, Cllr Ron Beadle and Cllr Stephen Knight.

Err hang on were these not the very same Lib Dems (give or take the odd person) who back in February of this year signed up to Labour’s policy making process.  To be clear those signing up back in Feb were (drum roll please) ...Prof Richard Grayson, Ruth Bright, Linda Jack,  Margaret Phelps, Nick Rijke,  Prof Stephen Haseler, Simon Hebditch, Dr Jo Ingold, Cllr Ron beadle plus Tim Starkey and Prof John Howson. At the time Prof Richard Grayson said ..Some of these people have expressed concern about the coalition and the direction of the party, some are relatively happy with both and are engaging because they believe in pluralism”Well it seems clear that it was Starkey and Howson who were the believers in pluralism then.

As Simon McGrath states so brilliantly over on LDV (comments)  “Their excuse for this at the time was that they were going to help convert Labour to Lib Dem policies. It now appears they they have been converted to Labour policies.” Or as Dave Page says somewhat more bluntly (comments)… “nice to see a bunch of self-important party wannabe-slebs shooting us in the foot in public“.  That is a probably rather harsh..Some of these people are bright, genuine, engaging people.. It’s just their approach that sucks and, whatever their intention, they haven’t done the party or, indeed the SLF, any favours today…

..And surely the Guardian headline should read .. “Bunch of disgruntled Lib Dems resort to plan B” . No story there then.

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