King John and Dracula
I know what you are thinking……..
This is an odd title for an economics blog. But bear with me a moment or two (or three!).
I am writing this following the 800th ‘birthday’ celebrations of the signing of Magna Carta (“MC”) by King John (which he did so under some degree of duress) and also the death of the British actor Christopher Lee. Famous to people of my generation less for his role in The Hobbit films and more for his rather terrifying take on The Prince of Darkness in the 1960s and 70s Hammer horror films. Although my personal favourite is his Lord Summerisle in the 1973 film The Wicker Man – apparently Lee considered this his best work.
But where are the links?
Well, MC is championed by many commentators as marking one of the first (if not the first) examples of laws which sought to curtail and limit the ability of the King (or ‘the executive’ if you will) to exercise arbitrary state power in a manner which serves his own personal interests as opposed to those of the wider nation. There is some truth in this – as indeed there is in the counter view which states that it rather less to do with such highfalutin noble principles and rather more to do with a spat between a narrow elite of the King and his barons as to exactly how they share the spoils they managed to suck out of the rest of society. But let’s leave that less generous view to one side and return to the first.
Timing is everything in life (Lee would perhaps have agreed given his profession). So it is delightfully apposite that whilst we remember MC and what we want it to stand for, that a bright light has been cast upon our Chancellor’s latest announcement that he wants to make Government borrowing ‘illegal’ during the ‘normal’ economic cycle. Yes, there is lots of wriggle room here (he is a highly astute politician after all) as what exactly does ‘normal’ look like? And the plain fact is that the assessment as to whether or not the economic circumstances the country is in is ‘normal’ or ‘abnormal’ is only one which can be made with hindsight.
But, some will say, this is good old fashioned Keynesian prudence; building surpluses in the ‘good’ times.
Yes it is true that Keynes argued for prudence during the ‘up’ cycle of the economy and that it was important to aim for surpluses during such an up cycle to better prepare for the inevitable future down cycle. However Keynes did not put forward a pick and mix economic theory – which is the approach Mr Osborne has seemed to adopt to date.
Nor would he have argued that the idea of running a surplus should also apply to investment in UK infrastructure. What the Chancellor has seemingly suggested is that in ‘normal’ times it would be illegal for the government to borrow to invest in new roads, high speed broadband, high speed railways, airports, schools etc etc. Let’s just think about this for a moment.
It is true that there are some businesses which have managed to grow without borrowing money. But, in our experience, they are few and far between and this situation has usually been forced upon them as it proved impossible to secure external growth funding (this is one of the market failures of our economy, the inability to prove development funding to the SME bedrock of the UK economic landscape – but that’s for another day).
Businesses know that there are two types of borrowing – that used to invest in the productive capacity of the business and aid its future development and flourishing and the other which is used to pay the bills as they fall due when you are short of income. The latter situation is not something which can continue indefinitely and is what Keynes had in mind with his advice. The former is an example of prudent, strategic financial management and leadership.
And bear in mind that Mr Osborne will also doubtless be focussed upon the forthcoming election. No, I don’t mean the next general election, I mean that for the leadership of the Conservative party. His latest announcement needs to be seen through this lens.
So, back to MC and what it signifies – limiting the power of the executive to wield state power in an arbitrary manner for the executive’s personal gain. A case can be made (with, perhaps, a degree of mischief!) that Mr Osborne’s announcement on making government borrowing illegal in ‘normal’ times flips this principle completely on its head. It is an attempt to arbitrarily exercise state power for ultimate personal advantage.
But it gets better than this. And this is where Dracula comes in.
You see the IMF has been releasing some very interesting ‘thought pieces’ recently; we touched upon one in the previous blog regarding their suggestion that the most effective thing many countries should do about their growing National Debt was to simply ignore it ( I paraphrase – but not by much). Their latest announcement goes much, much further. Using OECD data from some 40 or so countries they point out the negative effect upon the economic health, vitality and growth prospects of a country if it has increasing levels of inequality. I know, sounds a bit radical doesn’t it.
Their argument is clear and, to be fair, isn’t especially novel in its content as ‘The Spirit Level’ book came out a few years ago and said something very similar- more equal societies are better performing from an economic point of view. See Andy Haldane from the Bank of England who has also picked up on this data.
Hence, the conclusion is that governments who are wedded to the idea that austerity economics will generate private sector growth (expansionary fiscal contractions in the technical language) are completely wrong. Worse than this, the inference is that such Governments are being economically imprudent in pursuit of a particular political dogma. Interesting then that another arm of the IMF is accused of trying to force such imprudence upon Greece – again, that’s for another day.
What better drives economic growth for a country is taking measures to tackle inequality – including wealth re-distribution through more progressive taxation policies. Increasing the wealth, the spending power, of the bottom 20% in the income curve and the ‘squeezed middle classes’ by taxing the wealthy further delivers economic benefits for all.
In fact some have suggested that this conclusion of the IMF may be a final stake through the heart ( – d’you like it??) of the neo-liberal free market idea that ‘trickle down’ economics is the most effective and just dogma to adopt. The IMF research suggests that the idea of ‘trickle down’ is a fiction and in fact what actually happens is ‘trickle up’.
Interesting times for the dull science….. (except it isn’t a mathematical science at all, but an offshoot of political philosophy – but that’s……..well you know the rest).
If you would like to know more on the subject, please contact Stephen Gregson.