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Source: (consider it) Thread: Is there a money-tree? Have we looked hard enough?
anteater

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I am becoming increasingly unsure of the idea that UK indebtedness requires austerity, but I find economics difficult to grasp and would like to debate some of the issues involved. I am re-reading a book by Richard Murphy (The Joy of Tax) plus anything else that tackles the issue of whether it is good sense or madness to set about an ambitious program of UKG spending to overcome our present dismal condition. I admit I have done ok by the neo-liberal consensus but I know a lot haven't and I'm increasingly doubtful that it has any validity.

At root for me, is the idea that looking at the UK economy as if it were a domestic household economy is wrong and dangerous. And I think there is widespread agreement with this. But it seems intuitively easy to believe and so if it is totally wrong, a lot of persuasion needs to be done to get people away from it.

Basically, Murphy believes there is a money tree. In his initial defence it seems that we were able to find a money tree for banks without triggering the inevitable (?) inflation. And he strongly continues to advocate Corbyn's idea of a people's QE which Labout seems to have backed off from, either because they no longer believe it, or they feel it would be impossible to convince the country of.

One of his central ideas is that the UKG does not have to borrow externally since it can print the money it needs to finance a program of growth, and when the situation has improved can then reign back the supply of money to prevent inflation, which of course is what a lot of people do not believe. He criticises the OBR for continuing to classify as UKG debt, amounts which have been bought back via QE and so are debts owed to the State, where even the interest on them goes to the state. What is a debt you owe yourself? Fair question.

Enough of the outlines. Hopefully there will be people on the Ship who have familiarity with these ideas. Otherwise it will sink.

Here are some points I would like to debate:

1. It is said that QE in the UK has not caused inflation. But I have read that QE in the developed world has actually fuelled inflation in the developing world and caused huge rises in commodity prices and national unrest. Has anyone any insight on this, because if true it makes QE ethically poor.
2. It there a solid reason why it is more dangerous to devote QE to Keynesian-type programs and not just banks?
3. My main doubt is that when the UKG spends money it does not have the expertise to spend it widely. This was seen in the (£9 bn) NPfIT programme set off by Tony B which I worked on. Nobody working on it thought it would be anything other than a train wreck. It was pathetic in multiple ways, so the fear is that if we did QE to kickstart, say a Green Enginerring Industry, it would end up as the same sort of waste of money. Murphy speaks of the courageous state, and writes an inspiring book about it. But you need expertise as well. Do we have it? (I remember when the best brains in IT were public servants - a long time ago).
4. It the whole idea a pipe-dream? Because if not the current policy is just not on.

[ 14. June 2017, 15:49: Message edited by: anteater ]

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Alan Cresswell

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I'm no expert either. But, I think there is a money tree (and, there's nothing magical about it).

But, first a comment on the analogy to household finances and not overspending, so beloved of those who want to cut spending to reduce national debt. The problem with the analogy is that households borrow, in fact they borrow quite a lot. Indeed, the government almost encourages it. And, in many cases that borrowing is entirely reasonable and logical. We borrow to buy a house, and then often pay less in mortgage repayments than rent (and, even if renting was cheaper we retain the asset in a house we've bought). We borrow to buy a new car, enabling us to get to a wider range of jobs and other such freedoms. We borrow to send our children to university (especially those not in Scotland who have to pay extortionate tuition fees). We borrow for replacement windows, new boilers, to refit the kitchen and bathroom. The household finances analogy would say that there's nothing wrong with borrowing, especially when there's a likely payback on that. Yet those using the analogy want us to believe the nation shouldn't borrow. Anyone confused by that?

IMO (and, I'm no expert as noted) the money tree is called investment. Spend money to boost the economy, then that will be recouped through increased tax revenue. The question isn't about looking for the money tree, it's that we need to plant the money tree - or, preferably an entire orchard of them. Invest in education, so that we have a workforce able to do the jobs required. Invest in healthcare, so our workers aren't off sick. Invest in public transport so workers can get to work efficiently with minimal fuss. Invest in developing new technologies to meet the future demands of society. Of course it takes skill and expertise to identify where to invest, but without it there will be no money tree.

The problem with the agenda of the Conservative Party, and to an extent the Tory-Lite Labour of Blair/Brown, is that there was a systematic programme of cutting down money trees. Councils sold off their housing stock at bargain prices. National industries (utilities, transport, even the Post Office) were flogged off for peanuts. Schools and hospitals have experienced (at best) budget increases below the increases in costs. We no longer invest in university education, expecting students to invest in their own future.

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chris stiles
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quote:
Originally posted by anteater:
I am becoming increasingly unsure of the idea that UK indebtedness requires austerity, but I find economics difficult to grasp and would like to debate some of the issues involved. I am re-reading a book by Richard Murphy (The Joy of Tax)

I think good further reading is Mark Blyth's 'Austerity - History of a dangerous idea'. You can get a flavour of it from the various talks he has done to promote it (much of which are on youtube).

In regards to your first question - I'm not entirely sure what you are referring to, but one difficulty that developing countries face lies in sterilizing QE after the event, because they don't have many viable mechanisms for doing so.

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Crœsos
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Also not an expert, just an enthusiastic amateur.

Like a lot of economic questions, the answer seems to be "it depends". When the economy is booming (i.e. is fairly near to full employment*) there does not seem to be a "money tree". Increased government spending "crowds out" private spending, which is competing for the same already fully employed labor pool, requiring higher wages to attract workers. Hence inflationary pressure. In other words the fiscal multiplier is less than one. (£1 of government spending increases GDP by less than £1.)

On the other hand in a depressed economy (i.e. one with a lot of slack in the labor force) those inflationary pressures do not exist. There is enough underutilized labor that the government can employ a lot of people without causing wage-driven inflation. In situations like this the fiscal multiplier is greater than one. (£1 of government spending increases GDP by more than £1.) This analysis was pretty well vindicated in the wake of the recent financial crisis.

One crude way to figure out which situation you're in is to ask 'are wages increasing or stagnant'? If it's the former then there is no "money tree", at least not in the form of increased government spending. If it's the latter then there is.


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*Like a lot in economics "full employment" is a term of art used differently than when normal people use it. To an economist "full employment" means not "everyone who wants a job has one" but rather "employing more people than this will significantly increase inflation".

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Dafyd
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A government can simply create money in the same way that banks can: by printing more money than it's got assets to cover. You're not going to get a situation where everyone shows up at the Bank of England at once to claim the £5 promised to the bearer.

If the government creates too much money that's a problem - it creates inflation. Some schools of economics think it's a big problem. Keynesians would say that it all depends on what the rest of the economy is doing. Putting money in when the economy is in a boom is bad; putting it in when the economy is in a slump is good.

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we remain, thanks to original sin, much in love with talking about, rather than with, one another. Rowan Williams

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anteater

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Chris Styles: Thanks for the suggestion. I'll follow it up. You say:
quote:
I'm not entirely sure what you are referring to
Basically Murphy seems to view QE as practiced to date as benign. Now he is a principled man and would not want to see QE causing problems in the rest of the world, so I suppose I should ask him what he thinks on this. But the idea is that QE pumps money into the West whereas investment opportunities give higher returns in the developing world which can lead to a boom. The following is from the African Development Bank group as an example view:

quote:
Inflationary pressures: Higher liquidity flows to developing countries could raise inflation mainly through commodity prices and the lending capacity of the banking system in developing countries. As most commodity prices are denominated in the U.S. dollar, devaluation of the greenback arising from QE3 could cause a rise in commodities prices. In anticipation of the introduction of the QE3, commodity prices especially oil and agricultural commodities have surged. Although inflation has dipped so far in 2012, it remains a significant threat to emerging and developing countries. This is particularly true in Africa for food items which represent a significant share of consumption basket.


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anteater

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Croesus:
quote:
There is enough underutilized labor that the government can employ a lot of people without causing wage-driven inflation.
True but is it labour that can drive the economy in areas like Green Engineering? Maybe as Alan implies we need to start with re-skilling but it's a long process.

What I don't know is the economics of employing relatively unskilled labour. I would like to believe it can be done but a major challenge we have is how to usefully employ relatively unskilled labour. Maybe it's not so difficult. How long to train somebody in building skills for instance. I don't know.

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Sipech
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*Dons professional hat*

There are some failings when we both talk of and measure inflation, which are not being addressed. At present, we have the retail price index (RPI) and the consumer price index (CPI). In short, the RPI includes mortgage inflation while the CPI excludes it. There's a bit more to it than that.

Both, however, exclude house price inflation. This is desirable if you're a homeowner, as often the value of your house increases by more than you can earn (after expenses), but it's a blight for would-be first time buyers who see the real value of their savings (i.e. deposit) eaten away by inflation. For reference, house price inflation is currently running at 5.6%.

Note that basket of goods that goes into both RPI and CPI includes a mish-mash of things that people just happen to spend money on, and do not readily distinguish between those that are cost-of-living expenses (such at food, utilities, household cleaning items) and those that are more discretionary (such as holidays or video games).

In an ideal world, wage inflation would be outstripping the cost-of-living inflation, though there's little political will to change the methodology in case it gives a result that either the government of the day might find difficult to defend or which the opposition might not be confident of remedying in the future.

The problem that many have with QE is that is very indirect; a problem that was part of the idea behind PQE which would be more visceral. QE doesn't stimulate wage inflation but the jury is still out on whether it indirectly inflates the cost of the living.

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PaulTH*
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quote:
Originally posted by Alan Cresswell:
Spend money to boost the economy, then that will be recouped through increased tax revenue.

I am certainly not an expert, but I'd be interested for examples of economies where this idea has worked well in practice. Or where very high taxation increases national prosperity rather than stifling enterprise.

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Alan Cresswell

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quote:
Originally posted by PaulTH*:
quote:
Originally posted by Alan Cresswell:
Spend money to boost the economy, then that will be recouped through increased tax revenue.

I am certainly not an expert, but I'd be interested for examples of economies where this idea has worked well in practice. Or where very high taxation increases national prosperity rather than stifling enterprise.
Well, you can start with the New Deal in the US.

And, I never mentioned very high tax increases. Or, tax increases at all - the increased tax revenue comes from more people in employment, and more of them in better paid jobs, rather than necessarily increasing the rates of tax. Though, we currently have very low tax rates, so there is room for small, or even modest, tax rises.

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Dafyd
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quote:
Originally posted by PaulTH*:
I am certainly not an expert, but I'd be interested for examples of economies where this idea has worked well in practice. Or where very high taxation increases national prosperity rather than stifling enterprise.

One always turns to the Scandinavian countries, which have high taxation and high prosperity.
Most of the world in the fifties and sixties increased national prosperity faster than it is increasing now and had higher taxes.

As for the opposite course of action: here in the UK it is not doing any good. Wages are still rising more slowly than inflation. (And before you blame Labour for something that wasn't actually their fault - seven years of austerity have just made the supposed problem worse.)

[ 14. June 2017, 19:32: Message edited by: Dafyd ]

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PaulTH*
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quote:
Originally posted by Dafyd:
seven years of austerity have just made the supposed problem worse.

I don't disagree with you when we look around us. But I have an instinctive distrust of tax, borrow and spend, leading to the flight of capital and entrepreneurial vision, ending in stagnation and bankruptcy. I don't pretend to know all the answers.

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anteater

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Alan:
quote:
The problem with the analogy is that households borrow, in fact they borrow quite a lot. Indeed, the government almost encourages it. And, in many cases that borrowing is entirely reasonable and logical
Well, yes, all that is fine and makes sense, but is far removed from the reason that Murphy (who John McDonnell thinks is a bit too radical!) gives.

For him the key difference is that a Government, so long as it has a sovereign currency, can create money out of thin air. Literally. So there is no need to go to external financial markets to finance a recovery package. And this is what some people think is voodoo economics.

The Government borrows from itself and provides the funds by fiat. Now Murphy believes neither in Santa Claus nor the Tooth Fairy, so there's more to it than that. For him there is one snag that he considers highly unlikely to take place and one which is certain to take place but can be managed.

The first is that it will not be able to find people to buy its debt, and I don't claim to understand this. Since it is the UKG that buys it what's the problem? He says it's very unlikely to happen but it niggle me 'cause I don't understand it.

The certainly is inflation and a debauched currency if no corrective action is done. And this is a worry. You can imagine, that the plan has done most of what you want and you can see the economy overheating, and then mistime corrective measures.

Interestingly he does deal with one of my objections which I only found on second reading. The obvious way to stop overheating would be fiscally by raising taxes, but he admits that it is very difficult for anyone to write a manifesto promising to raise taxes for no obvious benefit, (maybe Nick Timothy could do it!).

So he believes that when the Gov needs to inject money it does it fiscally, and when it wants to reign back it does it by monetary policy (raising interest rates), not popular either but easier. But the danger is that you'll do neither.

A bit like the person who resolves that this time I'll really stop at three pints, but . . . . we know the story.

I think that right or wrong this is a difficult idea to sell, but I think it may well be right. And if the Government are muppets then nothing will work.

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Sarah G
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quote:
Originally posted by Sipech:
*Dons professional hat*.... QE doesn't stimulate wage inflation but the jury is still out on whether it indirectly inflates the cost of the living.

Trying to put the question as neutrally as possible, so that I can actually learn something, what would the majority of economists say would be the effects of the proposed Labour economic model?
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Crœsos
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quote:
Originally posted by Alan Cresswell:
Well, you can start with the New Deal in the US.

A fairly good example. Nearly four years of Hoovernomics and Mellon's liquidationism (essentially what we now call austerity) failed to improve the economy. FDR's New Deal (jobs programs funded through government deficit spending) fuels recovery. In 1938 the U.S. decides to cut back government spending despite economic indicators showing this was premature and the economy goes into a small recession again. The U.S. economy starts growing again with re-armament and the Second World War which, from a purely economic perspective, is pretty much the same thing as the New Deal: a jobs program (the draft) funded through government deficit spending (war bonds).

quote:
Originally posted by anteater:
So he believes that when the Gov needs to inject money it does it fiscally, and when it wants to reign back it does it by monetary policy (raising interest rates), not popular either but easier. But the danger is that you'll do neither.

A bit like the person who resolves that this time I'll really stop at three pints, but . . . . we know the story.

If anything, historical experience is that modern (meaning 20th and 21st century) governments are more likely end spending too early than keep it up too long. The cautionary tales seem to be Weimar Germany, modern Zimbabwe, and . . . well, that's it actually. You'd think we'd have more examples if this was a commonplace thing for governments to do.

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Leorning Cniht
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quote:
Originally posted by Sarah G:
Trying to put the question as neutrally as possible, so that I can actually learn something, what would the majority of economists say would be the effects of the proposed Labour economic model?

Well, for starters, ignore anything that Richard Murphy says. He's not an economist, has no particular expertise in economics, and if he said something right, it was probably an accident.

If you want a respectable vaguely lefty economist's take on it, you could do a lot worse than Simon Wren-Lewis. He signed a letter, also signed by a collection of other respectable academic economists, in broad support of Labour's economic approach over the Tories' austerity.

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anteater

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Learning Cnight: What's your beef with Murphy? I like his writing and would rather hear why his ideas are wrong then just that his career was Accountancy. I believe he is now Professor of Economic Practice at City University.

I can well believe that he has some things wrong and John McDonnell has, I believe, said that as a Macro Economist he leaves a lot to be desired. I can see some potential flaws but most of what he says has plausibility. IMO of course.

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Jane R
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PaulTH:
quote:
But I have an instinctive distrust of tax, borrow and spend, leading to the flight of capital and entrepreneurial vision, ending in stagnation and bankruptcy.
Do you. Do you really, or is it a result of reading the propaganda of the right-wing press? Because they're just telling you what their proprietors (who have hugely benefited from neo-liberalism) want you to hear.

There are two money trees, as a matter of fact. The first is your everyday High Street Bank, which "creates" new money every time it grants one of its customers a loan - to buy a car or a house, for example. The second (in this country) is called the Bank of England and not only has the authority to print new money, as in QE, but creates all the money we use.

As for the "flight of capital and entrepreneurial vision" - either it's already happened or it's not going to. Dyson's factories are in the Far East. The Daily Heil's headquarters are in Bermuda. Most of the big Internet companies (Amazon, Google) pay their tax on UK transactions elsewhere. Because they can. The economy still seems to be rumbling on, although most of the wealth generated is going to multinationals and/or billionaires who are not UK residents.

There is a global elite that controls most of the money in the system; you're right about that. They've got us right where they want us, squabbling over the crumbs from their table. Perhaps it's time to stop worrying about what they will do and try to make things better for ordinary people instead. Never mind about David Cameron's (quickly abandoned) quest for greater happiness for the moment: there are people in this country who don't even have their basic needs for food and shelter taken care of, in one of the richest countries of the world. We should be ashamed.

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chris stiles
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quote:
Originally posted by PaulTH*:
I don't disagree with you when we look around us. But I have an instinctive distrust of tax, borrow and spend, leading to the flight of capital and entrepreneurial vision, ending in stagnation and bankruptcy. I don't pretend to know all the answers.

Okay, but to turn this around, what evidence do you have that austerity ever works? In reality the oft quoted examples where it appears to have worked were relatively small economies trading with larger neighbours who were embarking upon massive expansionary spending.

The only other reason for austerity is the Reinhart/Rogoff paper on debt/gdp ratios - but it turned out that after factoring the arithmetic mistakes they had made, that this was a less than compelling argument.

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anteater

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PaulTh:
quote:
But I have an instinctive distrust of tax, borrow and spend
So do I and most people. But beware of instinct - it can be aclimatization to the standard neo-liberal consensus which is pretty widespread just now.

So reading someone like Murphy is a bit like reading a climate change denier - your feeling is "surely everybody can't be wrong" and also a bit of helplessness because if you do have to form your own opinion it's bloody difficult. Interesting though.

The idea that it's just a question of tax and spend is highly misleading. Murphy is rather controversial, although when he sticks to his main speciality which is tax, he is much less so. But there is a growing body of opinion that austerity is simply wrong-headed.

And it certainly has little appeal ethically. I've up till now bought into the neo-liberal agenda because it's done me well. But the prospect of a Labour administration has spurred me to investigate whether they are loonies or not, and I'm less and less sure that they are.

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Sipech
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quote:
Originally posted by Sarah G:
quote:
Originally posted by Sipech:
*Dons professional hat*.... QE doesn't stimulate wage inflation but the jury is still out on whether it indirectly inflates the cost of the living.

Trying to put the question as neutrally as possible, so that I can actually learn something, what would the majority of economists say would be the effects of the proposed Labour economic model?
Without having conducted a comprehensive survey, my answer is inherently biased towards the anecdotal. With that enormous caveat, the impression I get is that most economists would be highly critical of any Labour economic model.

The reason being one of education. Universities predominantly teach the neoliberal economics of Friedmann and Hayek. In the US, in particular, I understand that Keynes is barely mentioned in some of the more prestigious institutions. The idea is that economics is treated as medicine - there is an orthodox view and then there are quacks. Competing ideas are treated in economics departments like homeopathy is in a training hospital or like creationism is in a biology department.

The idea of 'teaching debate' is an alien concept. You may find a few outspoken economists on the left like Thomas Picketty or Ha-Joon Chang, but they are the exception rather than the rule.

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Sipech
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quote:
Originally posted by anteater:
Learning Cnight: What's your beef with Murphy? I like his writing and would rather hear why his ideas are wrong then just that his career was Accountancy. I believe he is now Professor of Economic Practice at City University.

I can well believe that he has some things wrong and John McDonnell has, I believe, said that as a Macro Economist he leaves a lot to be desired. I can see some potential flaws but most of what he says has plausibility. IMO of course.

I would largely agree with Learning Cnight's verdict on Murphy. I've clashed swords with him in the past and found that while he projects an air of authority, his understanding of the real world of business is severely wanting.

I recall a particular incident when he was advocating some tax reform when he built up a straw man and I pointed out to him that his base assumptions were simplistic and misleading, with his subsequent solution being inadequate and impractical. He didn't take kindly to my critique. Rather than engage, he left a curt comment and then shut down the discussion (which was in the comments on his blog).

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Dafyd
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quote:
Originally posted by Sipech:
quote:
Originally posted by Sarah G:
Trying to put the question as neutrally as possible, so that I can actually learn something, what would the majority of economists say would be the effects of the proposed Labour economic model?

Without having conducted a comprehensive survey, my answer is inherently biased towards the anecdotal. With that enormous caveat, the impression I get is that most economists would be highly critical of any Labour economic model.
I understand that universities are heavily dominated by right-wing neoliberal economists. Nevertheless my understanding - admittedly from within a bubble - is that even so more economists are critical of austerity policies than are in favour. That's based on surveys printed in the Guardian so there may be sampling errors.

[ 15. June 2017, 10:11: Message edited by: Dafyd ]

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Jane R
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Sipech:
quote:
The idea of 'teaching debate' is an alien concept. You may find a few outspoken economists on the left like Thomas Picketty or Ha-Joon Chang, but they are the exception rather than the rule.
This is a problem in many disciplines, not just economics. There is a dominant framework (let's call it a paradigm) within which you are allowed to tinker, but suggest that the whole framework needs to be changed and you're either a pariah or Albert Einstein.
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anteater

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As a comment on Chris Styles recommendation of Mark Blyth's book. Mark needs a commercial advisor or he'll never make many book royalities. Why?

His talks are great. I'm listening on YouTube to his talk-of-the-book, but it's such good fun, why read the book? Presumably his tendency as a speaker to characterise economic theories as bull (or) horse shit, or world leaders as Laurel and Hardy and his general light hearted attitude towards the disaster which is the modern economy, don't make it into print, so why would I read his book?

Unless he re-issues it as a comic book.

I've also just listened to Simon W-L. Also good, but with zero potential as a stand-up.

Maybe Mark stays sane on the basis you've got to laugh otherwise you'd cry.

[ 15. June 2017, 11:34: Message edited by: anteater ]

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Sarah G
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quote:
Originally posted by Sipech:
[QUOTE]Without having conducted a comprehensive survey, my answer is inherently biased towards the anecdotal. With that enormous caveat, the impression I get is that most economists would be highly critical of any Labour economic model.
<snip>
The idea of 'teaching debate' is an alien concept. You may find a few outspoken economists on the left like Thomas Picketty or Ha-Joon Chang, but they are the exception rather than the rule.

That's fascinating- one of the most controversy packed disciplines doesn't teach debate!

Please stick around; I suspect there's much to be learned.

One of the expressed concerns about the Magic Money Tree (MMT) is that seriously increasing investment in wages and investment in public services fuels inflation. Is that generally agreed? If so, how do the JC camp aim to neutralise that effect?

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Doc Tor
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quote:
Originally posted by Sarah G:
One of the expressed concerns about the Magic Money Tree (MMT) is that seriously increasing investment in wages and investment in public services fuels inflation. Is that generally agreed? If so, how do the JC camp aim to neutralise that effect?

I don't see how that can be agreed. The differentials between public and private sector are very small (and possibly negative), raw values explained by the higher education and qualifications required to work in the public sector, and the ongoing pay freeze (which means Mrs Tor has had pretty much no pay rises at all since the Recession during which time prices have risen by 25%.)

Bunging the public sector a few quid - hell, hiring a few more people so those left don't have to work stupid hours - isn't going to add to inflationary pressures.

Inflationary pressures which are, according to figures today, about to breach the 3% mark.

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chris stiles
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quote:
Originally posted by Sipech:
Without having conducted a comprehensive survey, my answer is inherently biased towards the anecdotal. With that enormous caveat, the impression I get is that most economists would be highly critical of any Labour economic model.

The reason being one of education. Universities predominantly teach the neoliberal economics of Friedmann and Hayek.

But that's fairly meaningless - all you are describing is a popularity contest masquerading as a serious field of inquiry (and no prizes for guessing why Hayek gets such attention in the US).
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alienfromzog

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quote:
Originally posted by anteater:
As a comment on Chris Styles recommendation of Mark Blyth's book. Mark needs a commercial advisor or he'll never make many book royalities. Why?

His talks are great. I'm listening on YouTube to his talk-of-the-book, but it's such good fun, why read the book? Presumably his tendency as a speaker to characterise economic theories as bull (or) horse shit, or world leaders as Laurel and Hardy and his general light hearted attitude towards the disaster which is the modern economy, don't make it into print, so why would I read his book?

Unless he re-issues it as a comic book.

I've also just listened to Simon W-L. Also good, but with zero potential as a stand-up.

Maybe Mark stays sane on the basis you've got to laugh otherwise you'd cry.

I would highly recommend Mark Blyth's book.

I don't think it's really true the Keynes isn't taught, from what I've read there is an on-going discussion between neo-Keynsians and Freidmanesque veiws.

Good alternative books are Krugman's End This Depression Now and Joseph Stiglitz's The Price of Inequality. All of these books are easily acceptable.

Blyth explains why both the theory and the practice of austerity is completely flawed and just does not work.

AFZ

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Enoch
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I don't think there is a money tree. I regret that it also is my considered opinion that economists choose which theories to believe in and advocate according to which theory would, if it turned out to be true, deliver what they'd like to see be able to happen. It's all driven by wishful thinking and whether you believe they know what they're talking about. I've emboldened that if because it's fundamental.

As much as on economic theory, it also depends on whether you're a glass half full or a glass half empty person. If you're a glass half full person, you find it quite easy to believe that a government escapes the rules that govern domestic economics and can spend its way out of its problems. If you're a glass half empty person, you don't.

Apart from that:-

1. Having lived through the period 1960-90, I can't avoid the conclusion that a government living on tick causes inflation.

2. If your currency inflates, it makes borrowing much more expensive and ultimately impossible. It's also a dishonest way for a government to treat its citizens.

3. The more extractive taxation becomes, the less people will feel any moral inhibitions about evading paying it, particularly if the rules appears random, partial, unfair or irrational.

4. When interest rates are low, it makes sense to borrow money to fund infrastructure projects - i.e. capital expenditure. And

5. It never makes sense to fund the revenue functions of government out of capital borrowing.

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Leorning Cniht
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quote:
Originally posted by anteater:
Learning Cnight: What's your beef with Murphy?
[..]
I can well believe that he has some things wrong and John McDonnell has, I believe, said that as a Macro Economist he leaves a lot to be desired. I can see some potential flaws but most of what he says has plausibility.

That's basically my problem with the man. Murphy doesn't understand economics, he doesn't understand tax incidence, and he frequently purports to believe contradictory statements at the same time* and yet he sounds vaguely plausible and several of the things he says sound superficially attractive.

That makes him the most dangerous kind of snake-oil salesman - he's the one telling you things you want to hear, and so you're less likely to question his accuracy.

He claims expertise he doesn't have. In my book, there's almost no greater sin.

*(one example - he rails against people who live abroad avoiding UK tax by living abroad (for example, Philip Green's wife Tina), whilst simultaneously claiming that wealthy people don't change their domicile in order to avoid tax.)

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Sarah G
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quote:
Originally posted by Doc Tor:
I don't see how that can be agreed. The differentials between public and private sector are very small (and possibly negative), raw values explained by the higher education and qualifications required to work in the public sector, and the ongoing pay freeze (which means Mrs Tor has had pretty much no pay rises at all since the Recession during which time prices have risen by 25%.)

Bunging the public sector a few quid - hell, hiring a few more people so those left don't have to work stupid hours - isn't going to add to inflationary pressures.

Inflationary pressures which are, according to figures today, about to breach the 3% mark.

Although much of this sounds plausible, I think there is a lot of value in asking where mainstream expert opinion is on this, and I hope Sipech can enlighten us.

Assuming JC intends to keep his promises, increased money is going to be spent.... spending a lot more than the Tories is surely his thing? It's certainly the expectation of his supporters.

My question is, does this in conventional economic theory add to the inflation rate, which as you say has already reached 3%?

With a follow up question, how is JC planning to keep inflation low?

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Doc Tor
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quote:
Originally posted by Sarah G:
My question is, does this in conventional economic theory add to the inflation rate, which as you say has already reached 3%?

Given that total public sector employment is around 1/5th private sector employment, you've a better case in arguing for private sector wage controls to put a break on inflation.

How does that sound?

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Dafyd
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quote:
Originally posted by Sarah G:
Assuming JC intends to keep his promises, increased money is going to be spent.... spending a lot more than the Tories is surely his thing? It's certainly the expectation of his supporters.

My question is, does this in conventional economic theory add to the inflation rate, which as you say has already reached 3%?

I suppose that what is driving inflation just now is a weak pound which is making imports more expensive and driving up prices overall to match. If that's so then I think increasing wages to compensate may not have any further inflationary effect.

One of the underlying differences between Keynesian economics and modern mainstream economics is that mainstream economics thinks that markets quickly find an efficient equilibrium, and Keynesian economics thinks that they can find inefficient equilibria fairly easily and then get stuck there. Rising prices without wages rising to match is a sign of inefficient behaviour.

I don't know that an inflation rate of 3% is near the danger zone. It's become something of an economic dogma that it must be kept low. Obviously it's in the interests of those of us with lots of savings to have low inflation rates. The value of low inflation rates to the wider economy is less clear. In the present economy where there are low wages and sluggish growth and rock bottom interest rates inflation might help get the economy moving by making investment in cash less attractive.

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anteater

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Leorning Cniht:
quote:
Murphy doesn't understand economics, he doesn't understand tax incidence
This illustrates the problem in getting to the bottom of these debates. It involves one in lots of learning, and of course, as a beginner, it is that much harder to tell the bullseyes from the bullshit.

Murphy certainly thinks he understands tax incidence, and is in disagreement with other economists, and presumably with yourself. It would take us quite a lot time to debate the rights and wrongs of all this, and I doubt it's worth trying.

Which is why it is so hard to base any election campaign on economics. It doesn't sound like you're against all left leaning economists, so maybe I'll agree that Murphy need not be the main source.

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PaulTH*
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"It's called Socialism" John McDonnell said proudly at last year's Labour Party Conference. But I don't understand any way in which Mr McDonnell's brand of socialism differs from communism. This is evident from the ringing endorsement the Communist Party of Great Britain gave to Mr Corbyn's manifesto. McDonnell is on record as singing the praises of Marx, Lenin and Trotsky. History shows us, in many parts of the world that it's a small jump from excessive state intervention to state control and totalitarianism. He also believes in extra parliamentary activity to destroy capitalism, and has called this weekend, for a million people on the streets of London to force Mrs May out. Along with trade union mobilisation.

While people may think my imagination is running riot, I can remember seeing Arthur Scargill on TV in the 1980's saying how much he admired how the Eastern Bloc countries were run. I have visited Poland several times since 2010, and I know people of my age group who can remember life under the communists. Everybody had a job and took as much sick leave as possible. They all had a doctor and they mostly retired early at 50. But nothing got done. They were a nation of zombies with no entrepreneurial spirit nor any sense of hope. The only way to get any favours was by loyalty to the Party. While religion wasn't suppressed, it was certainly oppressed. I know a lady whose father was a police officer. When her family wanted her to have her First Communion, she had to be sent to an aunt in a remote country village because her father couldn't be seen to be supporting it. Poland has come on a long way, but ask anyone there if they would like socialism back?

Capitalism generates wealth, but unfortunately it gets concentrated in the hands of the few. Socialism with its punitive taxes and overblown state destroys wealth and enterprise, and leads to a bog standard levelling down. What we need to find is a middle way, a sort of capitalism with conscience which allows the benefits of being a rich country to trickle down to everyone. My opinion is that the best way to achieve this is by centrist consensus politics. Corbyn's and McDonnell's plan to raise £50 billion by only taxing the idle rich and greedy tax dodging corporations is a fantasy, because they will simply restructure their finances to avoid paying it. So they will either over tax most of us or borrow and bust the economy. Their plan to repeal so called anti union legislation will see a return to the appalling Labour relations of the 1960's and 70's which I recall with dread.

I am mentally gearing myself up to a Corbyn government which I suspect will happen this year, but I think the magic money tree will have poisonous roots which will have baneful consequences long after I'm dead.

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chris stiles
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quote:
Originally posted by Dafyd:

I don't know that an inflation rate of 3% is near the danger zone. It's become something of an economic dogma that it must be kept low.

On this note; a number of people are arguing for the central bank targets to be raised from 2% to 4% on the basis that we know that the current target can lead to interest rates hitting the zero lower bound during a bust.
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chris stiles
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quote:
Originally posted by PaulTH*:

Corbyn's and McDonnell's plan to raise £50 billion by only taxing the idle rich and greedy tax dodging corporations is a fantasy, because they will simply restructure their finances to avoid paying it.

Actually, I'd argue that unless someone takes the bull by the horns and fixes this central problem capitalism in anything like its present form is doomed - and we are confined to some form of neo-feudalism.

Forget benefits and any form of social democracy, unless tax avoidance ends, states in the long term will not be able to fund basic things like the rule of law and the institutions which make markets possible.

Also, there's a strain of 'young people who want everything for free' to the discussion here and on other threads, to which I'll just leave this graph:

https://www.publications.parliament.uk/pa/cm201617/cmselect/cmworpen/59/IDExport-web-resources/image/Figure-9-Projected-lifet ime-receipts-health-education.png

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Dafyd
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quote:
Originally posted by PaulTH*:
History shows us, in many parts of the world that it's a small jump from excessive state intervention to state control and totalitarianism.

Most communist states in the world have come from revolutions against regimes whose only excessive state intervention was in the police and military.

quote:
What we need to find is a middle way, a sort of capitalism with conscience which allows the benefits of being a rich country to trickle down to everyone. My opinion is that the best way to achieve this is by centrist consensus politics.
The problem comes when people shift the centre about. Thatcher shifted it to the right. You could argue that Corbyn and MacDonnell's policies are simply where the centre was when Thatcher took power. To be honest, I don't think their manifesto is significantly to the left of Blair and Brown. The Liberal Democrat manifesto in this election included a 1p rise on income tax for middle and high earners which is arguably to the left of Corbyn.

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Doc Tor
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quote:
Originally posted by PaulTH*:
trickle down

I'm sorry, but anyone who uses this phrase seriously in a post about economics simply hasn't been awake for the last 50 years.

"Trickle down" hasn't, doesn't, and never will, work. It doesn't feed the hungry or clothe the poor or heal the sick. Everything good about this country, we've wrested, sometimes violently, from the hands of the rich and powerful. The mere idea that they'd let some it simply slip through their fingers is nonsense on a stick.

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Alan Cresswell

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quote:
Originally posted by PaulTH*:
What we need to find is a middle way, a sort of capitalism with conscience which allows the benefits of being a rich country to trickle down to everyone. My opinion is that the best way to achieve this is by centrist consensus politics.

That's a very interesting statement. First you define your "middle way" as the unbridled capitalism which the Tories seem intent on taking the UK towards - with the demonstrably un-workable "trickle down" conjecture that Doc Tor has already addressed. Then you say you opinion is for centrist consensus politics, so presumably if you voted according to your opinion your cross was next to the name of your Labour, LibDem or Green candidate - all of whom cluster around that centrist position.

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Baptist Trainfan
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quote:
Originally posted by Doc Tor:
quote:
Originally posted by PaulTH*:
trickle down

I'm sorry, but anyone who uses this phrase seriously in a post about economics simply hasn't been awake for the last 50 years.

"Trickle down" hasn't, doesn't, and never will, work. It doesn't feed the hungry or clothe the poor or heal the sick. Everything good about this country, we've wrested, sometimes violently, from the hands of the rich and powerful. The mere idea that they'd let some it simply slip through their fingers is nonsense on a stick.

Quite apart from issues of social justice, money will only flow from the rich to the poor if tax levels for them are high, and if there are significant tax advantages for divesting themselves of their dosh.
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Jane R
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Rich people don't like parting with their money. That is how they become, and remain, rich. That is why "trickle-down" economics does not work.

Or, as the late Terry Pratchett put it "There are more poor people than rich people, and it's easier to get money out of them."

Putting more money into the pockets of poor people not only enhances their quality of life; it boosts the economy, because they are more likely to spend it on goods or services. Rich people may do this as well, of course, but there are fewer of them so it will not have such a big effect - and they might just sock it away in their Swiss bank account instead.

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Boogie

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quote:
Originally posted by Jane R:
Rich people don't like parting with their money. That is how they become, and remain, rich. That is why "trickle-down" economics does not work.

Or, as the late Terry Pratchett put it "There are more poor people than rich people, and it's easier to get money out of them."

Putting more money into the pockets of poor people not only enhances their quality of life; it boosts the economy, because they are more likely to spend it on goods or services. Rich people may do this as well, of course, but there are fewer of them so it will not have such a big effect - and they might just sock it away in their Swiss bank account instead.

I 100% agree with this.

What use empty properties and piles of gold or art treasures hidden in vaults?

Rich people get rich because they care more about money than people. There must be a few that this doesn't apply to - but they are rare as hens teeth 🐔

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alienfromzog

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I am not an economist. However I think the following is a reasonable analogy of how our economy works. It is certainly closer to reality than any household analogy you may hear. I am hoping that some actual economist comes along to tell me what I’ve got wrong or congratulate me on my clarity of thought… YMMV.

quote:
This is an alienfromzog analogy:
Suppose, I own two fields. For the sake of simplicity I will stipulate that the soil is fertile and doesn’t require much in the way of attention and there will be no natural disasters... Essentially if I plant seed, it will grow and yield a crop I can sell. (I have tried various permutations but I want to make this simple).

To plant a field will cost me £3000. A full crop, when sold will net me £12,000 per field. So, do I plant one or two fields this year? Well, the problem is that I only have £5000 in the bank, so I can only afford 1 field’s worth of seed.

At the end of the year, I sell my crop and have a nice £12,000 return and the remaining £2000 means I have £14,000 in my account. Now, I have some very good arrangements with my local businesses so I only have to pay my bills at the end of the year but I have to pay for food for me and my family, transportation etc. etc. For the year this comes to £11,500. So once I’ve paid my bills I have £2500 left. So next year I cannot even afford to plant the whole field…

An alternative is that I borrow £1000 from my mate next door. I will even be generous and give him a big return on his loan, so it will cost me £1500 at the end of the year. I thus plant both my fields and at the end of the year I have a return of £24,000. I pay all my bills which will probably come to a bit more because I’ve shifted twice as much crop to market but still only comes to £15,000, so I have a return of £9000 minus the £1500 I own my neighbour. So my net at the end of the year is £7500 and I can afford to plant both fields without borrowing at all.
Example one:
Cash on hand: £5,000
Cost of seed / fertiliser etc: £3,000
Cash remaining: £2,000

Income from selling crop: £12,000
Subtotal @ end of year: £14,000

Costs for the year: £11,500
Net at the end of the year: 2,500.
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Example two:
Cash on hand: £5,000
Loan: £1,000
Cost of seed / fertiliser etc: £6,000
Cash remaining £0

Income from selling crop: £24,000
Subtotal @ end of year: £24,000

Costs for the year £15,000
Loan repayment: £1,500
Net at the end of the year: 7,500.

In terms of a modern, developed economy like ours, the empty, unused field corresponds to spare capacity in the economy – that is unemployment, underemployment (people who want to work fulltime but can only find part time work) and poor productivity (UK lagging behind developed world in this regard at the moment).

Of course the numbers are silly but the concept is vital that spare capacity is wasteful and ultimately austerity makes the economy smaller (in the first example I can’t even afford to plough and seed both fields next year).

That's revenue expenditure where the use of borrowing and government spending in the slump supports the economy. Capital spending would be, borrowing to buy another field (educating our population or investing in a new industry).

If you want to look at this properly in a real economy, it requires some serious maths which is beyond me to be honest. However it's easy to see which variables matter. Economists I trust will tell you that there is (still) significant spare capacity in our economy and real interest rates are effectively zero. Hence there is no doubt that borrowing to support the economy at this stage makes absolute sense and cutting back (austerity) is absolutely the wrong policy - it is totally counter-productive.

If I have two fields and £7000 cash and I borrowed to get 3 fields' worth of seed and fertilizer that would clearly be foolish as the best I could do is cram more seed into the fields I have (I don't know if this works but here I am reaching for some surrogate for inflationary pressures.... it's ok, I'll stop now).

AFZ

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PaulTH*
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quote:
Originally posted by Alan Cresswell:
so presumably if you voted according to your opinion your cross was next to the name of your Labour, LibDem or Green candidate - all of whom cluster around that centrist position.

I don't think that the manifesto Labour presented to us is in any way centrist. I don't agree with unilateral nuclear disarmament, though I long to live in a nuclear free world, and I don't agree with the Lib Dems on rerunning last year's referendum, so I wasn't able to vote for any of those parties.

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Paul

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Enoch
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# 14322

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quote:
Originally posted by Doc Tor:
... "Trickle down" hasn't, doesn't, and never will, work. It doesn't feed the hungry or clothe the poor or heal the sick. Everything good about this country, we've wrested, sometimes violently, from the hands of the rich and powerful. The mere idea that they'd let some it simply slip through their fingers is nonsense on a stick.

But that's just as much a statement of political or economic faith as the opposite view.

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Brexit wrexit - Sir Graham Watson

Posts: 7094 | From: Bristol UK(was European Green Capital 2015, now Ljubljana) | Registered: Nov 2008  |  IP: Logged
chris stiles
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# 12641

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quote:
Originally posted by Enoch:
But that's just as much a statement of political or economic faith as the opposite view.

Except for the actual studies of 'trickle down' done by economists at - variously - Harvard, Oxford and the IMF. Where the benefits of trickledown have proved to be - at best - tiny in the most ideal of cases, and in the general negative.

[ 17. June 2017, 13:04: Message edited by: chris stiles ]

Posts: 3541 | From: Berkshire | Registered: May 2007  |  IP: Logged
alienfromzog

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quote:
Originally posted by PaulTH*:
quote:
Originally posted by Alan Cresswell:
so presumably if you voted according to your opinion your cross was next to the name of your Labour, LibDem or Green candidate - all of whom cluster around that centrist position.

I don't think that the manifesto Labour presented to us is in any way centrist. I don't agree with unilateral nuclear disarmament, though I long to live in a nuclear free world, and I don't agree with the Lib Dems on rerunning last year's referendum, so I wasn't able to vote for any of those parties.
Given that a body economists supported it as in-line with mainstream economics and it contained no mention of unilateral disarmament and indeed committed to renewing trident, what on earth are you talking about?

AFZ

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Everyone is entitled to his own opinion, but not his own facts.
[Sen. D.P.Moynihan]

An Alien's View of Earth - my blog (or vanity exercise...)

Posts: 2096 | From: Zog, obviously! Straight past Alpha Centauri, 2nd planet on the left... | Registered: Dec 2003  |  IP: Logged
PaulTH*
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# 320

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quote:
Originally posted by alienfronzog:
Given that a body economists supported it as in-line with mainstream economics and it contained no mention of unilateral disarmament and indeed committed to renewing trident, what on earth are you talking about?

I mentioned unilateral nuclear disarmament because Alan suggested the Green Party as a possibility. When taking advice from economists, we must remember that there are as many different opinions as there are economists. I don't think hiking taxes to levels not seen since the 1940's is mainstream economics. As canfirmed by the IFS.

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Yours in Christ
Paul

Posts: 6365 | From: White Cliffs Country | Registered: May 2001  |  IP: Logged



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