LETTER: Our old economic models are broken

I HAVE been following the debate about the state of the economy between the mainstream political parties with interest.

In broad terms, the camps seem to split into “austerity-quick” and “austerity-slow’” and then sub-divide further into “austerity for the poor” (Conservative) or “austerity for all” (Labour and Liberal Democrat).

The Conservative Party is holding true to form: those with much shall have more, those with little shall have less. This economic and financial crisis is of epic proportions but the sight of Chancellor George Osborne pleading with the EU to maintain the privileges of the rich and powerful banking class was an unedifying spectacle.

Moreover, he gave the appearance of a man who had no grasp or the remotest understanding of the way this might be perceived by ordinary folks at home who are struggling to “make a do”. It failed to register even the slightest flicker in the consciousness of the party leadership, or if it has they have kept the fact well hidden.

Former Chancellor Nigel (now Lord) Lawson is on record as saying the Government should no longer be living in fear of the bankers. In other words, it should call their bluff. Unfortunately Prime Minister Cameron and Chancellor Osborne are continuing with their policy of appeasing powerful and vested corporate interests.

One aspect absent in the debate about debt-based public spending and credit-based private consumption is the concept of the marginal productivity of debt. This measures the relationship between additional debt and additional GDP. Providing the ratio is one or greater, then adding debt produces a larger expansion in GDP; once the ratio falls below one, the increases in debt are accompanied by economic contraction.

In certain political quarters, there is a universal belief that borrowing more money will produce growth. It may do, but if growth is at a lower rate than the rate of increase in debt then we will be in a situation where the economy is literally devouring itself through debt.

I think the “big secret” of our current plight is that the old economic model is broken and nobody has a clue what to do about it. The gods that once were worshipped with adulation have failed.

As David Penney has pointed out in his letters, it’s time for some serious rethinking.

KEVIN HEY

Castle Road, Colne