Of iced windscreens, national debt, and the irony of higher differential effects

Today is Epiphany Sunday, and I had a personal epiphany about the relationship between Britain's National Debt and the ice on a car windscreen.

Prior to Christmas I had hardly had to use antifreeze to clear the car windscreen at all this winter. Ironically the need to do so began after we were already past the winter solstice - the shortest day, which in 2017 was Thursday 21st December.

Both yesterday morning and this morning I had to spend a fair amount of time scraping ice off the car windscreen before going to Trudy Harrison's surgery and church respectively. This evening I have been out to put a cover on the windscreen as I shall be up early tomorrow to go to a county council pre-meeting, and already found that ice was forming again, so it's obviously going to be another heavy frost tonight.

This is part of a cycle of events in which the main variable - average temperature - changes during the seasons. It drops in winter - the first differential being the daily average change in temperature - as a result of the lower average daily amount of sunlight between the Autumn and Spring Equinoxes.

The second differential is the rate at which the drop in temperature changes, which in turn is driven by the difference between the current temperature and that consistent with the current amount of heat from sunlight, which in turn is driven by the actual cause of the seasons, the change in the length of the day.

But there is a time lag between the cause of the seasons - the change in the length of the day -and the effect - how cold in gets in winter or hot in summer. The coldest part of winter is well after the winter solstice, after the days have started to get longer again which will eventually lead to Spring and Summer, while the hottest part of Summer comes after the days have started to shorten.

Hence you have the irony that the effect of winter or summer is strongest when the process which will bring that winter or summer to an end has already started. The second differential has already reversed direction and so the first differential is shrinking and will soon reverse direction, but it has not yet done so and hence the change in direction has not yet begun to take effect.

Those readers who managed to stay awake during the calculus part of their school maths syllabus will understand that this is not uncommon in many cyclical processes, natural or human.

The simplest example to understand is when a car, ship or aircraft which has been changing course in one direction reverses this and begins to change course in the opposite direction.

The driver, helmsperson or pilot has already turned the wheel to change the direction of the turn, and if it is a rapid change of course those on board will already be feeling the g-force as the direction of travel is altered, but for a time even a car, more so an aircraft and much more so a ship, will continue to move in the old direction before the new takes effect.

I now arrive at the point of this discussion.

The economy of a country is far more like a supertanker than a car: it takes a VERY long time to change direction.

There can be no better example of this that the attempt to get Britain's national deficit and debt back under control when they went into highly dangerous territory during the Brown government.

Now, there is absolutely now doubt whatsoever which government started the spiral of increasing debt.  The 1979-97 Conservative government managed to run a budget surplus for a significant proportion of it's time in office and although there were some serious bumps in the road, managed to hand over an economy on leaving office in 1997 which was experiencing strong growth, low inflation, and a budget deficit of modest proportions.

For their first few years the 1997-2010 Labour government kept to the plans of the previous government but by 2005 independent bodies were suggesting that the debt Labour war running up was higher than was wise - and that's after they had kept millions of pounds of investment off the books through accounting tricks like the disastrously mismanaged PFI - described by one candidate in the Copeland by election as "Buy one hospital, pay for six" though it's arguably more like ten.

Then in 2007 the crash hit, and Britain's deficit went from a cause of concern to a disaster. When labour lost office in 2010 Labour was spending four pounds for every three coming in and the interest payment required to service the national debt which had been accumulated was more than the country spends on schools.

Worse, the loss of control of the public finances by Labour in 2007 was a second differential effect - as the deficit spiralled out of control and debt went up that meant more interest to pay on the debt and hence a bigger deficit  - a classic vicious circle.

This was the mess which the coalition inherited in 2010. Were it not for the painful measures to bring expenditure under control, often described as "austerity" which began in 2010 - and which, incidentally, all the major parties agreed in 2010 would be necessary, including Labour - Britain would by now have had a Greece-style collapse.

Unfortunately the measures taken by the coalition to bring expenditure under control were also a second differential effect - and we are still many years from being back on a truly sound financial footing as a country.

In fact, after eight years of financial restraint, what has been achieved is not a reversal of direction, but only a very large reduction in the first differential - Britain is still running a deficit so the national debt and the burden of interest to pay on it is still going up. It's currently about £2,000 a year per household in Britain.

There are three mutually exclusive criticisms or concerns which are often made of the handling of the deficit and debt by the present Conservative government and its' coalition predecessor.

One of these I regard as having a good deal of truth in it, one is a position which I strongly disagree with but accept that an honest and intelligent person could hold and the third could only be put forward by a fool or a knave.

The view which I personally sympathise with is that both the deficit and debt are still too high and that Britain needs to get back to a budget surplus as soon as practically possible and pay down some of the debt. This is not going to be politically or economically possible any time soon and for the avoidance of doubt, I am not criticising George Osborne or Philip Hammond for the fact that they have not been in a position to do it, but it is the policy which I would like to see us move as close as possible towards.

An alternative position, which for want of a better description we could call the Ed Miliband view, is that Britain needs to spend more and could accept higher borrowing as a result. I strongly disagree with this but it is at least an honest position and there are people I respect who hold it.

However there is a third line of criticism which makes no sense whatsoever, coming from certain parts of the Labour party and some parts of the media, which is to criticise the government both for spending cuts and for borrowing too much.

Yes, the government has borrowed much more than I like. Yes, because of the second differential effect the government has now borrowed more in the eight years since 2010 than Labour did in the three years between their loss of control of the budget in 2007 and losing office.

However, it is incoherent nonsense to simultaneously criticise the present administration for borrowing too much money and for not spending, and therefore borrowing, even more!

There are very special circumstances, first set out by Keynes, in which extra government spending can pull a country out of recession, take up slack in the economy,  and largely pay for itself.

But those circumstance only apply if a number of conditions are met including there being lots of slack in the economy, which in the UK in 2018 is simply not the case. As the IEA chief economist Julian Jessop wrote a few months ago,

"The fact remains that there are now many fewer people looking for work and little spare capacity in the economy as a whole. As a result, a large fiscal stimulus is still more likely to feed through into higher inflation than higher economic activity – unless you believe that additional government spending can magically boost the UK’s productivity overnight. Interest rates are now far more likely to rise too."

(This quote came from his article "Why there really aren't any magic money trees," which was published on the IEA website.)

To solve a problem like the financial mess created under Gordon Brown, you need to stick with sound and tough financial policies for a long time.

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