It’s the general election in Britain tomorrow, and candidates are on their last minute tours of the country today. The issues of terrorism and security are high on the agenda at the moment, and there’s been a lot of debate about who can be trusted to deliver the best post-Brexit deal. As usual there are lots of topics that have barely come up, including climate change, energy, democratic reforms. Among those un-asked questions is how the various parties might deal with a recession.
Imagine the discussion we could be having – if the economy were to take a downturn, how would your government react? What would you do differently from the Labour government 10 years ago? Do you have a strategy?
The economy is cyclical. Recessions hit the British economy in the mid 70s, early 80s, and early 90s. The next one took a little longer to materialise, leading some to speculate that they had ended boom and bust. When it did hit, it was a big one and we haven’t recovered the ground yet. That means that there is much less flexibility for when the next recession comes along. You can’t slash interest rates to stimulate demand if interest rates are already at record lows.
I’m not going to attempt to predict a recession. If it was easy to call we wouldn’t be caught out by them. But we do know that there are danger signs. High levels of consumer debt is one of them, and Britain’s unsecured debt levels are a whisker away from where they were when crisis hit in 2008. Property bubbles are part of the picture too, and Britain’s housing market has slowed in the last three months. There are all sorts of other contributing factors, and of course any kind of uncertainty or shock plays a role. Britain has huge uncertainty hanging over it in EU divorce negotiations.
The market will be factoring all of this in, and I presume that the treasury has contingency plans, but we haven’t talked about it as a nation. Wouldn’t it be good if we thought about it ahead of time, rather than panicking?
When governments react to a shock or a slowdown, it can be regressive. Quantitative easing is known to benefit the richest most. Or we could design schemes to benefit the poorest first, as direct payments or income support would do. We might throw money at half-baked schemes to stimulate demand, like the car scrappage scheme – or we could think of an equivalent that would have environmental benefits too. If a bank were to get into trouble again, there are ways to rescue it that benefit shareholders at the expense of taxpayers, and ways to to do it that benefit taxpayers in the long term and let shareholders carry the risk.
Presumably politicians don’t talk about this stuff in advance because opponents will round on them for ‘talking Britain down’. But that means that we never have a democratic discussion about how to deal with recessions. It’s an inevitable part of a growth economy, something that has more impact on ordinary people than most government policies, and it’s somehow beyond us to talk about it.
What do we do about that? How do we have a grown up conversation about recession ahead of time? And what policy ideas ought to be in the emergency bag?
I don’t really know, but I’d be interested in what we could come up with together. Drop me a comment or an email if you have any ideas or suggestions.
The Earthbound Report 
Why did May call an election early? Because she has been advised that economic conditions are about to get very tough, either because of Brexit, a recession or both and when they do, she would likely ;loose an election.
So yes, we need to talk about this now. You have reviewed several books in the last year that give some very good advice regarding how to change some aspects of the economy to make it more robust, or fairer, or less dependent on endless growth. But the UK is very hooked into what happens elsewhere; didn’t the ’08 recession not start with the USA sub-prime mortgage market?
Looking backwards over the past 200 years, it can be seen that recessions are easy to predict; there has been a consistent 18 year cycle, broken only by the two world wars; the cycles in different countries are, however, not closely synchronised, though more so than in the nineteenth century as economies are more interlinked.
The mechanism was explained in detail in one of the later chapters of Progress and Poverty. In principle, over the course of a cycle, land prices rise as a multiple of rents ie the yield drops. Towards the end of a cycle, the price rises accelerate as speculators pile onto the bandwagon, borrowing to purchase assets which consist, inside wrappings such as securities or equities, flows of what is primarily land rental income. This sets up a process of positive feedback.
Yields eventually drop to a critical point where they are barely enough to service the debt. The system is then vulnerable to the slightest disruption and crashes. Unfortunately, the crashes have been historically attributed to the disruption rather than the underlying systemic instability.
The problem can be prevented, as George pointed out, by applying land value taxation at a sufficiently high rate. That provides a negative feedback loop and stabilises the system.
I think you will find there is lots of planning for recessions going on in Treasuries and Economics departments around the world. Quantitative easing didn’t just suddenly appear, there had been lots of academic work on it well before the 2008 crash.
There is no way of preventing recessions, they are a necessary part of the economic cycle, to clear out the dead wood economically and tame over expansion. But we can’t predict when they will come; we can’t say that there will be one 18 years after the last one. I well remember Vince Cable predicted 12 of the last 3 crashes.
LVT will not prevent recessions. It might moderate them (or not) but like most one club solutions it isn’t a magic cure.
Lots of work has been done on the banks, like resolution mechanisms to allow them to go bust in an orderly way so the taxpayers aren’t on the hook.
One thing we can be sure of, the next recession will surprise people because they always do and will not happen in the way you expect or plan for. It is better to have a list of options than a fixed plan.
“I think you will find there is lots of planning for recessions going on in Treasuries and Economics departments around the world.”
How come the 2010 recession hit so unexpectedly?
“Quantitative easing didn’t just suddenly appear, there had been lots of academic work on it well before the 2008 crash.”
But QE has never worked. It supports overpriced asset values.
“There is no way of preventing recessions, they are a necessary part of the economic cycle, to clear out the dead wood economically and tame over expansion.”
That is a non-falsifiable assertion. You can do better than that.
“LVT will not prevent recessions.”
The policy has never been tested. No-one can say with certainty whether it would, or would not, work. However, every recession in the past 200 years has been preceded by a land price boom followed by a crash. Since land is one of the three primary factors of production, and a restriction in supply creates a supply-side bottleneck, the suggestion of a causal relationship is at least a possibility.
“but like most one club solutions it isn’t a magic cure.”
Many pathological conditions can be traced to a single cause. If your water main is damaged, your supply will be faulty. In that case a one-club solution is needed, and it all that is needed.
Given that no wealth can be produced in the absence of land, the situation is analogous. Even Google and Amazon need suitable locations for their server farms and warehouse, with good infrastructure (electricity, internet access, etc) and a pool of suitably qualified technicians available on call to keep their systems running 24/7.
In some ways there are two different questions here. The first is how do we deal with recessions, and yes, economists and academics and the treasury plan for these. My point is that this is never done democratically.
The second question is how do you reduce the severity of recessions, or move beyond the boom and bust of the current system. That’s where an LVT has a role. It might not prevent recessions altogether in an international economy, but it would help. And since there are many other good reasons for a land tax, we should put one in place.
The economy is made up of billions of decisions made by millions of people every day. It is incredibly hard to predict in a ‘this will happen tomorrow’ kind of way. It is also impossible to finely control unless you have a communist type system and that brings it’s own problems ( like demonstrably bringing slower average growth than a market boom and bust one). Hayek’s knowledge problem that you can never know enough to successfully control an economy.
There was no recession in 2010 in the UK. I assume you mean the 2008 recession. It was predicted by many in a ‘this can’t go on forever, warning light flashing kind of way’ but no one could sensibly predict exactly when or where in the economy the recession would hit. Certainly not in a way that would have a public policy use.
Even if the Chancellor thinks a recession is going to happen in 6 months time and takes action to slow the economy to prevent it he might have got it wrong so that we forgo growth that we could have had, or worse brings on the recession he is trying to prevent. Our tools for manipulating the economy are blunt and slow working. That is why concentrating on getting the fundamentals right (which might, among other things, include a LVT) is the best policy.
Not being able to prevent recessions and their role in clearing out dead wood in a market economy might not be falsifiable but I will make an appeal to experts that it is pretty much accepted by nearly all mainstream schools of economic thought. A boom in land prices before a recession is a symptom rather than the cause. Other assets being overvalued because the economy is showing signs of overheating investors move to land (it’s a good hedge against inflation for example).
On QE the question is what do you think it was meant to do. It was used as intended; to prevent deflation that could spiral and turn the recession into a slump (pace Japan in 1990s). Supporting asset prices was part of that. Since we didn’t have a deflationary spiral I think it worked quite well.
Your example of water supply being faulty as an analogy for the UK or world economy is clearly overly simplex. Unless you think the economy functions like the MONIAC which no living economist does.
https://en.m.wikipedia.org/wiki/MONIAC
LVT cures cancer too.
“LVT cures cancer too.”
Who has ever claimed that? However, the economy, in all circumstances, is the application of human labour to natural products which are transformed into desired goods which are then exchanged. Everything else sits on top of that. This is true even of high-level services when what is sold consists of information and knowledge.
The process gives rise to three revenue streams, wages (the return to labour), interest (the return to capital), and the residue, rent, which is the return to land. Once the economy develops from an agricultural one to an industrial one, and then to an information one, productivity increases by orders of magnitude. Rents of land which can be used for commerce rise correspondingly, by orders of magnitude.
Booms in land value commence at that phase of the cycle when recovery from a previous recession is starting to occur. Investors believe that prices will continue to rise, and so land becomes regarded as a good investment. Most land is “wrapped” into securities of various kinds such as equities. The psychology of investors gives rise to what is in effect a positive feedback loop. If you analyse previous boom-busts you will find that the P/E ratio rises to a point at which the system is unstable as income is barely sufficient to service debt. I suspect that figure is around 35 ie representing a yield of < 3%.
The boom is causative in that the collapse leads to vast amounts of unrepayable debt. Underneath this debt are land titles whose value has dropped. Owners are reluctant to sell or lease as this crystallises the losses. Thus the (mostly urban) land is held out of use since rents and prices do not fall to market-clearing levels. Because land is a prerequisite for economic activity, the withholding gives rise to a bottleneck. A survey of London businesses about 20 years ago revealed that lack of suitable premises was a major obstacle to expansion. I experienced this myself when I worked for a firm of manufacturing chemists based in Southwark. Eventually the firm moved to Basingstoke but lost key members of staff in the relocation.
It would be worth doing some research on this subject based on the figures for the past three recessions. It may be significant that these recessions have hit at intervals of around 18 years, a frequency also experienced in the nineteenth century cycles. The frequency is so consistent as to call for an explanation.
The last 5 UK recessions were 1973, 1975, 1980, 1990 and 2008. Only one 18 year gap between them.
Not sure of the chances of getting a research grant for your theory.
“The last 5 UK recessions were 1973, 1975, 1980, 1990 and 2008. Only one 18 year gap between them.”
1973-1980 were all part of the same recession. The UK economy was further squeezed by the Howe measures to control inflation. It did not begin to recover until around 1984.
These cycles can be traced through the nineteenth century.
“These cycles can be traced through the nineteenth century.”
Using Ley lines and numerology?
We can quibble all day over factual inaccuracies such as the UK economy growing strongly in 1983. Ultimately I don’t find single solutions for problems in complex systems convincing. I don’t think you’ll persuade me that LVT is a magic bullet rather than one of many tools for managing the economy.
‘ “These cycles can be traced through the nineteenth century.”
Using Ley lines and numerology?’
The 18 year real estate cycle is, if not an established fact, sufficiently widely reported as to be worthy of further investigation. If you have not come across the theory, then you have not been paying attention. Criticise it by all means if you can show that it is a construction of massaged or otherwise selective use of statistics, but your sarcastic tone or your response indicates the kind of arrogant state of mind which is not conducive to scientific enquiry.
“We can quibble all day over factual inaccuracies such as the UK economy growing strongly in 1983.”
It was you who claimed three recessions within the period 1973-1980, which implied there was recovery in-between. The recovery started after 1984. If I recall, house prices bottomed-out in 1983. Instead of blustering, you could use data such as that collected by Nationwide to put your argument on a sound basis – or not.
http://www.nationwide.co.uk/~/media/MainSite/documents/about/house-price-index/downloads/uk-house-prices-adjusted-for-inflation.xls
“Ultimately I don’t find single solutions for problems in complex systems convincing.”
Neither do I.
“I don’t think you’ll persuade me that LVT is a magic bullet rather than one of many tools for managing the economy.”
Neither do I. But it would not be a professional plumber who did not own a set of spanners and used only duct tape and mastic.
Ah. It becomes clear.
I thought it was obvious that the post was discussing economic recessions, not property ones given to numerous references to the economy. Given that an economic recession is defined as two quarters of GDP contraction and recovery return to GDP growth, house prices don’t come into it directly.perhaps I could have defined my terms better but then so could you. Most people whose economic thinking is total wrapped around Georgism don’t think of property recessions when they use the term recession.
Now there are theories of Elliot waves and economic super cycles but you weren’t referring to them.
The Georgist view is interesting but suffers from its followers trying to use it to cover everything. It isn’t the ‘One weird trick’ that can solve everything and even most of its devotes don’t think it will end the economic cycle which abolishing economic recessions would imply.
Ah. It becomes clear.
“I thought it was obvious that the post was discussing economic recessions, not property ones given to numerous references to the economy.”
What recessions are not driven by the property cycle?
“Given that an economic recession is defined as two quarters of GDP contraction and recovery return to GDP growth, house prices don’t come into it directly.perhaps I could have defined my terms better but then so could you. Most people whose economic thinking is total wrapped around Georgism don’t think of property recessions when they use the term recession.”
That is an econometrician’s definition. What the public at large experiences as depression is persistent high levels of unemployment and difficulties in maintaining a livelihood. These are invariably preceded by booms characterised by high levels of debt, accelerating land prices and falling yields, culminating in a crash. Because land is a primary factor of production, there is an effect on the entire economy; collapses in tulip prices or dot-com shares cannot give rise to this kind of dislocation.
“The Georgist view is interesting but suffers from its followers trying to use it to cover everything. It isn’t the ‘One weird trick’ that can solve everything”
If someone digs a trench across your water main, your taps will run dry. You could of course argue that whoever was doing the digging should not have started work before consulting a map showing the position of the underground services, but there is no need to invoke multiple causes for an explanation. The one weird trick is to mend the broken pipe.
“and even most of its devotes don’t think it will end the economic cycle which abolishing economic recessions would imply.”
What is this “economic cycle”? It is a law of nature that there has to be such a cycle?
Hi Jeremy,
I have been enjoying you blog the last couple of months and thought I would reply to your questions about recession and policies with a few ideas and more questions.
1. what do we do about the lack of recession policies? 1. It immediately makes me think of the USA ‘New Deal’ from the 1930’s, and that each community/business gives a little we can get a lot. For example, could 2. How to get the public talking about this? 1. I think it is about framing. Most want to assume we will keep going up up up, but what if we flip the conversation? There are so many who the difference between a recession and growth is little. They are still not making ends meet. Could we use a recession to improve equality? Community infrastructure? 3. How to embed environmental outcomes? 1. Planning policies could be a good start. Relaxing planning policies toward environmental and community related outcomes. 2. In neo-liberal policies, planning policies, infrastructure, and regulations are used to their advantage to continue exploiting natural resources and infrastructure. For example, it favors big ticket infrastructure projects and development much to the detriment of community or sustainability in the community. 3. Sustainability related community-led movements though have many barriers to implementing urban gardens, cycle paths, waste recycling or other solutions to problems. Some of it has to do with money, but most of it has to do with policy and planning barriers. The council tells them they can’t do it, because its not in their council plan, goes against parking requirements, has maintenance issues, or your group needs to cover insurance we don’t do it under council insurance. 1. Cycle paths could be built with paint and removing a few cars. Often in recessions people lose their cars, can’t afford them, lack health insurance. Being able to ride a bike could save disposable income, boost mental and physical health, and reduce air pollution. 2. Food and waste reduction. This is a growing area, but it still contentious around sell by/use by dates. During recessions could we use policies and work with waste providers/trucks to divert the food to other uses? Could they bring it to a free community fridge? Feed animals? Can we open up planning and regulations to make this easier? It could create more jobs and reduce 4. Recession policies with environmental outcomes could do well to focus on this area. Benefits include, promotion of local economy, increase in individuals cycling 4. Property bubbles and housing issues 1. I am a big fan of bringing back community banks or building society associations. Could these structures help facilitate a cushioning of the property market? Could individuals who own multiple homes, look at a rent -to-own scheme thus reducing their debt load? 2. Joining local projects could improve housing prices so we could tie this into local environmental projects that could increase business opportunities and innovation for people. 5. Life Cycle Analysis, Circular Economy, or the Donut Hole Economics should be part of any recession talk. 1. This could play well to all parties to embrace and could use various narratives within them. In a recession even neo-liberals looking at numbers should like this. 2. If their is limited money for investment for the foresable future is it better to do a project with a 10% return over 5 years before it crashes or a 5% return over 30 years? 6. Talking Britain Up 1. Why does the recession have to be about Talking Britain Down? So many are disillusioned with politics as usual could we use the community and individual family health (mental, physical, and financial) as ways to show that environmental recession policies could boost these things? 2. for example… “Jump your income out of this recession, join a local project today” 3. Having a grown up conversation means looking at the opportunities in the recession for the 80% of people who aren’t the elite and aren’t making a killing off globalism. 7. Health 1. Government would need to foot the bill for health though. This would allow flexibility in people pursuing the things above. A comfort of mind. 8. Lastly, how to use robots to our effectiveness? 1. I stumbled across this article today. An interesting point about wealth and technology from Stephen Hawking I just stumbled across if you haven’t seen it. http://www.huffingtonpost.com/entry/stephen-hawking-capitalism-robots_us_5616c20ce4b0dbb8000d9f15
Apologies for any grammar mistakes, it was a pretty quick brain dump.
Kind Regards, Megan Megan Sharkey (BSc, MPlan, MSusD) current: Doctoral Student in Urban Studies at University of Westminster
Mob: 07585868253 | w1627274@my.westminster.ac.uk London UK *Building a sustainable future starts with you!*
Thanks Megan – there’s a lot in there! Much of it we should be doing anyway, recession or not. I think tying environmental goals in with recession planning is important, and that was something the ‘new green deal’ group tried to do. They called for a stimulus packaged based around retrofitting and energy efficiency, among other things. I’d still like to see that, though again there’s no reason to wait for recession to do it.