Tuesday, October 28, 2008

You can't spend your way out of a recession, or can you?

In this week's press there is much being made of the Conservative attack by David Cameron et al on spendthrift Labour, as if its mismanagement should now be obvious to all. The political attack exploits the present crisis by pretending it is as much or more national than global and goes straight for Gordon Brown's jugular by seeking to expose his long and hard-won reputation for prudence and stability. The message is "You can't spend your way out of a recession!" 16 Hayekian or Friedmanite or Monetarist or New Keynesian or Neo-liberal economists wrote to the Sunday Telegraph saying "Occasional slowdowns are natural and necessary features of the market economy." Thus far I agree with them. They go on to say laissez-faire is the best policy and if something has to be done "which is highly disputable" then "taxes should be cut" i.e. George Bush's policy on entering office in the 2001 recession or the Geoffrey Howe fiscal and monetary stance of 1981, which cut spending and sent unemployment off the scale of all economists models to over 3 millions. The economists include Tim Congdon, Alan Peacock, Ruth Lea and the Chief Economists of Lloyds TSB and Cazenove. They want Government to provide tax cuts while remaining within 4% budget deficit and 40% ratio to GDP of National Debt. I think this stance is political and ideological and unwarranted. Conservatives have failed to notice it seems that the FT's economists and leading commentators are all now sounding convincingly Keynesian who recognise that the Government can and must spend our way out of recession. They recognise the unprecedented scale of problems this time, possibly by being more closely aware of the dangers of severe systemic problems in the financial system just as we enter recession.
The more died (sic) in the wool Conservative 16 are not getting it, even if Tim Congdon (FT 22 October) went so far as to advocate an unlimited long term repo liquidity window by a better capitalised Bank of England, only because he otherwise fears a "rapacious and hostile" Government. The not so sweet 16 want to discredit Gordon Brown in the Mais lecture tomorrow when in his Iron Chancellor style he tells us what we already know that the National debt will grow to exceed 40% (temporarily). His unfortunate iron (he doesn't do ironic) style is one of wooden assurrances (that repeat like a stuck-record, whichj Polly Toynbee in today's Guardian unkindly describes as "unable to stop saying things so blindingly untrue that you wonder how he gets the words out" that "as hammer blows rain down day after day" he can still reassert that Britain is better placed than other economies to weather recession). I answer some of the questions and make pointed statements below about Gordon Brown’s stewardship of the economy about which I have somewhere written a short history.
1. Government’s role is not as commanding as that of a company’s board and CEO, so let’s not exaggerate.
2. In Labour’s first term Gordon Brown kept to conservative budget forecasts inherited from Ken Clark, his Conservative predecessor whose Keynesian walk belied his Monetarist talk and who sensibly never remained within his own deficit projections. Gordon did, however, and went even further by repaying £15bn of National Debt almost immediately (on Martin Wheale’s advice from the NIESR when he really did not need to that - Martin was really surprised at being taken so literally when all his own forecasts were rarely close to accurate). Gordon embraced the idea as further political signal of his prudence to the markets (while at the same time the UK generously left Hong Kong endowed with $50 billions of foreign reserves that it could just as easily have raided to balance the UK Government's budget and boost spending).
3. When recession and dot.com bust arrived in 2001, Gordon by chance or by foresight (jury's still out) anticipated this by raising public spending ahead of time sufficiently to keep GDP growth positive when the US went into recession (and EU Eurozone growth was flat and low with 3 times UK unemployment rates). Consequently, UK property price growth barely stumbled. This one time Gordon really did ban boom & bust, but has never resorted to owning up to that; the truth that the UK economy is tied so tightly to that of the US has never been publicly admitted. Please note too that even New Labour’s distancing from old Labour’s so-called tax and spend profligacy was greatly exaggerated for political effect; there was only ever one year when Labour spent outside of Maastricht criteria even though these had not yet been invented! Labour’s budgets in the distant past, even by today’s prudential standards, were always conservative, marginal tax rates notwithstanding.
4. The UK in the last 14 good years has experienced improving and high employment (mostly under New labour), strong currency (whereby UK firms bought foreign firms and other assets cheaply), attracting massive foreign investment inflows (greater than China’s such that a quarter of UK industrial production received much higher investment and productivity growth than would otherwise have happened) and aggregate prosperity was high. 5. The government’s real share of the economy (not the budget’s ratio to GDP) was lower than the US (at about 18%) and the UK became for a few years the world’s 4th largest economy.
6. The trade deficit-gap grew too large (funded by selling financial assets) and property rose too fast depriving UK manufacturing of investment finance from banks, and yet industry performed better than in the ’80s. Public house building was abandoned absolutely (big mistake) and local government and agencies' powers, social and legal responsibilities continued to be squeezed financially under New Labour as had been begun under preceding Tory Governments. New Labour was too slow in repairing the damage done to Health and Education, and, in its first term especially, entirely ignored its employment responsibilities in the Public Sector as it did its responsibilities to pensioners. These are financial and economic engines of the economy that New Labour conservatively mistrusted and neglected.
7. Finance and professional services prospered at twice the rate of the rest of the economy, but no-one knew whether to, or how to, contain the most global of economic sectors on which much of 'trickle-down' economic 'feel-good' theory was based!
8. Inflation, bank rate, growth, national debt and budget deficits were kept within practical bounds. Despite households having the highest debt to GDP ratio in the EU, relative to household assets net debt was at EU average and considered safe.
9. Gordon’s crimes include allowing public pensions to drop to half of what they should be. Doubling the state pension to restore the value prevailing in the 1950s would have been eminently affordable as growing taxes paid by wealthy pensioners pay for all of state pensions and more. Poverty and old-age health provision could and should have become much better. Instead they deteriorated and continue to fester badly. A promise to double the state pension will win the next election for whichever party has the good sense to see that.
10. Inefficient housekeeping precepts (inherited from the Tories in the ’80s) led to failure to relate tax income directly and indirectly to public spending so that opportunities to economise on net cost to taxpayers of public spending were regularly missed and this led too to rotten accounting of public-private partnership schemes and inability to see the economic growth benefits of more and better targeted social welfare and infrastructure spending. In 1979 Thatcher and Neave banned the Treasury from ever again informing Cabinet of the difference between the gross cost and net after-tax cost of any item of public expenditure. This ban was not overturned since then.
In conclusion, there was little in the last 3 years say that Gordon or Alistair Darling failed to do that could have very significantly softened the impact of the present crisis whose risk factors are predominantly global, not even tightening the economy sooner by setting aside more room for borrowing within the Government’s own Golden Rule. Darling is sensibly trying to bring forward medium term spending plans and to speed up current spending so as to have a more timely counter-cyclical effect on top of the normal automatic stabilisers. The Conservative opposition's rhetoric about the Government not having a plan only an overdraft is knowingly simple-minded to exploit the general public’s naivete. It is beneath the intellect of many on the opposition front benches, but is spin-doctor inspired by Margaret Thatcher’s principled (but in practise unknowingly hypocritical) rhetoric of the early ’80s about being a good housekeeper of the public purse, when 365 well-educated economists published a joint letter of protest at the time arguing that present policy was patently absurd! It says a lot for the Opposition's case that it can today only muster 16 economists

No comments:

Post a Comment