Events | 2009.10.17
Cameron's dud options | David Blanchflower
The Tory economic plans have the potential to push Britain\'s economy into a death spiral of decline
We are in the midst of the worst recession most people alive have ever experienced, or will probably ever experience. It is already worse than the 1980s and it isn\'t over yet. The only comparison is to the 1930s (my parents, now in their 80s, can remember how bad it was). The monetary and fiscal authorities have so far managed to prevent a recession turning into a depression – but it still could, especially if David Cameron and George Osborne have their way.
Some people seem to think it is all over and have called an end to the recession. Far from it, normality is a long way off. It will take a very long time for output, employment and unemployment to return to pre-recession levels. As Mervyn King said at a press conference recently: "It\'s about levels, stupid."
The evidence is that financial crises are especially harmful and have especially long-lasting effects. Hence any recovery is likely to be slow and anaemic at best.
The simple lesson when you are deep in recession is that a serious policy error is to reverse stimulus too early, which then sends the economy crashing into a depression. This is what happened in the United States in the 30s. Monetary and fiscal policy were tightened before recovery was firmly established, which drove the country back into a deep recession at the end of 1937 .
And this week into the current economic crisis stepped the Tories with their ill thought-out plans for (a lack of) recovery. Cut public spending here, freeze public sector wages there, reduce the benefits of the poor, raise the pension age, and so on. It was hard to see any group that stood to benefit from their proposals.
Lesson one in a deep recession is you don\'t cut public spending until you are into the boom phase. Keynes taught us that. The consequence of cutting too soon is to drive the economy into a depression. That means rapidly rising unemployment, social disorder, rising poverty, falling living standards and even soup kitchens. The Tory economic proposals have the potential to push the British economy into a death spiral of decline that would be almost impossible to reverse for a generation.
The debate at such times is not about big government versus small government . It isn\'t about moving this service from public to private sector because the private sector can do it better. The debate here is about maintaining levels of aggregate demand. In a deep recession the choice is: the government does it or nobody does it; it is public spending v no spending. You don\'t worry about paying off debt when you are at war: you have other priorities. Win the war first.
To cap it all, the leader of the opposition, in his speech to the Tory conference, amazingly discussed what he called option one – the possibility that the UK should default on its debt. Mr Cameron, you shouldn\'t even be raising such possibilities. It\'s exactly what markets want to hear from a potential leader – you have actually even considered defaulting on our debt? Unbelievable. Better to have said nothing honestly.
There was one bit of his speech I thought sounded like quite a good plan, which he dismissed. That was what he called his option two: "We could encourage inflation, which would wipe out the value of the debt, making it easier to pay off." Sounds like a good idea to me, and probably to you.
Moderate inflation would help all the people in negative equity; rising asset prices would certainly help, and are one of the stated purposes of quantitative easing. A few years of inflation, around 5% or so, would be a really good idea. Keep interest rates low for the foreseeable future, keep the stimulus going.
One possibility is to keep the Bank of England\'s inflation CPI (consumer price) target at 2% until there is any possibility of hitting it and then simply raise the target. Or perhaps replace the CPI with an index that includes house prices, which would have the same effect of allowing monetary policy to remain loose. We don\'t need the central bank to reverse policy too soon either. We need to create some inflation for a while.
Cameron concluded his speech arguing for his third option – "for me the only option". He went on: "We must pay down this deficit. The longer we leave it, the worse it will be for all of us." Actually, wrong: the longer we leave it, in a recession, the better it will be for all of us. I personally would vote for option two and certainly would never even consider discussing option one.
For more information, please visit
http://www.guardian.co.uk/commentisfree/[...]e-recession-recovery-inflation
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