Opinion: Take care with the economic medicine you prescribe

If cuts in public spending are savage and premature, then the consequences for our economic health could be even worse than the harm done to public services.

I’m sure you have all heard talk of: green shoots, economic recovery, lights at the end of various tunnels, and a return to growth. It is claptrap designed to support a return to business as usual – what might also be labelled the old order – and we’ve all been hearing it for months now.

Liberal Democrats should not be taken in. While we may be in the first phase of an epic electoral battle, and it may be politic to join the cutters and slashers in order to demonstrate just how serious we are about getting the country’s finances in order, Liberal Democrats know that it is simply mad to stand by while private and public finance are confused. While private austerity isn’t any more likely to be a guarantee of general prosperity than public parsimony is to be a warranty of private affluence, governments can pursue common goals in ways that are not open to us as individuals.

A few days ago David (Danny) Blanchflower urged readers of the New Statesman to pay attention to Keynes warning that economic quick sands awaited those whose mistimed government austerity and thereby perpetuated rather than ended recession. Keynes, he pointed out, had issued a prescient warning, in 1930, about the ‘dragging conditions of semi-slump’.

In much the same fashion the most recent Economics (actually the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred) Nobel laureate, Paul Krugman, has been broadcasting frequent warnings from the opinion pages of the New York Times. He wants the US government to increase rather than retreat from its fiscal stimulus.

Blanchflower and Krugman have been joined by others who have a more direct and substantial commercial interest in the health of international markets and economic systems. Steve Ballmer, the chief executive of Microsoft, interviewed a few days ago by Robert Peston, told the BBC’s business editor that he found ‘it difficult to use the word “recovery”’. Ballmer told Peston that ‘we’re bumping along the bottom and will do so for a considerable time’. The head of GE International, Nani Beccalli, boss of GE businesses outside the US, recently told the FT’s banking editor that talk of governments preparing to give up on economic stimulus to counteract recession was ‘premature’.

So what do stock market rallies around the world signal about future economic conditions? Not much of any lasting economic significance, if you take the views of those with a good working knowledge of equity markets and a willingness to voice their expert independent judgements seriously.

Katherine Garrett-Cox, chief executive of Alliance Trust, is reported to have said that equity prices are being driven by sentiment rather than fundamentals. Crispin Odey, of Odey Asset Management, was also reported by the FT, to have identified ‘a bubble phase’ in UK equity markets; a phase that had been powered by the Bank of England’s quantitative easing. In a recent note to clients Mr Odey was said to have observed that individuals and institutions had joined in a stampede, one which had created a short-term bull market. His advice, according to the FT: investors should enjoy it while it lasts.

If Odey and Garrett-Cox are right then the 2009 rebound in equity prices is little more than a flash in the pan. It certainly shouldn’t become the foundation for any party’s economic policies – least of all the economic policies of the Liberal Democrats.

When the fiscal environment becomes tougher, consumer spending fails to recover, unemployment goes on rising and the Bank of England applies the brakes to quantitative easing – and you should expect all these things in the new year – the UK economy will catch another cold.

At the beginning of September this year Dominique Strauss-Kahn told those listening to his 2009 Bundesbank Lecture in Berlin: stimulus measures, which have been adopted to combat the global crisis, should only be withdrawn when ‘the economic recovery has taken hold and unemployment is set to decline’.

Strauss-Kahn had three main pieces of advice for economic policy makers in Europe and abroad.

A) Pursue policies, including fiscal policies, which help to build a greener and more sustainable economy. He told his audience that: ‘advances in green technology could…become the microprocessor revolution of tomorrow – while at the same time helping address global climate change.’

B) Don’t let failed banks off the hook. In Strauss-Kahn and the IMF’s more diplomatic language: ‘…remain focused on the [financial] crisis [and pursue] a comprehensive diagnosis of banking systems [ills with the objective of formulating and implementing] asset-management programs to deal with banks’ bad assets.’

C) Strengthen the machinery we need to manage the international financial system more collaboratively, constructively and successfully.

There can be little doubt that Strauss-Kahn had concluded, despite some progress at the G8 and G20, that governments lacked the ability to mount effective and concerted responses to economic shocks on their own and that international organisations remained inadequately equipped to help them do so.

Many of those who were responsible for inflating the most damaging financial bubble in a hundred years remain in powerful positions and are still engaged in blowing bubbles. Policy lessons have not been learnt and institutional changes, which are urgently needed to manage risk and build more sustainable economies, are being delayed and obstructed.

The continued reluctance of both Labour and Conservative party leaders to hold Britain’s financial establishments firmly to account and to tell the public how seriously Britain’s economic and financial systems have been damaged by the credit crunch means that there is an unprecedented political opportunity – and a great political obligation and imperative – for the Liberal Democrats.

The Party shouldn’t hesitate to proclaim its fairer and greener economics, and with ever greater vigour. It should also do more to demonstrate its willingness to become the principal scourge of those whose politics and economics rest on literally incredible and unsustainable claims about the possibility of a gradual return to the old ways, to business as usual.

* Ed Randall, a Liberal Democrat councillor in the London Borough of Greenwich from 1982 to 1998, edited the Dictionary of Liberal Thought jointly with Duncan Brack. Ed lectures on Politics and Risk at Goldsmiths University of London and has recently published Food, Risk and Politics (Manchester University Press – 2009).

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24 Comments

  • Herbert Brown 7th Oct '09 - 4:05pm

    “While we may be in the first phase of an epic electoral battle, and it may be politic to join the cutters and slashers in order to demonstrate just how serious we are about getting the country’s finances in order …”

    Surely if your argument is that cutting and slashing could be deeply damaging, that’s the last thing the Lib Dems should do. You don’t stand much chance of influencing the terms of debate if you spend all your time jumping on populist bandwagons …

  • Herbert, I couldn’t agree more. Please read the rest of the piece…including the rest of the sentence and the rest of the paragraph. What appears ‘politic’ in the heat of an electoral battle can often appear short-sighted in retrospect. I’m one of those who thinks that what can be appear ‘politic’ (artful, crafty or cunning) can come back to bite you. That is why I headed this piece: ‘Take care with the economic medicine you prescribe’. ER

  • Herbert Brown 7th Oct '09 - 4:39pm

    Ed

    Perhaps it would have been a bit clearer if you’d written something like “it would be a mistake to …” rather than “it may be politic to …”?

  • Terry Gilbert 7th Oct '09 - 5:06pm

    Absolutely right, Ed. Governments must keep investing to replace the private investment lost during the downturn. Borrow to offset the effects of recession, and repay when growth is restored and tax returns improve. As I have said before on this forum, we need Roosevelt like investment, not Hooverite ‘efficiency, which would prolong the slump. Given that there is an even more serious environmental crisis around the corner, it would be better to see the leadership of our party talking about a massive increase in public works with green technology, rather than ‘savage’ public spending cuts. I am left with the nasty feeling that, like the Tories, Nick Clegg and others in the party are using the recession as an excuse to attack public sector provision of essential services, so they can make them ‘more liberal’ by privatising or charging for them. More neoliberal would be more accurate.

  • Andrew Suffield 7th Oct '09 - 7:23pm

    instead of discussing whether to cut, Labour and Conservatives (and to some extent the Lib Dems) are talking only of how much to cut and where

    Well, most of the big name cuts in Lib Dem policy are things that we wanted to scrap anyway. They’ve just been re-spun as cost-saving exercises, rather than “getting rid of that awful ID cards thing”.

  • The deficit is currently 13%, the largest in peacetime history. In that context it is legitimate for the public to ask how – in the medium term – we will reduce it, so that we have the fiscal ability to ramp it up again in the next recession. There is a secondary question of whether we should cut it in 2010, 2011 or 2012, but clearly the deficit cannot remain at these levels in the medium term. Only part of it is a fall in tax revenues, so a “normal” economic rebound does not eliminate the deficit, let alone pay back the money we are currently borrowing.

  • sanbikinoraion 8th Oct '09 - 11:30am

    It may be that the leadership, having previously been plugging “cut this stuff” thought that changing tack to “spend spend spend!” might have been seen my the media as too much of a u-turn and opened them up to attack. Saying what the other 2 parties are saying is at least the safe option.

    (Whether we should be persuing the safe option or not is the real question! But that’s why I think they did it.)

  • I see Johann Hari has a good point about this in the independent today

  • David Allen 8th Oct '09 - 12:39pm

    Saying what the other parties are saying is not a safe option, it’s the road to oblivion. It’s all very well Cable calling Osborne “Lib Dem Lite”, there may indeed be detailed arguments in the small print to support this, but, the public are just going to see that the other way round, and say that we are “Tories Lite”.

  • Herbert Brown 8th Oct '09 - 1:15pm

    Kate

    Thanks for that. Here’s a link:
    http://www.independent.co.uk/opinion/commentators/johann-hari/johann-hari-britains-not-bust-so-dont-use-it-as-an-excuse-to-impose-cuts-1799217.html

    The penultimate paragraph reads:
    So why is Cameron getting away with it? Partly, of course, it is due to a media that has an allergy to arguments that take more than 30 seconds to explain and a bias to the Tories. But it is also due to a failure by Labour and the Lib Dems. Instead of standing up for the idea of a debt-funded stimulus to get us through the recession, they have panicked and accepted the bogus Tory framing. They have been reduced to whimpering: we do need cuts now, only we’ll be a little nicer in the way we do it. It has been a disaster. The British people are not having the looming Cameron slasher flick explained to them: we will only grasp the plot once the film has begun.

  • David Allen 8th Oct '09 - 6:16pm

    My instinctive sympathies are with the Keynesians. However, I’d like to see some thought given to the fact that it’s different this time. The Keynesians argued for nursing cyclical manufacturing industries like shipbuilding through hard times, so that when demand finally bounced back, our industry was still around to meet it. This time, the industry that has collapsed is casino banking. It is not clear that this is similarly a cyclical industry, nor that we would want to encourage it to bounce back!

    None of that is to give any encouragement at all to Conlibdem savage cutters who certainly haven’t thought about my point, haven’t indeed thought much about anything except what might (disastrously?) appeal to (misguided?) popular sentiment!

    Perhaps what we need is the war metaphor. Genteel stimulus like Roosevelt’s New Deal (and Obama’s newer deal) helped a bit, but didn’t really do enough. Then along came the Hitler war, suddenly we had to borrow and spend on an unprecedented scale, and, economically at any rate, it was just the cure we needed. Can’t we now fight climate change with the same vigour as our fathers and grandfathers fought Hitler?

  • “Don’t let failed banks off the hook. In Strauss-Kahn and the IMF’s more diplomatic language: ‘…remain focused on the [financial] crisis [and pursue] a comprehensive diagnosis of banking systems [ills with the objective of formulating and implementing] asset-management programs to deal with banks’ bad assets.’”

    This is the key point, we need to be putting forward how we will sort out the mess the bankers left.

  • David Allen 9th Oct '09 - 9:28pm

    16 economists:
    “public expenditure has already risen very rapidly in recent years, and a further large rise would … stunt the private sector’s recovery once recession is past.”

    Hang on a minute. What further large rise? None of the three main parties, not even Labour, is advocating that.

    Oh OK – you’re talking about people like me, who want to make “war” on climate change. Yes, that would mean spending lots of money – on an army of loft insulators, passive-house builders, wind turbine manufacturers, bus companies – in private sector industries! What recovery might that stunt, pray?

  • David Thorpe 15th Oct '09 - 3:48pm

    The ‘debate’ over cuts rests on one principal.
    The government have adopted a Keynesian model of deficit led stimul,us to exit this recession. That model requires that once the economy recovers to a ceretain point, the governemnt withdraw demand(or make cuts if you want) because the level of non ogvernemnt demand is now high enough.
    One of the main problems which parties which have pursued this over the decades have faced is that it takes a strong politician to say he will make the cuts.
    Brown is not a strong politician. He first tried to frame it as a debate between cuts and no cuts. But as a Keynesian he couldnt persist with that.
    So then it became, demand is nto yet high enough to need to cuts part of the plan, and indeed he even tried the metaphiscal argument that while Labour wouldnt ‘enjoy’ making cuts the tories wouold, as if that has the slightest relevance.
    But Brown does acknowledge that cuts are an important part of the plan on the road he has embarked upon, his essential weakness has come back to haunt him. He is looking for ways to raise maoney wihtoiut cutting before an election, so he hits on the idea of asset disaposal.
    While I dont think that there is a single reason on this earth why the government needs to own a chain of betting shops such as the Tote, I dont think now is the time for disposing of assets.
    First of all, it will lead to the crowdingt out of the private sector.
    I.e. those privcate sector businesses and entrprenuers which need/want new investment to rescue or expand their business will find that there is considerably less caoital in circulation as a portion of the capital goes to the government to pay for these assets.
    This means businesses have trouble growing,, which will prolong either the recession or the nescessity for government stimuluses, the latter being something we cannot afford in the current climate.
    The correct time to dispose of such assets was the boom time, because a) it would have taken excess capital out of the economy and prevented it from causing a bubble in another sector, and b) there would still be ample capital left over for the private sector.
    But thats the past.
    The correct time to sell inb the future is after the economy has grown for a considerable time and there is a surpluis of capital or danger of inflsation.
    Then you can sell in a market where you have a better chance of achieving a good price, wont be crowding out the private sector and can stem inflation. While at the same time using the moeny to pay down some of the national debt sp as to be prepared for bad times.
    It makes sense to do this in the future, rather than now, as the vast majority of the debt is owed to overseas lenders and its not in the economic interests of vbritain to take money out of the eocnomy right now

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