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).