The reason Vince Cable stood so far above his Labour and Tory counterparts during the financial crisis was his unique combination of economic subtlety and political guile; his rivals possessed those attributes the reverse way around.
In his much mentioned essay in the New Statesman entitled ‘When the facts change should I change my mind?” Cable shines a light on the dilemma serious politicians face in trying to balance the economic and political concerns inherent in policy making.
The essay, which takes its title from a famous JM Keynes quote, debunks a number of the left’s cherished myths, and delivers to all Liberal Democrats a dilemma as 2015 approaches. The first myth to be downed is that Vince has always been an opponent of coalition economic policy, when as the essay’s title demonstrates, any embrace of Plan B at this stage would represent a change of mind from his previous view.
The second myth exposed by the essay is that the coalition’s policy is consciously counter to the teachings of the great Liberal economist JM Keynes. As I point out here, and as Cable comments in much more cogent fashion, the government is pursuing counter-cyclical economic policies, which is textbook Keynes.
Finally, the myth that the much fabled “Plan B” for the UK economy would be a cure for all ailments is laid bare by the Business Secretary. The stimulus required for any putative “Plan B” would take time to impact on real growth. In Cable’s words turning the millions of pounds of extra capital investment already announced by the coalition into billions of pounds worth quickly is no simple task. “There are EU state aid clearance rules. Projects require careful planning and due diligence” he writes.
Thus any initiative to start the ball rolling on Plan B at this time may mean benefits which are not apparent until after 2015, while the markets, currently in one of the most risk averse phases in their history, will react badly to the change.
Which takes us to the dilemma which Cable believes is faced by himself and our party. The question mark at the end of his essay title is not rhetorical. Vince sees a genuine dichotomy between the political and the economic considerations as he ponders whether to switch his support to ‘Plan B’. With his political antennae on red alert, Cable will have been concerned as the coalition kicked the austerity can further along the road to a period past 2015, leaving the Liberal Democrats destined to fight another election as exponents of spending cuts.
Cable’s economic instincts will however be attuned to the reality that the coalition’s current path is addressing long-term economic problems, rather than merely chasing a minimum level of short term growth for maximum political advantage.
Vince argues that Plan A may be the least risky economic path to pursue. An embrace of Plan B offers the opportunity to enter the next election on the back of a spending splurge, garnering political advantage, while increasing the economic risk to Britain.
It’s likely the effects of Plan A won’t be seen on the ground this side of 2017, but even with the additional risk it brings, it’s possible that the same applies to Plan B.
So the “political judgement” which Cable alludes to at the end of his essay is whether to persevere with Plan A, which is potentially better for the long-term economy, even if much worse in its political consequences for the coalition. Or to pursue ‘Plan B’, which involves attempting to deliver short-term growth through greater risk taking, but may carry greater political rewards.
It is the absolute hallmark of Liberalism throughout the ages, from promoting free trade when others wouldn’t, to home rule for Ireland, to a welfare state, to ending discrimination on the grounds of sexuality, to the dangers of climate change, that Liberals tend to be ahead of the policy curve, but not get the credit for it later.
Cable’s forecasting of this economic crisis when no other politician was, showed him to be rooted in this tradition. He looks to the future, and wrestles his economic conscience with his political priorities, and doesn’t know what to do.
If the man most qualified to be Chancellor doesn’t know, I’m certainly not going to offer him the answer.
* David Thorpe was the Liberal Democrat Prospective Parliamentary Candidate for East Ham in the 2015 General Election
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6 Comments
Vince Cable notes that capital markets underwent a massive dislocation in the week around the 2010 UK general election due to the realization that Greece was on the verge of default. The bond markets suddenly started worrying about contagion and haircuts. It is perhaps useful to read this editorial from The Guardian three days before the general election as a reminder of the mood at the time : http://www.guardian.co.uk/commentisfree/2010/may/03/greece-bailout-bankruptcy.
Cable argues that the UK government was right to take drastic measures to instil confidence in the markets at that time but that time has now passed and that the medicine is now more dangerous than the illness.
I can only agree to a point: In my opinion two things have been clear for at least 12 months or more:
Firstly, QE is not working. As currently formulated it is having little effect except to create asset class bubbles and increase the prices of commodities through speculation. The recent lending figures make grim reading. I agree completely with Vince Cable (and have said so ad nauseam here) that the BoE must be more imaginative in its application of QE. The QE mandate already includes the option to purchase equities and bonds, the BoE has simply not used it.
Secondly, bond markets are much more sanguine these days than back in May 2010. Sticking to ruinous austerity plans – consciously allowing yourself to be sucked into a Fisherite debt/deflation spiral – is risking a lost decade to the nation for the sake of political machismo.
hi paul-
QE was deisgned for a purpose-it achieved that purpose and so the time has passed- and it shouldnt be used again-
as for the balance of risk-it has shifted-the basket of risks are now different-but its not simply a case of the crisis having passed.
Good article, Dave.
I do however think that the New Stateman essay was a carefully constructed document designed to tread a middle path between current coalition policy and Vince’s own inclinations without ruffling too many feathers at the treasury along the way.
Vince Cable’s interview in the Guardian is rather more forthright and specific on the immediate initiatives he would advocate Vince Cable exposes coalition divisions over austerity . Some key quotes:
The business secretary has called for a capital injection into housebuilding in the region of 1 % of GDP. He said: “If you are talking about under 1 % of GDP that is hardly going to shake the markets to the foundations”, adding this amounts to reinstating the capital spending cut since the peak of 2008-9.
Cable said there were “crucial sectors of the economy, like construction, which need a demand boost after being laid low by the bursting of the bubble” and highlighted commercial and residential property prices outside London as needing support.
He added: “To most people it seems merely common sense that in a crisis where the private sector lacks the confidence to invest, the government should do so: building modern infrastructure or giving councils the freedom to build affordable homes.” Historically, low interest rates mean that government (and local government) can borrow to invest cheaply.”
“Some people say we mustn’t frighten the horses. They say that any change in direction, however sensible, is too risky and will cause panic. There is of course a balance of risks and that mattered most when we came into office. But we should ask whether that balance of risks has changed,”
With respect to QE, I think Dave Thorpe is right to say that QE was designed for a purpose, but that time has passed. The 2011 Q1 bulletin from the Bank of England Understanding the recent weakness in broad money growth aimed to explain the recent weakness in broad money growth and the path of broad money velocity and concluded
a) Weakness in lending was associated with a weak inflow into money of £55 billion. That estimate is simply set
equal to the amount of lending actually observed, reflecting the conclusion that the financial crisis and credit
supply shock can broadly account for much of the observed weakness in lending.
(b) Banking sector stabilisation is estimated to have contributed to a net drain of money of around £160 billion.
That consisted of about a £240 billion reduction in money holdings estimated from data on banking sector issuance of
long-term debt and equity and retention of profits, in part offset by about £80 billion of gilt purchases by the banking
sector over the period.
(c) Asset purchases contributed to a net boost of money of £200 billion, assuming that the assets were purchased
from the non-bank private sector.:
The recent weakness in broad money growth may be explained by the weakness of bank lending arising from the recession and the impact of banking sector stabilisation. These two factors have been offset by the positive impact of asset purchases on broad money. The circumstantial evidence from the money data broadly corroborates the estimates of the net impact of asset purchases on asset prices from other empirical work. Sectoral evidence also suggests that asset purchases are broadly working via the balance sheets of households and companies
to contribute to an increase in nominal spending
The experience of the 1990s suggests that velocity’s long-run downward trend can be interrupted for extended periods of time. The recent conjuncture suggests that there are economic factors pushing up on velocity relative to its historical trend. These are likely to persist in the near term, suggesting that a given rate of growth in nominal spending is likely to be associated with weaker growth in broad money than was typically the case before the crisis. Developments in the banking sector and the relative rates of return on money and credit will be important determinants of whether and when the downward trend in underlying velocity is restored. Should money growth continue to remain weak, then analysing the causes of this, using the types of analysis employed in this article, will be important in judging whether that weakness is signalling weak nominal spending growth in the future.
Paul in Twickenham’s comments on the more aggressive use of monetary policy were also advocated by Vince Cable again in comments to the Guardian last weekVince Cable: a turning point in politics?
He says he expects the new governor of the Bank of England Mark Carney in particular to be more creative. “I have always supported the argument that the big bazooka is monetary policy, and the big problem has been that the way monetary policy has been operating has been very conservative. Just buying government securities does not take you as far as you should, and so what we need is a much more creative monetary policy. He favours ideas put forward by former monetary policy committee member Adam Posen for the bank to purchase bundles of small business loans in an effort to boost the supply of credit, and end an ‘investors’ strike’.”
The bank, he adds, does not need just an inflation objective, but also a growth objective. “How it does it is a technical issue. I don’t want to get into silly arguments of cabinet ministers dictating whether nominal GDP targets are better than something else. The bank clearly should have and must have an objective to support growth and should be flexible in the kinds of things that they do.
“The basic point is that we are in a very difficult position, we are facing an economy that is not growing, or only a bit. We have got to try things. We don’t want to be Japan with a decade of no growth.”
There is an excellent article by Martin Wolf in The FT which is available here in the Irish Times without the paywall: http://www.irishtimes.com/business/economy/britain-s-austerity-is-indefensible-1.1323708
It is particularly galling to hear The leader of The Liberal Democrats slap down a minister for promoting long-standing party policy,