Growth or deficit: “Economics is the method. The object is to change the soul”

There’s a good piece in The Guardian from Julian Glover who says, yes, the Coalition does want cuts for ideological reasons, but then what of it?

Yet ministers, by and large, hesitate before admitting this. Liberal Democrats worry about scaring their voters. Conservatives aren’t sure the country will understand their big idea. It’s easier to take refuge in the alternative truth that cuts are happening because they are needed. Even Ed Miliband issued a press release last week agreeing.

From this follows the lazy line that all this government is doing is responding robotically to its circumstances. But blaming the last government for the horror already sounds weak.

The truth is that English councils right down to Parish level have already started having their budgets capped last year, under Gordon Brown. Even in deep blue Tory parts of the country where ‘living within your means’ had long been part of the culture.

So Gordon Brown was already steering the UK into austerity Britain. Just not as fast as George Osborne’s Comprehensive Spending Review (CSR) is being trailed. And that heavy trailing has had the useful (from a government point of view) of invoking ‘shadow moves’ towards cuts in councils and various departments far beyond Whitehall.

The rather comic set piece between Sinn Fein and, well, the DUP (if only the latter would have taken the bait) last week over whether you should even attempt to identify cuts in advance of next month’s Comprehensive Spending Review was something of a sideshow to the main event.

Yet last week Larry Elliott, the widely respected economics editor of the Guardian, warned that those who calculate that the global economy is now safely beyond a ‘double dip’ may be wide of the mark:

The OECD said it was too early to say whether recent evidence of the loss of momentum in the recovery was temporary or permanent, but said the G7 group of industrialised nations – the US, Britain, Japan, Germany, France, Italy and Canada – were now likely to grow by 1.5% at an annual rate during the second half of 2010 compared with the 1.75% predicted in May.

In its latest forecast, the thinktank said it expected a gradual deceleration in growth from the peak in the second quarter of 2010. The OECD has pencilled in G7 expansion at an annualised 1.4% in the third quarter and 1% in the fourth, down from 3.2% in the first quarter and 2.5% in the second.

The US is expected to grow at an annualised rate of 2% in the third quarter, slowing to 1.2% in the fourth, after 1.6% in the second quarter and 3.7% in the first three months of the year. In Japan, GDP growth is forecast at 0.7% in the fourth quarter after 0.6% in the third. The UK is set to grow at an annualised rate of 2.7% in the third quarter, slowing to 1.5% in the final three months of the year.

Not everywhere is the same. Politics.ie had a decent thread last week based on this nice infographic on Europe’s economic climate in the FT, which shows the various differentials in economic performance. The Republic and Greece are bumping along the bottom whereas in places like Germany everything seems to be fine, thank you very much.

Except that economic growth in Germany appears very much to be driven in the traditional German way: ie by exporting goods. The Domestic market appears to be trailing by some considerable way. It leaves them vulnerable to the economic crash the now out of favour stimulus was supposed to avert.

Elliott’s not the only one worried about the macro climate. Friday week ago, Martin Wolf noted that for all the new government’s short term emphasis on righting the UK’s fiscal boat, ‘the market is screaming its lack of concern about UK fiscal credibility about UK fiscal credibility. UK government 10 year bonds are yielding 2.9 per cent and the real interest rate is below 1 per cent.”

He notes the current influence on conservative thinking of a paper by two Harvard based academics, Alberto Alesina and Silvia Ardagna written and published last year. In fact, it seems to point towards the fact that private habits (ie, hitting the credit card or investing in the property bubble rather than personal savings) has as much to do with the current crisis as any fiscal irresponsibility in government, whether real or imagined.

Wolf continues:

The Office for Budget Responsibility forecasts seem remarkably optimistic on the ability of net exports and business investment to offset fiscal contraction. But I would also stress the sheer uncertainty, as show in its probablity ‘fan charts’.

How would the government respond if its plans generated a recession, as is possible and, in my view, probable? I have no idea. It would presumably rely on the Bank of England. There are reasons to doubt that the latter would be very effective.

Wolf in turn points to Ed Balls’ new dictum that ‘a parliamentary term is not the same as an economic one’.

In fact, despite his air brushing of the awkward facts of the recent past Balls makes some useful points in a recent speech at Bloomberg (designed no doubt to get the maximum hearing in the US where Obama is struggling to explain the sense of Brown’s big legacy plan for the US: aka, the  Stimulus):

Above all, stability requires a credible medium term path for fiscal sustainability and stable growth. What undermines confidence is uncertainty over whether a sudden fiscal adjustment is deliverable and over the impact it will have on consumer and investor confidence.

Time and time again in recent years, we have seen the markets lose confidence – usually in emerging market economies – because they see fiscal adjustment plans which look tough but lack credibility and end up being self-defeating.

A vicious circle begins of slower growth, investor flight, further reduced projections for growth, a worsening fiscal position, and further loss of market confidence.

And the kicker:

…outside the Eurozone and with long-term real interest rates at record lows for both 10 year and 30 year bonds – Britain faces no difficulty servicing its debts as recent debt auctions have demonstrated – and the term structure of our debt is long thanks to the brilliant work of the Debt Management Agency.

If only the same could be said for Ireland, now the in grip of a series of ECB directives and the accountants of the Department of Finance.  Deflation is the only economic and political choice, so we are told.

Back to Balls again:

In a recent article in the Financial Times, the historian Niall Ferguson wrote:

“People are nervous of world war-sized deficits when there isn’t a war to justify them.”

But this is precisely the case I made to Gordon Brown and Alistair Darling last year – we have just experienced the biggest global financial crisis in a century, an event as momentous in historical and financial terms as war, famine or a natural disaster.

Our economies were saved from catastrophe only by government intervention to nationalise banks and to absorb huge financial liabilities from the private financial sector. To attempt to repair the damage of such an event and return the national debt to its previous level in just a few years is not only dangerously incredible in the eyes of financial markets but places an intolerable burden on current users of public services.

Just think if Clement Attlee’s government at the end of the Second World War had decided that the first priority was to reduce the debts built up during the war – there would have been no money to fund the creation of the NHS, no money to rebuild the railways and housing destroyed in the Blitz, no money to fund the expansion of the welfare state.

At this point it is worth doubling back to Matty Yglesias’s clever ‘self-fisking’ of Ferguson here… And to take Professor Niall Ferguson utterly unfairly out of his 2003 context:

…those who panicked about the debt under President Reagan failed to see how manageable it was. It’s even more manageable today.

In short, Glover (and the Cameron/Clegg coalition leadership) are right that there is a cultural problem alongside the big political/economic problem of debt. But it remains to be seen whether they have both the measure of the problem, or the mandate to follow through with their preferred solution.

Penultimate word to Glover again:

You can either pretend, as Labour does, that the government should go on as before, and hope no one notices the illogicality of promising to spend far less on much more; or you can recognise that the crisis of over-spending is really a crisis of over-government and do something about it: progressive austerity, as George Osborne once defined it.

This is no Hayekian nightmare. Indeed, the further the government can get from measuring everything in terms of pure economics the better. That isn’t only because the numbers are going to be grim. It is because the government is liberal, not Thatcherite, in its thinking.

The point of reducing spending is to change the state, not just spend less. Success can’t be measured in terms of the ratio of government expenditure to GDP, as someone on the Tory right – say, John Redwood – would like.

This point was there in Nick Clegg’s description on the Today programme of state dependency in the north-east as not only unaffordable but unhealthy. It is there in a book published this week by the Tory MP and Cameron ally Nick Boles. He describes “genuine horror at the overweening power of central government and its treatment of citizens either as supplicants … or lab rats in some vast social experiment, designed to improve mankind”.

Which Way’s Up?, Boles asks in the title of his book: the point is the gravitational pull of politics has changed. He argues for the decentralisation of money, power and policy far beyond anything the government currently has plans for, and it isn’t fair to say he is only calling for this because of cuts. Cameron’s friends were decentralisers long before the deficit became an issue.

Fine sentiments. But it remains to be seen whether the culturally driven urgency to foreshorten the repayment of national debt does what it says on the tin.

It is all much more reminiscent of an earlier age than Mr Glover might have us think. It was Margaret Thatcher after all who once said, “Economics is the method. The object is to change the soul.”

Whilst Mr Balls’ secularism in this regard may run the danger of missing the importance of reducing the UK’s long term personal debt problem, it might also pay the new UK government not to repeat Mrs T’s ultimate problem and confuse the two things…

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  • Seymour Major

    There is some ideology at work, as well as long-term party self interest. The more people who work in the state sector, the more that are likely to vote Labour. It also follows that the smaller the Government as a proportion of GDP, the less likely the Nation will be overburdened with National debt.

    “From this follows the lazy line that all this government is doing is responding robotically to its circumstances. But blaming the last government for the horror already sounds weak”

    I dont agree with this comment or the complacent outlook that Glover has in relation to UK debt. The reality is that Gordon’s browns plans for reducing debt were not strong enough. Even under this Government’s plans to cut spending, there will still be a budget deficit after 5 years, albeit that it will be down from about £155bn now to about £20 bn. Yes, the interest on the National debt will probably be relatively low but that will be down to luck and the National debt, which Labour does not seem to have been committed to tackling in the long term. Under their government, the National debt, would be forever an albatross around the Nation’s “neck.”

    “In short, Glover (and the Cameron/Clegg coalition leadership) are right that there is a cultural problem alongside the big political/economic problem of debt.”

    Absolutely, but the culture has been encouraged by Government mismanagement. Labour set the Bank of England inflation targets. Property prices were never part of the inflation measure so you had interest rates tracking inflation of consumer goods whilst property prices went soaring. As a result, there was too much credit and too much money sloshing around. There was an artificial glut of revenue, which the Government spent.

    To his credit George Osborne, whist in opposition, did identify this flaw and made a commitment then to tackling property inflation.

  • DC

    But then what of it?

    Try because neither party received a majority outcome at the election and both should pause for considered thought about cutting public services, before going ‘ideological’?

  • DoppiaVu

    But then what of it?

    Given how many economists seem to be of the view that massive cuts right now could propel us back into recession, then imposing cuts on idealogical grounds, rather than sound economics alone, seems pretty alarming to me.

    And lets not forget that when the credit-crunch first started kicking off, the Tories were pushing for exactly these sorts of measures back then. Most economists appear to agree that the stimulus package (that they opposed, presumably on idealogical grounds) that was imposed by most developed economies saved the world economy from melt-down.

  • Mick
    I suppose it is a great piece if you spend your days swimming in a sewer and believe those who will suffer from the coalitions cuts are mere collateral damage, just like hundreds of thousands of dead Afghans and Iraqis. Tell me, how is it possible for Glover to write a whole article about the coalitions intentions, without once mentioning those who will suffer most from them. What type of human being could do that, don’t tell me Mick, one you believe writes a good article.

    Seymour Major

    People like you never blinked an eye when banks and multi nationals carried massive levels of debt, but when a government decides to hit hardest those who are least able to afford it, whilst appointing bankers and corrupt tax dodgers to government posts, you wet yourselves with joy.

    Get real man, with this level of cuts many people will suffer unnecessarily hardships, but it will not be Mr Osborne or Glover, now will it? nor Mr Green, Freud, etc.

    Do you really wish to turn the clock back to the 1980s?

  • Driftwood

    An even better article:

    http://www.telegraph.co.uk/comment/telegraph-view/7995456/Welfare-the-lifestyle-choice-that-Britons-must-make.html

    As for going back to the 80’s, the music was better, and nobody starved.

    No-one will starve under these cuts either, in fact they might improve some people’s lifestyles. William Hill will probably have to take a cut though.

  • Driftwood
    Only someone like Osborne, Clegg or Cameron who are totally divorced from how the majority of people live in the UK, could make a daft statement like claiming benefits is a life style choice.

    It is not only daft it is simply untrue; and an absolute insult to the people who claim benefits, many of whom having worked and paid tax, only to find out when they need to claim a benefit it is far harder than politicians like Clegg and Osborne have led them to believe.

    As Keith Flett wrote in the Guardian today,
    “The number of people claiming jobseeker’s allowance in Tottenham on the latest figures (July 2010) is 5,880. The number of registered vacancies is 254.”

    Some choice, some life style.

  • Glencoppagagh

    Mick
    I don’t think anyone’s suggesting that everyone claiming benefit is making a ‘lifestyle choice’, particularly in current circumstances.
    However, if there are 254 unfilled vacancies in Tottenham it implies that 254 people could be working but aren’t.
    Do you actually believe that Jobseeker’s Allowance is the sole source of income for all 5,880 claimants?
    It’s almost certainly not the case in North Belfast let alone North London.

  • if there are 254 unfilled vacancies in Tottenham it implies that 254 people could be working but aren’t.

    Glen
    If you leave your prejudices at the door and consider how the labour market works it implies no such thing. I presume you are also talking about the lump, as someone who worked in the construction industry in the 1960s, I hoped we had seen the last of the lump, but it seems not, both Tory and New Labour governments have encouraged it to create a low wage economy.

    The fact is the main beneficiaries of the lump are not the minority who do the double, but cowboy employers who with the connivance of the tax office use it. What is happening here is tax payers are subsiding employers. I know of few workers who prefer working on the lump to being on the cards and being paid a fair wage, and be covered by insurance, holiday pay, etc.

    Like many people these days, you come at this from the wrong end. For no worker would be able to do the double if government made it a crime for employers to take on workers in this manner and persecuted those who broke this law.

    It is not rocket science to track such employers down, but whenever trade unions report such employers, all the authorities do is report the workers who are signing on, or more likely arrest those who are illegal immigrants, whilst the employers go scott free.

    As Bob Crowe said at the TUC today if the government concentrated on Tax fraud they could pay the deficit back without make these unnecessary cuts.

    .

  • I should have written prosecuted in the above, but come to think about it persecuting cowboy employers is a better idea 😉

  • Glencoppagagh

    ‘it implies no such thing’

    Why?

  • Mick Fealty
  • Mick Fealty

    Seymour,

    “The reality is that Gordon’s browns plans for reducing debt were not strong enough.”

    Is there some tangible evidence to support that?

  • DoppiaVu

    The Lump

    Never come across that term. But I guess it must have applied to me da, a construction worker who had little option other than to do the double for a long period during the 80’s. I always thought there was an irony about my dad doing the double, working at…the Palace Barracks.

    Mind you, this was during the period where the IRA were threatening any contractors that worked for the security forces, so in addition to no sick pay, no holiday pay, etc…my dad also had a death threat hanging over his head.

    Not a job that you would choose to do, if alternatives were available.