WORLD ECONOMIC CRISIS

Economics and the rhetoric from left to right – Its the ECONOMIC ORTHODOXY STUPID

Both the Spectator and New Statesman like to out do themselves on the partisan nature of debates on the economy.  Read the Spectator and you tend (with the odd exceptions) to get a diatribe of anti-left, deficit denying rhetoric, while the New Statesman balances the argument with often equal diatribes demonising the selfish right wing.

To get at the truth is something of a feat, and of course tends to be somewhere in between.

However, an interesting economic debate has occurred on the Spectator website which was mildly refreshing in it’s tone. An open letter to Will Straw about deficit reduction. . . 

The debate was interesting, as were the lengthy comments which showed just how the debate can be both interesting and of a base nature.  Of course the usual insulting nonsense went on, accusing “lefties” etc for almost all ills in the world.

The debate they have had, although interesting, was largely missing the point of the current economic decisions now facing us, as seen as the current inevitable crisis unfolds.

Rather than arguing who’s cutting faster, or harder, or trying to out do each other on the minutia of statistics, the wider macro-economic decisions are far more crucial.

I cannot state just how utterly pointless it is to decide just how right or wrong an economic policy is by comparing how deep the cuts are from one country to another.

The US economic situation is very different from the UK, and the UK’s different from many European countries.  The question is what is the right course for the UK economy now, not what went before, or what was done in Canada in the 1990′s, or indeed how deep the cuts are in the US.

As discussed previously our economy is running a tightrope course, too much one way or the other is likely to cause either a rising deficit causing inevitable economic problems in the future, or plunging into deeper recession.  Neither outcome is desirable, which is why taking the ideology out of the economic debate is so important, which is why so many commentators get it so utterly wrong.

It now looks likely, after the Bank of England has kept interest rates on hold yet again, that the expected hike in interest rates is far off.  Maybe even as much as 2 years down the line.

There are those on the right of the political and economic perspective who have been calling for interest rate hikes for over 2 years (ie – Nigel Lawson, Fraser Nelson, John Redwood). Yet it is clear that the economy could not take hikes in the base rate at this time.  People are hurting, their standard of living is reducing and people are spending less.

What is also clear, is that the deficit has to be dealt with and reduced.  Although our debt is historically low, the deficit is historically high which will impact on the overall debt eventually.

However, there is a myth of monumental proportions that has gathered steam and has been repeated often enough that many accept.

MYTHS

1) If we cut spending this will get rid of the deficit
2) The economy is like a household, we must cut our coat according to our cloth

This, although sounding reasonable is actually totally misleading.  Our economy is nothing like a household.  If we were to compare it to anything, it would be more like a blue chip company, who borrows money to invest, in order to create more revenue and profits.  As an economy, we create money through credit, therefore to borrow money is not only sensible, but essential.

However, it is important not to borrow too much, which is all to do with servicing debt.  If you can service the debt, then there should be no problem, however, you would not want to continue indefinitely increasing the debt burden.

If we reduce the deficit through cutting spending alone, we could actually do this relatively quickly and everything would be fine, but this is not how the economy works.  By reducing public spending, you reduce the amount of money in the economy and people are made unemployed.  Higher unemployment leads to a higher deficit – wasting resources in an economy is inefficient and costs money.

Reducing public spending also affects private companies as many services are outsourced to the private sector as well as infrastructure projects, therefore you not only reduce state spending and the size of the state, you also reduce the size of the private sector economic activity.

As discussed in The Truth About the UK Deficit , it is not primarily public spending that caused the large deficit, but the financial crisis that caused a recession and the collapse of tax receipts.  If the economy does not grow, income from tax reduces and the deficit increases.

This penny is just beginning to drop, as people are asking “where is the growth going to come from”? – Economists and Politicians have presumed we will have growth, some even saying cutting the size of the state automatically invigorates private enterprise.  However, the reality is much different.

So the debate, is not should we cut public spending – the answer is yes, but asking how much we cut spending and how do we encourage growth in the economy. Only the gradual reduction in public spending AND significant growth will rid us of the deficit.

If you cut too much, the deficit will rise.  If you do not encourage enterprise and keep the dole queue to a minimum, the deficit will rise.  If you tax ordinary people too much the deficit will rise.  If you cut taxes too much the deficit will rise.

The frailties of our economic situation are finely balanced.

There are those in the US and repeated by some commentators in the UK that blame “left wing” policies for the deficit.  Citing Obama as “left wing” and saying he has spent too much.  Of course, ignoring the fact that Obama inherited the economic situation, and ignoring the fact that it was a democratic administration under President Clinton that balanced the books and it was George Bush – one of the most right wing of Presidents, wh0 massively increased spending.

Not only this of course, but calls for continued tax cuts in the US  - when President Bush both increased spending AND decreased taxes for the rich.

ECONOMIC ORTHODOXY

The TRUTH is that there is no left or right of politics that has a monopoly of economic prudence.  Sadly, economic orthodoxy is the problem.

In the 1930′s – it was balancing the books that helped keep the world economy in perpetual depression.  It continued with protectionism and currency wars. Then came Keynes and counter intuitive economics.

In the past 30 years we have had neo-liberalism that has been the dominant force at work, an economic orthodoxy that has influenced world leaders, the IMF and the World Bank – world economists and leaders appear to have no where else to turn.  We are about to make seemingly similar mistakes as in the 1930′s – Balance the books at all costs; currency wars (see Switzerland, Japan and the USA); and leanings towards protectionism.

CRISIS IN THE MARKETS

At present the markets are making a mockery of democracy and economic and political prudence as they bay for blood, looking for the next buck, trying to ascertain where the safe havens are.

The August jitters have begun, aided and abetted by the inadequate political leadership in the Euro Zone and the inept Washington politicians playing chicken with the world economy.

Then there are the economists and asset management experts giving advice not to invest in Europe and the US and move money into commodities, South America and the East.

Some reading from their economic textbooks stating we need to let the countries in southern Europe default, let the banks go bust in Europe and the US and start again.

This of course is fine in an economic handbook from the Chicago school – a shock doctrine on how to make money out of a crisis, but for society and ordinary people this would be financial Armageddon  the like of which the UK has never seen.  Try speaking to the people of Argentina circa 2001 to get a grasp of what this entails and then amplify the impact 100 fold.

The Euro zone will have to restructure itself as it cannot survive without fiscal AND political union to be unified and make quick decisions.  This will not however happen in time to save the Euro in it’s present form.  But the markets are at present being hysterical over the Italian and Spanish deficits, and could well cause a self fulfilling prophecy – with the inevitable diatribe of – “the markets are always right”.

Growth will not come easily – and it is likely a sustained period of stagnation is ahead.  A great recession – or a depression – double dip recession – it matters little what we call it, all we know is this is going to be very painful and will take years to rectify.

FURTHER READING:

Euro Crisis – Greek Debt, Systemic Failure and Procrastination
We have nothing to fear except fear itself

 

 

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