By Dan McCurry
In an article in the Economist entitled The Lessons of 1937, Christine Romer, chair of Barack Obama’s Council of Economic Adviser,s appears to give public backing Gordon Brown’s policy of continued public spending and appears to slap down David Cameron’s policy of cuts on the first day of a Tory government.
Ms Romer’s expertise concerns the Great Depression and her argument centres on the “W” shaped recession-within-a-recession of 1937-38, after the recovery seemed to be solid and government suddenly declared victory and reined in spending. The recovery at the time was happening fast and unemployment had fallen from 25% to 15%, but with the sudden end of the fiscal stimulus the curve reversed and unemployment went back up to 20% before government panicked and restarted spending.
Ms Romer’s warning is apt to the current conversation between Mr Cameron and Mr Brown. Even the choice of her words seems to be wrapped in subtext; “To switch to austerity in the immediate future would surely set back recovery and risk a 1937-like recession within a recession”. It’s not often you hear economists use the word “austerity”, but then again Mr Cameron is not an economist.
The most important advice that Ms Romer provides to policy makers is one of timing. Although there is huge pressure to reduce the build up of debt and “get back to normal policy after an economic crisis that urge needs to be resisted until the economy is again approaching full employment”.
In economic language, “full employment” doesn’t mean everyone is in a job; there will always be dole scroungers of the ill or those moving between jobs, so “full employment” means that the economy is operating at its most resource efficient. She doesn’t specify exactly when fiscal stimulus should end only that the economy should be “approaching” full employment. Even if the recession is over by the time the election is called next year, with the unemployment lag, there is not a cat in hell’s chance that the economy will be approaching full employment.
It seems that Ms Romer’s concern is that a sudden change in fiscal policy can come about due to a change in government in spite of economic timing and this can plunge the economy back into recession. This would not address the issue of debt, but would in fact waste the previous stimulus and cause even higher debts to be encountered to recover the situation.
There has been much criticism of Gordon Brown’s recent advocacy of high spending. The real problem is that Brown allowed Cameron to run his arguments unopposed for many months, until it has got to the point that even people in the Labour party are accepting Cameron’s arguments. Brown must fight his corner for many months more if he is going to win the argument back. If necessary, he must simplify the arguments to the stuff of “Mr 10%” and so on, as long as the arguments get across and continue to get across. Brown is a fool to have ever let go of this argument, but he is not such a fool that he fails to recognise that it must be won back, not with the effort of 10% but with 100% all the way, from now until election time.