The Labour movement column
In response to the determination of Winston Churchill to return the pound to its pre-war Gold Standard level of four dollars 86 cents to the £1, John Maynard Keynes put pen to paper. He pointed out the catastrophic impact of such a move in his The economic consequences of Winston Churchill.
Churchill’s muscular economic policy had provoked a general strike within a year and soon after the UK, with other European powers, had to beg the USA to loosen its monetary policy to relieve pressure on their currencies.
Amazingly, the Federal Reserve responded in 1927 by shaving 0.5% off its main discount rate. There was a bonanza of cheap credit in Wall Street. For Lionel Robbins: “From that date, according to all evidence, the situation got completely out of control.” J.K. Galbraith blames Wall Street’s herd mentality rather than the Federal Reserve for what happened later but nonetheless, the availability of cheap credit enabled the surge of stock values that was to result in the crash of 1929.
Keynes saw unemployment and political tension as being the main consequence of Winston Churchill. It ended up, in many ways, being more severe than that. The diplomacy that backed over-valued European currencies contributed to calamity. The shackles of the Great Depression were not finally removed until World War II.
That was after the Administration of Franklin Delano Roosevelt had seen the economy plunge back into recession in 1937-38. Why? Because they reigned in public spending too quickly, as Samuel Brittain reminded us recently.
That brings us nicely to Her Majesty’s Opposition in 2009. Phillip Hammond, Shadow Chief Secretary to the Treasury, gleefully explained at the weekend how he plans to cut a swathe through public spending immediately following the election of a Conservative government in 2010. In a sweep of machismo worthy of a 1970s TV cop he exuberantly proclaimed that he was likely to, “become a great figure to pin up on the dartboard, and throw darts at.” I’ll say.
These Tories, these Cameron Tories, are bent on a single-minded mission to cut the budget deficit at all costs. Not only that but they are determined to do it right away, holding an emergency budget within weeks should they gain power.
Again, Phillip Hammond, a possible Chancellor in a Cameron government, describes the ‘sword of Damocles’ that is Standard & Poors who will reassess the UK’s credit worthiness in 2010 having already put it on notice. So Standard & Poors would be determining our economic policy. Can you imagine anything crazier than that? This would be the same Standard & Poors that was a factor in the financial crisis in the first place by over-rating securitised debt while being paid commissions by the issuers of that debt. Humility doesn’t come easy to our financial markets.
Of course, at absolutely no point does Phillip Hammond pose the question, ‘where will the economy be in June 2010?’ That’s the really scary thing. No-one knows. We can predict by looking at economic history. But compare this recession to previous recessions as NIESR has done and things start to look very concerning indeed. See below:
This recession is far worse – so far – than those experienced in the early 1990s and early 1980s and is tracking a similar line in growth terms to the Great Depression. It took 50 months of negative growth for that to be turned around.
This recession is likely to see unemployment within the region of 3 million within a year. And bear in mind the unpredictability of this all. The FT reported the expected surge in credit card debt defaults. Is that the next tidal wave to hit financial institutions? We just don’t know.
And yet, David Cameron is planning to go into specifics about spending cuts this Autumn. In a sense this is fine, as long as he asserts that this is dependent on the economic situation. If the recovery is not properly established, or should a further stimulus be required, spending cuts – or tax rises – should be delayed.
If he fails to make that clear, he will be flying in face of some of the best economic expertise in the market today. Richard Koo underlines the critical role that Japanese government support has played in keeping that economy afloat. Cut early, and you damage recovery. Joseph Stiglitz, Paul Krugman, Samuel Brittain, and Martin Wolf have all warned against over-zealous fiscal retrenchment.
Yet the Tories carry on regardless in their obsession with the deficit and national debt to the exclusion of all other considerations. In an a recent analysis for Centre Forum, Giles Wilkes concludes:
“A straightforward application of the deficit-averse policies of the 1980s would be unwise. Cheap borrowing terms have diminished the urgency with which the government has to approach paying down the debt. While the economy is still rendered fragile by highly indebted households and lingering deflation, this is just as well; a blind rush towards fiscal balance could bring back the recession with a vengeance.”
Wilkes’ paper, which has been receiving widespread interest, also tantalisingly holds up the proposition that wealth taxes – through the form of ending the Captial Gains Tax exemption on primary residences and a Council Tax surcharge on the highest value properties – have a role to play in closing the deficit.
He is highly critical of what he sees as over-optimistic government spending prior to the recession. Both public and private sectors were taking undue risks, as we now know with the benefit of hindsight. However, overall he sees the ballooning of public debt as a consequence – deliberate and automatic – of the collapse of economic output. And he is clear about the consequences of beginning the retrenchment too early.
This is enormous risk that a new Conservative government would be willing to take. More than any other point that the Labour party makes over the next few months, it is this message that must get through. The argument must be relentless. Cut public spending too early and output and employment will be hit while the national debt will actually balloon further. The economic consequences of David Cameron could be very severe indeed.