It’s the economy, Stupid

By Sam Burt

When David Cameron and Gordon Brown spoke at the World Economic Forum in Davos back in February, Cameron pleaded for a “moral capitalism” in an attempt to decontaminate the Tory brand from its free-market ideology. Brown spoke of how, given the unprecedented nature of the global crisis, there were few direct lessons offered by history. But both downplayed their debt to history. In the depths of the 1930’s Depression, President Hoover urged business leaders not to cut wage rolls. President Roosevelt offered action, not words. Whereas Cameron’s economic thinking is guided by the latest evolution of the Chicago School tradition, Brown has shown a glimmer of his New Keynesian credentials. This recession has magnified the fundamental difference of values between the parties.

“Recovery first, and then reform: don’t confuse the two”. This was Keynes’ advice to Franklin Roosevelt. Keynes was right. The government moved swiftly to stabilise the vicious cycles coursing through the economy in the short-run and laid down roots for longer-term progressive reforms.

We acted to shore up investment by increasing the threshold for empty property tax relief for small firms. By allowing firms to spread their VAT, corporation tax and NIC payments over a longer period, the government has offset the shortage of business lending by allowing firms to better fund investment from retained earnings.

A boost in government purchases and transfer payments should sustain aggregate demand and put a floor on the depth of the recession. The government is bringing forward £3bn in capital spending from 2010-11, including investment in the railways, environmental protection and energy efficiency. The total fiscal stimulus will exceed £20bn over the next 2 years, with £7bn of this disproportionately going to benefit lower-earners. This is both morally just and efficient, since low-earners spend more of every pound they earn.

As a party in government, we spent our first years paying off the national debt burden. For the business cycle from 1997-2006, we recorded a modest budget surplus, even as we directed considerable resources into necessary investment in public services. According to Paul Krugman, the UK in 2008 was near the bottom of the middle group of countries in terms of government debt.

The net debt is now going to rise in the medium-term, because the government is converting private debt into public debt. This is absolutely essential to help stabilise the economy, but we can only afford to do this because our level of government debt was relatively low. Contrary to what the ‘Cameroons’ say, we did fix the roof while the sun was shining.

The idea that we have shackled future generations with an immoral debt burden isn’t a necessary proposition, but a contingent one. The government has converted a large private debt into public debt. What burdens future generations depends on what the government now does with this public debt. With the government’s growing stake in the banking sector after the second bailout, it’s evident that the total final cost that will be passed on to future generations will depend on the market value of the government’s stake. That in turn depends on whether the sharp end of the recession is short or protracted. And that depends on whether the government acts as forward-looking, boldly and decisively in longer-term investments as it has done with initial recovery.

Comparisons have been drawn of our approach to this global recession and Roosevelt’s New Deal, but too few have been drawn between Hoover’s Republicans and Cameron’s Conservatives. Just as Hoover accelerated capital flight by declaring his fears about Roosevelt’s “Socialist” tendencies, so Osborne has broken the unofficial rule that politicians don’t talk down the pound, especially not during a crisis as potentially severe as this. This is a time for thinking big, whether on taking more low-earners out of income tax, infrastructure projects like Crossrail or using the opportunity of the Equality Bill to push a more ambitious agenda.