Dominic Lawson
http://www.timesonline.co.uk/tol/com...cle5213485.ece
As Jeremy Clarkson will tell you, if your car has started to skid out of control, the most dangerous thing to do is to pull the steering wheel violently in the opposite direction. That, however, is what Gordon Brown is doing with the British economy and the consequences could be just as catastrophic.
I do not find it remotely reassuring that the bulk of the economists working for our commercial banks agree with his plans to increase our national borrowings to levels not seen since the 1970s. Regiments of City economists in full battle cry, calculators unsheathed, can be an impressive spectacle – but let’s remember that these are exactly the same people who told their banking bosses that there would not be a crash in the housing market, either here or in America. Now they tell us that “profligacy is the new prudence”. They’ve got a nerve.
So, of course, has the prime minister, who is spinning exactly the same line. He also claims that the world’s financial regulators share his view that Britain should be part of a concerted drive to stimulate the global economy with fiscal measures – that is, tax cuts. Actually, they don’t – and many of them are the same people who have been warning for the past few years that Britain’s borrowings had become dangerously high.
On Monday, the deputy managing director of the International Monetary Fund (IMF), John Lipsky, said: “Fiscal action may not be advisable in countries with greater vulnerabilities, or those where debt sustainability is a major concern. Thus, those best able to finance new fiscal efforts and those with clearly sustainable debt positions should take the lead.”
In other words, Britain is specifically not being asked to take a lead, however much it flatters the prime minister’s vanity to pretend the opposite.
Nor is a dramatic reflationary policy even necessary for purely domestic considerations: in a global economy, if those countries whose finances are sounder carry out a concerted fiscal loosening, Britain will feel the benefits, chiefly as an exporter. On the other side of the equation, those arguing on Keynesian grounds for a British borrowing binge – or rather, an intensification of the existing blow-out – seem to forget that we are no longer in an era of exchange controls, in which money cannot flow uncontrollably across national borders.
The born-again Keynesians, who suddenly seem more numerous – though not necessarily more numerate – within the cabinet, argue forcefully that the primary problem is that a lack of consumer confidence will lead to a deflationary slump and that tax hand-outs will address this dire threat.
It is obviously true that if people have more money in their pockets then they have greater spending power, but this on its own does not address the question of confidence. If it is crystal clear that the tax cuts are purely temporary and that they will need to be clawed back in their entirety by tax rises later, why should any sensible person rush out to spend all the money?
We are given to understand that when he reveals the pre-budget report tomorrow, Alistair Darling will be explicit in acknowledging the need for tax rises later to pay for the increase in borrowing. Doubtless this reflects the intense unease within the Treasury at the policy imposed on it by No 10, but the overall effect will not be to increase consumer confidence – rather the reverse, in fact.
Again, those who see the global economic situation with the clarity that comes from a truly international perspective have already made this point to the British government. A fortnight ago, Jean-Claude Trichet, president of the European Central Bank (ECB), observed: “You have, unfortunately, countries that have already no room for manoeuvring. In those particular cases fiscal activism, instead of having a positive impact on the economy, could harm confidence, as economic agents would expect government authorities to address these imbalances, by increasing taxation a posteriori.”
In any case, the true danger might not be deflation, but policies predicated on its worst consequences. It’s true that economists use the spectre of a deflationary death spiral rather as mothers once warned their children about the Bogeyman. In principle, it is indeed terrifying: the economy would, like the mythical oozlum bird, fly round and round in ever-diminishing circles, until it disappears up its own fundamental orifice. On the other side of the argument, there is the fact that the oozlum bird doesn’t actually exist.
The deflationary spiral can come into being, however, the theoretical consequence of consumers united in a view that if prices are falling, they should defer purchases – with the result that prices fall still further and more and more businesses are ruined.
In practice, things are not so stark, partly because humans are more than just economic calculating machines. For example, over recent decades, the prices of electronic goods have fallen consistently. This has not stopped countless consumers rushing to buy the latest gadgets, even though they must know that in six months’ time the same object will be available from imitators – or even the same producer – at a lower price. This phenomenon also applies to clothing purchases, especially among the fashion-conscious.
In some of the most significant areas of business, there is simply no room for discretionary delays in expenditure. You might well think that the price of oil will continue to fall, but if your car’s fuel tank is empty, you won’t wait a fortnight to fill it up on the off-chance you might save a pound or two. Similarly, you might be right in believing food prices are set to fall further; but, again, you won’t say to your children: “I’m sorry there won’t be any food on the table this week, my darlings, but you’ll be pleased to know this means we’ll be able to afford much more next week.”
None of this is an argument for, as Brown stigmatises it, “doing nothing”. Deflation is to a large extent a monetary problem and therefore the most suitable weapons to address any such threat must also be from the monetary armoury – principally interest rates. In the US, with the Federal Reserve’s rate at 1%, that weapon is almost entirely depleted: hence the Fed is now talking about “quantitative easing” – the fancy new euphemism for printing money.
In the UK, by contrast, there is more room for manoeuvring interest rates down – which, unlike fiscal hand-outs, would increase overall spending power without frightening consumers with the inevitable consequence of later tax rises. Critically, however, the Bank of England is much less likely to authorise further rate reductions if an incontinent increase in Treasury debt further terrifies investors in sterling. This is made very clear in the minutes – published on Wednesday – of the monetary policy committee meeting which agreed to cut the Bank’s lending rate to 3%. The minutes recorded: “It would make sense to reassess the required scale of monetary easing after the chancellor’s pre-budget report.”
So there you have it: far from a global consensus that Brown is right to steer the British economy violently against the direction of travel, the IMF is against it, the ECB is against it, the Bank of England is against it - and even the Treasury is against it. Or, in the words suitable for the panto season: Oh, no you don’t, Gordon!
http://www.timesonline.co.uk/tol/com...cle5213485.ece
As Jeremy Clarkson will tell you, if your car has started to skid out of control, the most dangerous thing to do is to pull the steering wheel violently in the opposite direction. That, however, is what Gordon Brown is doing with the British economy and the consequences could be just as catastrophic.
I do not find it remotely reassuring that the bulk of the economists working for our commercial banks agree with his plans to increase our national borrowings to levels not seen since the 1970s. Regiments of City economists in full battle cry, calculators unsheathed, can be an impressive spectacle – but let’s remember that these are exactly the same people who told their banking bosses that there would not be a crash in the housing market, either here or in America. Now they tell us that “profligacy is the new prudence”. They’ve got a nerve.
So, of course, has the prime minister, who is spinning exactly the same line. He also claims that the world’s financial regulators share his view that Britain should be part of a concerted drive to stimulate the global economy with fiscal measures – that is, tax cuts. Actually, they don’t – and many of them are the same people who have been warning for the past few years that Britain’s borrowings had become dangerously high.
On Monday, the deputy managing director of the International Monetary Fund (IMF), John Lipsky, said: “Fiscal action may not be advisable in countries with greater vulnerabilities, or those where debt sustainability is a major concern. Thus, those best able to finance new fiscal efforts and those with clearly sustainable debt positions should take the lead.”
In other words, Britain is specifically not being asked to take a lead, however much it flatters the prime minister’s vanity to pretend the opposite.
Nor is a dramatic reflationary policy even necessary for purely domestic considerations: in a global economy, if those countries whose finances are sounder carry out a concerted fiscal loosening, Britain will feel the benefits, chiefly as an exporter. On the other side of the equation, those arguing on Keynesian grounds for a British borrowing binge – or rather, an intensification of the existing blow-out – seem to forget that we are no longer in an era of exchange controls, in which money cannot flow uncontrollably across national borders.
The born-again Keynesians, who suddenly seem more numerous – though not necessarily more numerate – within the cabinet, argue forcefully that the primary problem is that a lack of consumer confidence will lead to a deflationary slump and that tax hand-outs will address this dire threat.
It is obviously true that if people have more money in their pockets then they have greater spending power, but this on its own does not address the question of confidence. If it is crystal clear that the tax cuts are purely temporary and that they will need to be clawed back in their entirety by tax rises later, why should any sensible person rush out to spend all the money?
We are given to understand that when he reveals the pre-budget report tomorrow, Alistair Darling will be explicit in acknowledging the need for tax rises later to pay for the increase in borrowing. Doubtless this reflects the intense unease within the Treasury at the policy imposed on it by No 10, but the overall effect will not be to increase consumer confidence – rather the reverse, in fact.
Again, those who see the global economic situation with the clarity that comes from a truly international perspective have already made this point to the British government. A fortnight ago, Jean-Claude Trichet, president of the European Central Bank (ECB), observed: “You have, unfortunately, countries that have already no room for manoeuvring. In those particular cases fiscal activism, instead of having a positive impact on the economy, could harm confidence, as economic agents would expect government authorities to address these imbalances, by increasing taxation a posteriori.”
In any case, the true danger might not be deflation, but policies predicated on its worst consequences. It’s true that economists use the spectre of a deflationary death spiral rather as mothers once warned their children about the Bogeyman. In principle, it is indeed terrifying: the economy would, like the mythical oozlum bird, fly round and round in ever-diminishing circles, until it disappears up its own fundamental orifice. On the other side of the argument, there is the fact that the oozlum bird doesn’t actually exist.
The deflationary spiral can come into being, however, the theoretical consequence of consumers united in a view that if prices are falling, they should defer purchases – with the result that prices fall still further and more and more businesses are ruined.
In practice, things are not so stark, partly because humans are more than just economic calculating machines. For example, over recent decades, the prices of electronic goods have fallen consistently. This has not stopped countless consumers rushing to buy the latest gadgets, even though they must know that in six months’ time the same object will be available from imitators – or even the same producer – at a lower price. This phenomenon also applies to clothing purchases, especially among the fashion-conscious.
In some of the most significant areas of business, there is simply no room for discretionary delays in expenditure. You might well think that the price of oil will continue to fall, but if your car’s fuel tank is empty, you won’t wait a fortnight to fill it up on the off-chance you might save a pound or two. Similarly, you might be right in believing food prices are set to fall further; but, again, you won’t say to your children: “I’m sorry there won’t be any food on the table this week, my darlings, but you’ll be pleased to know this means we’ll be able to afford much more next week.”
None of this is an argument for, as Brown stigmatises it, “doing nothing”. Deflation is to a large extent a monetary problem and therefore the most suitable weapons to address any such threat must also be from the monetary armoury – principally interest rates. In the US, with the Federal Reserve’s rate at 1%, that weapon is almost entirely depleted: hence the Fed is now talking about “quantitative easing” – the fancy new euphemism for printing money.
In the UK, by contrast, there is more room for manoeuvring interest rates down – which, unlike fiscal hand-outs, would increase overall spending power without frightening consumers with the inevitable consequence of later tax rises. Critically, however, the Bank of England is much less likely to authorise further rate reductions if an incontinent increase in Treasury debt further terrifies investors in sterling. This is made very clear in the minutes – published on Wednesday – of the monetary policy committee meeting which agreed to cut the Bank’s lending rate to 3%. The minutes recorded: “It would make sense to reassess the required scale of monetary easing after the chancellor’s pre-budget report.”
So there you have it: far from a global consensus that Brown is right to steer the British economy violently against the direction of travel, the IMF is against it, the ECB is against it, the Bank of England is against it - and even the Treasury is against it. Or, in the words suitable for the panto season: Oh, no you don’t, Gordon!
Comment