Contrary to the repeated assertions made by the Government, there is no doubt that the British economy was particularly badly placed to withstand the crises in the financial sector and, even more importantly, in the productive sectors. Badly placed indeed, due an unbalanced economy that had become far too reliant on casino capitalism, to imprudence in government management of finances, mismanaged contracts and misdirected spend over very many years. And of course, on a truly epic scale, due to the abandonment of prudence, wisdom, diligence and even plain common sense in the banking and financial sector and the absence of effective financial regulation.
Added to this have been the ravages of the globalisation bandwagon on domestic industry, manufacturing in particular, with much of it closed down and many jobs already exported. The evisceration of our industries of substance rather than froth leaves the country less able to benefit from the lower value of the pound by producing for export - where the demand is there. The commercial banks have added further to this problem by effectively forcing viable producers out of business with severely tightened conditions or recalled loans. I sometimes think that banks, in their behaviour towards industry and individuals alike, are little better than a fifth column. As a result, there is still a real and present danger of approaching a 1930s situation.
How is this dire predicament to be remedied? Certainly not without a cost. Folly always has its price. We will do well to escape with 5% reduction in Gross Domestic Product. But how do we ensure that such a deep recession, where output recedes and where spending and income are well below normal, does not worsen further into depression where there are disastrous falls and the loss of GDP approaches double digits? And how do we ensure that a sustainable economic recovery begins as soon as possible?
Those in power, or aspiring to power, must have a clearly thought through and effective recovery strategy. It is not clear that this exists in government and certainly not in the principal opposition. In these circumstances, does it sound like good sense to start cutting back? Most certainly not. If output and income are to go up, then there must be extra spending from some quarter. The rational debate - and there is plenty of scope for discussion of which measures will
prove to be most effective - is about how a Keynesian solution that would achieve this is to be implemented, and which quarters can be persuaded and enabled to spend more.
A certain amount of benefit, but probably not all that much in the shorter term, may come from exports (not evident as yet) and visitors from overseas (some evidence of this). If the death grip of the banks can be loosened, and companies can be enabled at least to retain what they already have, and to increase their investment spending, then that would indeed be ideal. But, in order to justify investment, companies need to see demand for their products, which of course is precisely what isn’t there. So, once again, it makes no sense to cut back.
In terms of expanding aggregate demand, you can try to create that extra consumption with tax cuts. In this connection, income tax cuts would have been better than the VAT reduction, which clearly isn’t working. And transmitted interest rate reductions will also cause borrowers to have more at their disposal.
But interest rates are a double-edged sword whereby those who rely on savings for income are made worse off and so spend less. We know only too well that, courtesy of the banks, savers are hit early and in full and borrowers benefit later and less, if at all. Additionally, Experience in Japan in the 1990s found that in the face of interest rate cuts people saved harder to preserve their future security and incomes. We may see something of that effect here.
Important though they are, in my opinion there has been too much concentration on interest rates and taxation (though not enough about helping those who save) and now talk of increasingly imaginative and risky monetary policies too. Though all these policies have a role, there has in my view been not nearly enough of a focus on public works projects and support for manufacturing industry.
With infrastructure work - and goodness knows that after decades of under-investment we need it in energy, transport and right across the board - we generate business to firms and encourage them to invest, create or save jobs, keep more of the money at home and provide a better quality infrastructure and the much needed energy security and stable prices in the future. To my mind that’s a whole lot better and wiser than, in effect, saying: ‘Here’s £100, dash down the shopping centre and spend it on imports’.
What about Government waste? All too much of this is gone for good, but no-one in their senses would object to cutting current waste and improving efficiency - it’s important to do this. But in my view it is also important to divert the bulk of such savings to public works projects - and then to add to this total. It is imperative that the total be increased. Also in my view, if too much of the savings from waste reduction are passed on in the form of tax cuts then, entirely rationally in individual terms, people will probably use most of it to repair their domestic balance sheets - rather like the banks and with the same lack of benefit to the economy as a whole.
Economic recessions are about a serious shortage of aggregate demand. And in my view it also matters what makes up that demand. The less expenditure that is frittered away on bric-a-brac and which leaks out on imports, and the more of it that is invested in improvements in the nation’s infrastructure and the environment, securing productive jobs and supporting manufacturing, the better. And in the longer term, a restored and re-balanced economy, achieved by these Keynesian means described, will provide the firmest foundation for the restoration of future public finances and the resumption of prudent and sustainable ways of living.
Added to this have been the ravages of the globalisation bandwagon on domestic industry, manufacturing in particular, with much of it closed down and many jobs already exported. The evisceration of our industries of substance rather than froth leaves the country less able to benefit from the lower value of the pound by producing for export - where the demand is there. The commercial banks have added further to this problem by effectively forcing viable producers out of business with severely tightened conditions or recalled loans. I sometimes think that banks, in their behaviour towards industry and individuals alike, are little better than a fifth column. As a result, there is still a real and present danger of approaching a 1930s situation.
How is this dire predicament to be remedied? Certainly not without a cost. Folly always has its price. We will do well to escape with 5% reduction in Gross Domestic Product. But how do we ensure that such a deep recession, where output recedes and where spending and income are well below normal, does not worsen further into depression where there are disastrous falls and the loss of GDP approaches double digits? And how do we ensure that a sustainable economic recovery begins as soon as possible?
Those in power, or aspiring to power, must have a clearly thought through and effective recovery strategy. It is not clear that this exists in government and certainly not in the principal opposition. In these circumstances, does it sound like good sense to start cutting back? Most certainly not. If output and income are to go up, then there must be extra spending from some quarter. The rational debate - and there is plenty of scope for discussion of which measures will
prove to be most effective - is about how a Keynesian solution that would achieve this is to be implemented, and which quarters can be persuaded and enabled to spend more.A certain amount of benefit, but probably not all that much in the shorter term, may come from exports (not evident as yet) and visitors from overseas (some evidence of this). If the death grip of the banks can be loosened, and companies can be enabled at least to retain what they already have, and to increase their investment spending, then that would indeed be ideal. But, in order to justify investment, companies need to see demand for their products, which of course is precisely what isn’t there. So, once again, it makes no sense to cut back.
In terms of expanding aggregate demand, you can try to create that extra consumption with tax cuts. In this connection, income tax cuts would have been better than the VAT reduction, which clearly isn’t working. And transmitted interest rate reductions will also cause borrowers to have more at their disposal.
But interest rates are a double-edged sword whereby those who rely on savings for income are made worse off and so spend less. We know only too well that, courtesy of the banks, savers are hit early and in full and borrowers benefit later and less, if at all. Additionally, Experience in Japan in the 1990s found that in the face of interest rate cuts people saved harder to preserve their future security and incomes. We may see something of that effect here.
Important though they are, in my opinion there has been too much concentration on interest rates and taxation (though not enough about helping those who save) and now talk of increasingly imaginative and risky monetary policies too. Though all these policies have a role, there has in my view been not nearly enough of a focus on public works projects and support for manufacturing industry.
With infrastructure work - and goodness knows that after decades of under-investment we need it in energy, transport and right across the board - we generate business to firms and encourage them to invest, create or save jobs, keep more of the money at home and provide a better quality infrastructure and the much needed energy security and stable prices in the future. To my mind that’s a whole lot better and wiser than, in effect, saying: ‘Here’s £100, dash down the shopping centre and spend it on imports’.
What about Government waste? All too much of this is gone for good, but no-one in their senses would object to cutting current waste and improving efficiency - it’s important to do this. But in my view it is also important to divert the bulk of such savings to public works projects - and then to add to this total. It is imperative that the total be increased. Also in my view, if too much of the savings from waste reduction are passed on in the form of tax cuts then, entirely rationally in individual terms, people will probably use most of it to repair their domestic balance sheets - rather like the banks and with the same lack of benefit to the economy as a whole.
Economic recessions are about a serious shortage of aggregate demand. And in my view it also matters what makes up that demand. The less expenditure that is frittered away on bric-a-brac and which leaks out on imports, and the more of it that is invested in improvements in the nation’s infrastructure and the environment, securing productive jobs and supporting manufacturing, the better. And in the longer term, a restored and re-balanced economy, achieved by these Keynesian means described, will provide the firmest foundation for the restoration of future public finances and the resumption of prudent and sustainable ways of living.
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