Alasdair Macleod – 14 August 2009
There is much angst in the press over government economic policy. Labour politicians are claiming their initiatives are practical and helpful, and are accusing the Conservatives of having no policy other than to slash public sector services. The Conservatives deny this and are saying the government will have to cut spending but is refusing to admit it.
Meanwhile, the Bank of England is taking a generally cautious view, with inflation threatening to remain below target for the foreseeable future. The quantitative easing programme is being extended, but the numbers are not substantial in the context of the economy. However, far from being the monetary means of encouraging recovery, its true purpose is to print the money to finance government debt. This blatant inflationary policy is ringing alarm bells in some quarters, but it does not appear to be stimulating bank lending, so the inflationary impact is limited. If and when QE is translated into increased bank lending there will be an effect on prices. All this sums up official attitudes: that we will deal with tomorrow’s problems when they arise.
The truth is that the government is frozen by inaction. It is hoping that the current recovery in sentiment marks the turning point for the economy, but it cannot be sure. The Treasury is not sanctioning an expansion of government spending, and it resists giving money to the private sector’s “deserving causes”. In this respect, government fiscal and monetary policies are more sensible than that of the United States.
If this is praise, it is only by comparison and therefore faint and damned. The reality is that a do-nothing policy will at the very least condemn the economic adjustment to be unnecessarily deep and protracted. This is in a world which is fundamentally at the mercy of US economic problems, and the inevitable deterioration of that economy will be detrimental to the UK.
It is difficult to comprehend how bad things really are in the States. Headline unemployment for active job-seekers is shown at just under 10%, but the broadest measure, which includes those so discouraged they have stopped looking for work, is over 16%, and there is evidence that the official numbers understate even this number. John Williams of Shadow Government Statistics estimates the true figure for the broader measure is closer to 21%. The latter figure, which will certainly rise further, compares with a peak rate of 25% in 1933. The level of consumer debt to be unwound is the largest in history by any measurement – nominal, real or relative to GDP. Unwinding this debt means consumption deferred for as long as it takes. Some of this deferred consumption will pay down debt, leading to contracting bank balance sheets, and some will be saved. The savings will be entirely spoken for by government borrowing which will be so great there will be no funds left over for private sector recovery.
The profligacy of the Obama regime is truly staggering. We have had the cost of the financial bail-out, which with on-going liabilities has the potential alone to be as much as the US’s annual GDP. On top of this the budget deficit is forecast to exceed $1.8 trillion, and in the midst of this unprecedented crisis there is an Alice-in-Wonderland debate about taking on extra costs of free healthcare.
The problem in both the US and the UK is that governments are grabbing all the money and starving the private sector. The economists advising them do not seem to realise that the difference between the public sector and the private sector is simply production, that is to say more government equates to less production in the whole economy.
The only way the UK will recover is to cut government back drastically, and rescind more or less all the regulation introduced over the last twenty years. Unless this is done, the slump will be long and deep. The wrong thing to do is burden the productive part of the economy with further taxation.
On current form, it looks like neither Labour nor Conservatives will grasp this nettle, before or after the next election. The market will therefore eventually force action upon them.