Wednesday, 25 April 2012

The Predictable Double Dip

So today brings the news that the UK economy is back in recession.

This has been predicted by people like myself on the left of the political spectrum right since the moment that the Tories were elected in May 2010, and for good reason, because this was simply an inevitability given their choice of economic plan. Austerity is failing Europe and it is now demonstrably failing Britain.

The Tories are now, predictably, explaining how this is all the previous governments fault and that they inherited a terrible financial mess which they are taking tough decisions to fix. But I'd like to explain exactly how this point of view is completely wrong and inconsistent with their own policies and the facts as they are.

Lets get this out of the way first, the situation we are currently in is NOT the fault of the previous Labour government. Now, some might say "well you're a Labour Party member, so you would say that wouldn't you?" well I'd obviously sooner stick up for Labour than the Tories, but I am to the left of the party and and therefore have a lot of criticisms of the parties policies that I am not shy about. But on the issue of whether they spent too much, I am totally with the party because of what I see are the facts on the ground.

Throughout the 13 years of Labour government, they fluctuated between producing budget surpluses and deficits. In 2007 the year before the crash, the deficit was 3.1% of GDP. The fact is, public spending deficits are not necessarily a bad thing believe it or not! So long as they are not out of control and are managed properly. The analogy that is often made about the government is with a business and that no business would survive if it spent more then it had. But this is just illogical because most businesses start with debt, how else could people afford to set up businesses? But that debt isn't bad, in fact its good, because it eventually leads to profit, job creation and growth. The same principle applies to the government. If the government spends more money than it has on investment projects and creating growth, it is actually a good thing, because it eventually leads to more people having jobs, higher tax receipts and lower welfare payments. So, so long as this temporary debt is small, sensibly managed and spent correctly, there isn't a problem with the government being in debt.

In fact, so obviously was this the case that even the Tories were then making promises to "match Labours spending pound for pound", which shows that their change of position now is totally disingenuous and opportunistic.

The problem was - the 2008 financial crash. All of a sudden with the banks about to fail and the economy contracting, the government had to bail the banks out to secure everyone's savings and investments (because it would have been a disaster for us all if that had happened) and increase public spending to keep people in their jobs, rather than on the dole. The public spending deficit thus massively increased to a level that is now very unhealthy. But this was completely necessary otherwise the economy would have entered a downward spiral of people losing their jobs, increasing the welfare bill (and therefore public debt) and decreased economic activity. Labour increasing the deficit meant that the country avoided a depression and the economy quickly began growing again and unemployment was falling.

It's worth noting now that the Conservative Party were pretty much the only organisation in Europe that actually opposed public spending stimuli to get out of recession and in favour of immediate public spending cuts.

Now, Labour are accused of spending too much before the crash, and thereby making it worse when it hit. But this isn't the case and demonstrably has no bearing on the countries condition post-crash. Before the crash, Ireland had a budget surplus of around 3% and Iceland's was even larger and look how that turned out for them. There was clearly no correlation. The problem was the countries dependence on the financial sector and the under-regulation (and Tories can't really be ideologically consistent if they want to argue for more regulation...).

So when the Labour Party left office, the economy was on the road to recovery. The economy was growing and unemployment was falling. But when the Tories/ Lib Dems took over and started implementing their policies, the economy started going backwards because they had not learnt the economic lessons of the past.

This austerity drive was always going to lead to this double dip recession. If you cut public spending at a time when the economy is not yet stable, you will simply make things worse. Raising VAT will make people spend less, so businesses will make less money and be less likely to employ people, may make redundancies and add to unemployment. The higher unemployment we have, the more dole money the government has to hand out and less tax revenue it gets (thus increasing the deficit).

Cutting peoples benefits mean they have less money to spend in the economy. Whereas a tax cut for the richest simply makes the deficit bigger so that rich people can spend that extra money in places like Monaco or (dare I say) Jersey.

The modern Conservative Party is one of the remaining vestiges from an age where our economic understanding was not as great as it is now, and the modern Left hasn't been able to permanently change the economic consensus, since Thatcher and Reagan tore up the rule book and replaced it with an older edition in the 80s. It was John Meynard Keynes that taught us that in a recession, you just simply cannot rely on the Adam Smith "invisible hand" idea, you must have state intervention to prevent a recession turning into a depression. But because this idea is inconsistent with conservative values, they are doing their best to forget it and return to Adam Smith Laissez Faire economics.

After the Second World War, the country was in a far worse economic state than we are in today, and there was no austerity drive, but instead mass nationalisations, a huge housing program and the creation of the NHS. This kept the country at 0% unemployment for years and economic growth that meant Britain could pay back it's debts slowly and steadily without the worst off in our society suffering, in fact they prospered. This is what we need a return to.

I can only hope that these arguments start being won by the left. As it stands Francois Hollande is set to win the second round of the French Presidential Election which will hopefully smash this ridiculous austerity consensus in Europe to prove in a country similar to Britain that there is better way to sort out our problems.

Vive la France, Vive la Gauche!


P.S. Apologies to Jersey readers if something on UK politics bored you!


  1. Sam,

    Keynes simply did not understand economics.

    Government can never offer solutions, it can only get out of the way and let those who know what they are doing, do it.

    The Labour government did cause all these problems by bailing out the banks. They should have been left to fail according to free market principles.

    The Labour government also did not pay down any debt during the good times so when the inevitable bad times swing round (an inevitable consequence of following Keynes' delusions) further debt was inevitable.

    We are now following the only possible solution other than default - devaluation of the debt through hyper-inflation.

    Such hyper-inflation means that wages, benefits and savings are worth less and the standard of living is falling and fast.

    This is good in the long run as it will restore public sector wages to what they should be, instead of the ridiculous sums that are paid to these people now.

    Hopefully the Conservatives will stay in power for a long time and get things back on an even keel and government out of people's lives.

  2. Unless you are advocating the fallacy that the problem of excessive debt can be solved by issuing more debt, it is interesting that you choose to use the rise of Nazism as a stick to beat libertarian practices. The rise of Nazism was in fact much more signficiantly influenced by a reaction to the collapse of the Weimar republic, an inflationary disaster driven by the German Government's insistence on printing Marks to stimualte economic activity after the collapse of the German economy after the war.

    Your time might be spent more productively on studying your history books a little, rather than accusing others of being blinded to potential solutions because of an adherence to a particular political rhetoric. Neither side of the political spectrum is blameless in this crisis, and neither side, as history has proved, has the exclusive solution. Try and be a little more tolerant of others views, and they might engage. Trying to belittle them, or their beliefs, is a certain way to find yourself simply talking to those who already agree with you. And that might be gratifying, but ultimately doesn't cause your understanding or knowledge to deepen.

  3. Please tell me that a system error has removed your reply, and that you are not attempting some sort of revisionist meddling to show yourself in a better light ?

    1. The former. Not sure where it's gone, and don't have a record of it. Might re-write it when I have time.

  4. Sam, are you seriously suggesting that we borrow MORE money when our biggest export market is in financial decline?

    1. That's exactly what I am suggesting. It's also exactly what America is doing.

      The Eurozone is actually growing more than the British economy at the moment, so I don't really see that as an excuse.

  5. Sam, the crash happened and we can't change that. Our strategy now has to be based on the current unique situation. Keynes goes out the window. All the major financial agencies agree that the UK is following the right course. Labour would do the same thing, they just have the luxury of no responsibility so they can say what they want at the moment without being held to account.

    The economy was not on the road to recovery under Labour as the economy is tied to the the world economy and Labour had no control over that.

    Did we pay back our debts after the second world war? I thought we needed bailing out by the IMF?

    Are we actually cutting spending? We seem to be borrowing more and spending more. It's the world economy that has the biggest effect on our economy. The best we can hope for is to be more financially stable than our competitors.

    1. Obviously we can't change that the crash has happened, but if you don't learn your lessons from the mistakes of history you're doomed to repeat them, so it is important to make sure that blame is appropriately allocated so if this situation arises again we know what we are doing.

      As for financial agencies agreeing with Osbourne -

      There are plenty that think he is wrong, and, unlike these financial agencies you speak of, these economists have unfortunately been vindicated.

      America has taken a different path to us and, whilst they're not free of significant problems, no one is worried about them re-entering recession. That's where we could have been and it is where Labour wanted us to be.

      The paradox about cutting spending the in the way that is being done is that you are right, it increases borrowing and overall spending. More people out of jobs means higher welfare bills and less tax intake, so this whole austerity thing is just totally counter productive.

      If spending cuts are to happen, they need to be on wasteful projects (I'd start with the war!) and not on things that are going to harm the economy. There will be time for spending cuts later, but it can't be at a time when the economy is in the dangerzone.

  6. Not at all ...First class ,salient and affects us anyway.....please continue....

  7. All the major financial agencies agree .. the ones who commented nothing abou tthe dangers o fsub-prime and the stupidity of lending to those who cannot repay. Not a recommendation to follow their sage advice! It is the ability to repay that is the issue. But seriously this is only the man made artifice money. We have a much bigger problem in that we are 'overspending' on the natural account, and nature does not do overdraughts.