By John Weeks.
“Give me a sane chancellor.”
In its latest update on the world economy, the IMF changed its prediction for the economic growth of the United Kingdom from 0.8 percent to 0.2. To quote from The Guardian, “the Washington-based organisation predicted on Monday that growth in the UK will all but evaporate in 2012” (17 July 2012).
What The Guardian writer neglected to report is that the “down-grade” for the growth rate is in reality so optimistic that it makes Candide’s tutor, Pangloss, seem a pessimist. The UK economy contracted by minus 0.3 and minus 0.2 in the first and second quarters, respectively. A bit a non-advanced arithmetic implies that to obtain an average of +0.2 percent across the four quarters of 2012, growth in the last six months must be slightly over 0.6 percent.
This may not seem a robust growth target (it is appallingly low, actually). It is for the chancellor’s Coalition, because during the eight quarters that the present government so skillfully mismanaged the UK economy, that miserably low 0.6 percent was reached only twice, both times at exactly that and no more. The first time was the quarter that began less than a month after the election that gave the Coalition its opportunity for to display its reactionary incompetence. Any rational judgment assigns economic performance (good or bad) in that quarter to the previous government. The second time was a year later, the third quarter of 2011, when the Coalition’s rather strong version of growth was accompanied by a sharp decline in household consumption.
With the construction sector contracting, by a robust minus 3.0 percent in the first quarter of this year, the probability for any growth in the last six months is close to nil. This makes the six-tenths of one percent a huge hill to ascend. Setting aside Coalition fairy tale sources of growth (the Olympic Boom, better weather and fewer holidays), what are the realistic prospects? Of one thing we can be sure. The UK will receive no growth stimulus from external demand in the foreseeable future. The euro zone is entering free-fall, the US economy has slipped back into stagnation, and China will not ride to the rescue. While it continues to growth impressively, the Chinese economy has slowed, to eight percent says the ever-optimistic IMF (so, bet on 5 to 6 percent), implying a more than corresponding fall in import demand.
By necessity and through considerable practice, the UK Chancellor George Osborne has developed a routine for justifying negative growth (having created for himself the opportunity in five of the last seven quarters). No doubt the negative growth to come for the rest of this year and into the next will be attributed to “events beyond our control” (the E-BOC principle). There exist circumstances very much within the control of the Chancellor were he to have the inclination or the wit to act purposefully. If he did, what could he do?
At the risk of repeating the prescription for the thousandth time, Fiscal Stimulus, Mr Osborne, as in Spend More. The typical arguments against this were irrelevant two years ago and certainly are now. I can briefly dismiss these. We cannot spend more because that would:
– increase the deficit: The increase in the public sector deficit resulting from an increase in expenditure would be progressively eliminated by the stimulus to output that the increased expenditure itself would generate.
– increase the public debt: The increased output will always be greater than the increase of the debt, so the ratio of public debt to GDP (national output) would fall.
– generate interest payments of the debt that would cut into other, useful, public expenditures. The UK government’s borrowing rate is currently one-half of one percent with no sign of increasing. With the euro in trouble, the pound is in demand, holding UK borrowing rates rock-bottom.
– cause inflation. The UK inflation rate has fallen for the last three quarters, now approaching two percent, down from close to five a year ago.
Recently another irrelevant anti-stimulus argument appeared in an otherwise excellent article by Nick Cohen (Observer 1 July 2012). He tells his readers, “…David Blanchflower…warns that a switch to a Keynesian approach would take years. You cannot just turn on spending on infrastructure. Projects need to be planned and approved…” With all due respect to Mr Blanchflower’s anxieties about infrastructure planning, they irrelevant. For starters, the coalition government could reinstate the infrastructure projects it has cancelled, for example, school construction and flood protection (you might have noted the recent need for the latter).
Even were there not such projects, and there are, the stimulus need not restrict itself to capital expenditures. Hire more teachers, fund more treatments under the NHS, reverse the cuts in policemen and hire more, etc, etc. These expenditures are part of a “Keynesian approach” in the same since that expecting water to run downhill is a “Newtonian approach” to gravity.
There is no economic, engineering or accounting reason not to embark on an immediate fiscal stimulus in the United Kingdom. What prevents it is politics; indeed, an ideological form of political madness. Every quarter the economy stagnates or contracts and the Chancellor tells all who would listen that in the next quarter his cuts in public services will inspire private sector confidence that will bring investment to replace and exceed his cuts. Albert Einstein captured this approach to problems succinctly, “insanity is doing the same thing over and over again and expecting different results”, in this case the madness of Chancellor George and his government. Someone find Britain a sane chancellor.
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