Friday, 15 January 2010

Cameronomics, the verdict - simples...?

As the general election draws ever nearer (or, depending on your view, the seemingly never-ending campaign season drags on...), some very clear dividing lines are beginning to emerge between Labour, the Conservatives and Liberal Democrats. I've written a post on a policy area close to my heart, that of science policy, which you can read here. In this post I want to explore issues that underpin not just science policy but all government activity, issues that shape the direction our nation will take as we exit the most prolonged economic crisis in living memory - it's the economy, stupid...

Johnann Hari has commented on David Cameron's approach to the economy, and how it would likely result in even greater strife for so many in the UK (Nobel prize-winning economist Paul Krugman broadly agrees with this analysis so it's probably a safe bet...), akin to what Ireland has suffered in recent years. Hari contrasts Cameron and Osborne's stance - cut public spending deep, fast and across the board - with Brown and Darling's handling of public finanaces, placing their actions in the Keynsian camp of deficit spending to offset the dearth of demand in the private economy. So far, so Economics 101.

Indeed, nobody knows where we would be had we followed the 'Cameronomics' line of letting the recession runs its course without 'interference' from the government, nor is there much predicting the effects of paying down the £178bn pubic sector debt as fast as possible as George Osborne seems determined to do - given that we're in the longest-running and deepest economic downturn since records began despite billions of pounds of public bailouts, it's hard to imagine.

And yet, I'm not convinced that it's as simple as painting the current crisis, and the paths we have before us en route to recovery, as the plain dichotmoy that Hari describes - Keyenes versus cuts, as it were. He and many others seem to assume that just because cutting indiscriminately before the risk of a double-dip recession passes would be irresponsible, simply opening up the taps and spending indiscriminately, being the opposite, would achieve the opposite - that the policies Brown and Darling have pursued must be right as the most talked-about alternative on offer is wrong.

Take, as an example, the recently expired cut in VAT, much championed by Labour's economic heavyweights and thought to have cost £12.5bn - accordng to the previous analysis this would qualify as a Kenysian measure, but how are we to judge the outcomes of this policy? The idea (as Lord Drayson spelled out to last week's science debate) was to inject cash into the economy with immediate effect, and not with a significant delay that, for instance, a house-building initiative or some such 'public works programme' would involve. The same argument was, of course, made in favour of the quantitative easing that the Bank of England resorted to last year - that an immediate cash injection was a) preferable to doing nothing, and b) the best route out of negative growth. A year on from the VAT cut, and there's not really a great deal to say on (a) other than doing nothing was never an option given the greatest market failure in living memory.

As far as point (b) is concerned, it's fair to say that in the long run the VAT cut will probably be seen as one of many policies that simply didn't deliver - 12 months on we are still in recession, aside from which any technical, GDP-related exit from the downturn won't be much comfort to the thousands of families affected by the insecurity and uncertainty that lies ahead.

My point is simply this: seeing matter economic as straightforward tax-and-spend versus slash-and-grow just doesn't hold up today - it matter so much more on whom the tax burden falls, what to spend on, what to cut and how to grow.

And so we come to the Liberal Democrat approach to economic management, which, as economist Giles Wilkes tells us, is gaining traction amongst the great and the good in the world of finance. Ask not how much to tax the nation, but rather ask how - by raising the tax take from those who can well afford to pay more, thousands would be free from tax altogether and millions would benefit to some degree. Ask not how much the government can spend overall, but rather how that expenditure can be made an effective tool in delivering clear priorities - sustainability, freedom and above all fairness. Ask not how much cash can be slashed from the Treasury's coffers, but rather how we can rid ourselves of costly white elephants such as Trident and focus on what the country needs - effective public services for instance. Ask not how we can contrive a return to the inequitable, speculation-fuelled growth-for-some status quo ante, but rather how we can use the route away from recession to create a truly fair, balanced and green economy.

Remember, after all, why Keynes supported deficit spending in the first place. Not because the private economy, left to its own devices, would never recover; not because he advocated centralised statism in the long run; nor because of some ideological preference for fiscal exapnsion in times of strife. A true Keynsian would see that the state picking up the slack where markets fail can be the most effective way of ensuring that the most vulnerable don't get ravaged by the harsh consequences of economic collapse, but can only be so if it's done with clarity of thought and purpose - which we haven't seen from Labour, so no matter how wrong Cameronomics may be we must look elsewhere for salvation.


Ian Visits said...

I don't have a problem with borrowing when necessary, so long as the debt is paid of when possible - and most importantly, during the lifespan of its effects.

For example, capital expenditure should be financed by debt and repaid over the lifespan of the resultant road/rail/building as it is unfair that today's taxpayers fund the next generation's roads.

Likewise, increased spending in services which leads to higher economic activity in the long term can be justifiably financed by debt as it is the future society who benefit, so they should pick up the bill.

However, the debt should then be paid back over the lifespan of the economic benefit.

To puck numbers out of the air, if a road is built and deemed to last 25 years before needing significant repairs, then the repayments should be spread over maybe 30 years, with the bulk of the repayment being between 5-25 years.

However, the size of the economic stimulus for this recession is likely to be still felt by the grandchildren (if not great-grandchildren) of the current parents.

How would they have benefited from the current spending splurge?

Yes, some residual benefits can be found, but the percentages would be small, yet their cost burden is likely to be higher than the benefit.

Yes, the recession would have been worse without the massive hike in debt, and I am very pleased that my personal finances were not ruined by the recession.

Is it right that your grandchildren (I have no kids) should pick up the bill for my financial security though?

teekblog said...

@ Ian Visits: in many ways I agree that deficit spending can be justified when benefits accrue over a long period - the road example is a good one. The point I was trying to make was that although the Tory approach would have made things worse, Labour's attempted Keynsian stimulus was inadequate, poorly directed and mismanaged. So to answer your question, I think it would be fair to coming generations to pay back debt we accumulate to day, had it been spent effectively - i.e. by directing greater lending from truly nationalised banks, by setting up capital investment banks to fund renewal projects that private finance doesn't touch, by making sure that every penny is spent not on propping up defunct institutions and systems but on greening the economy and ensuring people stay in work.

The fact that you can only find 'residual benefits' of Labour's stimulus package is right, but to me that invalidates their particular trickle-down, market-driven approach to Keynsian intervention, not Keynes' economic philosophy per se...