Alistair Darling stood up to give his pre-Budget report (PBR) just as I was on a plane heading for sunny Florida. Whoopee! The first big snowstorm was heading for the east coast. My town had ten inches of snow. The idea of spending Christmas on the beach for the first time is pretty exciting. Saw four wild manatees and caught a small hammerhead shark today. Sure beats the snow.
The run-up to the PBR was action-packed. Along with 11 other professors of economics, I signed up to a letter that was published in the Financial Times, calling on the Chancellor to keep the stimulus going. We argued that the balance of risk suggests our country should be more concerned about a likely deepening of unemployment than about possible inflationary pressure. Reducing the deficit now through spending cuts, we went on to say, would undermine the recovery and ultimately damage the public finances further.
And then to Richard Quest’s show on CNN to talk about the PBR on the day that Greece’s debt was devalued and the Greek stock market fell by 7 per cent. First Dubai, then Greece; this financial crisis still has legs. Richard makes frequent appearances on US television, where he enthusiastically explains, in his wonderful accent, what it means to be British. The Greek finance minister, George Papaconstantinou, was up first. Richard’s pronunciation of the minister’s name was quite something. He asked smart questions and invited me back. Any time.
A dumb idea
And on to BBC2’s Newsnight with Gerry Robinson and Lord (Nigel) Lawson to discuss the PBR. To say the least, there wasn’t a meeting of minds. Robinson said he could see savings under every teacher’s desk, although where exactly he didn’t make clear.
Lawson trotted out a heartless diatribe about the need to slash, burn and pillage chunks of the public sector. But why wasn’t exactly clear, nor which bits of it. And of course it was all because there had been far too little regulation. Nigel, I thought the Tory party was against regulation? And then George Osborne, in an interview in the Times, said that if the Tories were elected, they would cut public spending dramatically and quickly. This amounts to a declaration of class war.
Such lessons from a bygone era show no understanding of basic economics, have little or no relevance in 2009 and are utterly irresponsible. Social unrest, here we come. Efficiency savings are one thing, but fiscal retrenchment now would be a disaster for ordinary people. This crisis did not arise because of the excessive power of trade unions. There hasn’t been a wage explosion, far from it. No need to bash the unions this time round, but why would they sit idly by? Public-sector workers vote, too. So, how exactly are the policies of the 1970s and 1980s relevant this time round, Nigel and George? These are one-size-fits-all economic policies, and are out of place and out of time.
In any case, I don’t really think they have the guts actually to take these draconian measures, if push comes to shove. I am not surprised the polls are narrowing, because this confused austerity message isn’t exactly likely to be a vote-winner. And it is unnecessary.
I keep asking which economists agree that it is sensible to cut public spending in the depths of this recession. Not a politician, but someone who actually has a background and training – and probably even a doctorate – in economics. Perhaps even a distinguished professor or two. The Nobel Prize-winners Paul Krugman and Joseph Stiglitz apparently agree that it is a dumb idea.
This is a crisis that originated in the financial sector. Over-exuberance in lending has now been replaced with under-exuberance, and this is not going to be resolved any time soon. Credit is still not flowing in the economy and banks still have not fixed their balance sheets. This is completely different from what happened in all previous postwar recessions.
Since the start of the recession in spring 2008, the public sector has been the solution, not the problem. Where we would be without the enormous government intervention hardly bears thinking about. The main reason that the public finances are in a mess is the huge fall in tax revenues that occurred when the recession hit.
What is needed is a sensible plan to pay off the debt once we are on the road to recovery. Cutting spending now would surely worsen the UK’s credit rating, as unemployment would head inexorably towards four million. Get a plan with a trigger. The trigger to implement any scheme to reduce the debt could be when we had grown by, say, 3 per cent, which means we would have recovered half of the drop in output we have experienced since the second quarter of 2008. A credible plan would hold risk premiums down.
Good job, Darling
And then to the PBR itself. I am especially pleased that measures were announced to reduce youth unemployment. Now, every 18- to 24-year-old who has been out of work for six months or more will be offered a job or a work placement, compared to 12 months before.
These new opportunities, numbering more than 100,000, will be supported by roughly £300m of new money. The government will also provide a place in education or training for every 16- or 17-year-old. I have been pushing hard for extra help for the young, and these moves – credit for which should go to the Work and Pensions Secretary, Yvette Cooper – are to be welcomed.
The measures to assist the unemployed are to be paid for by a one-off tax on bankers’ bonuses. The vast majority of people polled subsequently said they supported the tax. Thereis a widespread feeling that something unfair has been going on. The French president, Nicolas Sarkozy, agrees.
I have been persuaded by Martin Wolf’s well-argued case in the FT supporting such a windfall tax. The main thrust of his argument is that it is hard to argue in favour of exceptional interventions to bail out the financial sector at times of crisis, and then argue against them to recoup the costs when the crisis has passed. Exactly.
I think Alistair Darling did a pretty good job. Economic recovery would be choked off if spending is cut too quickly.
David Blanchflower is professor of economics at Dartmouth College, New Hampshire, and the University of Stirling
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