Thursday, 6 December 2012

Chancellors and Recessions

The greatest lie in politics is that economic growth is in the Chancellor's gift.

Because the economy is usually growing, it pays for chancellors to claim credit for it, but this is just Game Theory. As soon as it starts shrinking, the opposition start shouting about how the "chancellor's failed". They're both lying to you (and probably themselves too). Chancellors do influence the economy, but more subtly than the simple -/+ve GDP growth number.

I did not credit Brown for the boom, which was global, I did not blame him for the recession, which was global. I do blame Brown for the deficit, or at least that part of it which isn't automatic stabilisers and bank-bail-outs, but that is NOT the same thing as the recession. I do not blame Brown for the boom and bust because in the main, I don't think the business cycle is particularly amenable to manipulation by chancellors. And insofar as they are able to influence GDP growth, I don't think this is the Chancellor's main role.

So what are chancellors for? Even Gordon Brown knew this: to balance the budget (or nearly so) over the business cycle. This was his "Golden Rule" (remember that?). In this, he failed, spectacularly. This is not about the bank bail outs - that bit of the deficit from 2008/9 is fine. While I disagree with Brown's policy to bail the banks out, but I don't regard the policy as idiotic: it's certainly one of a number of possible solutions to a genuine problem. My problem is with the growth in state spending from 35% of the economy to 50% in 13 years, the over-complex tax-code (which is giving so much wiggle-room to "avoiders" right now) and the borrowing during the boom to fund a worthless army of state apparatchiks, which is causing so much pain now. In running a structural deficit to fund a massive expansion of state employment, Brown weakened the economy, removed the room for manoeuvre when the inevitable bust came, and arguably made the inevitable recession deeper when it did, and the resultant recovery slower.

So Chancellors do have an effect on the economy, but it's far more subtle than "is the economy growing?".

The longer the boom, the more painful the bust, and the UK enjoyed 16 years of economic growth (which started under the Tories...). Some of Brown's policies may have prolonged the boom - the UK version of the Greenspan Put certainly contributed to financial recklessness, but it was an approach shared by the USA and elsewhere. I doubt a Tory chancellor would have done much different. Ever cheaper money certainly contributed to the housing price bubble which has arguably not yet deflated. Even with all that cheap money, the biggest boom was in the state sector, where almost all the net new jobs of 13 years of Labour rule were created.

It is this army of state apparatchiks which kept the boom going, giving the impression of growth, where the private-sector had stagnated long before 2008.. Cheap money and diversity outreach-coordinators can only manipulate the GDP numbers for so long. And it it this Army of state apparatchiks being culled en-masse which forms the biggest component of "austerity". Yes it hurts for the PCS and UNITE to lose so many members, but those UNITE members are handing in their membership cards and joining the growing Private sector. Even during a slump, which Labour will tell you is the worst since the war, as soon as the Public sector stopped hiring, the private sector started. It's almost as if there was something in this "crowding out" theory. True many of these new capitalist running-dogs are "under-employed" self-employed or part-time workers, but these are the seed-corn of the next generation of small businesses.

So. Gordon Brown can arguably have made the current recession worse with his policies. And George Osborne's austerity might at once be slowing growth in the short term, and also be necessary. Just because sacking civil servants depresses GDP, it does not follow that not sacking them is the right thing to do. GDP growth does NOT generate lower deficits when that GDP growth is simply deficit financed spending on worthless, return-free state prod-noses.

In the parts of the economy where the state is dominant, the recession is brutal. Jobs are non-existent. In London and the South-East where the state is relatively small, people are saying "what recession?". Just as Labour's boom was an illusion created by a chancellor gaming (deliberately or accidentally) the GDP number by splurging money at the public sector, this "double dip" is the result of a chancellor (in my view) doing the right thing in attempting to balance the books and reign in a state-sector which had been growing over-mighty. When winds of austerity stop blowing through the public sector, we will be left with an economy carrying a much, much smaller burden of state jobsworths, with a lot of under-employed people in the private sector. This sounds like a recipe for growth to me.

The other lie politicians tell is the deliberate confusion (by both sides, when it suits), of debt (the size of the mortgage, if you like) and the deficit (the amount extra borrowed each year to cover income shortfalls). The deficit is falling, yes, slower than expected or desired, but it is falling from nearly 12% in 2010, to 6% now. This doesn't look to me like "failure" on reigning in the debt. However thanks to Ed Balls' former master, we still have a deficit therefore the debt is rising. Pointing out that the UK is borrowing more now than it did 5 years ago is just dishonest. It is obscene chutzpah from Balls to blame Osborne for failing to deal with what was, and remains the biggest deficit in the western world in just two years,when the biggest part of the extra borrowing is ... wait for it... debt interest. The solution to this growing part of Government expenditure is not Ed Balls' solution of "investment" (by which he means 'spending'). It involves driving interest rates down, and hoping inflation does the work for you.

The point is the boom pre-2008 wasn't as good, and the bust post 2010 isn't as bad, as the politicians or the GDP numbers would have you believe. GDP numbers are a lousy way to judge a chancellor's performance.



4 comments:

startledcod said...

As usual a good piece however for once I would take issue with a couple of points.

Whilst you are correct to identify that the Chancellor cannot create growth, as a result of the huge accretion of power to the Treasury under GB's 'stewardship' a Chancellor can have a greater effect than just balancing the books: increasing competitiveness through removal of non-labour wage costs and reducing the cost of energy would both be very effective growth stimulants. He also could have reduced the cost of headcount reduction by putting a virtual total halt on all state hiring.

I also feel your easing up on GB's record is excessively charitable in a 'hey, Uncle Joe Stalin wasn't that bad' type of way. When I have introduced people to reading blogs I have always pointed them towards your 'Gordon Brown - Economic Genius' series.

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Richard Jones said...

My only point here is that the responsible thing for a Chancellor to do is that during the 'good times' a country should be saving money for an inevitable 'rainy day.' Gordon Brown did not do this. I can only speak of my own experience on this.

I lived in Australia from 2002 to 2009. I recall in 2002 when meeting people from the UK how taxes were too high in OZ and how great it was in the UK with its fantastic financial sector. Australia had a windfall from it's mining boom and it's tax revenues paid off almost all the national debt and delivered tax savings like you would not believe up until 2008.

Unfortunately now some of these gains have been squandered. I'm not saying the the UK and Oz are the same because they are not but there was a very different attitude to how the treasury managed the good times.

Anonymous said...

An excellent appraisal

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