Tag Archives: fiscal stimulus

What both sides of the debate won’t admit: we’re stuffed, there’s nothing we can do about it, and the only politician who can save us is German

30 Nov

Proponents on the Left and the Right are convinced they know a way out of this crisis.  It’s very simple, they say: jack up government spending, says the Left; hack back government red tape, says the Right: that way rainbows lie.  In their ideological fervour, they have overlooked one possibility, one possibility that neither side will dare admit: it is this: we’re stuffed.  There is no all-curing fiscal remedy.  Not one MP can save us.

Let’s consider the Left’s panacea first.  Borrowing costs are at all-time lows: 2.1%.  So we have no need to fear: borrow more to finance a large fiscal stimulus package to save us from recession.  This will (they hope) restore confidence.  The self-perpetuating fear that comes with downturns will vanish.  Businesses will look to invest, hire staff and innovate.  Growth will reduce government debt (ahem, they hope).

One question: how much will we have to borrow?  Obama opted for a $825 billion stimulus, which left unemployment hovering just below 10%.  Roosevelt didn’t drive America out of the Great Depression until his ingenious government spending plan called “World War Two”.  If we do opt for WWII-style deficits, just who will bail us out?  Last time, Britain wangled assistance from America, through Keynes’ deft negotiations, through the Marshall Plan, and through a series of IMF bail-outs.  With America bust, this option is no longer available to us.

Our debt is high already.  It is not illiberal to say this.  At 76% of GDP in 2010, government debt is forecast to peak at 86% of GDP in 2013.  The deficit is 8.8% of GDP.  We could raise state spending to levels that could lift us out of recession, but our deficit-to-GDP would reach double figures.  Why think speculators would still demand 2% in return for this?

This is the odd thing about modern Lefties.  In their nonchalance towards colossal borrowing, they have faith in the markets.  They no longer view markets as an irrational Leviathan driven by a mixture of fear, amorality, testosterone and frenzied panic.  In fact, they are intensely relaxed about handing the nation’s fate to a herd of profit-hungry speculators.  Sure, we can run up a larger deficit and get charged peanuts for it, because – so the rational argument goes – in the long run, our debt will be reduced by higher growth.  Is this socialism’s view of market forces now: rationally determined?  Hasn’t the last 30 years taught us markets react instantly, irrationally and out of fear?

It is true government debt has been higher in the past than it is now.  As Mehdi Hasan points out, between 1918 and 1963, debt-to-GDP was constantly above 100%.  “In fact,” he says, almost with glee, “in the wake of the Second World War, it had reached 252%.”  Yet, times have changed.  How can a Lefty forget the forces of deregulation and globalisation that have gathered pace since the Thatcher years?  There exist financial instruments that allow traders to bet vast quantities of money on sovereign default.  In such a climate, how can you be so blasé about WWII-style deficits?

The Right’s panacea is simple: cut back regulations!  The Spectator has offered some suggestions: make hiring and firing easier; prune planning law; get rid of EU regulations.  Steve Hilton, Cameron’s blue-sky-thinking adviser, has mooted abolishing maternity pay and all consumer rights legislation.  The effect of all this is (they hope) to restore confidence.  Businesses will see the government making these decisive moves and be free from that growth-destroying fear, so they will immediately invest, innovate and quit firing workers.  This should reduce the government debt (they hope).

Many of these moves are welcome: firms often find it hard to fire bad workers and take new ones on, due to the threat of employment tribunals and workers’ rights; many regulations simply complicate things.  There is next to no evidence all this will raise growth by even 1%.  The reason businesses won’t take on new workers, according to a Newsnight poll, is because of worries about the economy.  The proportion of businesses that cite over-regulation and/or red tape as a reason is 6%.

The problem with the economy is not that firms are inefficient – they were efficient to produce sufficient growth before the crash – the problem is one of demand.  Firms fear bad sales in the future.  How do you break this fear?  The Right earnestly believes that announcing a bonfire of regulations will.  In an instant, businessmen around the country will be wiped clean of fear; they will open the window, shout, “Halleluia!  Thank J H Christ for releasing me from this debilitating terror!  I shall now generate the jobs and output that this nation needs!  Thank the Lord for George Osborne declaring an end to those business-crushing subsections of Acts of Parliament, and thank God for my degree in economics to understand all this!

The Keynesian method to rid the economy of uncertainty in a downturn is for government to spend more.  When firms fear for the future, let the state step in to create jobs and output, letting firms take over when growth has returned and fears subsided.  Unfortunately, this option is no longer available to us.  We cannot borrow any more.  We cannot export.  We cannot cut taxes.  We cannot spend.  The eurozone will soon enter recession and then, to use a seven-letter word, we are stuffed.

Recession is not only a likely option; it is the best option.  The worst is Depression.  This will happen if the euro breaks apart messily, if a large country defaults, or if banks go into meltdown.  The only politician who can stop this speaks German.  Angela Merkel should show some decisive leadership: she could urge the ECB to start buying Italian and Spanish debt, for one.  I have an awful feeling this won’t happen.