Political Needs Trump National Interest

January 13th, 2010 by The Parallax Brief

Danny Finkelstein uses his column in today’s Times to savage Prime Minister Gordon Brown:

The Chancellor [Alistair Darling] is insisting — as his predecessor Philip Snowden did in 1931, as Roy Jenkins did in 1968, as Denis Healey did in 1976 — that a plan for public expenditure reductions be agreed to retain the confidence of the markets. Gordon Brown — like Arthur Henderson in 1931, Aneurin Bevan in 1951 and Tony Benn and Mr Crosland in 1976 — is resisting. To dress up this resistance as if it was part of some new fangled clever (or even stupid) campaign strategy is to deny the force, the true importance, of what the Prime Minister is doing. It is to end up having a debate about things that really matter (tax, spending, debt, public services) in a sort of code (strategies, dividing lines) that only insiders can understand.

As Chancellor, Mr Brown spent money as if there would never be a bust — an absurd hypothesis. And now, as Prime Minister, he is blocking the measures necessary to put right this error.

For this dispute over public spending is different in one way from any of the past 100 years. The Prime Minister is refusing to support his Chancellor. MacDonald threw away a lifetime’s service to Labour to support Snowden, a man who cordially loathed him. Attlee sided with his Chancellor, Hugh Gaitskell, from his sickbed (“I am afraid they will have to go,” he mumbled to Gaitskell, who at first heard the remark as “very well, you will have to go”). The normally tricksy Harold Wilson gave solid backing to Jenkins. And Callaghan won round the critics by showing that he and his Chancellor were indivisible — if he had not done so, Mr Healey would not have prevailed.

Mr Brown, unlike any of these predecessors, has put himself at the head of the spending rebels. Far from backing his Chancellor in what needs to be done, he forces him to water down his proposals, making clearly inadequate plans to deal with the crisis.

The common attack on Mr Brown, the one we heard again last week from inside his party, is that he is a poor leader, that no one likes him, that he is a loser. But this verdict, damning though it is, is too kind.

It’s a brilliantly withering attack, but the Parallax Brief wonders whether Mr. Finkelstein hasn’t missed the two key points.

First, that part of the reason for the Prime Minister’s dalliances on public spending cuts is unavoidably the approaching election. Of course it is shabby to put party politics before the national interest, and a damning indictment of Labour that it seems to be entering the election with the no-policies policy usually reserved for the opposition. But to ignore the political realities of an approaching election is integral to the story, and should not be ignored.

Second, while it is true that the absence from the pre-budget report of a clear, tough plan of spending cuts to reign in the deficit was an appalling concession to brazen electioneering, it is also true that even if such a plan were in place down the minutest detail, it would not be implemented until after the election. Not because Labour doesn’t want to go to the polls as the party which savaged public services — which it surely doesn’t — but because cuts now would plunge the economy back into recession and have the peverse effect of increasing the debt-to-GDP burden.

And just as Parkinson’s Law tells us that work expands to fit the time available, so it is an unbreakable law of politics that no government will ever raise taxes or lower spending on key services until the last possible minute.

None of this makes Labour’s appalling fiscal policy in the run up to the crisis acceptable. Nor does it excuse the party’s inertia when it comes to dealing with the nation’s problems. Mr. Finkelstein is right to criticise both, and is probably justified in his evisceration of the Prime Minister. He is also correct to note that the country desperately needs a plan to deal with the deficit if it is to retain the confidence of the markets and maintain the ability to borrow cheaply.

But the real “old story” isn’t Labour squabbling over spending, but a party putting politics before country.

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Categories [ Economics and Finance, UK Politics ]

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Comrade Portillo: Spending Cuts “Impossible”; Tories Should Raise Taxes

November 23rd, 2009 by The Parallax Brief

Peter Hoskin on the Spectator’s Coffee House blog has an interesting take from Michael Portillo, who the Parallax Brief last remembers in Government as the uber-Thatcherite Dark Prince of the Right.

Ever the contrarian, Michael Portillo makes a case that you don’t hear from many on the right in his interview with Andrew Neil on Straight Talk this weekend. George Osborne has given “a fair amout of detail” about the Tories’ debt-reduction plans, he says, but that could be the wrong approach:

“I wouldn’t seek probably to give very much more detail …. You know, I was with Margaret Thatcher when she came in to Government in 1979, we faced a big public spending problem. It was terrible. It was a hard slog but she didn’t cut public spending. I was Chief Secretary between ’92 and ’94 – big public spending problem – I was trying to cut public spending; I did not succeed in cutting public spending. I don’t think the Tories will succeed in cutting public spending. Now this is what they won’t want to tell you. The reason they’re not telling you the cuts is that I think the cuts are almost impossible to make and what will happen, whoever wins the next election, is not so much that there’ll be public spending cuts, there will be restraint, but that there will be tax rises.”

The Parallax Brief has argued for a long time that the Right are going to be sorely disappointed if they think that an incoming Conservative government will be able to stabilize Britain’s desperate and exigent public finances through spending cuts alone. But he also believes, as does the Spectator, that the scale of the problem suggests that tax hikes alone cannot solve the problem either — public expenditure will have to be cut after the economy starts to right itself.

It’s interesting to see key figures on the right, such as the Spectator and Portillo, now supporting this view. The Parallax Brief wonders if they are paving the way for a more gentle approach to spending from the Conservative Party than many on the Right had hoped, and in the media had assumed?

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Categories [ Economics and Finance, UK Politics ]

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Can This Man Repeat Canadian, Swedish Successes and Fix Britain’s Finances?

November 17th, 2009 by The Parallax Brief

The Adam Smith Institute runs with a very good piece today regarding the task facing what is likely to be an incoming Conservative government to bring down Britain’s budget deficit.

So I have a new job for Philip Hammond MP. Currently he is the Conservatives’ spending spokesman, and what he doesn’t know about public spending isn’t worth knowing. But he needs to become instead the spokesman on public service renewal – and minister for that is the Conservatives win the election.

You will never streamline the public sector by Treasury ministers bullying departments over money. Instead, you need a complete review of what government does, what it has to do, what it can do better, and what can be done better by other people and by the public. All departments need to buy into that, and it needs a reform, not a finance minister in charge if everyone is going to trust the process and be a part of it. After all, the process may find that spending in some areas should be increased, even if other departments are found to be doing a lot of pointless stuff.

Sounds very sensible. The article goes on to point out that Canada faced a similar budget crisis to the one Britain faces today, and managed to turn its 9.1% deficit into a surplus. Sweden also went through a similar process — albeit using a different method, cutting the same percentage from the budget of each department in order to remove any feelings of resentment or unequal treatment, and generating a spirit of team work to battle the problem.

But whichever method is used, the government will have to start getting Britain’s fiscal house in order once unemployment figures start showing some strength, and inflation returns. And Canada’s and Sweden’s experiences show that it’s not an impossible task.

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Is Brown’s Anti-Unemployment Strategy Working?

November 12th, 2009 by The Parallax Brief

Charts which the Parallax Brief has found on the Office of National Statistics website (via Left Foot Forward), suggest that the Labour government’s efforts to combat unemployment may be more effective than often assumed, but also show that whether GDP improves or not, unemployment figures will likely offer Gordon Brown no respite on election day.

The chart below indicates just how bad this recession has been, with a decline steeper, and longer, than the previous big recessions.

However, as the next table shows, unemployment hasn’t increased by as much as in previous recessions. It started from a lower base than in 1990 and 1980, and has remained behind the curve set by both recessions.

Beyond the asinine partisan conclusions that could be drawn from these charts, the Parallax Brief wants to highlight two points.

The first is that the statistics show conclusively that unemployment lags movements in GDP. In both the 80-81 recession and the 90-91 recession, Britain’s GDP started moving back up in the 6th quarter after recession started, yet in the 1990-91 downturn, unemployment didn’t reach it’s peak until the 11th quarter. The 80-81 slump was even worse, with unemployment still at its high watermark in the 17th quarter — over four years after the recession started, and two and a half years after it finished. On both occasions, a full 19 quarters (nearly five years) after the recession started, unemployment levels were still above their pre-recession levels, despite GDP reaching it’s previous levels around three years after the recession began.

Yikes!

Even if we take the more optimistic early nineties scenario, unemployment will still be rising come election time.

The second point is that the government’s efforts should not be judged against unemployment levels in boom time, but how their predecessors managed in similar circumstances. In that context, it appears that Labour is, in fact, doing better.

But the Parallax Brief can’t escape the feeling that it is doing far, far worse than might have been the case if it had assiduously shepherded public finances during the good years. If the government had ran a surplus during the times of economic plenty, it would have had available the fiscal room for manoeuvre required for a truly effective blast against unemployment. But Labour didn’t so it wasn’t.

It’s probably true to say, then, that Labour has done well given the position it found itself in, but that’s a position of its own making.

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Categories [ Economics and Finance, UK Politics ]

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FT Right; Right Wing Wrong.

October 28th, 2009 by The Parallax Brief

The Financial Times on Monday published an editorial suggesting that George Osborne doesn’t look much like a chancellor in waiting.

The FT leader attacked Osborne on two fronts. First, it criticised the shadow chancellor for his lack of substance. On this matter the Parallax Brief believes the FT is being unrealistic. Parties in opposition have always been light on policy detail, so really, what do they expect?

More concerning, however, is the second prong of the FT skewer: Osborne’s apparent lack of economic savvy. He has criticised the government’s fiscal stimulus program, despite the fact withdrawing it would worsen the downturn, and also argued, according to the FT, ‘that cutting spending would make no difference to economic recovery because “what you lose in government spending, you gain in exports”,’ which is clearly nonsense.

Yesterday, however, ConservativeHome, struck back — in the most feeble way imaginable, well and truly throwing the baby out with the bathwater by whinging not only about the matter at hand, but the Financial Times’ supposed support of “big public spending, big Europe and big unaccountable elites” and  “the corporatism that so failed our land in the 1970s,” as well as for giving the impression that “Democracy to them seems to be a sort of evil necessity that has to be put up with from time to time”.

But apart from the unnecessary bad-mouthing, the ConservativeHome hissy fit didn’t even tackle the Financial Times’ premise that Osborne was wrong to advocate the withdrawal of stimulus in a liquidity trap economy. It instead seemed to accuse all those who believe it is right in a downturn to maintain public spending at a level unsustainable in the long run of endorsing profligacy writ large, unwarranted bonuses and waste:

“It’s simply unacceptable in the bust to hand out money like confetti any more… It’s quite wrong the head of the FSA is trousering bonuses when the banking system collapses around his ears. And what exactly has the head of Network Rail done to deserve his £200K bonus? This list goes on and on. What do all these quango heads and senior civil servants do to deserve massive bonuses?

… George Osborne is absolutely right to point out that rewards should be linked to longer term performance. How did it ever make sense to be any other way?”

Well, quite. Who could disagree with that? But those of us who believe in maintaining or ramping up public spending in the face of an economic storm have never argued that waste cannot be cut. It is our argument that overall spending should not, because to do so would be pro-cyclical, accentuate the downturn.

The party of economic responsibility would make this point. But the Conservative Party, and now its supporters, are not. In the editorial that so irked ConservativeHome, the FT called Osborne’s performance “alarming”. The Parallax Brief agrees, which is quite a situation considering Labour’s abject economic failure.

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Categories [ Economics and Finance, UK Politics ]

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More Mickey Mouse Economics, Please

October 20th, 2009 by The Parallax Brief

Kenneth Clark, the Shadow Business Secretary and Tory Big Beast, yesterday became the latest Conservative MP to blast away at the government’s economic policy. Clarke, according to the Guardian’s Parliament round up, ‘warned that to continue increasing public spending next year amounted to “Mickey Mouse economics”.’ Given what is expected to be lethargic recovery accompanied by high unemployment in the first half of next year, the Parallax Brief is seriously concerned for Britain’s economic prospects under a Conservative government if Ken Clarke genuinely believes that immediate cuts in spending are the prudent course of action.

Clearly, Britain’s finances are in a parlous state. No Government can go on spending more than it earns indefinitely, and ours is spending so much more than it earns that it must now borrow an eyewatering GBP493 mn every single day simply to stay afloat. Left and Right might disagree on whether the problem is best tackled through tax increases or spending cuts, but any sensible observer knows that when the recession ends there will have to be a ruthless and painful rebalancing.

When the recession ends. Because while under usual circumstances such an exploding deficit would have to be crushed remorselessly, in the current situation doing so would be calamitous.

On paper, it seems right to want to balance the budget. When the Parallax Brief’s household income is reduced, he must curb his extravagant ways. And so it stands to reason that the country should do the same. In practice, however, the economy is tumbling essentially because people all over the country are cutting back on spending all at once, and in this environment any government effort to try to balance its budget by slashing spending and raising taxes would only reinforce vicious cycle.

Many tens of thousands in the public sector would lose their jobs or have their wages cut and would therefore spend much less, which would mean private sector workers would lose their jobs as the businesses they worked for were forced to cut back. That in turn would feed back through the economy. Public works projects and spending plans would be frozen, putting suppliers out of business, worsening the situation. Meantime, on the income side, those who still had their jobs would all have less money to spend as income taxes were increased, while the money they did spend would travel less as indirect taxes like VAT were ramped up.

Make no mistake: slashing public spending right now to balance the books would make the current slump deeper, longer and harder to escape.

Conservatives would likely retort that this argument does not hold because eventually the bond market will take fright at the mountainous debt and start demanding higher interest rates to loan us money, choking off any recovery in the process.

But, like the idea that spending should be reduced to match income during a crisis, fears of the bond market’s reaction sounds convincing, but is in fact misleading. It appears to makes sense: if Britain looks like a riskier loan prospect, you’d want a higher return for lending to it. If the interest rates for gilts, the bonds Britain sells to finance deficits, increases, mortgage and loan rates will move up in lockstep, stymieing economic activity.

However, when the market judges a country’s ability to pay back its debt, it’s not really the absolute total debt that’s important but its size in relation to GDP. Think of it this way: if you were a bank manager, wouldn’t you be more willing to loan a hundred thousand pounds to a man who earns a million a year than to a man who earns twenty thousand a year? So, in fact, if the government immediately started cutting back on spending to reign in debt, the real burden of that debt would increase as GDP (the denominator) collapsed while total debt (the numerator) remained constant.

Economists call this the paradox of thrift, and it’s a phenomenon to which the Parallax Brief is certain George Osborne and Kenneth Clarke are not ignorant.

Why, then, are they choosing to ignore it? Could it be that the Conservative Party, traditionally the strongest party on economic matters, has mistaken austerity for orthodoxy in a macho effort to serve up some red meat to the faithful by showing it really is the party of public spending parsimony?

Whatever the reason, it says much for the Conservative Party that it is being outperformed on the economic debating floor by a party with a record as abject as Labour’s.

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Categories [ Economics and Finance, UK Politics ]

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