More Mickey Mouse Economics, Please
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.
Debt: Whose Fault is it, Anyway?
The Parallax Brief has noticed recently the resurgence of the insidious and wholly egregious belief that what ‘really’ led us to the economic morass in which we currently find ourselves mired was people irresponsibly taking on too much debt. The idea that the financial crisis and subsequent recession were the fault of folk who took on debt they could never afford in order to live beyond their means has been around pretty much since the word sub-prime first entered the lexicon of economic disaster, but most recently it cropped up in an Observer piece written by Heather McGregor, an executive headhunter, to defend the bonuses paid to bankers. “What got us into this crisis,” McGregor argues, as if she were making a statement of irrefutable fact, “was over-borrowing, both personally and corporately…”
It’s easy to understand why this idea has become received wisdom throughout much of the conservative Right on both sides of the Atlantic. First, within this paradigm, the credit crunch was a kind of biblical punishment for the paucity of discipline shown by the great unwashed during the last decade — teaching a wholly justified and welcome lesson about moral hazards which befall those who succumb to consumerist gluttony. Second, it serves the purpose of getting the banks (key financial and ideological supporters) and the market (perfectly efficient and a panacea for all society’s ills) off the hook.
But being a convenient fit doesn’t make it right.
When someone applies for a mortgage or a credit card, there are essentially only two sides to the transaction. The first side is someone like you or the Parallax Brief: perhaps a primary school headmaster, or a couple who run their own bed and breakfast, or a call centre team leader, or the person sitting at the next to you in the office — but anyway, whatever their occupation or background, it’s a person who has more than likely had no training in the detailed criteria and methodology banks use to decide when to award loans to people and how much to give them if they do.
On the other side of the deal is a professional who has.
When the mortgage is finally approved or the credit card limit set, that wasn’t the decision of the layman applicant: it was the decision of the bank, the expert.
Nobody really knows if they can get a mortgage or exactly how much they’ll be approved for when they apply. Of course, we often have an idea, but that’s usually based on what has been awarded to friends whose financial situations we can compare to our own, rather than intrinsic knowledge of the banks’ methodology and rating system. Nor can the school headmaster or the B&B owner force the bank to give him them money. They can only apply then wait to see the bank’s diagnosis their ability to pay back the money.
Unequivocally, it’s the bank who decides on whether to hand out money, how much a person gets and for what, so doesn’t it seem more than a little disingenuous to defend banks by arguing that the credit crunch is our fault for taking on too much debt?
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