Monday, October 25, 2010

Hemmingnomics

I've ridiculed politicians who simplistically compare the national economy to running a household, but we have a new winner in the Ignoble Economics category, John Hemming, MP for Yardley. Here's his concise history of the economic crisis in a verbatim transcript from Sunday's Politics Show West Midlands

"You can perhaps imagine the situation - the Labour Party were piloting a plane, a crocodile got loose on the plane and it went into a steep dive and what we're trying to do is pull it out of that dive"
That proved impossible the last time a crocodile escaped on a plane, so perhaps that wasn't just tasteless, but a very bad example to choose. On a campaign to improve public understanding of economics, John then switched metaphors in mid-flight and started talking about cake - perhaps he misses the £400 a month he used to claim for food:

What's happened is the national cake is now smaller than it was before the recession and we're proposing that after four years we get back to, say you divide into five slices, two of the slices are on public services. That's more than under the first two Blair governments, so we're not talking about massive cuts in terms of the proportion of the national cake that's spent on public services. The Labour Party's alternative is to go the Greek style, spend our way out of trouble, spending your way out of trouble doesn't get you anywhere.
Actually, there is evidence to say that it does and nobody has yet proposed paying for public services with baked goods, although a form of barter economy cannot be far away with Osborne in charge. But let us talk about the 'Greek style.' This refers to the spiralling cost of Greek government debt and the potential for the Greeks to default on those sovereign debt commitments - the two are interconnected. Curiously, John hasn't always been so worried about Greece - back in March this year, he wrote that
"...it is clear that we are not in the greek territory."
This is against a background of an 18 year decline in the yields on UK government ten year gilts - the cost of British government borrowing has been declining since John Major was in government, as compared to rocketing costs of Greek borrowing, a sign of the faith that the market has in the ability of governments to repay borrowings.

Now I'm no economist - although I am as qualified as George Osborne is in that capacity - so let's take the views of a man who has just won a Nobel Prize for economics, Professor Christopher Pissarides, perhaps slightly better qualified than John Hemming in these matters

"It is important to avoid this sovereign risk. But in my view, Britain is a long way from such a threat and the chancellor has exaggerated the sovereign risks that are threatening the country... Unemployment is high and job vacancies few. By taking the action that the chancellor outlined in his statement, the situation might well become worse.... These risks were not necessary at this point. He could have outlined a clear deficit-reduction plan over the next five years, postponing more of the cuts, until recovery became less fragile. The sovereign risk would have been minimal."
And while we're sampling the views of Nobel prize-winners, let's see what Paul Krugman thinks,

Both the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis....

...it was all about the apocalypse looming if Britain failed to go down this route. Never mind that British debt as a percentage of national income is actually below its historical average; never mind that British interest rates stayed low even as the nation’s budget deficit soared, reflecting the belief of investors that the country can and will get its finances under control. Britain, declared Mr. Osborne, was on the “brink of bankruptcy.”

What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it.
I will keep saying it. This is a high risk strategy and it is a gamble - the historical antecedents for Osborne's action, so lovingly backed by the Liberal Democrats - are very poor. I desperately hope that Krugman is wrong and that we bump through with low growth, but only because the alternative will be so much worse for millions of people. The fact that if Krugman is right and in 2015, MPs like John Hemming will be out of work and forced to rely on their millions is scant comfort for the pain that will be inflicted on ordinary families.

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