Sunday, 7 August 2011

The emerging consensus we musn't accept


For my hundredth blog, I thought I'd look at a bit of emerging conventional wisdom.

Like most sayings familiar to the man on the streett, and like many nuggets of falsehood we examine on this blog, it's well wide of the mark. But it contains enough truth to look plausible. Other examples include the mythical 50% target for Higher Education entrance that undermine vocational education (complete nonsense), the 'war of old against young' involved in intergenerational transfers (a series of inappropriate analogies), and the destruction of European fisheries wrought only and forever by the European Commission (a huge exaggeration eagerly accepted by guilty-faced consumers who then go and buy more cod).

The one to look out for at the moment looks something like this. Well, Ireland, Greece, Portugal, Italy and Spain have got themselves in a pickle by borrowing too much. Good job old George Osborne and Nick Clegg run the economy, eh? They've saved us from all that via their pre-emptive austerity. Instead of debt rising for most of this Parliament, it'll be falling by its end. And unlike those squabbling Americans, we've been given a strong lead from 'the top', which means everyone can trust our direction of march.

Well, pah. Maybe a three out of ten for the politics, but about one of ten for the economics.

For one thing, there is absolutely no truth whatsoever in the view that the level of UK debt was unsustainably high, either in terms of short-term history, or since the 1970s, in the long run since the nineteenth century, or indeed as compared with that in other countries with deficit problems but with less room for manouevre. Secondly, the idea that the structural deficit will be eliminated by 2015, and that therefore the general debt stock will be on the way down, is highly questionable.

But I digress.

Even more importantly, take a moment to look at the graph above. What it basically shows is the reason why the UK's great recession didn't turn into a great depression. Government borrowing almost exactly matches corporate saving. While companies built up inventories and surpluses, held onto workers by freezing or cutting wages, and put off investment, the Brown administration went on a great big investment spree to plug the gap. It just about worked. Unemployment didn't rise as fast or as far as in the early 80s or early 90s.

Who's going to plug this great demand gap now that the pink line at the bottom of the graph is going to head remorselessly upwards? Who's going to do the spending that the NHS, police, schools and local authorities will not?

Well, if you're a UK consumer, you are supposed to put your finger in the dyke. Personal indebtedness will have to rise, and rise by quite a lot, to take up the slack. Sorry about the mixed metaphors there, but you get the point. You can read the official numbers and comments of the Office for Budget Responsibility here, by the way.

All this at a time when households are going to be way, way worse off, and while as Nick Cohen puts it in The Observer today, a good slice of the population is living in 'quiet desperation' about how to make ends meet - not mounting the barricades or besieging the dole office yet, but running down savings, cancelling spending, scouring the shelves for good savings deals. These are the people who are going to have to borrow our way out of recession - to build up the debt that the Government, manifestly much better able to do so, will not.

Think it's possible? No, neither do I. And that's why the conventional widsom of the moment is wrong. As usual.

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