Notes on the present discontents
Some interconnected thoughts on the financial and economic crisis that have struck me in recent days:
1. The media pundits (including the lead story in the FT of 25-26 April) and opposition spokespersons have all been crowing triumphantly over the dreadful GDP figures for the first quarter of 2009, claiming that they demonstrate the absurd over-optimism of Alistair Darling’s assessment of the extent of the shrinkage of the economy and his forecast that the economy should start to grow again towards the end of this year. But on an inside page of the same FT Chris Giles records some major reservations:
There is a big risk, however, of adding two and two together and coming up with five. The first quarter of the year was truly terrible but Mr Darling was braced for it to be bad.
The Treasury’s failure to spot just how dire official figures would be was shared by all City economists. And for all these mistakes, the bad quarter does not translate mechanically into worse figures for the rest of the year. The chances of recovery by the end of 2009 are not dented by the size of the first-quarter contraction. …
The bigger point that the Treasury was making last night was that the growth figures do not necessarily mean worse public finances.
One bad quarter will make almost no difference to the £175bn borrowing in 2009-10, nor the path of consolidation thereafter. This is far more dependent on years of public spending austerity than on rapid growth. If anything, the Budget was an attempt by Mr Darling and the Treasury to get all the bad news on borrowing out of the way well before the election.
It was much more pessimistic on borrowing than the Institute for Fiscal Studies, the International Monetary Fund, the City and all but the most pessimistic of external forecasters.
What a pity that other right-wing commentators haven’t been making the same points! But they no doubt take the view that there’s no need to spoil a good political bash at the government by giving half the game away in the process.
2. I find worse than distasteful the confident repetition by Cameron, Osborne and the right-wing press that the government is responsible for the financial crisis. The massive spending by the Blair and Brown governments since 1997 on, especially, health and education was made urgently necessary by the disgraceful under-investment in those vital services under preceding Tory governments: and even the Tories accepted that. Gordon Brown’s ‘golden rules’ — borrowing only for capital expenditure, ensuring that recurrent expenditure would be matched by revenue over the economic cycle — were self-evidently sound, even if they left some waggle-room for adjustment of the dates of the cycle. And I don’t recall the Tories denouncing the government’s regulation of the investment banks and other financial institutions for being too light: on the contrary, they were constantly clamouring for even lighter regulation. Anyway, blaming the government for failing to regulate the disastrous behaviour of the bankers, even if they could (see next item), is a bit like blaming the police for a burglary. The burglar bears the prime responsibility for the burglary: the crime might (or might not) highlight some procedural, structural or operational failing on the part of the police, but that’s a separate issue.
In the Punch-and-Judy world of British politics, I suppose it’s inevitable that the Conservative Loyal Opposition will exploit every opportunity offered by the economic crisis to discredit the government generally and the prime minister in particular. It just seems a pity that in the greatest national crisis since the second world war, the opposition lacks the statesmanship to offer the government its support in doing what plainly needs to be done, reserving its criticisms for issues where ministers have clearly transgressed or adopted seriously questionable policies. If they had chosen that more responsible and constructive path, the Tories would still almost certainly win the next election hands down — and then find themselves in a much better position politically to tackle what’s bound to be a pretty poisonous inheritance, as well as then having earned the right to ask for Labour Party support for their essential remedial measures.
3. It’s obviously right, with hindsight, to review now the structure of the regulatory system introduced in 1997 by Brown as Chancellor of the Exchequer in the light of what has happened. But it’s also legitimate to question whether even the most efficient and stringent regulatory system would have stood much chance of pre-empting the bankers’ determined march to self-destruction. The financial system is now so extensively globalised that only a global authority, effectively meaning a world government, would have been able to control it in the global public interest. The system is now beyond the control of any single national government. Yet when the G20 were preparing to assemble in London to debate what action to take, and Gordon Brown and a few other national leaders proposed a new international regulatory system, the Americans in particular and many other countries’ leaders took fright at this idea of sacrificing an iota of their national sovereignty in the interest of the prosperity of the whole world, and the idea sank almost without trace. No foreigners are going to tell Uncle Sam what to do! All that could be agreed was some form of future consultation among the main national regulators. So when the taxpayers of the world have pumped enough of their own money into the banks to induce them to start doing their job again, we shall return to the old arrangements for regulating them on a national basis, and the global-scale banks will have us all over a barrel once again.
4. World government, although plainly desirable in principle — not only to regain democratic control of the globalised economy — is clearly out of the question for as far ahead as it’s useful to look. But there may be lessons to be learned from the unique experiment of the mis-named European Union. For all its faults, the EU represents a novel and extremely ingenious compromise between, at one extreme, all-out untrammelled national sovereignty for each member state, and at the other extreme, a European supra-national super-state with all the attributes of a standard sovereign state. EU members voluntarily surrender elements of their sovereignty to the EU centre for the common good, in areas where the whole EU working collectively can be far more effective than the individual member states working on their own. One of the EU’s great virtues is that this new form of internationalism may become a model for a much wider form of international co-operation, going far beyond Europe. Such a control structure may become essential if the planet is to be saved — even more important than preventing another economic disaster. It’s a pity that hostility to the EU in Britain is so widespread, and so intense, that commentators are deterred from pointing out most of its great merits.
5. Once we all begin to emerge from the worst of this crisis, almost all governments are going to have to choose where to place the main emphasis in their recovery strategies: higher taxes, or cuts in government spending. Of course both will be necessary. But David Cameron has already made it clear that a Conservative government in Britain will be looking chiefly to impose stringent cuts in public expenditure, perhaps even accompanied by reduced taxation, although he’s so far been extremely coy about where the cuts will fall. (Certainly the Tories have exhibited very strong distaste for the new 50% marginal rate of income tax on the very highest and richest earners, even though it has attracted strong majority support in the polls.) Any Labour government, as last week’s budget shows, will instinctively prefer to raise taxes on the rich rather than attacking the essential social services on which the most vulnerable people in society depend so heavily. It looks as if this distinction may open up an ideological gap between left and right in British politics of a kind that we haven’t seen in decades. Perhaps politics will begin to focus on policy differences again, rather than the ad hominem and trivial point-scoring attacks that disfigure the national dialogue at present.
6. Two factors that have contributed heavily to the crisis: huge house price bubbles, especially in the US and the UK; and the massive trade imbalance between the US and China, with China in effect lending the US colossal amounts of money to finance both private and government over-spending. The British government could, and with hindsight should, have acted to rein in mortgage lending to borrowers unlikely to be able to service the debts, by regulating the size of permissible mortgage loans in relation to income: but this would have been highly unpopular in a situation where there’s a sharp shortage of low-income housing, largely thanks to Mrs Thatcher’s misguided destruction of local authority housing provision. But no British government could have done anything about American sub-prime mortgages, the US house price bubble, or the China-US trade imbalance, all of which helped to make the global economic collapse inevitable. It’s questionable, too, whether as a matter of political reality any US government could have done much if anything about those three doomy phenomena. But former President GW Bush clearly didn’t need to make them even worse.
7. In all the bleating from the billionaires and their media apologists about the 50% marginal rate of tax on very high incomes, and the angry accusations that it represents a reversion to 1960s tax-and-spend Labour Party socialism (we should be so lucky!), the key word ‘marginal’ tends to be conveniently overlooked. The bleaters are happy to reinforce the widespread belief that the new rate will mean those earning — or at any rate raking in — over £150,000 a year having to pay half of that £150,000+ back in tax each year, whereas of course the 50% rate applies only to that part of income which exceeds £150,000. The idea that such a tax will drive hundreds of otherwise decent, hard-working, socially responsible citizens into exile seems on the face of it barmy. Anyway, if it drives out some of the avaricious financiers who helped to visit this economic disaster on the rest of us, so much the better. Few of those who lose their homes, their jobs and their savings because of it will shed many tears for them.