The Destruction of Animal Spirits: George Osborne's Plan to Galvanise the Economy through Austerity Has Failed, as the Keynesians Predicted It Would. Can He Change Course before It's Too Late? or Are We Already in the Death Spiral of Another Recession?

By Blanchflower, David | New Statesman (1996), December 5, 2011 | Go to article overview

The Destruction of Animal Spirits: George Osborne's Plan to Galvanise the Economy through Austerity Has Failed, as the Keynesians Predicted It Would. Can He Change Course before It's Too Late? or Are We Already in the Death Spiral of Another Recession?


Blanchflower, David, New Statesman (1996)


The mess that the economy is in was predictable from the moment this economically naive coalition government took office in May 2010 with no plan for growth. For all the bluster of the autumn statement delivered by the Chancellor, George Osborne, on Tuesday 29 November, there is a double-dip recession coming and several years of low growth, courtesy of the men ensconced in numbers 10 and 11 Downing Street.

The bitter experience of the 1930s should have served as a warning to Osborne of the dangers of withdrawing government stimulus before a recovery was fully established. He had plenty of advice from economists, including me, as well as several Nobel Prize winners, who warned of the dangers of a punitive austerity programme. But that advice was ignored and now the government is already expected to borrow at least [pounds sterling] 158bn more than planned a year ago.

It hasn't helped that Osborne, David Cameron and Nick Clegg have continued to repeat two outrageous calumnies. The first is that, at the time of the general election, the country was bankrupt, or close to it, when it demonstrably was not. The second calumny the coalition leaders have continued to repeat is that the UK economy is comparable to those of stricken Greece, Italy, Spain and Portugal, countries that are stuck in monetary union without their own central bank or exchange rate. Talking down the economy destroyed what John Maynard Keynes called "animal spirits" and has pushed the UK into a vicious cycle of decline that is unlikely to be reversible for a generation.

The claim that the government has made the UK a relative safe haven in the sovereign debt storm and helped to keep interest rates at record low levels is without foundation. UK bond yields are so low because the markets have no expectation that the Bank of England's Monetary Policy Committee (MPC) will raise rates any time soon and because we have a central bank that is free to do quantitative easing. Plus, there is zero chance of a default. Every country that has its own currency and can borrow in it, including Denmark, Switzerland, Norway and the US, has even lower bond yields.

[ILLUSTRATION OMITTED]

We know from WikiLeaks that, prior to the 2010 general election, my old adversary Mervyn King, governor of the Bank of England, presciently told Louis Susman, friend of Barack Obama and US ambassador to London, that Cameron and Osborne lacked experience and depth. King argued that they operated too much within a narrow circle, dealt in broad generalities, tended to think about issues only in terms of their political rather than their economic impact and surrounded themselves with a weak team of young advisers. We are all now paying the price for such inexperience.

Beyond the autumn statement, the bad news from private-sector firms continues to come in thick and fast. The fear is that these latest measures from the Chancellor have come too late to prevent a further round of business failures.

Cries form the right

The Organisation for Economic Co-operation and Development (OECD), the Office for Budget Responsibility (OBR), the British Chambers of Commerce, the MPC and the European Commission have all lowered their growth forecasts for the UK (see adjacenttable). The OBR members Robert Chote, Stephen Nickell and Graham Parker apparently accepted Osborne's claim that the economy would benefit from "expansionary fiscal contraction" - in other words, that public spending cuts and austerity would lead to a resurgence in the private sector. It hasn't happened.

The OBR is now much more in line with other forecasters, in lowering its estimates of GDP, growth. However, rather surprisingly, it has still I raised its growth estimates to 3. o per cent in 2015 and 2016, which seems overly optimistic, when, unemployment is predicted to hit a high of 8.7 per cent by 2012. The OBR now predicts a total reduction in public-sector employment of 1 around 710,000 between the first quarter of 2011 and the first of 2017, compared to 400,000 1 between the first quarter of 2011 and the first of t 2016 in the March forecast. …

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