When the Facts Change, Should I Change My Mind? the Long Economic Stagnation of Post-Crisis Britain
Cable, Vince, New Statesman (1996)
The British economy is still operating at levels around or below those before the zoo8 financial crisis and roughly is per cent below an albeit unsustainable precrisis trend. There was next to no growth during 201 2 and the prospect for 2013 is of very modest recovery.
Unsurprisingly there is vigorous debate as to what has gone wrong. And also what has gone right; unemployment has fallen as a result of a million (net) new jobs in the private sector and there is vigorous growth of new enterprises. Optimistic official growth forecasts and prophets of mass unemployment have both been confounded.
Arguments about growth and recovery involve different timescales. I share the view, set out well by the LSE Growth Commission, that long-term growth involves a major and sustained commitment to skills, innovation and infrastructure investment. However, we are also currently below trend growth and below capacitv.
Two years ago, I responded in the New Statesman to Robert Skidelsky's "Keynesian" critique of government economic policies. He returned to the charge in the NS in September wiz. His contribution has been to lift the dispiritingly low level of public debate about UK economic policy by drawing on the great work of Keynes, of whom he is the definitive biographer and whose disciples taught me economics.
Skidelsky's central observation is the "striking coincidence" between what he describes as the coalition's "large dose of austerity" and a period of what he calls "semi-slump". He is sufficiently gracious and well informed to state that it is "foolish to say that [George] Osborne's budgets have caused the slump"--unlike the Labour front bench, which has had no such inhibitions. His complaint is a more subtle one: that "austerity ... has kept [the economy] from recovering".
In the political bearpit the arguments are less sophisticated. Keynes's name is often used to dignify any proposal that insolves the government spending more money and any opposition to cuts.
This crude Keynesianism sidesteps the causes and effects of the financial crisis, including the drag on growth from damaged banks; as well as other structural problems, such as skills shortages and a long-standing neglect of vital exporting industries, which our national industrial strategy is now trying to address.
In opposition to the cruder "demand-side" arguments are some equally crude "supply-side" arguments, which trace an ancestral link to another of the 20th-century greats, Friedrich Hayek (or the Austrian school more generally). This bastardised supply-side economics often degenerates into a saloonbar whine about HSE inspectors, newts and birds that block new development, bloody-minded workers, equalities legislation and Eurocrats who dream up regulations for square tomatoes and straight bananas. Philosophical cover is provided by the belief that the Drivate sector can always fill the space left by a retreating state.
An eclectic approach
Neither set of prejudices does justice to the complexities of the crisis that has submerged the UK (and other western countries) in deep economic water. A variety of approaches is relevant. Worryingly, few economists beyond Hyman Minsky and Charles Kindleberger have really addressed the phenomenon of financial mania and banking collapses (although Ben Bernanke, the chairman of the Federal Reserve, produced important work on how the banking crisis worsened the Great Depression in the US). Another defining feature of the present crisis has been the accumulation of a large volume of household debt, mostly linked to mortgages, which, as Irving Fisher argued a century ago, leads to "debt deflation", with a downward spiral of depressed demand, unserviceable debt and weak confidence. Then Milton Friedman understood the importance of money supply in the interwar slump, which has played out in the current crisis in activist, unorthodox monetary policy. …