Cameron should know that money in pockets, not austerity, brings growth
David Cameron’s idea for lifting Britain harks back to 1930s Bank of England dogma. What we need is a cash injection
guardian.co.uk, Thursday 24 May 2012 20.30 BST
David Cameron is right. The government must tackle the deficit while securing growth. The G8 in Washington agrees with him, so do Europe’s finance ministers, so does the IMF’s Christine Lagarde, so intermittently does the Labour party. If so many people agree, what is the problem?
In reality Britain, and much of Europe, is chasing deficit reduction so hard that growth eludes it. Europe is in the grip of a demand famine that is the economic equivalent of the Black Death. A plague is feeding on itself. Today Britain was confirmed to be in persisting recession, precisely what the prime minister and his chancellor, George Osborne, said would not happen. Two years ago they derided those pleading for plan B as cynics and pessimists. I hear no apology.
In the Commons on Wednesday, Cameron described his attempt at a shotgun marriage of austerity and growth. He listed four components, combining “deficit reduction … an active monetary policy, structural reform to make us competitive, and innovative ways of using our hard-won credibility”. He did not elaborate on modalities. Yet when rhetoric and reality appear in such glaring conflict as now, even a man as self-confident as the PM must sense he is up a stormy creek without a paddle.
Britain’s deficit reduction has not been very austere, not like Greece or Spain. It is aimed at reverting public spending to its level of roughly five years ago, hardly straitened times. It has been effective in sustaining Britain’s foreign credit. But it cannot be denied that it has stifled growth. Chided on Wednesday to reconcile his conflicting ambitions by the MP Dennis Skinner, Cameron said lamely that the purpose of his austerity was “to deliver low interest rates which are essential for growth”.
As this seems to be the intellectual prop of the policy, it merits analysis. Low interest rates are not “essential” to growth, as Cameron says. They may help, but what is essential is higher demand, rising sales and profits. These are vital not just to growth but to government revenues and deficit reduction.
Cameron has pursued the lowest interest rates in modern British history, yet the economy has not grown but lurched into prolonged recession. How can he link the two? His cart is before his horse.
Throughout these troubles Britain has suffered from the worst economic bugbear: ingénue politicians in thrall to the Bank of England. The Bank’s amiable governor, Sir Mervyn King, mesmerises Cameron and Osborne as he did Gordon Brown and Alistair Darling. The Bank’s conduct of monetary policy for the past three years has been as disastrous as was its conduct of financial regulation in the preceding two. But no heads have rolled.
Cameron’s second growth prescription is of an “active” monetarism. This has consisted of King filling bank vaults with £325bn of credit notes. It has helped banks back to profitability but there is no sign that the policy has had any impact on credit to businesses, let alone on domestic money supply. It must be the costliest fiasco in regulatory history. Yet all King could say to a supine Commons committee in March was: “If there is one word I think we need to hang on to … it is patience. We’ve done the things that are necessary.” Cameron’s own banker admits that his monetary policy is not active but inert.
The message that Keynes drew from the inter-war depression was that there was no get-out-of-jail card. A choice had to be made between deflation and recession on the one hand, and recovery with possible inflation on the other. In essence governments should postpone deficit reduction in hard times, and build surpluses in good ones. Even if surpluses were not built, as in the last boom, deflating economies in a recession merely prolongs that recession.
Cameron’s belief that austerity holds the key to growth through low interest rates and bank bailouts is Bank of England dogma of the 1930s. He may as well don a black jacket and striped trousers and declare unemployment the medicine for human sin. Economics students used to be reassured that such ideas would never again be heard because governments were no longer that stupid. Really?
Across Europe democracy is telling politicians this game is up. People want recovery stimulated, as much as governments want a return to buoyant revenue. The age of the bankers is ending. But what form should stimulus take? Cameron’s two remaining prescriptions are opaque. Structural reform “to raise competitiveness” is noble in theory, but does nothing for growth in the short term. Deregulation has yet to reveal itself in practice and will hardly send consumers rushing out to buy.
As for “innovative ways of using our hard-won credibility”, this was left unspecified, but does at least offer a glimmer of hope. Current Whitehall talk is of public spending “off balance sheet” – in theory hidden from the bond markets – which usually means privatised building projects such as Michael Gove’s revived schools programme. They are seldom “shovel-ready” and yield little or nothing in the short term. N,or are they really off balance sheet, though they obsess prestige-hungry ministers. They are more likely to fuel the next boom and the next deficit crisis.
More intriguing is if Cameron is at last ready to draw on the coalition’s much-vaunted credit balance and throw a little caution to the wind. Retailers, small businesses, large corporations, city councils and the exchequer are all skint. They desperately need goods moving from shelves, shops restocking, banks lending against renewed cash flow, employment growing and taxes being paid.
There is no shortage of ideas for this, long rehearsed in this column. They range from boosting social benefits for a year to temporary tax reliefs, scrappage schemes and time-limited spending vouchers. Given present unemployment and spare capacity it is inconceivable that such an injection would be inflationary. The Bank of England could print £500 per head in notes and dump them in every private bank account in the land for less than it has given its banking friends. It would be the quickest way of injecting cash into the veins of the economy “off balance sheet”.
Such short-term boosts to demand would hardly endanger Cameron’s “hard-won credibility”. As a Tory he should know that the fastest growth in jobs comes from private spending; from money circulating in cash machines and purses through shops and services. The economy has been sated with state growth. To borrow a phrase from Cameron’s favourite politician, Tony Blair, it needs people’s growth.