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An economist on Fantasy Island Samuel Brittan Financial Times 25/05/07 There has long been a flourishing literature proclaiming that we are living in a fool's paradise and that behind a facade of prosperity and good fun the cracks are beginning to emerge. This was, for instance, the message of Cato the Elder in ancient Rome, of Oliver Goldsmith in his 18th century poem, The Deserted Village, and of mid-twentieth century Labour critics of the UK's supposedly candyfloss economy, epitomised by prime minister Harold Macmillan's "you have never had it so good". Larry Elliott and Dan Atkinson, two economics editors, present a worthy statement in this tradition*. Their book is Old Labour in a descriptive and non-pejorative sense and it is well written. Their critique of the neglect of the UK balance of payments and their belief in the superiority of manufacturing and selective support for strategic industries partly echoes what prime minister designate Gordon Brown used to say in opposition before he was re-educated by Ed Balls, his adviser, whose role is curiously neglected by our authors. They make no secret of their hankering for the postwar world of capital controls, demand management aimed at full employment rather than price stability and the traditional welfare state. But they differ from many others of that school in refusing to abate their strictures because a Labour government, in power for 10 years, has been moving in the opposite direction. I should therefore not be in the least surprised to see their work embraced by Cameron-style Conservatives. But there is also an overlap with the outlook of cautious City figures such as the highly respected economist Andrew Smithers. They can also find support in some cautiously worded critiques of the irrational exuberance behind the credit cycle penned at the Bank for International Settlements. On a wider front, their contempt for the "creative economy", depicted for instance in Rachel Johnson's novel, Notting Hell, or in some of Hugh Grant's films, echoes the culturally conservative strictures in Digby Anderson's Decadence, which I discussed critically in this column on December 28 2005. The authors diagnose fantasies in policies on prices, the "knowledge economy", the public sector, work and defence where they arise from pretending that choices do not have to be made. Another much worse category comprises debt and climate change, "where only an abrupt change of direction stands any chance of avoiding disaster". The authors suggest that Sir Nicholas Stern, the patron saint of the global warming lobby, might himself have been guilty of believing in preventive action on the cheap. But the central thesis on which the book stands or falls is that "debt - both public and to a much greater extent private - is the greatest domestic threat to the British economy". The thesis pays insufficient attention to the international context. The main contribution of Lord Keynes, who is favourably mentioned several times, to economic theory was the "paradox of thrift". This maintains that, in contrast to the teachings of the virtuous, an excess of savings can promote a slump. This was surely a danger in the opening years of the 21st century in view of the extremely high savings of China and the oil producers. A slump was averted partly by very low world long-term real interest rates and partly by the "dissaving" of the US, the UK and other English-speaking countries. While carefully monitored deficit spending by governments can sometimes be a valid option, the burden of supporting the world economy can hardly rest indefinitely on the shoulders of Anglo-American shoppers and home owners. One telling stistic is that between 2000 and 2006, UK consumer debt, including mortgages, rose by 66 per cent while average earnings rose by 22 per cent. The Bank of England accepts that a minority?of households face repayment difficulties but cannot so far see this as a systemic problem. One riposte to the alarmists is to say that mortgage debt is secured on the asset side "by the same house prices that the debt itself had helped to inflate". Another is to point to the growing financial assets of the personal sector. I have an uneasy feeling that there is something in the alarmist case. It is impossible to turn on the television without seeing offers of extraordinary cash prizes in support of dubious claims. On my way into town a couple of days ago I was trailing a bus with a large advertisement calling on people to buy hotel rooms "6 per cent return guaranteed". While this is investment of sorts it is hardly what Elliott and Atkinson have in mind. There is a whiff of The Last Days of Pompeii in the atmosphere. I have no magic bullet to suggest, certainly not a return to a siege economy. But we can at least lean against the wind: for instance, to resolve forecasting uncertainties in favour of tighter money, to campaign for tougher lending safeguards and for central banks to take more direct account of asset bubbles. Excessive credit, undue risk-taking and dubious ventures are different concepts, but in practice overlap to a disconcerting extent. *Fantasy Island, Constable
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