The problem with all this economic doom and gloom
Samuel Brittan Financial Times 02/01/09
During the long period of the cold war, which lasted for more than four decades after the end of the second world war, nothing infuriated me more than the question often put to me: "Is there going to be another world war?"
It was obviously even more unpleasant to contemplate than any kind of economic setback. But it seemed to me a pointless and unproductive kind of discussion. I could have answered "a 10 per cent chance", "a 50 per cent chance", or "an 80 per cent chance" with equal plausibility. I did not and could not know. Nor could anyone else. This kind of pointless crystal ball-gazing only deflected attention from a much more important question. This was: "Are we doing enough to reduce the probability of such a catastrophe?" By "we" I did not mean mankind in general but the government of the country in which I happened to live and was a citizen, namely the UK.
There are indeed parallels with the present economic outlook. I cannot claim to have foreseen the financial blow-out. But I did warn in my column of February 1 2008 of the danger of talking ourselves into a depression, and I wrote of the need to "buck up". President Franklin Roosevelt put it more elegantly when he said: "We have nothing to fear but fear itself."
The most alarming feature at present is the fatalistic public mood. The slump is being discussed as if it were a natural catastrophe like the arrival of the comet that destroyed the dinosaurs. All the popular talk is of retrenchment, cutting down and spartan savings of all kinds. It should not take a genius to appreciate that such activities can only make the situation worse and aggravate a downward vicious spiral. I would be the last to argue that people should spend recklessly for patriotic reasons, but nor should they stint themselves.
A slump is a tragedy for those who lose their jobs and also for those who fear to lose them. But it is also a logical absurdity that there should exist unsatisfied wants side by side with idle workers willing to supply them. The natural condition of mankind is one of scarcity, and conflicts are often about the allocation of scarce resources. You cannot usually have endless amounts of both guns and butter. Kashmir cannot belong to both India and Pakistan. The political and economic art is to find a way of living with such tensions.
But in a slump the rule of these copybook maxims is temporarily suspended. You can have more of A without sacrificing B. You can have environmental investment without sacrificing consumer satisfaction. Indeed the slump arises because not enough is being spent. We are in a kind of parallel universe familiar to cosmologists, when the normal rules are turned upside down and the traditional prudential warnings no longer apply. They will do so at some time in the future, but why not make the most of it while we can?
For what it is worth, policymaking is essentially more straightforward than it was a little while ago. Of course there are problems about the exact means by which purchasing power should be stimulated and about the relationship between fiscal and monetary weapons. But these are second-order compared with the dilemma that previously existed between fighting recession, which called for expansionary measures, and rising inflation, triggered off by explosive increases in oil and commodity prices, which called for restrictive measures. Inflation has now turned down with a vengeance and if we could free ourselves from the bondage of 12-monthly comparisons we would see that it no longer exists.
One of the main objections to what I am saying is the size of debts governments accumulate in anti-depression spending. How much better it would have been if they had tried to educate their electorates in the difference between private- and public-sector debt. It is an exaggeration to say in a single country, as the early Keynesians did, "we owe it to ourselves", but it is still true of the industrial world as a whole. Thus Gordon Brown, the UK prime minister, is right to argue for a multilateral approach.
A different kind of objection is that recessions are said to have a purpose. They accelerate the destruction of misplaced activities and overspeculative investment. It is what the Austrian economist Joseph Schumpeter called "creative destruction". Yes, up to a point. But this does not justify the secondary and tertiary destruction of perfectly viable activities because purchasing power has fallen throughout the economy. Indeed Schumpeter himself, who as a professor at Harvard had distanced himself from macroeconomic arguments, suddenly panicked in the 1930s depression and urged a very large fiscal stimulus. Friedrich Hayek, who was a different kind of Austrian, distinguished in his remarks in the 1970s between inevitable recessions and a "secondary depression" caused by a cumulative loss of purchasing power throughout the economy. But there is no evidence that he made this distinction in the 1930s when he taught at the London School of Economics and was one of Keynes's principal opponents.
There will be a time to return to the copybook virtues. But it is not yet. As the writer of Ecclesiastes put it:
"To every thing there is a season and a time to every purpose under the heavens."
|Published on www.samuelbrittan.co.uk
Contact - samuel dot brittan at ft dot com