A funny way of firing up the locomotive
Samuel Brittan The Financial Times 18/01/13
Railway buffs will be familiar with trains that have a locomotive behind as well as in front of the carriages. But a train with only a rear locomotive? Maybe in some remote part of the Andes, but hardly a normal phenomenon.
Unfortunately this metaphor describes all too well the UK's strategy for restoring the economy to growth. And you do not have to be a growth fanatic to realise that it needs restarting. On the last count, UK gross domestic product was 3 per cent below its 2008 peak. This was a fall exceeded only by Italy among the Group of Seven leading nations.
So far the government has focused mainly on stimulating business investment, equivalent to trying to drive from the rear locomotive. There have been bouts of investment-led growth - such as the US and UK 19th-century railway booms. But the normal process is for consumption to lead. The latest project - the funding for lending scheme - seems better designed than most. But it cannot be large enough to lift the whole economy.
Special interest therefore attaches to a paper by economic historian Nicholas Crafts of Warwick university on the lessons of the recovery from the 1930-32 recession. Radicals will argue that the recovery was insufficient outside southeast England. Even so, Prof Crafts has an impressive chart showing that the current recovery, such as it is, has gone much less far than that of the corresponding period of the 1930s.
Then, real interest rates were reduced, not merely by Bank of England policy - Treasury bill rates remained below 1 per cent from 1933 to 1939 - but by a credible ministerial commitment to inflation. Yes, inflation. But this was much more feasible, starting from a low and falling price level, than in the present era when the official inflation objective of 2 per cent has nearly always been exceeded. Real short-term interest rates fell from nearly 10 per cent to almost nothing from 1933 onwards. This was combined, at least at first, with a severe fiscal stance by the Conservative-led coalition of the day.
Policy in the 1930s had its downside in encouragement to cartels, a general tariff, controls on foreign investment and similar measures that contributed to the much-discussed postwar "English sickness". Neville Chamberlain, who masterminded economic policy during this period, was after all a member of a protectionist dynasty.
Prof Crafts is critical of the composition of the present government's public spending curbs, pointing out that a rise in social security spending of £33.6bn in the eight years to 2007 will be nearly offset by a cut in public investment. However, given the outcry that has accompanied existing policy, could ministers have got away with doing it the other way round?
But on the narrower financial front, Prof Crafts realises we need something comparable to the housing boom of the 1930s. Debating points about rearmament are irrelevant, as that did not affect the economy until 1935. He hints that we could take the housing route again, citing evidence that the stock of houses is 3m below, and real house prices 35 per cent above, the long-run equilibrium. He would like to see relaxation of planning rules and incentives for communities to want development. He suggests such changes could lead to an extra 200,000 houses being built each year. Some of his suggestions, such as the auction of planning permission, will be familiar to readers of this column.
Despite his criticisms, Prof Crafts is anxious not to shift too far from the parameters of present policy. But a much more radical critique is possible, focusing on the wrongheadedness of an austerity approach, both now and in the interwar period, when there is high unemployment.
Such a critique is presented by Mark Blyth, a US professor of British origin, in Austerity: The History of a Dangerous Idea. Ignore the political bile and partisanship - the author succeeds in demonstrating that austerity policies have mainly succeeded in making depressions and unemployment worse, both now and in the interwar period. Indeed, they have often failed in their own terms, as by reducing growth or inducing recessions they have made budget deficits even worse.
Prof Blyth's ire is directed at public spending cuts - tax increases seem to be all right. He would also have preferred leaving ailing banks to their fate, as in Iceland. Whatever one thinks of this, it is difficult to rebut his critique of budget cuts as a cure for all woes.
It is easy to forget that the original advocate of expansionist demand management, John Maynard Keynes, saw his mission as saving capitalism rather than destroying it. Then, as would be the case today, he was up against the self-destructive instincts of political leaders, who transferred home truths about family budgets to wrong-headed principles for running national economies.
|Published on www.samuelbrittan.co.uk
Contact - samuel dot brittan at ft dot com