Kaletsky and the Tories
I have a residual respect for Anatole Kaletsky that comes from being forced to read him as an economics guru during the lead-up to my A-level all those years ago. This respect seems, somehow, to survive his being wrong on more or less everything of significance during that time. But worms turn, and his article this morning is fatuous in the extreme. We’ll pass over the fawning over Gordon Brown with little more than an indulgent sneer (if there is such a thing).
The good news for the world economy is that Mr Brown has become a leader of global stature, filling the policy vacuum created by the clueless dithering of the Bush Administration and the surprising failure of Barack Obama to step into the breach.
Balls. And not of the Ed variety either. And anyway, just what the hell does he expect Barack Obama to do about it? The man has absolutely no power to do anything whatsoever. And such is Brown’s towering stature in the world that no-one gives the tiniest toss about him – he racked the grand total of, um, no mentions at all in most US press coverage of the recent G20 summit. But my real beef is with his depiction of Conservative economic policy.
Last week George Osborne showed that he had learnt nothing, by foolishly identifying the recent weakness of sterling with the alleged weakness of the British economy and the Government's fiscal policy. In fact, the pound's decline is not a problem but a solution. It follows naturally from the Bank of England's aggressive rate cuts and the monetary freedom that Britain retained by staying out of the euro. This precious freedom is now reflected in the highly competitive exchange rate and ultra-low interest rates that will help to lay the foundations for recovery, just as they did in 1994-95 and 1983-84.
There’s a reasonable point to be made that monetarily necessary interest-rate cuts have driven the value of sterling lower. However, if Sterling continues its slide – as is likely if Labour indulge in the sort of unfunded fiscal stimulus they seem to be planning – then interest rates will have to rise in order to attract the levels of borrowing that Labour will be forced to seek. Interest rate pressure is not the only cause of sliding currency, as Kaletsky must surely know. Kaletsky goes on to damn the Tories opposition to rampant fiscal expansionism saying that all prudence must be suspended until the end of the credit crunch:
That will be the time to hear from advocates of fiscal prudence - but until then the right policy will be to borrow and spend.
I have two things to say about this. The first is that the Tories have abandoned Labour spending commitments that Labour have also abandoned. It’s hardly earth-shattering. The second is that there is something intrinsically unconvincing about the following argument. Britain is entering a recession in a economically poor state. This is because for the duration of a ten year boom there has been too little saving and too much public and private borrowing. The only way to get out of this situation, is for the Government to borrow much much more, and to encourage the public also to borrow more. Japan basically tried this throughout the 1990s. Public debt ballooned to ludicrous levels, interest rates remained at zero for years, growth never really recovered.
Every Labour Government basically spends money until it runs out, and then borrows more until it runs out of that. That’s why Labour Governments leave office with unemployment higher than when they began, and usually with sterling in crisis. It’s just taken longer this time.