The new government is facing daunting economic challenges. The historically minded will recall that the international financial crisis hit in 1931, two years after the start of the great depression, aborting the recovery and forcing Britain off the gold standard. A double-dip recession is a distinct possibility today; and the government’s finances are in a mess. Ministers will have to think hard, and thinking is usually helped by reading. Since they have little time to read long books having taken office, here are four short reads to help them learn some lessons from this great recession. They will be particularly helpful to George Osborne.
The most politically challenging is Tony Judt’s Ill Fares the Land. Judt invites us to rethink the role of the state. Socialism is dead – too contaminated with the crimes of Stalinism. But the Reagan/Thatcher revolution was no answer. In the name of self-enrichment it allowed inequality to rip; and is now discredited by economic failure. Judt wants to reclaim the middle ground of social democracy. As a historian, he argues that the conservation of the 20th century’s social achievements may be the most important political task today, warning that the “heedless rush” to dismember social protection threatens a destructive political backlash.
In Crisis Economics the economist Nouriel Roubini offers a crash course in financial reform. Politicians, he says, have been much too deferential to the myths and powers of the financial system. Roubini proposes extensive regulation of asset-backed securities – and a possible banning of the more complex derivatives – as well as separating retail from investment banking. In the UK this would mean a partial reversal of Thatcher’s “big bang” of the 1980s, which set the City free from previous financial controls. Roubini’s tract recognises that the state is not always the problem; it can also be the solution.
Politicians who are curious to understand why markets fail might do worse than skim the burgeoning literature of “behavioural economics”. This branch of economics aims to understand how people actually behave, as against the idealised view of “rational” behaviour which has dominated mainstream economics. Highly recommended for those tedious train journeys our politicians have to make between the centre of power and the source of their mandates is James Montier’s The Little Book of Behavioral Investing. This slim volume offers several entertaining tests to check the reader’s grasp of reality, a useful service for a politician.
There are facts galore in Carmen Reinhart and Kenneth Rogoff’s This Time is Different, a wonderful book to dip into for those statespersons interested in both finance and folly. Chapter 14 makes sombre reading for any who expect a rapid recovery to lighten the burden of painful retrenchment. The Reinhart-Rogoff conclusion is that, once economies have fallen into a hole, it is an exceedingly hard and lengthy business for them to clamber out of it. This reinforces the lesson of Judt and Roubini: it is much less costly in the end to have a mixed system of state and markets than to put all one’s trust in markets. There is a fascinating table which shows that Greece has been in default on its sovereign debt every other year on average since its independence in 1823. The UK has never defaulted.