Urgently needed: a plan C to save Britain’s economy

Co-authored with Felix Martin

The Office for Budget Responsibility forecast in March that the UK economy would grow by 1.7 per cent in 2011, and that the government could meet its target of eliminating the structural deficit by 2014-15. But the economy has underperformed these forecasts by so much that it now seems growth will be little more than 1 per cent, and the target not achieved until 2016-17. A recent speech by David Cameron showed he was preparing to announce what a report from Barclays Capital neatly called “two years’ slippage in eight months”.

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A Way out of Britain’s Growth Dilemma

Co-authored with Felix Martin

As he prepares for Wednesday’s Budget, George Osborne, chancellor, faces a dilemma. On the one hand the recovery has stalled even before his cuts have started. On the other the simple solution of relaxing austerity plans to stave off a double-dip recession is financially and politically unrealistic. Fortunately, there is a way to square this circle – and it requires no U-turn at all.

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A golden opportunity for monetary reform

Three cheers for Robert Zoellick. Writing in the FT this week, the World Bank president set out an ambitious agenda for the Group of 20 leading economies to “rebalance demand” and “spur growth”. He recognises that the reduction of current account imbalances is a necessary condition for a non-protectionist trading system.

Global imbalances lie at the heart of the current recession; failure to address them will abort recovery and lead to currency wars. Gold can play a minor part in the necessary rebalancing, as Mr Zoellick suggests – although history shows that a gold standard would be too deflationary.

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Britain’s Austerity Apostles Duck the Debate

Next week the parliamentary battle over cuts will start up again. The chancellor, George Osborne, will say the government’s programme of fiscal retrenchment is necessary to “restore confidence”. Alan Johnson, his shadow, will say it threatens the “fragile recovery”. The government plans to cut public spending by 10 per cent over four years as part of its deficit reduction plan. This will extract 5 per cent out of a shrunken economy. It is the most audacious axe-cutting exercise in almost a century, double the size of the cuts in the 1930s, equalled only by the 1921 Geddes Axe, which cut government spending by 11 per cent in two years. Labour says it is too much, too fast.

The two positions are clear enough, the arguments underlying them less so. What macroeconomic theory do the budget hawks have to subscribe to, to believe that taking £100bn out of the economy in the next four years will produce recovery? And what do the budget doves need to believe to claim the cutters are wrong?

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Future generations will curse us for cutting in a slump

Co-authored with Michael Kennedy

In 1937 Keynes wrote: “The boom, not the slump, is the right time for austerity at the Treasury.” Jean-Claude Trichet, president of the European Central Bank, disagrees. Stripped of its jargon, his argument last Friday in the Financial Times is that fiscal retrenchment is needed to “consolidate recovery”. This has become the standard European – though not American – line. “Failure to address the deficit is the greatest danger we face,” said UK Treasury minister Lord Sassoon in the House of Lords on Monday, faithfully echoing the words of his master, chancellor George Osborne. But beyond vaguely referring to the need to restore “confidence”, none of the cutters can explain how reducing public spending when private spending is already depressed will “consolidate recovery”.

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Once Again We Must Ask: ‘Who Governs?’

In 1974, Edward Heath asked: “Who governs – government or trade unions?” Five years later British voters delivered a final verdict by electing Margaret Thatcher. The equivalent today would be: “Who governs – government or financial markets?” No clear answer has yet been given, but the question may well define the political battleground for the next five years.

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Do not rush to switch off the life support

Co-authored with Prof Marcus Miller

The fragility of the British economy in face of the Great Recession demands a rethinking not just of macroeconomic policy, but of the balance between consumption and investment, between finance and industry. In response to this challenge, George Osborne, the shadow chancellor, set out a “new economic model” in the annual Mais lecture last week. But there is little evidence of new thinking. There is no reference, for example, to what one might learn from the experience of Japan, which faced a similar “balance sheet recession” in the 1990s. Mr Osborne harks back to the old view that government is the problem not the solution – a philosophy that led to widespread financial deregulation and the current crisis.

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Economists clash on shifting sands

History is replete with famous intellectual battles. In the natural sciences, these have usually led to decisive victories, with good science ousting bad. There are few Ptolemaic astronomers left, or believers in the phlogiston theory of combustion. In the social sciences, the situation is different. There have been famous battles galore, but no decisive victories. Indeed, it is characteristic of the social sciences that their battles are interminable, temporary defeats being followed by the regrouping of the defeated forces for a renewed assault.

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