In his autumn statement today the chancellor claimed it was his deficit reduction plan that enabled the British government to borrow money even more cheaply than the Germans, thus saving the taxpayer £21bn in interest rate charges over five years. Ed Balls rejoined that “he still clings to the illiterate fantasy that low long-term interest rates in Britain are a sign of enhanced credibility and not, as they were in Japan in the 1990s or in America today, a sign of stagnant growth in our economy”. The intellectual debate between George Osborne and his critics hinges on this single point: what is it that makes a deficit-reduction programme “credible”?
This is the latest in a spate of books provoked by the world economic crisis and one of the best. Jeffrey Sachs calls himself a “clinical economist”. In The End of Poverty he applied his clinician’s skills to the distempers of Africa; in this book he turns them to the hubristic and wasteful habits of America. The details of the Fall – if by that he means the collapse of the American banking system in 2008 – do not concern him; it is what the Fall tells us about contemporary American capitalism.
The phrase “horses for courses” is as valid for politics as for other activities. It’s as impossible to think of Gordon Brown at the recent Fifa meeting in Zurich pleading England’s cause for the World Cup as it is to imagine David Cameron expounding the nitty-gritty of capital adequacy ratios at a meeting of the G20. When the economic crisis erupted in 2008-9, Brown, like Churchill in 1940, was the right man in the right place at the right time. He’d had 10 years as chancellor of the exchequer. He’d read widely and thought deeply about economics, finance, globalisation. He was the one national leader who came to the crisis with a plan and the authority to push it through.
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.
By Robert Skidelsky and Vijay Joshi
Next Saturday world leaders meet in Washington to discuss new rules for the global financial system (though little will be achieved with President-elect Obama absent). So far, thinking about this matter has scarcely got beyond calls for better banking regulation: a microeconomic issue that is doubtless important but misses the main economic plot. The Bretton Woods system of 1944 was set up to “promote a stable system of exchange rates”. This system has gone. But any new agreement, will need to be equally ambitious in addressing the problem of exchange rates, because the prevailing “non-system” has played a major role in the wild credit boom that has led to the financial crisis.