-
- The Observer, Sunday 14 February 2010
It was almost an aside, but during his quarterly press conference last week, Mervyn King, governor of the Bank of England, said that at the previous weekend's meeting of the G7 finance ministers and central bank governors the representatives of several countries had expressed the hope for a pick-up in the world economy.
The governor then made the point that the G7 – the US, Japan, Germany, France, Britain, Italy and Canada – constitute a rather important proportion of that economy, the clear implication being that everybody is waiting for everybody else to provide the revival of the world economy from which they hope to benefit via export demand for their goods.
There is a paradox here. Policymakers, and commentators such as myself, do worry about the dangers of competitive devaluation and protectionism. But the UK, as the governor pointed out, is better placed than countries such as Greece, Portugal, Spain and Italy to take advantage of any revival in world trade because, after a prolonged period of overvaluation, the pound has experienced a hefty devaluation – euphemistically known as "an adjustment" – since 2007.
But, as the Bank well knows, the manifestation of that advantage is a long time coming, because of the damage done to the world economy by a banking system still in denial about its responsibility and the implications for it future behaviour.
King did say that the monetary policy committee "believes that a gradual recovery in output may now be in prospect", but what hit the headlines was the statement that "the UK economy has continued to bump along the bottom".
In particular, reporters have concentrated on the Bank's "central forecast" of growth of a mere 1.3% this year, a projected growth rate that is so exiguous as to be barely worthy of association with the word "recovery".
Now, the governor goes out of his way to stress the imprecision and fallibility of such forecasts, and some effort has been made by the Bank to suggest that, if you take the long view, not much has changed since its last forecasts in November. However, your correspondent suspects that in recent months King himself has been gloomier about the outlook than those November forecasts (2.2% growth for this year) indicated, and the Bank forecasting machine now agrees with him.
Another point that struck me was that, while emphasising the uncertainty surrounding the issue of how much industrial capacity may have been lost during the Great Recession, he did not seem to be in the camp that believes a large proportion has been "lost forever".
The amount of spare capacity in the economy at present is so great that the Bank regards inflationary dangers as minimal over the next two years, once the "blip" of the recent increase in petrol prices and VAT has been absorbed.
But the chairman of the committee that steers the UK economy evidently believes that, if we get enough growth of demand, much of the capacity currently described as "lost" could be brought back into use. This is important for several reasons, not least because those analysts who have made a gloomy assessment of the degree of lost capacity are concerned this will have a longer term impact on the economy's overall growth potential.
At which point I have to return, with minimal apologies, to what Nobel Laureate Paul Krugman calls "deficit hysteria" and another Nobel Laureate, Joseph Stiglitz, calls "deficit fetishism". Krugman says these fiscal scare tactics bring back "memories of the groupthink that took hold during the run-up to the Iraq war. Now, as then, dubious allegations, not backed by hard evidence, are being reported as having been established beyond a shadow of a doubt."
In the longer term, as the private sector recovers, the deficit can and should fall. It was British economist RCO Matthews who pointed out many years ago that there were very few budget deficits during what is now regarded as the "golden age" of Keynesianism after the second world war. What mattered was that governments were prepared to run budget deficits to stabilise and revive the economy when necessary.
Massive budget deficits are both appropriate and necessary at times like this, when the danger is not inflation but deflation, and private sector confidence is at such a low ebb, and savings so high.
There are those in the Conservative party, and elsewhere, who believe confidence will be restored if there is a savage attack on the deficit with recovery far from assured. They have rewritten the history of the early 1980s and would like us to go through the whole experience again, when there is no palpable threat from the trade unions or inflation.
I cannot but wonder at the sheer cheek of those in the financial sector of the economy who are advocating budget cuts guaranteed to hit the poorest the hardest, and not exactly to assist the improvement of the infrastructure which all those multinationals cite as an important factor in their decisions about location.
In many cases these advocates of austerity for others are the same people who brought the economy to its knees. I know Gordon Brown played fast and loose with his budgetary rules, but the only way out of the combination of his errors and the near catastrophe induced by the bankers is for the economy to be allowed to grow, not to be pinned down further.
Given King's well-founded fears about what might happen to industrial capacity if growth is too sluggish for too long, there is a strong case for our policymakers altering what is known as "the rhetoric" from an emphasis on austerity to one of growth.
Pessimism about the UK as an industrial location has been much overdone, and I have reason to believe that certain multinationals are finding the tax regime for investment in this country rather more attractive than the public bleating would indicate. In particular, in intervals between trying to save New Labour, business secretary Lord Mandelson seems to be making quite an impression on industrialists. Let's go for it!