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| Let no one be fooled: this is not the triumph of austerity, Mr Osborne | Let no one be fooled: this is not the triumph of austerity, Mr Osborne |
| (2 months later) | |
| The Osborne team are feeling sprightly. In their eyes, the chancellor has toughed it out despite the naysaying critics of austerity. Osborne resisted their siren calls to relent on his plans to shrink both the deficit and the state and now he is rewarded with an escalating economic recovery. The Tory party can forget the prince over the water, aka Boris Johnson, as the man to rescue its sinking fortunes; there is already a prince in Great George Street: Osborne. | The Osborne team are feeling sprightly. In their eyes, the chancellor has toughed it out despite the naysaying critics of austerity. Osborne resisted their siren calls to relent on his plans to shrink both the deficit and the state and now he is rewarded with an escalating economic recovery. The Tory party can forget the prince over the water, aka Boris Johnson, as the man to rescue its sinking fortunes; there is already a prince in Great George Street: Osborne. |
| The autumn statement this week, always an important moment in the economic and political calendar, has assumed an even greater importance. The opposition has been setting the political agenda for most of autumn, something Mrs Thatcher never achieved as opposition leader; now is the opportunity for the government to reclaim the ability to make the political weather. Be sure that the chancellor will not want to let the chance slip. | The autumn statement this week, always an important moment in the economic and political calendar, has assumed an even greater importance. The opposition has been setting the political agenda for most of autumn, something Mrs Thatcher never achieved as opposition leader; now is the opportunity for the government to reclaim the ability to make the political weather. Be sure that the chancellor will not want to let the chance slip. |
| So amid the confirmation that he has money to provide free school meals for the first three years of primary school (the government is caring), make tax allowances transferable for married couples (it backs traditional values) and check increases in fuel duties (it supports hard-working families), Osborne and his allies have another objective – they will not allow Wednesday to go by without rubbing in that he was right about the economy. | So amid the confirmation that he has money to provide free school meals for the first three years of primary school (the government is caring), make tax allowances transferable for married couples (it backs traditional values) and check increases in fuel duties (it supports hard-working families), Osborne and his allies have another objective – they will not allow Wednesday to go by without rubbing in that he was right about the economy. |
| Except that neoliberalism and austerity have not triumphed. The recovery is the result of the upward swing of the economic cycle finally asserting itself, aided by policies informed by the opposite of what Osborne purports to believe. He was clever enough to recognise he was wrong, borrow from the Keynesian economic locker and relent on his deficit reduction plans. He has hidden behind the most extraordinary Keynesian interventions of the Bank of England, never admitting the scale of the philosophic shift and then claimed victory. It is a disingenuous operation, if pulled off with enormous chutzpah. | Except that neoliberalism and austerity have not triumphed. The recovery is the result of the upward swing of the economic cycle finally asserting itself, aided by policies informed by the opposite of what Osborne purports to believe. He was clever enough to recognise he was wrong, borrow from the Keynesian economic locker and relent on his deficit reduction plans. He has hidden behind the most extraordinary Keynesian interventions of the Bank of England, never admitting the scale of the philosophic shift and then claimed victory. It is a disingenuous operation, if pulled off with enormous chutzpah. |
| But for the rest of us, it is profoundly disabling. By not recognising the success of his eclectic and spatchcocked Keynesianism, the public is misinformed – told that austerity worked and, as importantly, the philosophy behind it works too. | But for the rest of us, it is profoundly disabling. By not recognising the success of his eclectic and spatchcocked Keynesianism, the public is misinformed – told that austerity worked and, as importantly, the philosophy behind it works too. |
| This means that the measures needed to redirect and secure the recovery so that it is based decisively on investment and a growth of exports – and less on consumption and consumer credit –will either not be taken or will be done half-heartedly. Worse, Osborne may believe his own propaganda and do stuff that is actively harmful. Thus the Conservative party can be protected from the awful truth that Thatcherism fails. | This means that the measures needed to redirect and secure the recovery so that it is based decisively on investment and a growth of exports – and less on consumption and consumer credit –will either not be taken or will be done half-heartedly. Worse, Osborne may believe his own propaganda and do stuff that is actively harmful. Thus the Conservative party can be protected from the awful truth that Thatcherism fails. |
| The scale of the monetary activism from the Bank of England over the past few years, along with the Bank taking ever smarter tools to direct financial flows where they are needed, is borrowed straight from Keynes's A Treatise on Money. If ever there was monetary policy à outrance, as he called it, it is now, though we now prefer the term "quantitative easing". We have record low interest rates alongside active measures to direct credit where it is wanted, underwriting risk, with the Bank standing by to head off any house price boom, not with interest rate hikes but, first, with interventions in the mortgage market. | The scale of the monetary activism from the Bank of England over the past few years, along with the Bank taking ever smarter tools to direct financial flows where they are needed, is borrowed straight from Keynes's A Treatise on Money. If ever there was monetary policy à outrance, as he called it, it is now, though we now prefer the term "quantitative easing". We have record low interest rates alongside active measures to direct credit where it is wanted, underwriting risk, with the Bank standing by to head off any house price boom, not with interest rate hikes but, first, with interventions in the mortgage market. |
| Twenty-two years ago – warning: a big retro plug coming up – I wrote a pamphlet, Good Housekeeping: How to Manage Credit and Debt, for the Institute of Public Policy Research, in which I tried to update Keynes's ideas on money and credit (ideas later developed in the book The State We're In). I thought the Bank, alongside interest rate changes, needed a range of tools to ensure that credit went where it was needed and could head off unwanted property booms. It needed to make banks and building societies ask for higher deposits from home buyers as house prices rose quickly or lower deposits as prices weakened (changing loan to value ratios). | Twenty-two years ago – warning: a big retro plug coming up – I wrote a pamphlet, Good Housekeeping: How to Manage Credit and Debt, for the Institute of Public Policy Research, in which I tried to update Keynes's ideas on money and credit (ideas later developed in the book The State We're In). I thought the Bank, alongside interest rate changes, needed a range of tools to ensure that credit went where it was needed and could head off unwanted property booms. It needed to make banks and building societies ask for higher deposits from home buyers as house prices rose quickly or lower deposits as prices weakened (changing loan to value ratios). |
| Also, it should actively manage the capital and liquidity in the banking system over the ups and downs of the credit cycle to stamp out wild exaggerations. The Bank should actively discriminate: to support necessary lending where the system is failing – for example, to small- and medium-sized business – and to restrain lending where it is not needed. | Also, it should actively manage the capital and liquidity in the banking system over the ups and downs of the credit cycle to stamp out wild exaggerations. The Bank should actively discriminate: to support necessary lending where the system is failing – for example, to small- and medium-sized business – and to restrain lending where it is not needed. |
| The paper informed Labour party thinking and lay behind its 1992 manifesto commitment to "manage credit sensibly". The proposals, though, were very unfashionable. The Bank's then chief economist, Mervyn King, wrote to me to explain they were unworkable and intellectually wrong. All the Bank needed to control credit and asset prices was to change short-term interest rates, he argued: the interventions I proposed would damage banking efficiency and, by inference, obstruct the necessary deregulation ushered in by Thatcher's reforms. Labour lost, and Blair and Brown – in this area Lady Thatcher's heirs – regarded the whole framework as anti-business and anti-City. | The paper informed Labour party thinking and lay behind its 1992 manifesto commitment to "manage credit sensibly". The proposals, though, were very unfashionable. The Bank's then chief economist, Mervyn King, wrote to me to explain they were unworkable and intellectually wrong. All the Bank needed to control credit and asset prices was to change short-term interest rates, he argued: the interventions I proposed would damage banking efficiency and, by inference, obstruct the necessary deregulation ushered in by Thatcher's reforms. Labour lost, and Blair and Brown – in this area Lady Thatcher's heirs – regarded the whole framework as anti-business and anti-City. |
| The world moves in mysterious ways. Today, those once heretical Keynesian ideas are the new orthodoxy, championed by a new governor of the Bank of England, Mark Carney, appointed by a Conservative chancellor. Last week, Carney, launching the latest financial stability report, committed himself to nearly all the proposals, doing what Labour would have done had Neil Kinnock been elected in 1992. | The world moves in mysterious ways. Today, those once heretical Keynesian ideas are the new orthodoxy, championed by a new governor of the Bank of England, Mark Carney, appointed by a Conservative chancellor. Last week, Carney, launching the latest financial stability report, committed himself to nearly all the proposals, doing what Labour would have done had Neil Kinnock been elected in 1992. |
| It's good news but, as Carney must know, intelligent monetary and credit policy cannot take the entire strain of managing the recovery so that it both stays on track and is better balanced. There is a role for fiscal policy, industrial activism, intervention in the banking system and smart institution building. For example, I would develop a help to invest policy modelled on Help to Buy, offering a partial guarantee for lending to business. Whatever else, none of this is neoliberal Thatcherism. | It's good news but, as Carney must know, intelligent monetary and credit policy cannot take the entire strain of managing the recovery so that it both stays on track and is better balanced. There is a role for fiscal policy, industrial activism, intervention in the banking system and smart institution building. For example, I would develop a help to invest policy modelled on Help to Buy, offering a partial guarantee for lending to business. Whatever else, none of this is neoliberal Thatcherism. |
| For on fiscal policy, Osborne has again moved. Over his first 18 months, he raised taxes and slashed capital spending, lengthening the recession by a good two years. Then he saw the light. Even though the projected deficit for 2014/15 was an amazing £65bn higher than planned in the summer of 2010 (because of the extended recession he provoked), he has done nothing about it. He has been rewarded by the economy snapping back upward. Nor is he proposing to attack current public spending in any material way for another year. | For on fiscal policy, Osborne has again moved. Over his first 18 months, he raised taxes and slashed capital spending, lengthening the recession by a good two years. Then he saw the light. Even though the projected deficit for 2014/15 was an amazing £65bn higher than planned in the summer of 2010 (because of the extended recession he provoked), he has done nothing about it. He has been rewarded by the economy snapping back upward. Nor is he proposing to attack current public spending in any material way for another year. |
| Combine that with the hyper-monetary stimulus offered by the Bank and the natural tendency of economies after a long period of recession to swing upward and we have a Keynesian recovery. If there are no unexpected shocks from abroad, growth in this snap-back phase could climb to 3%. | Combine that with the hyper-monetary stimulus offered by the Bank and the natural tendency of economies after a long period of recession to swing upward and we have a Keynesian recovery. If there are no unexpected shocks from abroad, growth in this snap-back phase could climb to 3%. |
| None of these reasons for recovery can be admitted, however. Nonetheless, the reality cannot be disguised. Whether it is energy policy, controls on payday lenders or the Bank of England's new approach to the financial system, the state is having to regulate markets because otherwise dysfunction rules. The paradigm is shifting – always a prelude to power shifts. Which is why Osborne and his acolytes will fight so hard on Wednesday to argue austerity is working – and why the reality behind their rhetoric needs to be pointed out. | None of these reasons for recovery can be admitted, however. Nonetheless, the reality cannot be disguised. Whether it is energy policy, controls on payday lenders or the Bank of England's new approach to the financial system, the state is having to regulate markets because otherwise dysfunction rules. The paradigm is shifting – always a prelude to power shifts. Which is why Osborne and his acolytes will fight so hard on Wednesday to argue austerity is working – and why the reality behind their rhetoric needs to be pointed out. |