When recovery follows austerity, it is not cause and effect

http://www.theguardian.com/business/2014/may/04/recovery-austerity-cause-effect-george-osborne

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It would be rather amusing if sleaze came to the rescue of the Conservative party. Consider the sequence of events: a Conservative MP resigns in a cash-for-questions affair; a vacancy is created; Nigel Farage, fearing electoral humiliation, declines to stand; and the superficial level of Ukip's apparent support becomes more apparent.

I have only met the genial Mr Farage once; it was, strangely enough, at a pro-European occasion, organised by the now defunct Lehman Brothers. Messrs Cameron and Osborne must be hoping that Farage and his motley crew will go the same way as that firm. They are most certainly hoping that the British economy's return to what looks like a respectable rate of growth will enable them to pull off the confidence trick that is the essence of the chancellor's economic strategy.

Curiously, the collapse of Lehman, followed by the near-demise of the entire financial system, was not unhelpful to the Tories. A crisis that was caused by the banks, resulting from the deregulation championed by the Thatcher governments of the 1980s, proved a perfect propaganda gift to the coalition.

For the truth that dare not speak its name is that, in opposition, Cameron and Osborne supported Labour's spending levels, and the "imprudence" that Gordon Brown practised in the latter days of his chancellorship made a trivial contribution to the deficit of 11% of GDP inherited by the coalition in 2010. Nevertheless, the coalition has made hay with its repeated reference to "Labour's mess" and taken full advantage of former treasury chief secretary Liam Byrne's ill-advised joke – and it was a joke – that there was no money left.

There was plenty of money left, and more available. Investors around the world were queuing up to put money into the UK, and the average maturity on British government debt was 14 years. Osborne's comparison of the British position to that of Greece was mischievous and wrong.

The welcome news that the economy has finally been growing again after three years of "flatlining" does not alter the fact that the chancellor's economic strategy has been a lamentable failure. To hear him declaim, in that smug way of his, that the recovery is the consequence of his austerity policies would be funny if it were not so patently dishonest.

My friend Lord Skidelsky, the distinguished biographer of Keynes, reminded an audience from the financial world recently of that classic fallacy post hoc, ergo propter hoc – which, loosely translated, means it is a mistake to conclude that because one event follows another, it was caused by the event that preceded it.

To listen to the chancellor you would think that he inherited a stagnant economy and breathed life back into it. What he actually did was inherit an economy that was beginning to emerge from depression, and promptly took action to drive it back into depression.

He did this partly by implementing a tight fiscal squeeze, and partly by going on and on about "austerity", thereby guaranteeing to lower those "animal spirits" that are necessary to encourage large and small companies alike to invest for the future.

Use of the catchword "austerity" inevitably conjured up visions of postwar Britain. The comparison was absurd, because in those days Britain really was broke and there was, to coin a phrase, no alternative to a prolonged period of austerity.

It is by now well known that the forecasts made in 2010, both for growth and deficit reduction, had to be continually revised over the following three years to take account of reality. True, the state of the banking system was hardly conducive to growth; but it was the height of economic folly to add, through deliberate policy actions, to the depressing influence of the financial sector with a combined fiscal and monetary squeeze.

It sounds odd to talk of a monetary squeeze when interest rates were at rock bottom, but the point is that there was a huge contraction in credit and the stock of money. This was eventually counteracted via so-called "quantitative easing", a silly term that simply meant the monetary authorities were pumping money into the economy and trying to revive the market for credit in a way that should naturally accompany growth.

We are now at a very interesting juncture. There is much talk about the need to rebalance the economy, but there is likely to be growing concern about the balance of fiscal and monetary policy. It is interesting that, with recent surveys from the CBI suddenly giving the impression that orders are booming, the former CBI economic director and now monetary policy committee member Ian McCafferty is hinting at the need for a tighter monetary policy.

This is not at all what Governor Carney or Chancellor Osborne wish to hear, and with output still not back to the levels of 2008 – and some 20% below what it ought to be according to historical trends – the last thing one would want is action to stop the recovery in its tracks.

Nevertheless, taken with all the concern about the level of asset prices, the commitment to keep interest rates so low for so long looks increasingly shaky. And this has implications for the wisdom, or not, of the continued fiscal squeeze planned by the chancellor: rebalancing would involve an easier fiscal stance.