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William Keegan on business

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    The chancellor is pinning the government's re-electoral hopes on voters believing that Labour is responsible for the mess he has created

    For some time now our chancellor of the exchequer has come across to the public as a kind of cheeky chappie. Last week we heard, through the medium of his father-in-law, my old acquaintance Lord Howell (energy secretary in Margaret Thatcher's first government) that George Osborne believes "the prime minister is not familiar with these [green] issues, does not understand them".

    Then highly placed Conservative sources indicated that the chancellor was against the entire "green agenda" of a prime minister who once declared that he was leading "the greenest government ever".

    Perhaps both prime minister and chancellor should reflect on another colloquial meaning of "green" – as in "inexperienced" or "not up to it" – which latter phrase was once used by Labour prime minister Clement Attlee on being asked why he was firing a member of his cabinet.

    Nevertheless, as his economic strategy disintegrates in front of his, and our, eyes, one has to admire Osborne's insouciance. In hard times a sense of humour always helps, and in an article for the Times last week the chancellor demonstrated that he has certainly not lost his .

    I am not referring to the main point, which was picked up by the rest of the media. The subject of gay marriage does not come into my definition of economic policy; nor, as far as I know, is it normally a subject of interest to Treasury officials.

    What interested me were the chancellor's inferences of the significance of the US election result for politics in the UK. "First," he said, "the incumbent government was re-elected despite a historically weak economic recovery." So that's all right for the Conservatives in 2015, then.

    Is it? We shall see. There is a difference between a historically weak US recovery of 2% a year and the experience of the UK, where there has been virtually no recovery to speak of and, according to the latest assessment by the Bank of England, there will be nothing like a return to pre-recession levels in the near future. Indeed, the talk is now of a triple-dip recession, although, in common with the National Institute of Economic and Social Research, I regard the economy as in depression until output returns to that previous peak, which has, one fears, gone outside and may be some time. It all depends on the semantics: recession returns, or depression persists. Either way, it is an Atlantic Ocean away from growth at 2% a year.

    But the chancellor's humorous comparisons with the US do not stop there. Osborne believes that a key reason why Barack Obama won was that American voters still blamed the Republicans for the economic mess inherited by Obama, and, likewise, way ahead in 2015, British voters will still be blaming the last Labour government. With three years to go, and the brunt of the patently ill-conceived austerity programme still to come? I doubt it. Even now, slightly under half of voters blame the last government, and they have seen nothing yet.

    Osborne views "our council tax freeze" as a vote-winner. This is the chancellor of a government that talks of localism but squeezes central government grants to local authorities to the limits. The impact on local services will not just be on the poor: Osborne's austerity programme will almost certainly hit the shires and the prosperous suburbs.

    Now, the point about the austerity programme is not that it caused the crisis but that it aborted the recovery, and continues to inhibit it.

    We experienced something close to a laboratory experiment in this country when, after the financial crash, the previous government lowered VAT and precipitated a recovery. That recovery was stopped in its tracks by the premature restoration of the earlier VAT rate, and the announcement of the austerity programme. At the time Osborne's sense of humour extended to such sick jokes as to compare our situation to that of Greece.

    At the same time, we were told that the Bank of England, via monetary policy, would counteract the effect of the fiscal squeeze. Well, there is a limit to which interest rates can fall, and it does not help that banks have gone from one (pre-crisis) extreme to the other when it comes to the granting of credit. As Lord Skidelsky demonstrated in his recent GLS Shackle Biennial Memorial Lecture in Cambridge, the success of quantitative easing has been decidedly limited, probably more so here than in the US.

    And last week Sir Mervyn King himself emphasised the limits of monetary policy. Of course, when the governor of the Bank said "there are limits to the ability of domestic policy to stimulate private demand", he did not add "especially when the stance of fiscal policy is calculated to restrict that demand".

    I sympathise with King's concern about the effect on our international competitiveness of the 8% rise in the average value of the pound in the past year – a significant partial erosion of the earlier devaluation. But no doubt the credit ratings agencies will contribute to a reversal of this, since Moody's has indicated that the UK's triple-A rating will be threatened if the growth prospects worsen or the chancellor fails to stick to his deficit reduction timetable. The chances of both these things becoming reality are hardly slim.


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    The chancellor was once determined that Bank governors should serve eight years and have to apply for the job. Both these criteria have now been discarded for convenience

    A man's word is supposed to be his bond. When it comes to George Osborne, a chancellor's word is – well, his word. After presiding over one of the most lamentable economic strategies of any post-war Conservative chancellor – even Black Wednesday had the advantage of leading to an economic recovery – George Osborne has just given us another example of how his word can only be trusted up to a point.

    I refer, of course, to the announcement that the next governor of the Bank of England is to be Mark Carney, at present governor of the Bank of Canada.

    Just as Osborne's deficit reduction strategy was to have produced a sizeable economic recovery – always a delusion, but we had the chancellor's word for it – now, in desperation, he has gone back on his word about the promised arrangements for appointing a governor of the Bank of England.

    In opposition and in government, Osborne made a huge fuss about his brilliant idea that future governors would be appointed for one eight-year term. This would, we were told, be a clever way of avoiding all the inevitable speculation that occurs about whether or not governors serving a five-year term will have their contracts renewed. He also took up the suggestion from his Labour predecessor, Alistair Darling, that, to avoid cronyism, the job should be advertised and those fancying their chances should have to apply.

    It was not a great idea to ask people to apply, because at that level there was an obvious danger that some good candidates might not wish to expose themselves to the public humiliation of not getting the job. But the eight-year term always struck me as a bad idea too, because the traditional practice gave ministers the opportunity to rid themselves of turbulent governors, especially if there had been a change of government.

    In appointing Carney, Osborne has gone back on both of his commitments. Carney's initial denials of interest in the job were not, as has been reported in some places, what Winston Churchill (a former chancellor) called "terminological inexactitudes", or plain lies. He did not apply. Indeed, he had to be wooed by a star-struck chancellor. In addition, not to put too fine a point upon it, he had to be bribed.

    Yes, at a time of a policy of planned penury for the poorest in our society, including shameful cuts in welfare benefits, causing misery for hundreds of thousands of citizens, the salary of the governor of the Bank of England will go up by more than 50% next July, and be accompanied by pension contributions and "relocation and housing expenses".

    There seems to be little question of Carney's ability, although, as usual, much of the comment has been well over the top. As Jeremy Paxman said on Newsnight when the editor of the Economist (a friend of Carney's) was lauding the Canadian, "you'll be telling me he walks on water next".

    Carney's initial reaction was, according to the Financial Times, negative. He "told UK officials he did not want the strings attached to the job: a central bank with an economy in severe difficulties, a salary much lower than he liked, the need to move his wife and four daughters to Britain, and the prospect of serving an eight-year term".

    Well, it has to be said that, if nothing else, Carney, who will serve for five years, is a formidable negotiator. Osborne has proved to be putty in his hands. And we have it on the authority of Mrs Carney in the Canadian press that Carney only accepted the job because an opening in Canadian politics has disappeared for the time being.

    At all events, we are back to the old days of appointments not applications, and a lot of distinguished candidates have been the victims of what became a complete charade. The chancellor's mind had already been made up.

    In announcing the appointment, Osborne looked like the cat who got the cream. But if he is still at the Treasury when Carney arrives next July – and a Macmillan-style prime minister would by now have given him the sack for his abject failure to "deliver" – Osborne may be in for a nasty shock.

    Our chancellor seems to think that Canada is a glowing example of "expansionary fiscal contraction" – that is, of emerging from depression and securing a good rate of economic growth by cutting the budget deficit and imposing austerity on those who are most certainly not "in this together". He cites the experience of Canada in the 1990s – failing to appreciate that it was rapid growth, fuelled by a devaluation and a boom in trade with the US, that induced the Canadian recovery, a recovery which enabled the deficit to be reduced with little pain.

    Well, as the autumn statement and the latest report from the Office for Budget Responsibility will demonstrate once again on Wednesday, Osborne's policy is hurting but it isn't working. And how!

    Carney, if he is as good as people say he is, must know this. Indeed, as noted above, when first approached he did not wish to have any truck "with an economy in severe difficulties" – namely the UK.

    He has contrived to be bribed into changing his mind. He apparently relishes the challenge of restoring supervision to the Bank of England and repairing the banking system. But if he has any sense he will take one look at the policies his chancellor is conducting, and become as difficult as many a governor before him.


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    The Bank of England's next governor appears to think the simple 2% inflation target should be ditched, but doubts remain about his strategy

    When the Office for Budget Responsibility recently delivered its pretty gloomy message about the state of the economy and the national finances to the chancellor, eyewitnesses were surprised at how relaxed George Osborne appeared to be.

    The reason, apparently, was that the chancellor was so pleased with himself for having landed what he regards as his big catch – the Canadian Mark Carney for the job of governor of the Bank of England – that the implications of the OBR report for his imperilled strategy hardly sank in.

    Now it may be that, having arrogantly dismissed any thought of a Plan B for the economy, Osborne for some time has been toying with what he might regard as a devilishly clever Plan C. That's C for Carney, the man he hopes will get him off the many hooks on which he has impaled himself, produce a dramatic economic recovery and lead the Conservatives to a triumphant election victory in 2015.

    What does it matter that the OBR's version of the economy's prospects looks convincingly dreadful? We have a deus ex Canada about to descend, so we can laugh off the OBR report, especially when it gives us room to wrongfoot that irritating shadow chancellor.

    There was no doubt that Ed Balls was wrongfooted; but I suspect not for long. Within days of the autumn statement, Robert Chote, the chairman of the OBR, was telling the Commons Treasury select committee: "Putting a lot of weight on a forecast that borrowing is going to fall or indeed rise by £1bn between one year and the next is ignoring the uncertainty. I certainly wouldn't be staking my reputation on a £1bn shift in the budget deficit from one year to the next."

    Osborne and the Treasury had an easy time on autumn statement day, because they had managed expectations well and there was plenty of media speculation about the bad news from the OBR. However, Osborne may not be as clever as he thinks with his tactic of "divide and rule" when it comes to his assault on the poor.

    Leaving aside the unfortunate fact that under modern capitalism many workers are paid so badly that the state finds it necessary to subsidise employees, and in effect employers, to provide a living wage, the practice of cutting benefits at all in present circumstances is highly debatable from a policy point of view.

    We are experiencing a severe shortage of demand in the economy, and the austerity programme makes things worse, not better, quite apart from its punishing distributional effects. As that great old campaigner Michael Heseltine observed last week: "Government appears like villains, descending like Mongol hordes on the most vulnerable, leaving community welfare like bleeding stumps."

    But let us return to the policymaker in the wings, Mark Carney: no cut in housing benefit for him. Indeed, the Treasury committee, when the governor-in-waiting appears before them, could do worse than ask how much he has managed to negotiate himself in housing allowances. Its members are not the only ones who may be in for a shock.

    Last week Carney hit the headlines with a speech in Toronto which, despite his denials – which now, of course, have "previous" – has been widely interpreted as heralding a marked change in the approach to monetary policy, with a greater emphasis on growth and employment rather than the inflation target, which has been the holy grail for two decades now.

    Of course it is the elected government of the day that is in ultimate charge of the regime in which the Bank of England is free to alter, or not, its interest rate – which in turn is supposed to set the example for other rates. It is not clear yet, for all the worship Carney is attracting, whether he is speaking with the approval of the chancellor or shooting from the hip. One recalls how, when Robin Leigh-Pemberton was made governor in 1983, he gave some unguarded interviews before arriving in Threadneedle Street, and was advised to keep his counsel.

    Superficially, Carney appears to have a major change of policy in mind. He likes the idea of targeting nominal gross domestic product, ie real growth plus inflation rather than inflation alone. Sir Samuel Brittan has been advocating such a policy for decades in the Financial Times, although that great Treasury permanent secretary Sir Douglas Wass always maintained that for operational purposes nominal GDP was too much of a "lagging indicator".

    There are also those who think that, by deliberately "aiming off" the inflation target, the Bank of England is already, in effect, halfway towards realising Carney's "revolutionary" change.

    However as Stephen King, group chief economist of HSBC, points out: "There is over-optimism about what you are expecting to achieve from growth in terms of monetary policy."

    Central bankers may have absorbed the lessons of the 1920s and 1930s, and not made the Great Recession worse via monetary policy. But governments in the UK and the eurozone have not learned those lessons. The austerity programmes here and across the channel are offsetting what the central banks are trying to achieve with monetary policy.

    Things are bad for many reasons. But fiscal policy is making them a lot worse, with potentially dire implications for society.


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    Britain should not be contemplating isolation from Europe; rather, it should engage with its leaders to stop austerity measures that threaten social stability

    You have got to hand it to the Conservative party's right wing and their camp followers in Ukip. They may own properties in France, Spain or Italy; the excessive free-market policies they enthusiastically espoused under Margaret Thatcher may have contributed to a situation where about half of "our" exports are produced by foreign-owned companies in the UK, but my goodness, don't they just hate Europe!

    As if the conjuncture of a world financial crisis and a eurozone on life support is not enough, it looks as though the big issue which is going to dominate British politics in 2013 is not how Britain, drawing on a wealth of historical experience, can contribute to a co-ordinated rescue plan for so many afflicted western economies including our own; no, it is going to be whether or not we should have a referendum about our membership of the EU – not necessarily this year, but at some stage during what has already established itself as a turbulent decade.

    You could not make it up. It was not for nothing that Sir Edward Heath, the Conservative prime minister who thought he had finally resolved Britain's ambiguous relationship with Europe by taking us into the European Community, used to refer to his sceptical colleagues as "septics".

    The story of the long haul from President Charles de Gaulle's multiple use of the word "non" to UK entry and then the 1975 referendum is elegantly told in The Official History of Britain and the European Community, Volume 2, From Rejection to Referendum, 1963-75 (Routledge) by Sir Stephen Wall.

    Wall is in the best tradition of British diplomatists. His inside knowledge – he was private secretary to five foreign secretaries, and to PM John Major, as well as being an adviser on Europe to Tony Blair – and his access to the archives, have been put to good use in an enthralling account which I recommend to all, including the sceptics, or septics, and which may just give the latter pause for thought.

    The question they might ask themselves is: do we really have to go through all this again, and in the midst of a serious economic crisis?

    Now, I write as someone who is not such a Europhile as to have supported what I regarded as the premature and faulty construction of the eurozone. And, of course, there is continual need for reform of the abuses of the EU budget, not least the way that the common agricultural policy, while a smaller proportion of the budget than it used to be, subsidises large corporate, often Eurosceptical, farmers who are the first to complain about subsidies for the poor and the homeless.

    But such abuses are best attacked from within the tent, not outside it. And those fantasists who go on about a looser association with Scandinavia and Switzerland will benefit from the historical explanation of why we as a nation felt it necessary to move from EFTA (the European Free Trade Association) to our successive applications to join the real thing.

    It is remarkable how people still go on about the "special relationship" with the US as an alternative to membership of the EU. If there is one thing successive postwar US administrations have been consistent about regarding our relationship with Europe, it is that we should be within, not without.

    Many of us hoped that the 1975 referendum – when we voted to stay in by a two-to-one majority – would settle the issue for good. But the real position, as noted by David Watt in the Financial Times, was that the 1975 vote had made secession "inconceivable inthis generation". As Wall points out, the day after the referendum, PM Harold Wilson told his principal private secretary, Ken Stowe, that it had taken him 10 years to achieve a yes vote.

    By this he meant that he had decided way back in 1965 that membership was in the country's best interests, but all the time he was fighting a very powerful group of anti-marketeers within the party. "People say I have no strategy, cannot think strategically," he observed to Stowe in what must surely be one of his greatest quotes. He had decided that the only way to defeat these anti-marketeers was to go above them to the country.

    The saying "a week is a long time in politics", used by Wilson, was actually coined by President Truman. Well, a generation is a very long time in politics, and the generation that David Watt referred to is no longer in control. We have another prime minister, leader of the party that took the UK into the community, and wisely chose not to sign up for the single currency, who is now faced with the problem of keeping his party together.

    Keeping out of the eurozone has enabled UK policymakers to retain an independent monetary policy and flexibility in the exchange rate. Fiscal policy, both here and in the eurozone, is absurdly inappropriate for a depression associated with a banking crisis, but unemployment here is mercifully a long way below the levels in Spain, Portugal, Ireland and Greece.

    But what is happening in the so-called peripheral nations is deeply worrying. Anyone with a sense of history is familiar with the saying "civilisation hangs by a thread". The austerity policies espoused by Germany, the IMF and the European commission are gambling with social stability. It is time for European policymakers to get together and examine their consciences as well as their policies. This should be a more important objective for the British government than reconsidering its membership of the EU.


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    Berlin bends over backwards to reassure Europe that it has no desire for domination. But its championing of misguided fiscal orthodoxy is dragging the whole continent down

    The Conservative party is in such a state over Europe that the Obama administration has had to remind it in public that the much-treasured special relationship between Britain and the US depends these days on this nation's presence in the EU, rather than its defection.

    Conservative sceptics who complain that this is not the kind of European Union that was envisaged when we entered need to go back in history. The idea that the wool has been pulled over the British public's eyes does not fit too easily with the public record of the late 60s and early 70s.

    Indeed, in those days it was manifest that our fellow Europeans were aiming at monetary union by 1980. Older readers will remember the Werner Report, which set out the plans. Then came the breakup of the Bretton Woods fixed-but-adjustable exchange rate system, the first oil crisis, and the collapse of assorted stout parties.

    Paradoxically, however, the disruption of earlier plans led, after a long time-lag, to the second attempt, as the European monetary system, inaugurated in 1978-79, prepared the way for the single currency of 1999 via the Single European Act of 1986, signed by that veritable mistress of detail, one Margaret Thatcher.

    The EMS, better known for its principal component, the European exchange rate mechanism, was an attempt to create a "zone of monetary stability" in Europe in the face of Washington's benign neglect of relationships between countries' exchange rates. The dollar was no longer to be the linchpin of the system.

    Many of us rather hoped that monetary union had been kicked into touch, but the fall of the Berlin Wall in 1989 and the reunification of Germany in 1990 aroused fears on the part of both President Mitterrand of France and Chancellor Kohl of Germany that Germany might become too dominant. With the sacrifice of the deutschmark, Germany signed up to the single currency, the political aim being the achievement of a European Germany, rather than a German Europe.

    Contrary to the views of many people in this country, modern Germany bends over backwards to deny any suggestion of plans to dominate Europe. It was amusing last week to hear a senior executive of BMW, which now owns Rolls-Royce, going out of his way to insist that Rolls-Royce was still "a British company".

    Ironically, however, it is easy for Germany's good intentions to be misinterpreted, because the way that economic policy has evolved in Europe since the onset of the financial crisis has been led by Germany and is based on the same false premise as the economic policy pursued by a certain coalition closer to home.

    The premise is that austerity, or planned penury, contains the seeds of economic revival. "Expansionary fiscal contraction" is the oxymoronic term for what is being practised in the UK and most of the eurozone.

    I have many times tried to point out that what makes sense for the individual or household does not make sense for the entire economy. As the indefatigable Paul Krugman puts it: "A family can decide to spend less and try to earn more. But in the economy as a whole, spending and earning go together: my spending is your income; your spending is my income. If everyone tries to slash spending at the same time, incomes will fall – and unemployment will soar."

    After a period of selective amnesia, economists at the International Monetary Fund and elsewhere have rediscovered the "multiplier" – the insight given to Keynes by his lesser-known colleague Richard Kahn. Traditionally this is discussed in terms of the way that extra public spending or lower taxes can have a "multiplier" effect in stimulating demand and activity in the economy as a whole.

    Now, for reasons that ought to have been obvious, they are discovering that the multiplier effect can work the other way as well. Why, the impact of needless austerity on peripheral eurozone countries is now affecting the outlook in Germany itself, via lower demand for its exports.

    This is not to say that the contraction induced by the current fashion for austerity and cuts is entirely responsible for our economic troubles. In recent years there has been the unfortunate concatenation of the banking crisis (still very much with us in Europe), the rise in the price of oil and food, and, in the UK's case, the added impact on import prices of the 2007-9 devaluation of the pound.

    Yet devaluation, long delayed, was necessary because of the deterioration in our trading position associated with the neglect of manufacturing and the way policymakers relied too much on financial services. Even now, during a prolonged depression, Britain is not paying its way in the world, and is in a significant balance-of-payments deficit. As the economist John Mills points out, the real source of concern in this country is the trading position rather than the budgetary one.

    The implication is disturbing, but it is a judgment that appears to be shared by the governor of the Bank of England: the exchange rate is still too high! If the markets were to take this view, then there would be a further squeeze on people's real incomes as import prices rose again.

    All things considered, the last thing this country and this economy needs is the coalition's austerity programme, which depresses demand even further.


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    The pressure of economic bad news is becoming so intense that banker is turning publicly upon banker – and even supposed panaceas such as rate-setting independence are in question

    The outgoing governor of the Bank of England indulges in thinly disguised criticism of the views of his nominated successor, the Canadian Mark Carney. A former member of the Bank's monetary policy committee – the American Adam Posen – conducts a manifestly undisguised assault on the centralised way in which Sir Mervyn King allegedly runs the Bank, having already on many occasions differed from him on policy.

    And Jens Weidmann, president of Germany's Bundesbank, says that Stephen King, the chief economist at HSBC, is "perhaps right" in forecasting the demise of that fashionable financial panacea of recent decades – central bank independence. Weidmann cites political interference with the independence of the Bank of Japan, among others.

    Yes, central banks are under attack: and central bankers are taking pot-shots at one another.

    King, who did more than any other British official to promulgate the adoption of "inflation-targeting", made an impassioned plea last week for its preservation, including, in his speech in Belfast, a history of all those inflationary problems of the 1970s, and the long struggle to bring inflation down to tolerable rates.

    In saying "tolerable" I am begging the question; but economic history shows that a moderate amount of inflation is a necessary condition for growth. Rip-roaring inflation is certainly not, and is socially destructive as well. But deflation – falling prices – is inimical to growth, as the recent experience of Japan has demonstrated.

    In recent years King's position has been an Augustinian one: the necessity of announcing inflation targets, but the desirability of not hitting them too soon, if at all.

    By contrast, Carney has revived the idea of a target for nominal gross domestic product, a measure that is the sum of inflation and real growth.

    People seem to have forgotten that, under chancellor Nigel Lawson, the Thatcher government tried targeting "money GDP" with pretty poor results. Carney could do well to study that excellent book The Economy Under Mrs Thatcher, 1979-1990, by the economist Christopher Johnson (who, sadly, died just before Christmas). As Johnson wrote, with the money supply statistics all over the place, "the use of money GDP created further confusion and was ineffective in controlling either real growth or inflation".

    Another book worthy of Carney's attention is Inside The Bank of England: Memoirs of Christopher Dow, Chief Economist 1973-84, which has been long delayed, but whose publication last week turns out to be well timed.

    Dow, who was on the frontlines when inflation was serious (25% in 1975) kept a diary – against the wishes of the governor of the time, Gordon Richardson, who, I am pretty certain, would have granted him a posthumous pardon if he had read this remarkable book. (That is, if they are not already discussing it up there in the great central bankers' resting parlour in the sky.)

    Richardson was governor from 1973 to 1983. He arrived at the Bank shortly after Dow had been appointed by the previous governor, Leslie O'Brien, and worked closely with Dow throughout, one of the latter's self-appointed tasks being to try to keep Richardson's flirtations with monetarism, and concerns about public sector borrowing, within reasonable bounds.

    In their introduction to the memoirs, the economists Graham Hacche and Christopher Taylor, who worked for Dow, note that "the main worries for UK watchers when Dow entered the Bank were slower trend productivity growth than in other major economies, persistent balance of payment problems, and an upward trend in inflation".

    Plus ça change, although, as noted, inflation then was in another league. But, as now, it was a time of economic crisis – welcome to the party, Mr Carney – and, in addition to concerns about economic policy, Richardson and Dow spent much of their time trying to reform the Bank, a task which, the chancellor and the Treasury have made no secret about, is due to be embarked upon all over again under the leadership of Carney.

    In a foreword to the book, Sir Kit McMahon, former deputy governor, says of the Bank in the mid-1970s: "The Bank's organisation was ancient and creaking." Not to put too fine a point upon it, that is what the Treasury thought when appointing Carney.

    But if the Treasury thinks that by tinkering with monetary policy Carney will help it out of a fiscal hole, it may have another think coming. A sound Keynesian, Dow thought that the management of aggregate demand, with the object of maintaining high output and employment, depended mainly on fiscal policy. A contractionary fiscal policy – especially one of trying to cut the deficit at a time of depression – is hardly calculated to bring us out of depression, as a succession of GDP figures, including the latest 0.3% decline, have shown.

    Thus, as Gordon Brown wrote recently in an article for Reuters: "The policy void today lies less in the weaknesses of national central bank leadership than in the reluctance of national governments to contemplate global leadership." Brown demonstrated such leadership in 2008-09, both in his contribution to the rescue of the banking system and in coordinating the G20 economic stimulus in April 2009. Then came the austerity merchants, to, literally, devastating effect.


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    The Bank of England is trying to summon growth. But unless there is a change in fiscal policy, will it come?

    David Cameron's problem is that, although he regards himself as the "heir to Blair", he did not have someone of the political courage and clout of Neil Kinnock to detoxify his party before he took over.

    The Conservatives, especially under the chancellorship of George Osborne, are coming across as the worst of the old-fashioned, rightwing, bash-the-poor party that the likes of my late "wet" Tory friend Lord Gilmour hoped had been banished for ever.

    For those of us Keynesians who think that it is not a sensible policy to cut public spending when the private sector is depressed – thereby adding to the factors inhibiting economic recovery – the present stance of the government is disturbing enough. But many of us, while we find present policies both intellectually offensive and emotionally repellent, do not suffer personally from the effects. Not so the poor and the disabled, who find their benefits being reduced in the name of austerity policies they are told are necessary because of the deficit and the supposed need to pay down the debt.

    At a time like this, it is very important not to pay down the debt. It is what keeps us going, preventing an even worse depression. Unfortunately, so desperate is our beleaguered prime minister that he recently committed a classic "terminological inexactitude" by proclaiming in a party political broadcast that the government was paying down the debt when it manifestly was not.

    It was perfectly fair, under the rules of love and politics, to complain that the deficit was attributable to the previous government, even though the fact is that it was largely the result of the financial crisis that afflicted most western economies, and only partly due to the specific policies of Gordon Brown. But to claim that public sector debt is falling when it is not is a step too far by a plainly rattled prime minister.

    One country that was less affected than most by banking crisis was Canada. This seems to be at least one of the reasons why our chancellor was so keen to recruit its central bank governor, Mark Carney, to succeed Mervyn King at the Bank of England.

    Now, regular readers may recall that I was pretty critical before Christmas of the way in which Osborne broke his own rules about the procedure for appointing King's successor. But it has to be said that Carney put up a reasonable performance in front of the Treasury select committee last week.

    Given that, in the arcane world of central banking, Carney is considered "box office", I knew that there would be a queue to get into the hearing, but I did not get where I am today by queuing, so I decided to watch it all – or most of it; there are limits – on television. Carney himself took a similar view, and was 25 minutes late for his own hearing.

    I say "reasonable" performance, and reasonable was the operative word, frequently used by the urbane committee chairman, Andrew Tyrie, and Carney himself. The other great theme was flexibility. When asked about his putative liking for targeting nominal gross domestic product (the sum of inflation and real growth), Carney gave the impression that he had rowed back from his earlier position, acknowledging there were measurement and operational problems with nominal GDP as a target for monetary policy.

    Carney believes it is important that the public should understand what monetary authorities are up to, and it doesn't help if they are not quite sure themselves. However, in understanding his position, it is helpful to know that one thing Carney does emphasise is that, in the UK, nominal GDP is now almost 15% below what previous trends suggest it would have been in the absence of the crisis. In other words, there is ample scope for a major effort at expansionary economic policies in order to lift this beleaguered economy of ours out of depression.

    Carney emerges as coming from what that great Canadian political analyst Colin Campbell describes as the school of "mainstream Bernanke". He believes in continuing with a flexible inflation target – that is, an Augustinian approach to financial virtue – and is emphatically worried, like Ben Bernanke, the US Federal Reserve chairman, about the high level of unemployment and the danger that, if unemployment persists for too long, the victims really will live up to the "unemployable" label so favoured by rightwing Neanderthals.

    Now, it is all very well the Bank of England trying to stimulate growth. But certain words from Henry IV Part 1 come to mind: these great technocrats may be able to "call spirits from the vasty deep", but "will they come when you do call for them?"

    In a recent speech to the Mile End Group at Queen Mary, University of London, Sir Nicholas Macpherson, permanent secretary to the Treasury, quoted his predecessor Lord Bridges on the Treasury's efforts since 1941 to make "a conscious attempt to use fiscal measures to hold the balance between the money in people's pockets and what they could buy with it".

    It is not clear to me that, with real wages depressed, and budgetary cuts on top, Osborne's Treasury is fulfilling this duty. Fiscal policy is counteracting monetary policy. Carney evidently believes in the power of exhortation. But when he summons the spirits from the deep, will they come if there is no dramatic change in fiscal policy? I have my doubts.


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    The Faustian pact the coalition made with the Bank of England and the markets has not worked. It's time to end austerity and use fiscal policy to revive Britain

    Faustian pacts are not a good idea. On assuming office in 2010 the coalition entered into a pact with the Bank of England and the financial markets which ranks as one of the most ill-conceived ventures in economic policy by any British government since the second world war.

    It was to be deficit reduction – indeed the elimination of the so-called "structural" deficit – by 2015, in return for supportive monetary (including exchange rate) policy from the Bank of England and the enthusiastic backing of the financial markets. The sine qua non as the criterion for success of this policy and pact was to be a marked improvement in the pace of economic recovery.

    The chancellor, George Osborne, made a bad start by raising VAT – a £12bn blow to consumer spending, with additional multiplier effects. The economy the incoming government inherited was recovering, albeit slowly. But the combination of the perverse increase in taxation (knocking almost 1% off gross domestic product per annum), and the impact of the austerity programme was sufficient to stop the recovery in its tracks.

    This added to the deflationary impact of higher import prices arising from the massive – but necessary – devaluation of the pound in which the Treasury and the Bank of England had acquiesced. Then there have been all the other depressing influences on real incomes of which the governor, Sir Mervyn King, recently complained.

    I should emphasise that paradoxically, an increase in energy prices can be inflationary in that it affects the general price level and deflationary in that, via the impact on real incomes, it has a depressing effect on spending power and therefore economic activity. Thus the monetary policy committee can be criticised by purists for not hitting the official inflation target of 2%, yet praised for not taking its brief too literally, and aggravating the depression.

    For depression it is: in common with the redoubtable Jonathan Portes of the National Institute of Economic and Social Affairs I have regarded the term depression appropriate to a situation where output continues to remain well below its previous peak, let alone the 15% or so by which it is below what the historical trend would indicate.

    In a paper which I recommend to all ("How to Restore Growth and Cut the Deficit, The Policy Consequences of Revived Keynesianism, Lombard Street Research") the economist Christopher Smallwood reminds us of Keynes's definition of depression: "a chronic condition of subnormal activity without any marked tendency either towards recovery or towards complete collapse".

    Although things are pretty bad, we have certainly avoided complete collapse – so far! The role of Gordon Brown and others in "saving the world" in 2008-09 was vital in preventing disaster then. Central bankers since had either read or heard about Liaquat Ahamed's book Lords of Finance about how their predecessors got it so wrong in the 1920s and 1930s. Through quantitative easing – open market operations to offset a private sector credit crunch by easing monetary conditions – the central banks have stopped the rot.

    Quantitative easing was urged way back by Keynes in order to lower interest rates. But it was when monetary policy was ineffective – like "pushing on a string" – that Keynes advocated what have come to be known as "Keynesian" policies – the use of fiscal policy (government spending) – to revive activity.

    Unfortunately, under the Faustian pact we have witnessed a double whammy: fiscal policy being used to reduce government spending when the economy is already depressed. And a monetary policy that has been pushing on a string.

    As Smallwood points out, the Treasury and Bank drew the wrong conclusion from the apparent success of the combination of fiscal contraction and monetary expansion in the 1980s and 1990s. "In both cases, the contractionary impact of tax rises and spending cuts was counterbalanced by substantial falls in interest rates, and of the sterling exchange rate at a time when our export markets were growing," he writes. Exports and investment took up the slack left by budgetary cuts.

    This time there was not much further for interest rates to fall. Indeed, banks were widening their margins and many borrowers did not feel the intended effects. For some, interest rates actually rose. Moreover, despite the more competitive pound, the sluggishness of our main markets prevented an export boom.

    George Osborne cannot bear to admit he has been wrong, blames the Bank, and produces a Canadian ex machina in the shape of Mark Carney. And so far from pleasing the financial markets with this austerity programme, he finds they are more concerned about lack of growth, or continuing depression. Indeed the markets showed signs of incipient panic when they learned last week that King himself wanted more quantitative easing at the last meeting of the MPC.

    Now, following recent work on the operation of "fiscal multipliers" in the US, Smallwood argues that a switch to a policy of fiscal expansion is the only way out. The multiplier was a discovery of the economist Richard Kahn's, which Keynes adopted. Normally economists think of additional public spending or tax cuts having "multiplier" effects, as the person or institution in receipt of extra funds spends them in a way that boosts the incomes and spending of others. Similarly, higher investment produces what economists call "accelerator effects".

    But at present we have very damaging negative multiplier effects, in which budget cuts lead to obvious hardship, to further reductions in people's ready cash and consequent social problems.

    Smallwood argues convincingly that fiscal policy needs, selectively, to be put into reverse. "A properly designed fiscal stimulus could restore growth, at the same time generating powerful tax flow-backs from (a) national income (multiplier effects); (b) higher private investment (accelerator effects); and (c) improved long-term growth potential as a result of increased investment."

    There is a huge range of potential infrastructure projects out there. They can pay for themselves. The only way out of this mess is a complete reversal of fiscal policy. It would be seriously ironic if the financial markets ended up punishing this country for the unintended consequences of a Faustian pact that was meant to please them. The ratings agencies have already started.


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    As housing minister, David Cameron's hero created 300,000 homes. As prime minister, he fired cabinet members without compunction. There is much we can learn from him still

    When someone told me that Sir Mervyn King wanted to break up the bank, it was tempting to think he might be referring to the Bank of England. The governor has been put in an unenviable position by the way the chancellor has been so openly favouring his successor, Mark Carney, and King is becoming increasingly outspoken.

    The putative plot thickened when we learned that some RBS cash machines had seized up: but there is no evidence that this was the next move in the outgoing governor's welcome assault on RBS.

    Meanwhile, back at the ranch, we learned that the Carneyisation of monetary policy will be a central feature of the budget on 20 March. "Osborne to hand Carney powers to kickstart economy," roared the Financial Times. It got better: "George Osborne's budget will pave the way for Mark Carney, incoming Bank of England governor, to come to the rescue of the economy as the chancellor sets the scene for a new era of looser monetary policy."

    There you have it: such confidence! And what a magnificent example of the begged question – assuming what has yet to be proved! The chancellor's spinners are spinning out of control.

    By "the chancellor", I am of course referring to George Osborne and not to business secretary Vince Cable, who tried in last week's New Statesmanto inject some fiscal sense into the coalition's lamentably misguided economic strategy.

    Many observers have been urging the government to take advantage of rock-bottom interest rates to raise investment and demand in an economy whose depression has outlasted that experienced in the 1930s. Although he posed the problem as a "controversial" question, Cable made it pretty clear that the government "should borrow more, at current very low interest rates, in order to finance more capital spending". The list of possible, indeed desirable, projects includes the building of schools and colleges and "small" road and rail developments.

    And then there is new housebuilding, which featured prominently in the economic recovery of the 1930s. The connection between the lack of housebuilding and the swelling bill for subsidised rents is all too obvious, and the blame for neglect of public-sector housing lies at the door of successive Conservative and Labour governments. Oh, sorry, I nearly forgot: this government, which is being so unpleasant towards the poor, is actually a coalition of Conservatives and Liberal Democrats.

    But back to the budget. Harold Macmillan – Conservative chancellor in 1956 and prime minister from 1957 to 1963 – is one of David Cameron's heroes. As housing minister in the early 1950s he was celebrated for presiding over a major building programme, and his target of 300,000 dwellings was indeed achieved. If he were here today and consulted about the economic impasse, he would almost certainly tell the prime minister to sack his chancellor – Macmillan himself had no compunction in these matters – conduct an unashamed U-turn, and abandon the policies that actually restrict the growth Cameron says he is aiming at.

    In preparing his budget speech, Osborne could do worse than refer to the one budget speech Macmillan himself delivered, on 17 April 1956. I would not recommend the two hours that Macmillan spent on his feet, but there are some great passages, including a quotation from the historian Macaulay's Essays to the effect that worries about debt and deficits go back centuries, yet "on what principle is it that, when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?".

    There is an interesting contrast between then and now. As Macmillan said, "monetary policy cannot 'go it alone'. It can only operate effectively in conjunction with fiscal and other measures …"

    Now, Macmillan was talking in 1956 about "checking demand". He said "no one has yet found an easy way to restrict credit without higher interest rates". Fast forward, and today he would be talking about the need to boost demand, and complaining that "no one has yet found an easy way to boost credit with lower interest rates". That is to say, thanks to the banking crisis and its repercussions, quantitative easing may be boosting asset prices but not the credit mechanism that boosts demand.

    Macmillan wanted to boost savings – and, memorably, introduced premium bonds. The current ineffective "rebalancing exercise" should be boosting spending, not savings.

    Which brings us to an important lecture last week by Dr Sushil Wadhwani, a former member of the Bank of England's monetary policy committee, delivering the annual Peston lecture at Queen Mary, University of London.

    Addressing the question "The great stagnation: what can policymakers do?", Wadhwani proposes a fiscal boost via what he calls "a money-financed fiscal expansion" – vouchers to stimulate consumption and temporary tax incentives to promote investment. Personally, I would add a cut in VAT.

    Such a policy is known by economists as a "helicopter drop" – not manna from heaven, but money out of the blue. My question is: do we make enough helicopters these days?


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    The coalition is suffering the worst of both worlds: excoriated by the right for continuing to borrow, but not borrowing enough to bring about a recovery

    A friend in the "penny off a pint" pub told me on budget evening that the economy was rebalancing well. "In my high street it is rebalancing towards betting shops, fried chicken outlets, pawn shops, Poundland and payday loans," he said. "And do you know what the payday loan shops advertise themselves with? 'The banks won't give it to you, but we will'." Yes, and at what rates of interest!

    The "penny off" reminded me of budgets of the old days, but in this day and age it was a wonderful jape on the part of a government that thinks we all drink too much. Perhaps they have finally got the point that in the face of an increasingly irrational economic policy, the public just wants to drown its sorrows.

    Sorry, did I say "irrational"? It may be irrational to us Keynesians, but we must never forget that Osborne's budgets are based on a political strategy that assumes the general public is gullible enough to accept indefinitely the misleading propaganda that our economic troubles are caused entirely by the profligacy of the last government, and the fallacy that when the private sector cuts back then so must the public sector.

    You would not believe, to listen to this most dangerous of chancellors, that the so-called "structural deficit" inherited by the coalition in 2010 was no worse than the one inherited by Labour in 1997.

    Gordon Brown and Ed Balls may have made the mistake of paying too much heed to the likes of George Osborne and thus placing faith in the financial sector that let everybody down, but they did not cause the worldwide collapse of bank lending in 2008-09 that precipitated the great recession and the first annual decline in world trade since the 1930s.

    One's concern until recently was that the coalition had been getting away with its misrepresentation of causes, effects and required solutions; also, until recently, that while being very effective in criticising the government, Labour appears to have given the impression to most people that it does not have much of an alternative. "They would cut, but more slowly" has been the general view.

    To judge from the standard of debate on the BBC's Question Time the day after the budget, Labour still has an uphill struggle to get across the fundamental point that it is not the borrowing that is the problem, but the prolonged depression and the way that the multiplier effects of budget cuts make the situation worse and hold back the recovery.

    Output in this country is some 15% below what it would have been on past trends, and it is not true that the potential for economic growth in this country has come to a halt. What has come to a halt is the application of the lessons of the interwar years that governments have the fiscal tools at their disposal to revive demand.

    In a sense this government is getting the worst of both worlds: it is excoriated by the right for continuing to borrow, yet its failure to boost demand and borrow more means that it is not taking the necessary action to provide what the governor-in-waiting of the Bank of England calls "escape velocity".

    Mark Carney refers to monetary policy, but what monetary policy and the government's reluctant toleration of higher-than-intended borrowing have essentially achieved is not growth, but stabilisation at a depressed level.

    Now there were some good, Heseltinian "supply side" efforts in the budget – we can pass over the chaos of the chancellor's housing measures – but, in macroeconomic policy terms their combined effect is marginal, as can be seen from the gloomy forecasts from an Office for Budget Responsibility that usually errs on the side of optimism.

    It is a not-unfounded leftwing interpretation of what is going on that a nasty, rightwing government is using the pretext of a much-exaggerated "Labour mess" to cut back public services and the social safety net quite deliberately, in a way that is severely aggravating poverty, homelessness and hardship for many citizens. But not every backer of this policy has nasty rightwing motives. It is just that they are trapped in a mindset where they have been convinced that they will lose "credibility" with the financial markets if they do not persevere with the fiscal version of sado-monetarism. Yet as the failure of the policy becomes more apparent, and the prospect of growth recedes, they will find they will lose credibility anyway.

    For Whitehall and City insiders, the centrepiece of the budget was the plan, wrapped in a mist of vagueness, to encourage the Bank of England to be more like the US Federal Reserve in taking account of unemployment as well as inflation, and giving the markets more guidance as to how long interest rates will remain low.

    For Mervyn King and Mark Carney, the US Federal Reserve chairman Ben Bernanke is the exemplar. But, unlike Sir Mervyn, Bernanke did not commit himself to supporting an inappropriate fiscal strategy. The chancellor repeated in his budget speech that "active monetary policy and a responsible fiscal policy are two components of our economic plan". Unfortunately, monetary activism has its limits in a depression; and the fiscal policy is "responsible" in a different sense. It is responsible, as the OBR recently pointed out to the prime minister, for hampering the "recovery".


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    Whether or not the chancellor avoids presiding over a triple dip, the truth remains that he took over an economy that was growing slowly in 2010 and pulled it under

    Exiguous rates of growth in the parts of the economy that austerity doesn't reach do not constitute a justification for the chancellor's chilling strategy. But be warned: a last refuge of the scoundrel will be to claim "Look! It was all worthwhile. Thanks to our necessary and unavoidable policy of austerity, the economy is in better shape and is growing again."

    The chancellor and his supporters will gloss over the inconvenient truth that the economy was in fact growing again when they took over in May 2010 – goodness: was it less than three years ago? It seems more like a decade.

    It was not the troubles of the eurozone that derailed the recovery. It was the dramatic impact on business and consumer confidence of an austerity programme based on a misleading analogy – comparing our "plight" to that of Greece – and a false premise, namely that monetary policy would offset the impact of fiscal cutbacks.

    What monetary policy – low interest rates, quantitative easing and assorted gimmicks – has achieved is to prevent the degree of monetary contraction that aggravated the depression of 1929-31. Even so, such is the continuing state of the banking system that even an enlightened monetary response has severe limitations.

    There are moments in economic policy when governments make such obvious mistakes that even those of us who were taught always to see the alternative point of view wonder whether we are just "seeing things".

    The most egregious cases often concern changes in what is known as indirect taxation, of which the most conspicuous element is VAT. Thus a rightwing commentator recently praised the Thatcher government for having "conquered" inflation after inheriting a rate of 10% from Labour in 1979.

    What this revisionist omitted from the story was the way that, by almost doubling the rate of VAT for most transactions, the new government aggravated the problem. The conquest began a year later, by which time the year-on-year rate had peaked at 21.9%.

    And in Japan, in the mid-1990s, the government of the time put an abrupt stop to an economic recovery by almost doubling VAT.

    The big mistake the present British government made was again related to VAT: by restoring the rate to 20%, Osborne deflated the economy by close to 1% of gross domestic product, thereby taking it back into a recession whose length and consequences have justified the phrase "prolonged depression".

    So here we are, with a public mood of resignation to prolonged austerity, and a chancellor who hopes that with the reappearance of even an exiguous rate of economic growth he will have fooled people into accepting that it was somehow all worthwhile. The ultimate in defeatism is manifested by those who complain that the economy has not responded enough to the biggest devaluation since 1949.

    So what would your correspondent do? The first thing to establish would be that, although the trade and balance of payments figures are bad, there is no need for a devaluation: we have already had one of 25%. Because of the immediate effect on import prices, necessary devaluations tend to make the trading picture look even worse before it gets better – the J-curve effect. That is what has been happening. But, albeit slowly, there is evidence that the manufacturing and service sectors are finally waking up to the opportunities.

    Traditionally, in order to make a devaluation work, the government has to "make room" in the economy by depressing domestic demand.

    In present circumstances, however, there is no reason to do so. Our economy is so depressed, and operating so far below capacity and potential, that a major boost to domestic demand is necessary, and could be effected by a cut from 20% back to 17.5% in VAT.

    This would have a more immediate effect than the longer-term infrastructure projects currently proposed – which are also necessary and for which there is also plenty of room in our depressed economy. These can be financed very cheaply: indeed, in many cases they are investments that will pay for themselves in due course.

    The most important investment of all has to be in the sort of ambitious housing programme – no fewer than 300,000 new dwellings a year – that Harold Macmillan pulled off in the 1950s.

    It becomes increasingly obvious that the bill for housing benefit is the consequence of neglect of housebuilding by successive governments, starting with Thatcher's. We see the pernicious social effects in the way cuts in benefits and the "bedroom tax" are disrupting so many family lives.

    We need a secretary of state for housing (and nothing else) in the cabinet. Macmillan is reputedly one of the present prime minister's heroes. He should go for it!


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    Far from being a time of economic miracles, growth in the 80s was no better than it was in the 70s: and inflation was conquered only by the effects of a long and damaging recession

    In The Man Who Shot Liberty Valance, Ransom Stoddard (played by James Stewart) goes to great lengths, many years after the event, to explain to the local newspaper editor that it was Tom Doniphon (played by John Wayne) who did the deed, not himself. But the editor tears up his notes and declares that he prefers the legend to the facts.

    It has been like that following the death of Margaret Thatcher, with the latter in the role of "The Woman Who Transformed the British Economy". As one who chronicled events from 1979-90, I have to say it did not feel like that then and does not feel like that now.

    One would expect a "transformation" of the economy to show up in the statistics for economic growth. But what the facts show, as opposed to the legend, is that the annual rate of increase in GDP between 1980 and 1989 was 2.2%, exactly the same as the 2.2% per annum recorded between 1970 and 1979, the decade when everything was supposed to be going to pot.

    These statistics come from the late Christopher Johnson's balanced assessment of a most controversial period, The Economy under Mrs Thatcher 1979-1990. Johnson concludes: "Mrs Thatcher is likely to go down in history more for her political and military than for her economic and social record." As for "lasting" effects on economic growth, the average growth of GDP since 2005 has been an exiguous 0.6%. Some transformation!

    There was always something bogus about Thatcher. The prayer she quoted in 1979 about peace and harmony was the work of a French cleric during the first world war, and had nothing to do with St Francis. Harmony was the last thing Britain's first woman prime minister brought to her country.

    Unfortunately, the sale of council houses at knockdown prices, while popular, led to no serious attempt to build more social housing – this didn't fit with the dogma – so the seeds were sown for the housing crisis of today.

    Productivity was generally considered one of the successes, but this was less a case of a miraculous industrial revival than of a higher batting average because fewer people were playing. I recall asking whether, in their obsession with small business, it was the Thatcherites' ambition to turn every large business into a small one.

    The problems were evident from the beginning. Having inherited an inflation rate of 10% in 1979 and promised to halve, if not eliminate, it, Thatcher presided over a policy – monetarism – which, far from conquering inflation, was so ineffective that within a year inflation had risen to almost 22%. Thanks to the worst recession since the second world war, the year-on-year rate of inflation was down to 3.7% by the time of the 1983 election.

    It was not just dead industrial wood that was lost: many thriving firms went under. At one stage, the chairman of ICI asked Thatcher whether, given the squeeze, she wanted firms such as his to remain in Britain.

    Thatcher was the most unpopular prime minister since records began – until the Falklands war. She was lucky to win the 1983 election, because the opposition was split, thanks to the breakaway from Labour by the Social Democrats – who, if they had stayed, might have helped to dissuade Labour from running on a vulnerable ticket.

    Apart from trade union reform and misleading achievements in productivity, the Thatcher period was noted for offering privatisation not only to this country but to the rest of the world. Some was good; some was bad.

    But the gravamen of the economic charge against her is the neglect of manufacturing industry. Although output did grow a little over the period, our performance was far more sluggish, vis-a-vis the rest of Europe and the wider OECD area, than you would think from all the crowing about economic "miracles". As Jim Prior, her first employment secretary, wrote of his monetarist colleagues: "Their attitude to manufacturing industry bordered on the contemptuous. They shared the view … that we were better suited as a nation to being a service economy and should no longer worry about production."

    Having created an unemployment crisis in order to reverse the (largely) self-inflicted doubling of inflation, the Thatcher government proceeded to create a "dependency culture", massaging the figures by encouraging the jobless to claim disability benefit.

    Privatisation hardly figured in the 1979 election. It was subsequently seized upon as a diversion from the wider failure of economic policy and a useful source of revenue. But the most adventitious source of revenue was the North Sea – a source to which one Thatcherite would refer as "what we are using to finance unemployment".

    Poverty increased dramatically, as society became more unequal, and the postwar consensus was destroyed. As the sacked cabinet minister Lord Gilmour observed: "The sacrifice imposed on the poor produced nothing miraculous except for the rich."

    Eventually, we had the Lawson boom, with inflation back to 10%, and, all other panaceas having failed, recourse was had to the Exchange Rate Mechanism to control inflation.

    Well before the poll tax and the difficulties over Europe, the impression gaining ground in her cabinet was that the prime minister was showing signs of going off her head. The manner in which she behaved, and, finally, the way her cabinet colleagues responded, poisoned the Conservative party.

    No wonder they prefer the legend.


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    Britain is in a depression. Cuts won't cure it. And there's so much we could be spending money on

    The government and the nation desperately require a Plan B. If our obstinate chancellor is not prepared to own up to the need, then he should have words with his prime minister about his interest in another cabinet post and leave the door open for a more expansion-minded colleague.

    Two names that come to mind are Lord Heseltine and Kenneth Clarke. Both have had to pay lip service to the chancellor's "austerity strategy", but it is obvious from the conclusions of his recent Downing Street-commissioned report on growth what Heseltine really thinks of Plan A. And Clarke knows that the way to achieve a reduction in the deficit is by encouraging the economy to grow at a decent lick – not add to private sector cutbacks with public sector ones on top. This is what he achieved during his 1993-97 chancellorship.

    Alas, at 80 Heseltine would probably not want the job, and Clarke is far too unpopular with the Thatcherites who, along with Ukip, have now frightened that nice David Cameron into ditching his attempts to soften the Conservative party.

    George Osborne's shamelessness knows no bounds. The ratings agencies were going to be the judge and jury of his pre-Keynesian strategy. They have given their verdict. The American academics Kenneth Rogoff and Carmen Reinhart had in theory demonstrated that borrowing and rising debt levels caused low (or no) growth, but rival academics have now demonstrated that their research was deeply flawed: the causality is the other way around.

    When elaborating on his austerity strategy in the Mais Lecture of 2010, Osborne drew putative justification for his policies from the work of Rogoff and Reinhart. It is, by the way, with some amusement that one now finds the two academics proclaiming: "Our consistent advice has been to avoid withdrawing fiscal stimulus too quickly, a position identical to that of most mainstream economists."

    The question is whether a fiscal stimulus should be withdrawn at all before a decent economic recovery is established. For all his previous fiscal sins – and they are not nearly as grievous as they have been painted – Gordon Brown realised this. The error made by policymakers in the UK and the eurozone has been, in the words of Sir Samuel Brittan, to return "to old habits" after the rescue operation of 2009-10.

    Osborne has admitted, indeed boasted, that his model was Geoffrey Howe's budget of 1981, which – according to mythology – produced a dramatic recovery by cutting public spending and raising taxes. Osborne rescinded Labour's cut in VAT and began a public spending squeeze, the consequences of which are all around us – with more to come as the Treasury completes a new spending round for the year 2015-16.

    The 1981 fiscal squeeze did not produce a recovery; but the economic cycle eventually turned up, helped not least by the budget strategy of easier monetary policy and an engineered fall in the pound. Then came the abolition of credit controls. Even so, unemployment went on rising until 1986.

    An important difference between then and now is that we now have a banking crisis. Also – as former Treasury official Sir Tim Lankester pointed out at a seminar on 1981 last week organised by the Treasury and the Mile End Group – consumer debt was much lower then than now.

    All this talk about double dip or no double dip is a red herring. The fact is the economy remains in depression, with gross domestic product some 15% below what previous trends would suggest possible.

    Now, controlling and curbing the growth of public spending is in the Treasury's DNA. But this is not the time for further cuts; indeed, it is time to reverse the process by which youth programmes, school sports facilities (so much for the Olympic spirit) and many local social services are being emasculated.

    The pressure for economically unnecessary, indeed socially harmful, cuts has become so intense that furious cabinet ministers in other departments are urging the prime minister to break his commitment to "ringfence" the health service.

    The absurdity of the situation was vividly brought home to me by the wonderful NHS surgeon who recently operated on my left shoulder after I had tripped on a pavement: London teaching hospitals are noticing a significant increase in admissions to accident and emergency as a result of falls connected with unmended pavements and potholes.

    It is the economics of the madhouse for local authorities to be in this position, thereby adding to the pressure on the NHS.

    How about government grants of, say, £2m per local authority, to be spent specifically on mending all those potholes and pavements, on condition that the money has to be spent by 30 September 2014?


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    Even Francophile Conservatives now want Britain to go it alone. But it's not the euro that's holding us back: it's the government

    According to Greek mythology, Cerberus was the many-headed hound that stood at the gates of Hades, the underworld. Feeding the hound of hell was a thankless task. He always wanted more. Hence the expression "a sop to Cerberus", meaning a futile gift of a morsel that only leaves the hound baying for more.

    I am not suggesting for one moment that Ukip or the Tory party are dogs. But the expression "a sop to Cerberus" – much favoured by my classics master in days gone by – does keep coming to mind, with our beleaguered prime minister in the increasingly frustrating position of delivering the sops.

    Mythical history does not relate whether there are also pigeons at the gates of Hades. But if there are, my old friend Lord Lawson has certainly thrown a cat among them with his Ukip-style call for us to leave the European Union altogether – he who himself lives a fair proportion of the year in la belle France.

    Lawson likes the way of life in France. So do many of us, who seize every opportunity to relish it – unlike, it seems from recent opinion polls, the French themselves, who are not as content as we thought.

    It was admiration for the standards of the French and other European health systems that prompted New Labour to devote a fair proportion of the budget to modernising our own NHS. Further back, envy of what was perceived as superior economic performance was one of the main reasons why our nation applied to join what was then the Common Market.

    Whether they vote Conservative, Labour or otherwise, the British people are fundamentally conservative. In the 1975 referendum they always seemed likely to vote to stay in, rather than take a leap outside. And, whatever the opinion polls show now, I suspect that if this new proposed referendum ever takes place, there will once again be a vote for staying in. But what a lot of time would be wasted meanwhile!

    As older readers will know, I have always regarded the EU, for all its irritations, as what the authors of 1066 and All That would have described as a Good Thing. But the eurozone was a step too far, and it is to the credit of John Major that we "opted out" and to the credit of Gordon Brown that Tony Blair's pressure to join was resisted.

    The ultimate irony was the spectacle last week of David Cameron, in his capacity as this year's chairman of the G8, representing the EU in early discussions with President Obama about a proposed free trade area with the US, while back home his MPs and even ministers were calling for our complete withdrawal from the EU.

    As the president reminded Cameron, it is in the UK's best interests to remain in the EU. He could have added that membership of the EU and exemption from the eurozone gives us the best combination.

    Freedom from the constraints of the single currency has enabled us to secure a devaluation that, according to the latest estimates from the Office for Budget Responsibility, produced a gain in net trade (exports minus imports) equivalent to 2% of GDP between the fourth quarter of 2007 and the fourth quarter of 2010. Recent figures have not been so good, but have been distorted by the vagaries of production of North Sea oil. The governor of the Bank of England, Sir Mervyn King, pointed out last week that since 2007 and the devaluation, the trade deficit (excluding North Sea oil) has averaged 1.5% of GDP compared with 3% before.

    Such exchange rate adjustments have not been available to the suffering southern states of the eurozone vis-a-vis super-competitive Germany. Nor, for that matter, have they been available to France. Moreover, the weaker eurozone economies have been further debilitated by austerity programmes that derive partly from the Teutonic belief that suffering does lesser economies good and partly from the way the bond markets panicked until Mario Draghi, president of the European Central Bank, promised to do "whatever it takes" to keep the show on the road.

    The bond markets have now woken up to the deficiencies of the austerity model. The fundamental flaws of the way the policy operates in the eurozone are well explained in the latest weekly comment from Russell Jones and John Llewellyn of Llewellyn Consulting. Coming from analysts who, unusually for this country, have been broadly friendly towards the eurozone project, their questioning of the long-term sustainability of the eurozone, on account of the asymmetrical way the rules operate, ought to be taken seriously in Berlin and Frankfurt.

    What makes the British economic situation so frustrating is that we are not subject to the deflationary bias of the eurozone: George Osborne and his pals have simply imposed one of their own, inventing imaginary threats from the bond markets.

    The cuts in social security have been especially severe for the poorest in our society. Yet, as the Child Poverty Action Group points out, the poorest spend a larger proportion of their income than other groups, and the cuts have multiplier effects that hardly encourage that elusive recovery. The cuts are not only damaging in themselves: they are what Tim Nicholls of CPAG calls a "fiscal hindrance" to economic recovery.

    What a convenient diversion from the damage caused by the chancellor's economic strategy all this nonsense about leaving the EU is.


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    Even traditional bastions of austerity such as the IMF are starting to see the error of their ways. Only the chancellor, and Liberal Democrats 'bored by economics', continue to deny the truth

    Had Keynes not been cremated, the policies of austerity pursued in this country and the eurozone since 2010 would no doubt have had him turning in his grave.

    Thanks not least to Gordon Brown in 2008-09, the teachings of Keynes were briefly rediscovered. Unfortunately the international coordination initiated by Brown and endorsed by Presidents Obama and Sarkozy did not last. Mistaking a banking crisis for a fiscal crisis, European leaders – including, not least, George Osborne – went for premature fiscal retrenchment, with results that were all too accurately forecast by critics.

    In recent months even that traditional bastion of fiscal tightening, the International Monetary Fund, has seen the error of its ways. But Osborne ploughs on, with another round of spending cuts planned for later this month, while every day the media report the hardship and disruption to families caused by cuts in social security and housing benefits that are economically unnecessary.

    In his desperation, the chancellor has been economical with the actualité both about the IMF's general criticism and in particular about its views on how and when the nationalised banks RBS and Lloyds should be returned to the private sector. The IMF does not approve of a hasty return, with shares sold at a knockdown price, in the interest of giving an early and minor boost to the short-term budgetary position.

    In which context, the retiring governor of the Bank of England, Sir Mervyn King, is being accused by those who were at the coalface of rewriting history when recently claiming that he had a bigger and better plan for rescuing the banks than the one with which the Brown government came up.

    This is hotly disputed by both the Darling and the Brown camps, who are also bitter about the role King played in supporting the coalition's deficit reduction strategy.

    Now, there is nothing sinister in governors having confidential discussions with opposition leaders, whether or not they are in the process of forming a coalition. One recalls how Chancellor Kenneth Clarke was perfectly relaxed about letting the then governor, Eddie George, have discussions with the Brown-Balls team in the runup to the 1997 election.

    Indeed, it is one of the more attractive aspects of the unwritten British constitution that such discussions can take place. But an undoubted source of grievance between Labour and the governor has been the way that King – whose brief was, and continues to be, monetary policy – was seen to add fiscal policy to his armoury of advice.

    Not that Sir Mervyn had any responsibility for fiscal policy. But it is well known that privately, and to some extent publicly, he backed Osborne's ill-fated deficit reduction plan.

    Osborne himself has from time to time made it clear that, in adopting this strategy, he was influenced by the view that the fiscal tightening that took place in Sir Geoffrey Howe's 1981 budget led to an economic recovery. In taking this view, Osborne displayed an unfortunate misunderstanding of the strategy behind the 1981 budget, which involved a major shift in policy towards easing monetary policy and lowering the exchange rate.

    Even so, it is a myth that this rebalancing of policy led immediately to a recovery. Unemployment went on rising until 1986, and the UK was the only major OECD economy to experience a fall in gross domestic product in 1981. Moreover the eventual recovery depended on the abolition of credit controls.

    By 2010, when this eccentric coalition was formed, we had already experienced a sensational devaluation, and there was precious little scope for an expansionary monetary policy.

    The obvious thing to do – the lesson that Keynes had taught several generations, including those to which King and your correspondent belong – was to use fiscal policy as an expansionary device, to offset the contractionary effect of the depression. Instead, fiscal policy was, and still is, being used to aggravate those depressionary forces.

    In Five Days in May, his invaluable book on the negotiations that led to the Conservative-Liberal Democrat coalition, Lord Adonis establishes that, to their eternal discredit, Nick Clegg – of whom we are told "economics bores him" – and David Laws of the Liberal Democrats were gung-ho for this anti-Keynesian strategy. So, it saddens me to hear, was my old friend Chris Huhne, once a solid Keynesian.

    Although the nation is taking a long time to wake up to it, the result of the last election and the resulting coalition has had tragic consequences for our economy and our society. The IMF has now got the message. George Osborne remains, to use that dreadful but sometimes useful phrase, "in denial".

    Five Days in May: The Coalition and Beyond, Andrew Adonis, Biteback Publishing


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    The shadow chancellor's pledge to match coalition cuts smacks of a failure of nerve. Perhaps Ed Balls should re-read his celebrated Bloomberg speech of 2010

    Has the Labour party thrown in the towel? Are rightwing commentators correct in claiming that recent speeches by Ed Miliband and Ed Balls amount to surrender? Given the strength of Balls's compelling case against the coalition's austerity programme – from that prescient Bloomberg lecture in August 2010 onwards – the news that Labour intends to stick to the coalition's spending plans for 2015-16, essentially acquiescing in a policy it had successfully ridiculed, is disturbing, to put it mildly.

    That celebrated Bloomberg lecture drew reluctant admiration from no less a Conservative figure than Alexander "Boris" Johnson, who noted that George Osborne's warnings of a Greek-style sovereign debt crisis and cripplingly high interest rates proved wide of the mark. At the time Johnson, taking Balls seriously, expressed fears of a double-dip recession and called for the government to go easy on its austerity programme.

    We now seem to be witnessing a collective failure of nerve. At just the moment when even the International Monetary Fund is owning up to having got it wrong, Labour, fearful of entering the next election campaign being pilloried as the spending party, gives the impression of being trapped in the headlights. And just for good measure, those highly respected independent thinktanks, the Institute for Fiscal Studies and the Institute for Government, have lamely accepted that it is going to be a case of "austerity, austerity, austerity" for the remainder of the decade.

    One commentator has compared the situation to 1976, when the chancellor, Denis Healey, turned back at Heathrow rather than fly to an IMF meeting in Manila. The IMF people who mattered were closer to home, and there was an almighty crisis. Conservative commentators never tire of quoting the speech by prime minister Jim Callaghan to the Labour conference in the midst of that crisis, when he said that the days of spending one's way out of recession were gone. But, as Callaghan made clear in his memoirs, that speech was entirely tactical.

    The fact of the matter is that the only way an economy can emerge from depression is by spending its way out. And if the banking system has, to all intents and purposes, gone absent without leave, and the private sector is in the doldrums, then the public sector has to step in. Month by month, analysts grasp at straws whenever there is an economic indicator suggesting that there could possibly be the beginnings of an upturn. But in the early stages of a traditional economic recovery one should be looking for a sustained growth rate of two, three or four percent, until the huge amount of slack in the economy – idle plant, unused machinery, unemployed people desperate for work – is absorbed.

    Yet that most reputable of think-tanks, the National Institute of Economic and Social Research, which recently celebrated its 75th birthday, observes in its May review: "The absence of a sustained period of robust growth has plagued the UK economy since the end of the 'Great Recession' in the second quarter of 2009."

    That was the time when, with world trade collapsing at a rate of 20% per annum, G20 policymakers, with Gordon Brown at the helm, steered the world economy back on course, with the aid of a $1 trillion collective stimulus. Brown wanted to maintain the stimulus: the US government did, but the 2010 coalition did not, in the name of budgetary consolidation. The US budget position improved dramatically with economic growth while the British deficit, in the absence of decent growth, continues to be an embarrassment. As Niesr notes about this country: "Economic performance is perhaps better described as 'stagnant'." The coalition is presiding over the worst recovery ever.

    In his 2010 speech, Balls rightly said the deficit and level of national debt must be tackled eventually, "but only once growth is fully secured and over a markedly longer period than George Osborne is currently planning".

    Growth at this stage is manifestly not fully secured. The coalition is planning drastic cuts for 2015-16 without having the faintest idea whether the economy will have emerged from depression. For Labour to commit itself to acceptance of those cuts at this stage is economically unwise. Some political correspondents may salute the Opposition for heading off Conservative criticism, and listening to ill-informed focus groups, but this is all spin.

    As Balls said himself in 2010 of the banking crisis, the country "has been through a once-in-a-generation event like the second world war … it was possible for our postwar government to have the wisdom and foresight to recognise the benefits of a slower, steadier approach to reducing an even bigger debt."

    The temptation for an electorate that has heard Labour attack austerity for three years, and now learns about what appears to be a major U-turn, is to ask: so what is the difference between the parties?

    Well, there is a difference. It was reported a few weeks ago that Labour had abandoned its plan to cut VAT. What Ed Balls actually said in his speech on 3 June was: "Today, with growth prospects still very uncertain … a temporary VAT cut now is still the right prescription … "

    Unfortunately, Labour is not in a position to make a temporary VAT cut. Without a major boost to demand, the situation in 2015-16 could still be one of a barely perceptible recovery from depression – which makes the adoption of plans for further spending cuts look all the more eccentric.


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    It is not 1940s austerity under a Labour government that Ed Miliband should be invoking but 1950s recovery

    'David Cameron genuinely tried to detoxify the Conservative party in the belief that his right wing had nowhere else to go … then along came Ukip." Thus spoke a senior Conservative figure recently, on the eve of Labour's truly amazing U-turn on economic policy in general and austerity in particular.

    The speaker was one of many traditional Conservatives who were bemoaning the way their party, still suffering the fallout from rightwing resentment at the defenestration of Margaret Thatcher 23 years ago, seemed to be tearing itself apart. I lost count of the number of Tories who complained that "divided parties do not win elections".

    Meanwhile, they noted with reluctant admiration how perceptive from the outlet had been the analysis by shadow chancellor Ed Balls of the weaknesses of George Osborne's economic strategy. They might not like Ed Balls; indeed, the shadow chancellor has a remarkable ability to put Conservatives' backs up; but how right he had been in predicting the failure of a strategy that has been dubbed with the oxymoron "expansionary fiscal contraction".

    Before we go any further, it is worth addressing those critics who argue that the austerity policy is not the cause of the crisis. The answer is simple: those, alas all too few, of us who go on about the austerity policy are perfectly aware that the roots of the depression lay, and lie, with the failure of the financial system. The point is that programmes of austerity in the UK and the eurozone have aggravated that crisis and been almost tailormade to prevent a recovery.

    Indeed, there is an impressive weight of evidence that recovery had begun in 2010, thanks to the collective impact of fiscal and monetary measures known as "the stimulus", but the recovery was aborted by the premature abandonment of the fiscal side of the stimulus. Indeed, pace the incoming governor of the Bank of England, Mark Carney, there is a limit to what monetary policy can do, as his central banking colleagues around the world are beginning to emphasise – a limit recognised decades ago by John Maynard Keynes, who emphasised the importance of fiscal policy.

    Fiscal policy involves changes in the levels of taxation and public spending, in order to stimulate a depressed economy or to cool down one that is overheating. That policymakers may have ignored the "slowing down" side of fiscal policy is no argument against what should be a fitting response to depression, namely fiscal expansion.

    The perversity of policies adopted in the UK and eurozone is that, far from going for fiscal expansion, the likes of George Osborne have deliberately opted for contraction.

    It is certainly easy to point out that even in this objective they are missing their targets. The point is that they have not opted for conscious expansion. They talk about the importance of growth but do nothing to stimulate it. Indeed, perversely, they do the reverse. Hence, after the sensational fiscal tightening of the coalition years, last week Osborne piled on the pressure with yet more planned cuts.

    Yet senior Labour party members, instead of capitalising on their success in attacking the government's failed strategy, choose to hoist the white flag and accept the broad thrust of the chancellor's policy, quibbling over the details, and even then sounding as though they are terrified of saying anything that might upset the rightwing press.

    They call this the need for credibility. Do they not see that in the very act of seeking credibility they are losing it?

    A veteran of many past Labour efforts at seeking credibility, Roy Hattersley, makes an appeal for sanity in a new book (The Socialist Way Social Democracy in Contemporary Britain, I B Tauris). Labour has a choice, he says: "It can grub about in search of policies which will attract the swing voters and lose the next general election or it can become again an indisputable party of principle and win."

    This economy, with masses of spare industrial and service capacity, and millions who are either officially unemployed or in work but underemployed, is crying out for a serious economic recovery programme. There are hundreds of thousands of houses or flats to be built, and there is a huge opportunity for investment in our public infrastructure – the infrastructure that the most rightwing entrepreneur requires in order to conduct private business.

    Labour should be planning tens of billions of spending, in an economy that is running up to 15% below what historical trends indicate is possible. It is not 1940s austerity under a Labour government that Ed Miliband should be evoking but 1950s recovery.

    The defence of Labour's U-turn is that "this is all about politics". Yet, as we were reminded by the Treasury's chief economic adviser, Dave Ramsden, last week, in a lecture at the Mile End Group, Queen Mary, University of London, it was because Balls rightly argued that the decision about entering the eurozone should be based on economics, not politics, that Gordon Brown instituted an enquiry based on what were known as "the five tests".

    Ramsden was the key civil servant in charge of that exercise, and he made clear in his lecture on the 10th anniversary of the unveiling of the results that the result was not predetermined by Brown or Balls but was a genuine analysis.

    Most people think Labour got it right putting the economic case above the political. It saddens me that they seem to be abandoning their economic case about austerity for what they seem to think is a short-term political advantage – which to my mind sounds dubious anyway.


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    Good weather has encouraged the rightwing press to forecast recovery, but we still haven't got back to 2008 conditions

    Many years ago I spotted a correlation (a favourite word among economists) between a certain financial commentator's daily pronouncements on the state of the economy and the weather. When it was sunny, the news was always being interpreted as being good; when it was miserable there appeared to be a sudden downturn in the economic outlook.

    This came back to me during the recent spell of hot weather: there seems to have been an outburst of optimism about the economy, especially in the rightwing press. It has all been worth it, we are told by the Treasury: the economy is moving "from rescue to recovery". Even the International Monetary Fund is revising its UK forecasts upwards, and the newspapers hint that the IMF chief economist Olivier Blanchard was quite wrong a few months ago to call for a British "Plan B".

    Now, it was Samuel Beckett who is supposed to have said when asked by a friend if good weather made him glad to be alive: "I wouldn't go as far as that." As one who is glad to be alive in fair weather and foul, I have to say that I would still not risk betting on a sustained recovery and I should never accept the idea that it has all been worth it. It is, for example, stretching several points for the chancellor to claim that he has "rescued" the economy when for several years now he has been giving it the 19th century leeching treatment.

    The message from monthly and quarterly statistics and regular surveys of business opinion can be interpreted in many ways. For instance, economists, especially Americans, like to "annualise" new figures: if one does that to the latest estimate from the National Institute of Economic and Social Research it is, in theory, time, if not for rejoicing, then certainly for breathing a massive sigh of relief.

    Thus the NIESR estimates that in the April-June quarter gross domestic product grew by 0.6%, equivalent to an annual rate of about 2.5%. If this could be sustained, then one could begin to talk seriously of a recovery, although, by past standards it would hardly be sensational. During a typical recovery in previous decades the British economy would grow for a time at 3-4% per annum, before settling down to the long-run average of close to 2.5%. (Figures in real terms, after taking account of inflation.)

    The NIESR's reasonable definition of recession is "a period when output is falling or receding". At the moment it looks as though the recession is over, although, with the banking system still so fragile, and the eurozone far from out of the woods, all hell could yet break loose. But, even on the assumption that all hell does not break loose, and there is a sluggish recovery from now on, the chances of even the 2.5% annualised pace of April-June being maintained are very slim, and outside the sights of most forecasters. As Ed Balls has pointed out, the revised IMF forecast for the UK this year, at 0.9% growth year-on-year (against 0.7% forecast in April) is still below the 1% it expected at the turn of the year.

    The growth in the second quarter was largely in services, with manufacturing output, on which we depend for almost two-thirds of our export earnings, actually running lower than a year ago. The NIESR uses the term "depression" to describe a situation where GDP is below its previous peak; it expects, on current trends, that the peak reached in 2008 will not be regained, at the earliest, until 2015.

    Of course 2015 will be an election year. The chancellor can be confidently expected to claim that he has worked wonders when all that will have been achieved is a return to the position two years before he took office.

    It is a lamentable record: the worst recovery ever, under a chancellor who talks about growth and enterprise, and under policies which are causing unnecessary hardship to many of the poorest in our nation.

    Of course, this depression is taking place at a much higher level of general living standards than in the terrible depression of the early 1930s. And to look around central London, parts of which give the impression that the population is engaged in one perpetual street party, you could be forgiven for thinking that critics such as myself are making it up.

    But we are not. The cuts are at their most savage in the way that local authorities are being forced by central government to cut back on essential services, and not least in the way that years of neglect, by both major parties, are showing up in the housing crisis. This government's bedroom tax is arguably "the unkindest cut of all".

    The government is also culpable for its sluggishness in recognising the opportunity provided by low long-term interest rates for a major infrastructure programme. We are three years into this coalition and it is only just waking up to the infrastructure crisis, having meanwhile aggravated it with savage cuts in investment.

    Our cheeky chancellor rationalises the position by claiming that he has "created the space" for infrastructure spending. But as the economist John Llewellyn points out: "If we had had the infrastructure spending, the space would not be there."

    Do not be fooled. There may or may not be a modest economic recovery from now on, but the strategy of fiscal retrenchment to make space for a private sector recovery has been a lamentable failure, at considerable, and needless, social cost.


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    The pressure of economic bad news is becoming so intense that banker is turning publicly upon banker – and even supposed panaceas such as rate-setting independence are in question

    The outgoing governor of the Bank of England indulges in thinly disguised criticism of the views of his nominated successor, the Canadian Mark Carney. A former member of the Bank's monetary policy committee – the American Adam Posen – conducts a manifestly undisguised assault on the centralised way in which Sir Mervyn King allegedly runs the Bank, having already on many occasions differed from him on policy.

    And Jens Weidmann, president of Germany's Bundesbank, says that Stephen King, the chief economist at HSBC, is "perhaps right" in forecasting the demise of that fashionable financial panacea of recent decades – central bank independence. Weidmann cites political interference with the independence of the Bank of Japan, among others.

    Yes, central banks are under attack: and central bankers are taking pot-shots at one another.

    King, who did more than any other British official to promulgate the adoption of "inflation-targeting", made an impassioned plea last week for its preservation, including, in his speech in Belfast, a history of all those inflationary problems of the 1970s, and the long struggle to bring inflation down to tolerable rates.

    In saying "tolerable" I am begging the question; but economic history shows that a moderate amount of inflation is a necessary condition for growth. Rip-roaring inflation is certainly not, and is socially destructive as well. But deflation – falling prices – is inimical to growth, as the recent experience of Japan has demonstrated.

    In recent years King's position has been an Augustinian one: the necessity of announcing inflation targets, but the desirability of not hitting them too soon, if at all.

    By contrast, Carney has revived the idea of a target for nominal gross domestic product, a measure that is the sum of inflation and real growth.

    People seem to have forgotten that, under chancellor Nigel Lawson, the Thatcher government tried targeting "money GDP" with pretty poor results. Carney could do well to study that excellent book The Economy Under Mrs Thatcher, 1979-1990, by the economist Christopher Johnson (who, sadly, died just before Christmas). As Johnson wrote, with the money supply statistics all over the place, "the use of money GDP created further confusion and was ineffective in controlling either real growth or inflation".

    Another book worthy of Carney's attention is Inside The Bank of England: Memoirs of Christopher Dow, Chief Economist 1973-84, which has been long delayed, but whose publication last week turns out to be well timed.

    Dow, who was on the frontlines when inflation was serious (25% in 1975) kept a diary – against the wishes of the governor of the time, Gordon Richardson, who, I am pretty certain, would have granted him a posthumous pardon if he had read this remarkable book. (That is, if they are not already discussing it up there in the great central bankers' resting parlour in the sky.)

    Richardson was governor from 1973 to 1983. He arrived at the Bank shortly after Dow had been appointed by the previous governor, Leslie O'Brien, and worked closely with Dow throughout, one of the latter's self-appointed tasks being to try to keep Richardson's flirtations with monetarism, and concerns about public sector borrowing, within reasonable bounds.

    In their introduction to the memoirs, the economists Graham Hacche and Christopher Taylor, who worked for Dow, note that "the main worries for UK watchers when Dow entered the Bank were slower trend productivity growth than in other major economies, persistent balance of payment problems, and an upward trend in inflation".

    Plus ça change, although, as noted, inflation then was in another league. But, as now, it was a time of economic crisis – welcome to the party, Mr Carney – and, in addition to concerns about economic policy, Richardson and Dow spent much of their time trying to reform the Bank, a task which, the chancellor and the Treasury have made no secret about, is due to be embarked upon all over again under the leadership of Carney.

    In a foreword to the book, Sir Kit McMahon, former deputy governor, says of the Bank in the mid-1970s: "The Bank's organisation was ancient and creaking." Not to put too fine a point upon it, that is what the Treasury thought when appointing Carney.

    But if the Treasury thinks that by tinkering with monetary policy Carney will help it out of a fiscal hole, it may have another think coming. A sound Keynesian, Dow thought that the management of aggregate demand, with the object of maintaining high output and employment, depended mainly on fiscal policy. A contractionary fiscal policy – especially one of trying to cut the deficit at a time of depression – is hardly calculated to bring us out of depression, as a succession of GDP figures, including the latest 0.3% decline, have shown.

    Thus, as Gordon Brown wrote recently in an article for Reuters: "The policy void today lies less in the weaknesses of national central bank leadership than in the reluctance of national governments to contemplate global leadership." Brown demonstrated such leadership in 2008-09, both in his contribution to the rescue of the banking system and in coordinating the G20 economic stimulus in April 2009. Then came the austerity merchants, to, literally, devastating effect.


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    The Bank of England is trying to summon growth. But unless there is a change in fiscal policy, will it come?

    David Cameron's problem is that, although he regards himself as the "heir to Blair", he did not have someone of the political courage and clout of Neil Kinnock to detoxify his party before he took over.

    The Conservatives, especially under the chancellorship of George Osborne, are coming across as the worst of the old-fashioned, rightwing, bash-the-poor party that the likes of my late "wet" Tory friend Lord Gilmour hoped had been banished for ever.

    For those of us Keynesians who think that it is not a sensible policy to cut public spending when the private sector is depressed – thereby adding to the factors inhibiting economic recovery – the present stance of the government is disturbing enough. But many of us, while we find present policies both intellectually offensive and emotionally repellent, do not suffer personally from the effects. Not so the poor and the disabled, who find their benefits being reduced in the name of austerity policies they are told are necessary because of the deficit and the supposed need to pay down the debt.

    At a time like this, it is very important not to pay down the debt. It is what keeps us going, preventing an even worse depression. Unfortunately, so desperate is our beleaguered prime minister that he recently committed a classic "terminological inexactitude" by proclaiming in a party political broadcast that the government was paying down the debt when it manifestly was not.

    It was perfectly fair, under the rules of love and politics, to complain that the deficit was attributable to the previous government, even though the fact is that it was largely the result of the financial crisis that afflicted most western economies, and only partly due to the specific policies of Gordon Brown. But to claim that public sector debt is falling when it is not is a step too far by a plainly rattled prime minister.

    One country that was less affected than most by banking crisis was Canada. This seems to be at least one of the reasons why our chancellor was so keen to recruit its central bank governor, Mark Carney, to succeed Mervyn King at the Bank of England.

    Now, regular readers may recall that I was pretty critical before Christmas of the way in which Osborne broke his own rules about the procedure for appointing King's successor. But it has to be said that Carney put up a reasonable performance in front of the Treasury select committee last week.

    Given that, in the arcane world of central banking, Carney is considered "box office", I knew that there would be a queue to get into the hearing, but I did not get where I am today by queuing, so I decided to watch it all – or most of it; there are limits – on television. Carney himself took a similar view, and was 25 minutes late for his own hearing.

    I say "reasonable" performance, and reasonable was the operative word, frequently used by the urbane committee chairman, Andrew Tyrie, and Carney himself. The other great theme was flexibility. When asked about his putative liking for targeting nominal gross domestic product (the sum of inflation and real growth), Carney gave the impression that he had rowed back from his earlier position, acknowledging there were measurement and operational problems with nominal GDP as a target for monetary policy.

    Carney believes it is important that the public should understand what monetary authorities are up to, and it doesn't help if they are not quite sure themselves. However, in understanding his position, it is helpful to know that one thing Carney does emphasise is that, in the UK, nominal GDP is now almost 15% below what previous trends suggest it would have been in the absence of the crisis. In other words, there is ample scope for a major effort at expansionary economic policies in order to lift this beleaguered economy of ours out of depression.

    Carney emerges as coming from what that great Canadian political analyst Colin Campbell describes as the school of "mainstream Bernanke". He believes in continuing with a flexible inflation target – that is, an Augustinian approach to financial virtue – and is emphatically worried, like Ben Bernanke, the US Federal Reserve chairman, about the high level of unemployment and the danger that, if unemployment persists for too long, the victims really will live up to the "unemployable" label so favoured by rightwing Neanderthals.

    Now, it is all very well the Bank of England trying to stimulate growth. But certain words from Henry IV Part 1 come to mind: these great technocrats may be able to "call spirits from the vasty deep", but "will they come when you do call for them?"

    In a recent speech to the Mile End Group at Queen Mary, University of London, Sir Nicholas Macpherson, permanent secretary to the Treasury, quoted his predecessor Lord Bridges on the Treasury's efforts since 1941 to make "a conscious attempt to use fiscal measures to hold the balance between the money in people's pockets and what they could buy with it".

    It is not clear to me that, with real wages depressed, and budgetary cuts on top, Osborne's Treasury is fulfilling this duty. Fiscal policy is counteracting monetary policy. Carney evidently believes in the power of exhortation. But when he summons the spirits from the deep, will they come if there is no dramatic change in fiscal policy? I have my doubts.


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