As planned penury spreads around Europe, George Osborne is now claiming that deficit cuts are part of the stimulus
The governor of the Bank of England expressed surprise some months ago that the public was not angrier about the general state of economic affairs. Whether the demonstrations in London last Thursday will help the newly knighted Mervyn King quell that feeling is an open question, however. For I fear that what we may be witnessing in this country is that time-honoured political strategem, divide and rule.
By rights, at least half the country ought to be up in arms about the false prospectus on which both members of this strange coalition fought last year's election. (Was it only last year? They seem to have been with us an unconscionably long time already. ) But the government and certain elements of the media seem to have been quite successful at stirring up resentment towards the recipients of public sector pensions, grossly exaggerating both the average size of such pensions and the cost to the taxpayer (members of the public sector pay taxes, too), and giving the impression that it is the fault of the public sector pensioner that his or her stipend may be greater than their counterparts in the private sector, as if the financial sector's gross mismanagement of private-sector pensions had nothing to do with it.
Yes, it was the financial sector which, before precipitating the worst recession of most of our lifetimes, also brought the great pensions disaster. But it is the poor what gets the blame, and the rightwing press is more concerned about the occasional welfare cheat than it is about the fact that bankers whose businesses have been temporarily nationalised are paying themselves bonuses.
It is now a commonplace that the gap between the wealth and earnings of rich and poor has become enormous in the past 30 years, both in Britain and the US, but this does not stop the Republicans and the British right from demanding tax cuts for themselves while imposing austerity on the rest. Last week I heard a veteran of the international diplomatic scene, whom I had always regarded as rather hawkish, express sympathy in private for the Greek populace, and harsh words for shipping magnates and other rich Greek tax dodgers. But generally austerity is now the watchword, most obviously in Greece, but also in much of the rest of Europe, not least Spain, Portugal, Ireland and Italy.
The author John Le Carr� has a rather better phrase for what this government is up to: "Planned penury."
In this divide and rule world, we are not all in it together. The penury is being carefully planned, and Giulio Tremonti, the Italian finance minister, even maintains that "deficit spending is in the archives".
Signor Tremonti is a consummate politician. I only hope that, like James Callaghan, our prime minister during the British negotiations with the International Monetary Fund in 1976, he is merely being tactical. To appease the financial markets, Callaghan said the days were gone when countries could spend their way out of recession. But as a matter of fact, there is no way known to man or woman of emerging from recession other than by spending, and if the private sector will not do it, the public sector must.
The problem that has become more and more obvious is that what became known as the "stimulus" ? provided by a fiscal boost and monetary easing ? was more successful at arresting the decline than in precipitating a marked economic recovery.
Our present chancellor has wickedly redefined the meaning of stimulus, by saying in his recent Mansion House speech: "We have a deficit larger than Portugal, but virtually the same interest rates as Germany. That is the huge stimulus our plan delivers to the economy. And abandoning our deficit reduction plan would take that stimulus away." So the cuts are an essential part of the stimulus, according to George Osborne. Well, you could have fooled me.
You could also have fooled Trevor Greetham, director of asset allocation at Fidelity Fund Management, who pointed out at an investment debate last week that, for all the claims that these deficits are largely structural, we do not know how much unemployment is cyclical and how much is structural. He said: "If you tighten policy too soon on the basis that it is all structural, you end up with this cohort of people who are unskilled. I would rather overdo it than underdo it: keep going until you have wage inflation and then tighten."
This was in response to Sir John Gieve, former deputy governor of the Bank of England, and the present regime at the Bank for International Settlements (BIS), who are calling for monetary tightening now.
(I must say that when I heard about the BIS report I could not help recalling that the BIS was originally set up to administer German reparations between the wars. It was founded in austerity. Does it want more ?)
But I liked the observation by Gieve that "what was seen as an emergency to prevent meltdown [ie the low interest rate stimulus, not Osborne's] has become a policy". However, I think the general economic situation remains so grave that it should remain the policy.
It is easy enough to tighten policy when you have a runaway boom. The problem is that we have nothing like that. With so much deleveraging going on, governments and central banks have to be the levers. If every economic actor cuts back the result is ? well, to mix metaphors and resort to a fashionable cliche, meltdown.
Bradford Bulls Mervyn King Tony Cottee Documentary Celestine Babayaro BBC
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