Wednesday, April 14, 2010

Economic lessons from across the pond

Although the US is held out as the most affected by the current recession, apparently many of the same problems apply to the UK as well.

Martin Wolf, the oft-honored dean of British economics correspondents, went straight to the point in his column this morning in the FT (emphasis mine):

How ill is the UK economy? What are the challenges for economic policy? These questions seem to me to be far more urgent than before any general election since 1979, when Margaret Thatcher came to power.

The one point on which everybody agrees is over the depth of the fiscal hole: the government is borrowing a pound for every four it spends. But nobody wants to discuss what might need to be done. This is not surprising: today’s fiscal deficits exceed those of any previous period in peacetime.
The rest of his column is about the need to reign in deficit spending before deficits can no longer be financed, while stimulating trade and investment: he promises answers in his next column.

Wolf is relatively restrained in his criticism of current British deficit spending compared to another FT columnist, entrepreneur-turned-equity-investor Luke Johnson. In the same issue of the dead tree paper, Johnson began his column:
Should entrepreneurs get involved in politics? In general I think not, but last week I added my name to a list of business executives who objected to increased taxes on jobs in Britain – which the Labour government has proposed. The list was compiled by the Conservatives, who are locked in a titanic struggle to win the UK election on May 6. I participated because the stakes could not be higher.

Unquestionably this is no ordinary election. Britain has suffered 13 years of Labour rule, and the country is in a desperate state. It is like a company slithering towards bankruptcy. And, like any business that has to be turned round, there is one absolute rule to fix the mess: change the management. If there is no transformation at the top, then I fear we could become a bigger version of Argentina in 2001.

It is hard to comprehend how much damage Labour has done to our economic prospects, but I suppose that, like a frog in simmering water, if the heat is increased gradually, you almost fail to notice the pain – until it’s too late. The most damning statistic is the following: the state’s percentage of gross domestic product in Britain has risen from about 38 per cent in 1997 to perhaps 52 per cent today. Funding this vast amount of public largesse means the UK borrows 25 per cent of all its state spending. Clearly the country is living beyond its means.
Lest there be any doubt about where he stands, he concludes his column:
In a capitalist economy, investors and entrepreneurs make the entire system function. If the state alienates them to an excessive degree, then they opt out, and jobs and tax revenues evaporate. Labour is an entirely fraudulent organisation that pretends to believe in business, then buries it in bureaucracy and tax. Five more years of Gordon Brown would leave Britain an economic wasteland.

Anyone who even begins to understand enterprise or economics should see that a new government with fresh leadership and a working majority must be given power next month. The alternative of a hung parliament will lead to capital flight, a slumping currency, rising inflation, higher interest rates, higher unemployment, a gilt strike, runs on British banks, and a crisis perhaps as bad as the rolling collapse in Greece.

So although I am neither a donor nor member of the Conservative party, nor do I have any party political ambitions, on this occasion I feel passionately that Labour must be thrown from office and a government formed with an adequate mandate – because more Labour is a form of national suicide.
While this blog does not advocate any specific candidate or party — on either side of the pond — I second Johnson’s indictment of the eventual consequences of indefinite deficit spending and the crowding out (particularly for entrepreneurs) caused by the massive increase in the size and cost of government.

The latest in outsourced economic criticism, instituted as a cost saving measure in these difficult financial times.


davert said...

To be fair, deficit hawks like this guy only show up when Labour is in charge. If the Tories are in charge, deficits are unimportant. You've seen the same with guys who defended deficits under Bush (even attacked Clinton's surplus) who suddenly decided deficits are evil under Obama. The idea that Labour is inherently evil is ... well, it invalidates everything else he says.

Joel West said...

It's possible someone got religion, with deficit spending now at levels unprecedented for peacetime. So in this particular case, I’ll wait and see whether (as you suggest) his anger at deficits varies more with who's doing the spending and less with how much spending there is.

I do agree (at least in part) with your general point. Democrats are keen on balanced budgets if it means tax increases (as in the Clinton years). Republicans claim to care about deficits — unless it means tax increases — and never seem to have the political will (or political power) to bring real spending cuts. (Exhibit A: Bush 43).

Current spending is unsustainable, but it‘s unclear how it will end: massive spending cuts — at least back to where we were 2 years ago — massive tax increases, or inflating the currency to abrogate the debt all or in part.