Taking a leaf out of Simon Cowell’s book – an immodest boast: a couple of days ago the Guardian invited a range of economists/commentators to give a zero to 10 rating for ‘green shoots’ in the economy – in effect to revise our ratings produced in the Spring. I am the only contributor to argue for a zero rating – Ruth Lea of the Arbuthnot Banking Group improves her rating to 2.5 – up from 1. Bang on time, the GDP numbers appeared – and ‘unexpectedly’ (for the Danni Minogue school of economists) GDP is down again – and this is now the longest recession since records began in 1955 – which goes some way to explaining the rise of the BNP.
My comment posted below:
“My rating for economic recovery has not changed much – and continues to hover around zero. This might seem odd given a slight (but meaningless) upturn in GDP, the stock market bubble, and swelling bank bonuses. And odd too, since a falling pound boosts exports and allows Russian oligarchs and other holders of euros to push up house prices by snapping up scarce London properties.
My pessimism persists because, despite the windfall gains provided by the Bank of England and taxpayers, the balance sheets of banks remain very fragile – making bonus profligacy both financially and morally questionable. Rising mortgage and other defaults will hurt the City of London as bankruptcies and unemployment worsen.
Domestic demand continues to fall, as banks tighten lending to consumers and companies, and as the latter pay down excessive debts. Things will be made worse as the environmentally crass “cash for clunkers” boost ends, and as VAT rises in January. The lower pound ought to help us balance this fall by boosting exports. But permanent output losses and the stalling of bank lending in both our major trading partners – the US and EU – mean there will be few customers for British goods. I am also not confident that a rising Asia can compensate for these losses – in time.
The growing political pressure to exacerbate the crisis by treating the government’s budget as if it were a simple household budget and forcing it to balance worries me most. Politicians have forgotten that when government debt was five times what it is today – 250% of GDP in 1945 – a Labour government began to spend: by investing in the NHS, public housing and education. Miraculously (for economic orthodoxy) government debt fell. In other words, the government budget is not at all like a household budget – because government spending generates tax revenues. The economy will only recover when government investment compensates for a collapse in private investment. Right now that spending could take the form of urgent measures needed to deal with climate change – for example property insulation, flood defences and energy efficiency. Instead of marching into an election clouded by grim unemployment numbers, the government could be mobilising a “carbon army of green-collar workers”. Sadly the grip of economic orthodoxy on the public imagination is such that we are about to trample all over feeble green shoots, and sink into the quagmire of depression.”