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Some economic benefits β such as a strong currency β can go too far and cause problems of their own. But there is no danger of such excess in the current crop of financial indicators
Many years ago a Treasury friend, Mike Mercer, and I coined a word with an ancient Greek derivation. It has not yet made it to the reference books, but one lives in hope.
The word was “euphobia”, or “fear of good news”. The context was the way in which, after the dramatic sterling crisis of 1976, from which the Labour government never quite recovered, the pound became much too strong for the international competitiveness of British industry. A strong pound seemed like good news; but there was such a thing as excessive strength, leading, paradoxically, to weakness.
It is doubtful whether there is much incidence of euphobia in modern Greece at the moment. The latest rescue operation seems to be generally regarded not so much as helping to keep the show on the road as merely postponing a catastrophe.
Closer to home, however, there have been elements of good news that are being talked up by those with a vested interest in doing so. But the news is certainly not so overwhelming as to merit a bout of euphobia. As Sir Mervyn King, governor of the Bank of England, recently commented: “Although some recent business surveys suggest a brighter picture for activityβ¦ the fiscal consolidation and tight credit conditions at home, and the weakness of our major overseas trading partners, are acting as a drag on growth.”
Always to be relied upon for a good turn of phrase, the governor has predicted a “zigzag” pattern of growth this year, warning that any enthusiasm about a possible upturn this quarter β after the October-December contraction β is unlikely to be sustained. The Bank keeps telling us that things will improve as the reduction in the rate of inflation eases the squeeze on purchasing power. But the fact is that there is still a squeeze. Indeed, reports from the Bank’s impassive network of regional agents suggest that the economy may still, in Ed Balls’s phrase, be “flatlining”.
The Bank says one of the factors contributing to a lower inflation rate is that from now on “the increase in the standard rate of VAT a year ago drops out of the calculation. In fact, last year’s increase in VAT has dropped into the equation: the monthly inflation figure is being compared with figures that were boosted by the January 2011 increase in VAT. The baseline for the year-on-year comparison is higher, therefore the increase, ceteris paribus, is less.
The Bank has faced a certain amount of criticism, but it has been right to make the inflation target of 2% a very distant one. The overwhelming priority is to try to do something about the level of unemployment, especially among the young; acting precipitately to tighten monetary policy during a depression would have been a major mistake. This said, I have every sympathy with those many people whose pensions are being reduced to pitifully small levels by the impact of easy money on annuity rates. I have spent most of my career avoiding the thorny subject of pensions, but there must be a better way of calculating them after a long working life.
The squeeze on real incomes has been caused not only by the rise in VAT, but also by the impact of the earlier devaluation of the pound, and higher energy prices. What is more, if there is a conflict between Israel and Iran, all bets are off when it comes to energy prices and the possibility of further reductions in the inflation rate.
Thanks to the Obama administration’s fiscal stimulus, output in the US is already back to pre-recession levels, whereas it looks as though the Bank does not expect Britain to be in this position until 2013 β to which I am tempted to add “if then”.
While not going as far as President Reagan, who once joked “I don’t worry about the deficit β it’s big enough to take care of itself”, I do think we should not lose sight of the salient fact: the main culprits were the banks, whose preposterous “business model” misled the Treasury, the Bank and the Brown government into believing there was an endless flow of revenue coming from the financial sector. Not to put too fine a point upon it, the financial sector turned out to be a liability, not an asset.
As the Bank’s Andrew Haldane says in an article (“The Doom Loop” in the London Review of Books): “The evolution of banking … has satisfied the immediate demands of shareholders and managers, but has short-changed everyone else.” He urges action to curb “the profit-seeking incentives of the equity minority”, noting that β how’s this for short-termism? β “average holding periods for US and UK banks’ shares fell from around three years in 1998 to around three months by 2008″.
Robert Neild, emeritus professor of economics at Cambridge University, has conducted an exhaustive historical study of the course of the national debt. He notes in the Royal Economics Society’s January newsletter: “Britain, a leader in the management of government finances, has maintained a national debt without default for more than three centuries.” The ratio of debt has often been far higher than today, and “since 1970 the debt-to-GDP ratio has not changed greatly”. Figures from Eurostat showed the UK with debt at 80% of GDP in 2010, against 82% in France and 83% in Germany.
Neild concludes that the chancellor has been unnecessarily alarmist, with the kind of counterproductive effects produced by similar policies in the 1930s. As Dr Anthony Eisinger of the Royal College of Physicians commented last week: “Why are governments so frightened of conducting a U-turn? If doctors find they have made a mistake, they don’t persevere with a diagnosis that will kill the patient.”