A tough spot

First of all, forget the polls. It’s not that they don’t matter, it’s that they’re less important than events in deciding how popular the government is.

In the last six months, we’ve seen the Government be fifteen to twenty points behind in the polls, get back to virtually even to fifteen then quickly fall fifteen to twenty points behind again. Were either the initial decline, subsequent recovery or the following decline foreseeable by examining the entrails of the polls themselves?

I argue not.  Looking at the polls tells you only what is happening now, not what is going to happen or what might happen in the future. For that you have to look at the impact of events, crises and decisions leaders take.

That’s where I want to focus.   For a start…

…personally, I didn’t get too excited by our polling recovery last November. I was pleased it happened, of course but wasn’t convinced it could last. This was because what we were seeing was support for the governments action in stopping a banking collapse and keeping the economy going.

Despite wide support for those decisions, and the Tory policy being utterly risible, we knew that the economy was going to be hard for several months, that there would be a sustained period of bad economic news (increased unemployment, bankruptcies and falling house prices) to come.

In those circumstances, the credit you get because you stopped things from being even worse is bound to run out pretty quickly. So it’s proved. I therefore have a surprising degree of sang froid abut the current numbers. It’s what I expect. When the countries in recession people get annoyed with the government. Fair enough.

The question is not what we’re going to do about being unpopular, but about what we do about the recession. Get that right and the polling numbers will probably look after themselves (with a little help from skilled media communicators).  Get the recession wrong, and no amount of political prognostication will save us.

So, despite being a tedious political hack,  I’m not worried about the poll numbers. I’m worried about the inflation numbers, the unemployment numbers and the export numbers. I very much hope the cabinet and our MPs share this philosophy.

As a result, the question I keep asking is are we going in the right direction economically as a government?

Broadly, yes. Despite all the sound and fury over bank bonuses and Lloyds, I don’t think there’s much serious argument that allowing Lloyds and HBOS to merge and keep their debt private ws a worse idea than nationalising HBOS, which was the alternative.

We’re still seeing the aftershocks of a collapse in asset value on Banks, but the Bank of England seems to be doing a lot to ensure the banks are able to lend if they wish. They’re not lending though, and I want to come back to why in a moment.

Interest rate policy is sound, if increasingly irrelevant. The VAT cut my be mocked by conservative politicians, but as the credit crisis turns into a global demand crisis, it’s doing a valuable service in increasing consumer purchasing power.

I’m also glad the pounds been free to depreciate. I know this is heresy, but when export markets are collapsing and deflation is a risk,  in the short term I’d rather have a currency that made my products cheaper and imports more expensive than a currency that made imports cheaper and exports expensive.

Yet things are still pretty awful.

Companies are complaining that they can’t get their existing lending refinanced or rolled over. Large companies and their suppliers are finding markets drying up and customers rare. If banks have the money to lend again, it’s less clear which businesses would be a good idea to lend to.

After all, who is sensibly thinking of investing in major capital expansion now? Instead, lending seems to be needed for short term tiding over purposes – keeping factories open and workers employed during a sudden and shocking decline in sales, or because businesses have built their business models on low cost credit availability and are really struggling when the cost of credit rises a little. Supporting these businesses is not in any meaningful term providing commercial credit – it’s a stimulus by another name.

Which is why I keep wondering to what extent  this now a credit crisis, and to what extent it is a demand crisis.My attitude is that it is fundamentally now the latter, and the role of government in the short term has to be to do all it can to stimulate domestic demand and encourage others to do the same.

If we look at what’s happened over the last eighteen month you can estimate that global asset values have fallen some twenty trillion dollars. As far as I can tell, that means the global economy is twenty trillion dollars poorer than it was a year or so ago. Now, I’m willing to be corrected about what that means, but my starting assumption is that as people, companies and nations get poorer, they spend less. They buy fewer companies, pay lower salaries, employ fewer people and those people buy fewer cars, pay down debt if they can, postpone holidays.  Which in turn…. yeah. You get the picture.

Which could explain why it’s the people who sell things and make things who are suffering horribly now.

All of which takes me back to where I think political and economic strategy co-incide.

If the problem is no longer simply a credit problem but a demand problem, we have to act to encourage demand.  That means giving direct help to those who are most likely to spend their money, and spending money directly where it will provide jobs and hence purchasing power. (Of course, at  some point we’ll have to reverse that, but only when demand no longer needs stimulating)

That means a programme of public works, explicitly sold and marketed as job and wealth creating. Houses, schools, airports, trains, ships, IT networks and green cars. Scientific research spending needs to go up, as should university and vocational spending.

That means introducing tax changes that put money directly into the hands of low income families that will spend it.

That means taking the unemployed and as a short term measure supporting their families with extra financial support to get them through retraining and upskilling- especially where they receive little or know redundancy payment.

Finally, it means being prepared to be bold, to move quickly, to seize opportunities to save companies and invest in industries.

If I have one concern it is that we are as a party and as a government too locked into an incremental-ism and a gradualism that i precisely the right policy for normal times but totally wrong for moments of economic crisis.

We’re in a fight. We’ve got to pitch it as such, big. bold moves that stand out, surprise and make people behave differently.

Will the Tories like it? No. Will the press and the commentariat? Probably not. But frankly, I don’t care. The only people I want to hear from are first, people who might be encouraged to buy things, second, companies that want to make things,  and finally, economists who know what might help  the first two lots  buy and make things.

As far as I can tell, the worries of each of these three groups is that not enough is being done, not that too much is being done.

Economically, I don’t think cautiousness can cut it. P politically, it has no chance.

So,  over the next two months, I want to see the Government tell the British people it has a plan coming.

Tell them it’s a big, audacious plan to stabilise the banks, support struggling busineeses, then co-ordinate with other countries to drive forward demand by giving a lot of help to families and busineeses directly, while putting investment into projects that will prepae Britain for the future and employ people today.

Let people argue about the plan, let them fightover it. criticise it, whinge about it and complain it’ll never work. Make it the centerpeice of every political debate and every discssion of our economy.

Do all of those things, but make it big, make it bold, and make it Labour.

21 Responses to “A tough spot”

  1. grzegorczyktt

    I think the answer to that question is pretty simple.

    Economically, because “now” the problem is evolving. Back in November it was a credit crisis, “Now” it’s a demand crisis. Back in November we took monetary steps to prevent bank collapse and deal with credit issues, “Now” we’re taking fiscal steps to stimulate demand.

    Politically, because “now” is the time of year for the Budget.

    As a political communications hack, I think it’s an easy argument to frame.

    Reply
  2. Duncan

    Agreed that the situation has got a lot worse since November.

    I also agree that infrastructure spending, higher JSA, higher state pensions and tax cuts for the lowest paid are the way forward.

    The Tories and many commentators will have a go.

    They will probably quote James Callaghan’s ‘you can’t spend your way out of a recession’.

    Problem with that quote is that it’s too simplistic. It all depends on the type of recession. If you have a supply shock led, inflationary recession (like the 1970’s oil shocks) – then no you can’t, spending just adds to inflation and makes the problem worse.

    If you have a demand shock led, deflationary recession (as now, or Japan in the 1990’s, or indeed the World in the 1930’s) then of course you can! Indeed that is exactly what you should do.

    This is why it is at least better for the government to face a demand led recession than a supply led one. You solve the latter by cutting spending, raising taxes and hiking interest rates (unpopular things). You solve the former by raising spending whilst cutting taxes and interest rates (popular things!).

    Reply
  3. Vulpus_rex

    Big audacious plans cost big audacious amounts of money and we are stoney broke.

    We had big audacious amounts of money – but that’s been hosed away on a big truly audacious pile of rubbish/nothing (take your pick).

    Brown has had his chance many times over but his reputation for financial incompetence is now so bad he could announce any audacious plan you like and people will just roll their eyes and say “Yes, all very interesting but can we please just have an election?”.

    Reply
  4. Hopi Sen

    Liam’s question is a fair one.

    I’d make three responses – first, things have changed. The extent of the demand drop is bigger than was expected, the pound has depreciated, and america, germany and japan have reported worse economic date. The hole is deeper.

    Second, while things have changed, they’ve also clarified. The nature of the problem we face has become clearer. In Novemeber, credible economic commentators, (and the Shadow Chancellor) were arguing that all that was needed was a reduction in interest rates. Do nithing to upset that, they advised. I disagreed then, but there was at least an argument to say that you should try all your monetary tools to the maximum extent first. Now, global interest rates are tending to zero and we’re still in the hole. That tells us more about the kind of hole we’re in.

    Finally, I was arguing for the same things back then too.. see here, for example.

    http://hopisen.wordpress.com/2008/10/20/toujours-laudace/

    and here

    http://hopisen.wordpress.com/2008/11/18/into-the-mirror-world/

    So I can at least claim consistency!

    Reply
  5. alunephraim

    “If I have one concern it is that we are as a party and as a government too locked into an incremental-ism and a gradualism that i precisely the right policy for normal times but totally wrong for moments of economic crisis.”

    It’s not just Labour; it’s (basically) all social democratic parties. Which is why most of them having been having a hard a time of it in elections and surveys as Labour (harder in many cases). The awful truth is that revisionist social democracy has less to offer people during bad economic times than when the economy is growing; it’s been a problem before (and in many different countries) but it’s never been dealt with.

    Reply
  6. bigmacsub

    Please dont throw out terms like risible with no explanation. You might as well say “do nothing Tories”

    You are right about a demand crisis, and Gordon was almost right with his birth pangs quip, but it’s more like cold turkey withdrawal symptoms fom an overdose of credit. It had to end but that doesn’t make it less painful.

    Managing that lifestyle change is what the government should be doing and a borrowing binge ain’t a good example.

    Stimulus be damned!

    …and don’t go all ‘no help for working families’, bullshit, that would be too hypocritical.

    Reply
  7. Brian Hughes

    Good post – we are of course in uncharted waters (at least uncharted for the previous 70 years) and in an evolving crisis so it’s not surprising that our leaders don’t have all the answers instantly to hand.

    Certainly a stimulus in the form of increased tax & pension credits, JSA etc is more likely to boost consumer spending significantly than are the tax cuts proposed by the Tories which would give cash also to middle and high income earners. A good proportion of such people would be more likely to save it and/or repay loans than to spend it, I know I would.

    As a man said (although not necessarily in the same sentence): we’re best when at our boldest; we’re best when we’re Labour.

    As to the polls, assuming a May 2010 general election we’re less than three quarters of the way through this parliament and less than two thirds of the way through Gordon Brown’s first term as PM, so they are irrelevant except for those people who enjoy polls and/or find them relevant (eg those coming up for election this May). I fear we may have fewer MEPs and councillors come mid June…

    Reply
  8. bigmacsub

    Brian, really, “such people”?

    You and Labour minded people alike think you can control “such people” or any people with your clever ideas and socially responsible principles. Well you can’t.

    Its all about fundamentals, and New Labour doesn’t know where theirs are.

    Reply
  9. hopisen

    bigmac, i don’t think it’s particularly unreasonable to suggest that higher income people are lore likely to save money than spend it in current circumstances – though actually I think it’s more likely they will pay debt down at the moment – it being a perfect moment to get rid of mortgage and credit card debt if you have a reasonably comfortable income..

    Reply
  10. Duncan

    Bigmac, re:higher income people saving tax cuts.

    That’s certainly what Keynes thought, the marginal propensity to save rises with income.

    Although you may prefer… It’s also what Milton Friedman thought. The permanent income hypothesis: high earners will simply save any tax cut they see as temporary.

    Reply
  11. newmania

    As a man said …we’re best when we’re Labour.

    Yes that was Brown when he was leading the left of the Party against Blair which is why he is the architect of the other side of the equation which Hopi ignores but the British people do not . We cannot afford it We cannot afford any of it so what he says is wind-baggery in a Kinnock stylee ..Some thing must be done , this is something ..therefore ….. We cannot go on living in this fantasy world invented by people who sell sound bites imposed on people who sell cars and fridges and insurance !
    This spending is spending my money my children’s money and without even debating it in Parliament for Christ’s sake . What is the point of the whole pantomime
    As we cannot afford to do anything much The subject of quantities easing has arisen , the Zimbabawe alternative . So do we take the hard drugs of government , a quick fix but deadly and hard to get off , …inflation ,. Do we do this when we have already stored up problems for the twenty years just to save Gordon Brown’s career ?
    No we don’t . This is not a demand problem Hop this is a value problem . The reason the banks are still stuck is that the other banks know they are hiding more debt , printing money will make it worse . You go ahead , come up with your big bold whatever it is , cost it and take it to the country which you should be doing now . Labour will be destroyed .
    We need real tax cuts , we need spending cuts and we do not need Politicians taking their bonus now and leaving everyone lese to pay for it for years

    Make your case and call an election , there is no way back and with unanimity the people are saying “In go`

    Reply
  12. newmania

    Bloody hell just saw the MORI Poll , 48% to 28% . Hopi do youi think Brown might be gone before the election. There have been rumours and you must have heard them..

    Spill the beans go on go on , is Harperson really cranking up her bid ?

    Reply
  13. newmania

    PS Hopi , can you explain one thing , as no-pone liked New Labour before the economy collapsed , what makes you think they will when it recovers ?

    There are far deeper problems than you have yet admitted

    Reply
  14. bigmacsub

    Hopi and Duncan,

    I’m not disagreeing with your principles of tax and savings, just that you can do anything about it.
    Without of course a deeply skewed taxation system that will look suspiciously like social engineering.

    Reply
  15. john

    ‘The VAT cut my be mocked by conservative politicians, but as the credit crisis turns into a global demand crisis, it’s doing a valuable service in increasing consumer purchasing power.’

    In the real world the mocking is certainly not restricted to conservative politicians,but also numerous business leaders Digby Jones and Simon Wolfson to name a couple.

    It’s not astro physics to understand that when stores are offering up to 70% discounts a piddling 2.1% has zero affect on whether a consumer buys or not.

    Moreover,the 2.5% vat reduction translates to 2.1% on the vatable item,so are more consumers going to buy because the reduction is 32.1% instead of 30% or 52.1% instead of 50%

    Meanwhile another £12.5 billion gets pissed away by this hopeless government.

    Reply
  16. hopisen

    John,

    “It’s not astro physics to understand that when stores are offering up to 70% discounts a piddling 2.1% has zero affect on whether a consumer buys or not.”

    Funny you should say that.

    I was in T K Maxx in Newcastle, a well known 70% discounter, about a fortnight after the VAT cut. There were huge posters everywhere telling people that they’d get their VAT back at the till. Like many stores, TK Maxx has things to buy at the till.

    In front of me, a woman was just getting some clothes for her family – a fairly substantial purchase, over a hundred pounds. When the amount she was asked to pay was 2% less than she expected, about two or three pounds, she asked if that was right, then leant over and bought a box of chocolates too.

    In other words, she had more purchasing power than she thought, so she made another purchase.

    The point of the VAT cut is to increase overall consumer purchasing power, in the same way that inflation reduces purchasing power.

    You’re making the mistake that most journalists did when the VAT cut came in, which is to think that the benefit of the VAT cut is to do with people deciding to buy flat screen TVs because they’ll get £15 off. A few people might make such a decision, because the shift on the demand curve is significant to them, but the point is rather what those who were going to buy a TV anyway do with the £15 they otherwise wouldn’t have had. if ten thousand flat screen TVs are sold in a single month , that’s £150,000 of extra purchasing power looking for things to buy.

    Reply
  17. Shamik Das

    “The VAT cut my be mocked by conservative politicians, but as the credit crisis turns into a global demand crisis, it’s doing a valuable service in increasing consumer purchasing power”

    Yes of course it is. A cut of 1/47th or 2% tends to have that effect!

    It’s gonna greatly increase “consumer purchasing power”!

    d’Oh! The economically-illiterate Prime Mentalist strikes again…

    Reply

Leave a Reply