Osborne misses the point; Mervyn King misses the bigger point
Category: Thought for the day
And so it came to pass that the UK government has been forced to outline a new austerity drive. It wouldn’t have been necessary if its previous plan had come off. Meanwhile, as Mervyn King’s days as Bank of England governor come to an end and his criticisms of the government become more vocal, it is time to vocalise the biggest criticism of Dr King.
“Had the world stuck to the script George Osborne wrote for it back in 2010, Wednesday’s UK spending review would not have been necessary,” so began an editorial in yesterday’s ‘FT’. So there is nothing for it. More cuts. More sweeping cuts. And if they don’t work, well, it will be even more sweeping cuts.
Is there a fatal flaw in the logic? Is it not possible that the reason why Mr Osborne has not met his targets is precisely because of his spending cuts? It is surely no coincidence that in the US, where austerity has only just begun, the economic recovery is far more advanced.
Actually, as I have said here before, I don’t have a problem with one country – even one as large as the UK – making spending cuts in isolation. It is just that when austerity becomes a worldwide thing, or at least a Europe-wide thing, it becomes highly dangerous.
But if you study the collapse of civilizations, from ancient Sumer to Easter Island, you will find that very often the problems started because of certain practices carried out by the population. In the case of Sumer it was agricultural techniques relating to increasing soil salinity; in the case of Easter Island it was deforestation. But the collapse occurred because in response to the problems, the practices were increased. So falling soil fertility led to even more intensive farming in Sumer, and an impending ecological crisis on Easter Island led to the population erecting more statues to honour their gods, which in turn led to further deforestation. I fear that any economic problems associated with climate change, caused by the burning of fossil fuels will lead to more investment into ways to extract fossil fuels from the Earth.
I see a parallel with austerity. The more the cuts damage the economy, the heavier the cuts.
What I find particularly disturbing is the indiscriminate nature of local government cuts. Services that work and are relied upon by people are being closed down, while in other regions services which are as useful as a chocolate teapot are being maintained.
The Big Society is a good idea, but the concept has flaws. For one thing it relies on volunteers doing the work that may have been previously carried out by paid professionals. Some volunteers are saints, but some turn out to be unreliable, uncommitted, and expect to be worshipped for their kindness. Paid professionals often see their job as a vocation, and are fantastically committed – They are being laid off and replaced with volunteers, who can work every other Tuesday, except when they on holiday or going to Ascot, or Wimbledon.
But the real errors that are being made relate not so much to fiscal policy, rather it is the way in which monetary and fiscal policy are kept so separate.
Quantitative easing is too blunt, and impossible to direct. Both the UK and Japan in the 1930s printed money to create economic recovery by funding government spending, and both had commensurate success.
Last year former PMC man Adam Posen voiced the biggest criticism of Mervyn King. He said: “I personally view the teeth-gnashing and garment-rending about what’s fiscal and monetary as too much drama for too little content.” He said that the Bank of England seems to hold “anguished religious ethics” about QE.
Central bankers are haunted by past mistakes that led to hyperinflation, but are ignoring past mistakes which led to mass unemployment and maybe even world wars. They should have learnt from their experience of the last few years, that inflation is not a danger, and deflation has not gone way.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees