Economic Reovery
It is worth having a look at the way things stand, as they do not look quite as hopeful as we might have expected, given the better than expected progress in the second half of 2009. Now we have the problems in the Eurozone, B.P and cuts, not just in the U.K but in several of our trading partners. This is offering a much gloomier picture with slow or nil recovery all across Europe. In the U.S there is growth but house prices are still falling and M3 is shrinking fast.
Some are now beginning to fear that the remedy of government spending to carry these economies forward to growth may not work, leaving huge debts and no realistic means of paying them. The economic stimulus theory attracts a good many economists and most politicians to the left of centre. The flaw may be that too much of the previous boom was on borrowed money and therefore false, with real economic activity several notches lower.
Moreover too many countries have been running and went into the crisis running, fiscal deficits on everyday spending. For these countries to borrow to keep the artificial economic activity alive means not only living above their income, but getting deeper and deeper into debt. The resultant cuts in expenditure enforced of necessity, together with increases in taxation necessary to eliminate the fiscal deficit and reduce overall debt to manageable levels produce a tightening in the economy causing either a double dip or very low growth. We are in that category. The idea that maintaining government expenditure will restore the economy to previous levels, works only if previous levels were earned, not borrowed.
The notion that a restoration in the levels of economic activity will pay for the borrowing needed to get there is valid only if in the good times the budget was in surplus. With us it was not. The new government therefore has a very tough task ahead. In other countries in Europe action is finally in hand to get real. It may or may not be too late. The markets are nervous.
The alternative, monetarist approach is at the onset of recession to let the weak businesses go under, cut expenditure to income and avoid fiscal stimulus by borrowing. Recovery comes from new start ups and stronger businesses expanding to fill the gaps left by the collapse of the weak. If stimulus is needed to boost the process, this should be done with quantitative easing creating new, not borrowed, money.
This idea was dismissed out of hand all across the West at the start of the crisis. It is beginning to look as if that may have been a mistake. Its sponsors argue that the economy emerges from recession re-vitalised and renewed, leaner and more efficient, with new blood and new ideas. Moreover there is a good deal less government debt, well below margins which saddle future generations.
Meanwhile the economies of the East not only have all the surpluses, reserves and cash, but they have all the growth too. Good news is that manufacturing is growing very fast in the U.K. This may be dented by the Euro problems as 50% of our output goes to Euroland, but the eastern economies are growing apace modernising their infrastructure and meeting rising consumer demand, which should present ample opportunities to make good the shortfall.
The coalition needs to free up business from daft regulations, organise business tax to encourage investment and get the banks to finance this economic lifeline rather than their own gambling.