Thursday, 16 October 2008

Joined-up government in action

Economic misery continues unabated. The banks are now more stable and there are signs that inter-bank lending will recover. But deflation of the credit bubble is causing the hot air of overvalued companies to gush from the stock markets at a huge rate. Recession seems guaranteed in all major economies because the apparent wealth of the credit-bubble years was false and it is time to pay.

There has been much wailing and gnashing of teeth about the current (or, as the case may be, imminent) recession. This is hardly surprising because many people will lose their jobs, many businesses will fold and many homes will be repossessed. In my view a deep recession is unavoidable, let me explain why.

First it is necessary to look at the definition of recession. The definition generally used in this country is that a recession occurs when there is a reduction in Gross Domestic Product (GDP) for two successive quarters. As I understand it, a reduction in GDP means a reduction in the total value of goods and services sold by all businesses in the UK after taking inflation into account (yes, I have read many of the definitions put forward by economists, but I have to keep this simple so that I can understand what I am writing). The last six or seven years have seen businesses thriving on the back of spending funded by credit. Shops, bars and restaurants hired extra staff to deal with the additional customers and the people given those new jobs then spent their earnings in other shops, bars and restaurants and so the cycle continued.

For as long as people spend money they do no have the knock-on effect can look very good for a national economy. Lots of cash is swilling around, lots of jobs are created, lots of tax is paid and everyone is happy. The problem comes when the lenders fear they might not get their money back. Loans for cars, electronic fripperies and home improvements become hard to come by so businesses selling cars, electronic fripperies and home improvement materials suffer a reduction in income. In exactly the same way that spending borrowed money creates jobs so a withdrawal of credit reduces spending on unnecessary items and causes businesses supplying those things to cut back staff or fold completely.

The current recession is based on one thing and one thing only, excessive credit. It financed an artificial boom and now it is the cause of a very real bust.

The only way out of recession is to negate the problem (as much as possible) and rebuild the economy in reliance on more solid businesses. This is where the UK has a problem. For many years one of our most profitable areas has been financial services. Domestically and internationally our banks have done well by trading on the back of the excessive credit they created. I cannot avoid the conclusion that a recession caused by the hot air of unsustainable credit will last until credit is down to a sustainable level.

Government could help by reducing taxation to ease the squeeze many small businesses will suffer (but it can't reduce tax because it is bankrupt), or by bringing forward capital expenditure projects such as building new roads or schools now rather than in three years' time (but it can't spend because it's bankrupt), or by cutting out the 500,000 non-jobs they have created over the last ten years to keep the unemployment levels artificially low (but they can't do that because it would be to admit they were wrong). So what is the government doing to help? It is signing-up to a commitment to reduce UK carbon emissions by an even greater amount than the previously unachievable target.

A fine example of joined-up government.

1 comment:

Anonymous said...

Ah, well, there'll be no carbon ewmissions at all when the power stations fail and nobody can afford a car.

We'll be so Green we'll be mediaeval.

They could cut taxes if they stopped all their freebies and shed their quangos and sponsored lunatic fringes, but they won't. It won't even occur to them.

The medics have a term for those born to be politicians. Anencephalics.