Saturday, 15 November 2008

A weekend in Washington

The way the BBC is reporting it one might be forgiven for believing this weekend's meeting of the political leaders of nineteen of the largest economies in the world will cure all financial ills. In fact they can agree anything they want and it will make little difference to anything. After all, if they had a magic wand it would have been wafted around months ago and recession would have been avoided.

It is obvious what will happen, indeed it has already been presaged in early press conferences. They will agree to seek to stimulate their economies through tax cuts to boost consumer spending and tax funded projects to boost spending yet further. In the background developing countries will demand vast additional handouts from the West, in the foreground bland desires for better this and better that will announced and everyone will go home claiming it was a huge success. In some countries it will work, in others it will make things worse, in most it will make no difference whatsoever and overall recession will end when it would have ended anyway. This weekend's gathering is a collosal waste of time and money.

The single reason for the current mess is that previous apparent growth was funded by unsustainable credit which is no longer available. The amount of money available to be spent is reduced because people can no longer borrow as they have for several years. Even if they could borrow, many will not now do so because they have existing debts and it is time to pay the piper. It is all so simple really. If you earn £500 a week and spend £520 the time will come when you have to reduce your spending to below £500 and use the balance to repay what you have borrowed in the past. Just reducing your expenditure to what you earn will involve a 4% fall in spending, yet it is not a fall in wealth it is an adjustment so that your spending equals your wealth rather than exceeding it. For years the UK economy has been boosted by people spending money they do not have and it is now time to take that false wealth out of the equation and start living realistically. The current recession is all about matching the apparent wealth of the country to its actual wealth. In a way it is not a recession at all but a removal of billions of pounds of self-delusion. In exactly the same way, the fall in house prices is not removing genuine wealth from anyone it is removing fictitious wealth which has caused householders to suffer from self-delusion.

The real challenge is to remove self-delusion from the public sector. The seed for doing so is being sown this weekend. Even poor Gordon has had to acknowledge that if you want to maintain consumer spending in order to help manufacturers and retailers weather the storm, government must stop taking so much out of every wage packet so that individuals have more to spend. If, as seems to be the case, he believes that is good for the economy when times are hard there is the tiniest scintilla of hope that he might realise it is good for the economy at all times. For the first time in his political life he has had to concede that individuals can spend their money better than government can spend it. Is there a chance that he actually believes this? Time will tell, but it is encouraging that he has taken the first tentative step towards fiscal continence.

When people are spending their own money they seek value for every penny and they keep an eye on things. The businesses they deal with know they have to provide a good service or the customers will go elsewhere. The more goods and services that are subject to those market pressures, the better the quality of what is provided and the better the value for money. It has long surprised me that some people call for government to nationalise businesses and run them "for the people". After all, who would you trust more to provide groceries of good quality at a good price, the government or Tesco? Tesco makes huge profits whilst delivering excellent value for money, it is the best possible evidence that profit is a good thing not a burden.

Poor Gordon is, of course, holding on to one delusion with such a vice-like grip that there seems little chance of redemption. He is steadfastly refusing to countenance a drop in government spending of any kind. Part of me accepts that axing the hundreds of thousands of non-jobs currently supported by taxpayers would not be a sensible thing to do during a recession because it could exacerbate the downturn. Another part of me says that the sooner the heavy cost to the taxpayer is eased the sooner we can come out of recession. At all times we should be realistic. Current levels of government expenditure are based on the false notion that the country is far wealthier than it really is. The bloated public sector grew on the back of fictitious wealth created by the credit bubble. In so far as it was sustainable at all, it was only sustainable out of the fictitious wealth. Explosion of the fiction necessarily means that it is no longer sustainable and must be cut back.

That side of the equation will not be addressed by the great and good this weekend. If the time comes that Gordon has to run cap in hand to the IMF for emergency funding one condition they will impose is that the government cuts layer after layer of worthless fat. That is exactly what was required when the last Labour administration brought the country to its financial knees in the mid 1970s. If Gordon has any sense he will take the lead and realise that non-jobs are exactly that. He has a fancy term for creating non-jobs, it is "endogenous growth theory", the rest of the world calls it burdensome waste. After he has primped and preened himself over the next week, telling everyone who wants to listen (and many who do not) that he has saved the world economy single-handed, he will have to face reality. Reality requires the end of big government and a return to value for money. He won't be able to do it because he is too stubborn. Creating the biggest of big governments in the Western world is something of which he is immensely proud. To him it is an end in itself. To the rest of us it is an unaffordable dead weight - a pretty good description of Gordon, if you ask me.

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