Wednesday, 25 March 2009

Underwear - the key to economic recovery

One of the most interesting things about current economic strife is that no one knows what to do about it. "What nonsense!" you cry, but it's true. There is not a single person on the planet who knows what to do. All that any of us can say is that we believe one course of action or another is likely to be beneficial, and even then others will disagree that the outcome we predict for our preferred option is desirable in any event. Even if we all agreed on the perfect result, we can only ever believe that certain actions will get us there; we cannot know they will because the problems being encountered at present are unprecedented and take place in a world that is very different from the 1930s when the nearest comparison occurred.

The effects (good or bad) of moves made so far by national governments to kick-start their dormant economies cannot be predicted as a matter of knowledge nor with any degree of certainty. And, perhaps most importantly, existing measures will play-out differently in different countries such that one might benefit from leaving things as they are and another might benefit from a further initiative. I believe it is a combination of lack of superhuman foresight and the need to do what is right for their own country that causes some leaders of Western countries to resist poor Gordon's calls for concerted action.

So far the only country following anything like the path he advocates is the USA, although it would take an excruciating degree of naivety for anyone to believe they are following that path because poor Gordon argues for it. The US government, more than any other in the Northern Hemisphere, acts purely out of what it considers the best interests of the country for which it has responsibility. What it proposes might be right or it might be wrong, that debate is being held in its legislature and through its news networks. You won't hear many high-falutin' calls for America to sacrifice its own interests in support of the so-called world economy. What you will hear, and what has been heard already, is debate about the effect President Obama's plans are likely to have on the financial well-being of the American people. Possible effects on international trade come into the equation but from a purely US perspective. Once they have finished the debate and voted for a particular package of measures the matter will not be over, because then they will have to see how those measures work in practice. The most experienced, highly qualified and ostensibly sensible economists will disagree amongst themselves both about the suitability of the final package and about the effect it will have. I find that rather refreshing because it reminds us that we are dealing with a process of educated guesswork rather than science.

Against that background I am left, yet again, perplexed by poor Gordon. Germany and France say "hold on, oh one-eyed Scottish idiot of the Manse, we need to see whether the vast sum we have already forked-out has had any effect before we throw more good money after bad." Gordon says "No no no, continental brothers and sisters, I am right, you must stimulate further and you must do so in the manner I have devised." Two questions come to mind.

First, how can it be wrong to sit back and observe the effects of current policies before changing them? After all it is not a zero-sum game. Further so-called stimulation comes at a price and over-stimulation is risky (as any fat middle-aged man with a weak heart can tell you, especially when Joanna Lumley is involved). It always used to be said that changes in central bank interest rates take a year or so to work their way through the system. Although part of their effect could often be judged after a month or two, they had a widespread influence on highly sophisticated economies and it was hardly surprising that the full consequences could not be judged quickly. When a strategic policy is initiated at enormous cost in unprecedented circumstances it becomes particularly important to allow it to have its influence (if any) and decide what to do next only when the effect of the first move can be evaluated.

Secondly, who is poor Gordon to tell them what to do? I don't just mean that his disastrous stewardship of the UK economy is hardly evidence of good judgment on his part, but it's just not his call. Indeed, it's not his call in two respects. Not only is management of the economy of a particular country the exclusive responsibility of its own government, but the very concept that the same pattern of governmental action will suit everyone is patently absurd.

Of course his current pointless globetrotting at the expense of the UK taxpayer is more about trying to bolster his image before the next round of excoriating opinion polls appear than it is about saving the world. At least, that is the reality. It is not necessarily how poor Gordon sees it. Everywhere he goes he is being told "thank you, but we'll do it our way". Sometimes, as in the European Parliament yesterday, he is told something rather more forthright. His reaction is, as always, not to listen and consider what others have to say, but to descend into a froth of self-indulgent fury that anyone should question his uniquely brilliant analysis. That is about to cause a bit of a problem.

This time next week London will be awash with the bigwigs of the twenty most rapidly shrinking economies in the world. It is Gordon's big moment, or so he thinks. He should have the courage and integrity to say "frankly chaps, we're all guessing here and this is my best guess ...". It might allow him to win influence and befriend people. Instead he will continue to claim that everyone agrees with him. He won't shift an inch because he doesn't have the moral or intellectual strength to do so. A summit which could have been used to consider a range of strategic policies is likely, instead, to be dedicated to finding a form of words to spare his blushes.

This week we have seen both his glove-puppet Chancellor of the Exchequer and his placeman Governor of the Bank of England so frustrated with his intransigence that they have taken the unprecedented step of refuting his approach in public while he is out of the country. They assert that the UK cannot afford further government borrowing in an attempt to re-kick-start the economy. They might be right, they might be wrong. Over the pond President Obama might find support for his case that the US can afford to follow such a path. He might be right, he might be wrong. Germany isn't prepared to follow suit because it's economy was not burdened with excessive debt and it feels no need to adopt that burden in order to show unity with anyone. Frau Merkel might be right, she might be wrong. The inescapable fact is it is all a matter of opinion and judgment and those with direct responsibility to the citizens of any country must be allowed to follow the course they think right.

I rail from time to time against the very concept of one-size-fits-all, whether it be in economic management, in the internal laws of different countries, in voting systems or in pretty much anything. It seems to me to be an especially inapt concept for national economies. Not only do they all operate differently, with differing balances of manufacturing and service industries, they also operate against different cultural backgrounds. Countries such as France and Sweden are wedded to massive welfare states and until their populations vote for something different they will continue to be so. That's their choice. Some think them barking mad, some think they don't go far enough. But it's their choice. Other countries look on and decide whether they like what they see. We adopt some of the things they do because we think they will be beneficial here, other of their choices are considered inappropriate to the way we like to live in the UK. It's not a matter of us being right and them being wrong, or vice versa, it is a matter of the government of each country doing what it thinks is right for that country and taking its chances at the next general election. When it comes to macro-economic policy exactly the same applies.

No one knows what will best, and fastest, lift the countries of the developed world out of recession. Of all the heads of government of the G20 nations, poor Gordon is the only one who claims there is a single answer and that it must be set in stone for everyone. There is no more chance of it fitting each national economy than there is of a single size of underwear being appropriate for all.


1 comment:

james c said...

FB,

This is my reading of events.

The reluctance of the Germans to stimulate their economy is based on what they believe to be their self-interest. Their economy is export-driven and will benefit from other countries' financial stimuli.

In other words, they think they are all right, Jock. Unfortunately for them, they are not.Unless the major surplus countries (China and Germany) start spending, it will be much harder for the world to recover.