Wednesday, 10 June 2009

Meanwhile, back at the recession ...

While we have been distracted by MPs being paid by us for giant topiary bathplugs and the exposure of the true weakness of Gordon Brown's grip on power, our old friend the recession has been carrying on doing its own thing. Jobs have been lost in huge numbers in the manufacturing, service and retail sectors. House prices have levelled-out temporarily due to the annual Spring rush but remain well above realistically affordable levels. Increased activity in the housing market will provide a small knock-on boost for manufacturers and sellers of carpets, furniture and washing machines.

In the last week news has come of 800-odd jobs going at LDV, with thousands more at risk in associated businesses, 700 at Hewlett-Packard and more than 1,600 at Lloyds Bank. These are the headline-grabbers but there are many more coming from the closure of, and cost-cutting in, small businesses. There is clearly a long way to go before the effect of all these redundancies works its way through the system. In the meantime other businesses will be affected by the loss of spending power by those who have lost work (and tax revenues will fall).

When asked in an interview last week why he refuses to call a general election Gordon Brown said he was busy dealing with the recession. We have heard a lot of references to "steering the country through" and "leading the fight again" recession in recent months but the reality is that there is almost nothing he or any politician can or should do. There is a reason LDV is closing - it cannot make vans that people want to buy at a price that makes a profit. There is a reason Hewlett-Packard is shedding jobs - it doesn't need them and cannot afford to continue employing them. There is a reason Lloyds Banking Group is closing its Cheltenham & Gloucester-branded branches - it cannot afford to keep them open. What can the government do about any of these cases? The answer, of course, is absolutely nothing other than offer subsidies and hope that, by some miracle, keeping loss-making enterprises open will turn them profitable. It is no surprise to find the trades unions arguing for exactly that to be done but it is a wholly futile exercise which simply increases losses in the long run.

We are in recession because our economy was unbalanced, being kept afloat by hot air and unaffordable credit. There is no escaping the fact that a contraction was necessary, the only question is how large that contraction needs to be before balance is restored. No one knows the answer now any more than they did a year ago because the national economy is not one big thing it is an aggregate of millions of little things. Mr Smith in Brighton and Mrs Jones in Birmingham might earn similar salaries and have similar debts and expenses, but one might choose to reduce their debt and the other might not, or both might, or neither might. These personal decisions affect consumer demand are wholly unpredictable. Similarly, the effect of reduced demand on individual businesses will vary according to how they are run and the wishes of their owners; seemingly identical businesses in Brighton and Birmingham might take completely different approaches. There is nothing government can do about that. And then there is the question of how people react now to the stark fact that taxes are likely to have to rise substantially in the next year or two (and thereafter). Some will ignore it and hope it goes away, others will cut spending now and save to prepare themselves for the onslaught. These personal decisions will have a dramatic effect on how quickly recession ends yet no amount of speechifying and theorising by politicians or anyone else will change them. The real economy, comprising those millions of individual decisions, will find its own response to the current situation. The little people are the real economists in all this.

The best thing poor Gordon can do is sit on his hands and hope the damage he did to the economy in his decade as Chancellor is not as bad as it is.


Mark Wadsworth said...

Agreed. "If in doubt. do nothing" is the best policy.

Except taxes don't have to rise - the government is spending and wasting far too much, is all.

J Bonington Jagworth said...

Gordon is still clinging to the belief* that he and HMG have any control. Of course, he was happy to take the credit then the economy was doing well, but even that was only by sowing the seeds of later destruction (e.g. deregulation of those who least needed it). That means that he is at least partly responsible for the collapse, but he can't have it both ways - it he washes his hands of the recession (because other people are experiencing it, too) then he can't very well claim to be in a position to rectify it!

*Presbyterian he may be, but I don't think he believes anything of the sort. Blair didn't leave to honour any agreement with Gordon - he left because he knew what was coming!

TheFatBigot said...

Well yes, Mr Wadsworth, except that I was addressing what is likely to happen rather than what I believe should happen.

Thank you for your contribution, Mr Jagworth, and for your recent comments on other threads. Welcome to my little exercise in blogology.

Like many politicians poor Gordon grossly overestimates the amount of control governments really have over events. They can take certain actions and mess things up but I am far from convinced that they can do much of benefit other than create a sound framework and then hope for the best.

james c said...


The UK did not plunnge into recession as a result of imbalances.

It went into a deep recession because of the US subprime debacle, and problems with its own banking sector,which become de facto insolvent.

J Bonington Jagworth said...

Thank you, FB. Your blogology looks pretty good to me - I only wonder that you have the time!