The UK economy after the recession-Part 6

11 02 2009

Political responses to the recession

For a long period after the financial crisis began the government’s only intervention was to bail out Northern Rock. There was no attempt to boost the economy through fiscal means, as the US government attempted via tax rebates in early 2008. Nor was there any recognition of the need to cut interest rates until the autumn of 2008. The predominant attitude was that the market should be allowed to sort itself out, thus continuing the managerial approach to the economy which has typified New Labour.

The failure of leadership during the recession has roots in the decline of politics. For example, an out of touch political establishment was afraid that inflation would provoke struggles for higher wages, thus leading to a delay in making interest rate cuts beyond what was desirable.

Since the onset of the recession proper in the last quarter of 2008 most public discussion has largely taken place around the issue of consumption rather than production, with the emphasis on stimulating consumption via public spending.

 Too little consumption?

The essential message can be summarised in three sentences: if an entire nation decides to cut spending and increase saving at the same time, the result is not an increase in saving but an increase in unemployment. This means that households can only increase their savings or reduce their debts if someone else spends and borrows more to keep the economy afloat – and in a recession that normally has to be government. And finally a government that spends and borrows in a recession can usually repay much of this borrowing without raising tax rates, because recovery automatically yields higher revenues and reduces spending on the unemployed. 1

 

Now that the recession has become real, the government has been panicked into action on both the fiscal stimulus side and on interest rates. Almost overnight its rhetoric shifted from ‘hands off’ to a fully fledged neo-keynesianism.

Amidst a lot of talk about ‘putting the fire out first’ the government’s explicit approach is to restore lending to 2007 levels and to try to pump up the housing market again. Critics of this approach, such as Tory leader David Cameron, have focused on the likelihood that this will lead to necessary cuts in public spending in the future.

Or too much?

In partial reaction to the neo Keynesian response to the recession has been claims that the problem is the opposite, too much consumption. Some politicians and sections of the middle class press in particular have been in the forefront of championing personal austerity as a response to the recession, arguing that the need for sustainability has been given a new imperative.

The focus on consumption does not help to clarify the serious weakness at the heart of the UK economy. As we have seen earlier in this paper, most of the growth in the UK economy in recent years came in the financial, housing and retail sectors. Now that these sectors have been badly damaged it is a dangerous strategy to pin hopes of recovery on them. Instead, the focus should be on where productive investment should take place and how it can be encouraged.

 


Public response

The most alarming feature at present is the fatalistic public mood. The slump is being discussed as if it were a natural catastrophe like the arrival of the comet that destroyed the dinosaurs.2

Given the semi-paralysis of political leaders it is hardly surprising that the overwhelming public response so far to the recession has been passive acceptance. As long as this is the case then it is unlikely that public debate will turn to finding ways out of this catastrophe and looking to the future.

This passivity has gone side by side with an outburst of hedonism and escapism, rates of sexually transmitted diseases shot up in Canary Wharf once the downturn set in.3

Also the 118 telephone directory services reported that they had experienced ‘a sharp increase in number requests for sex shops, lap dancing clubs and escort agencies’.4


 

1. Anatole Kaletsky the Times 20 October 2008

2 Samual Brittan Financial Times January 2 2009

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