New Labour often trumpets that they have generated long term economic stability. This is simply not true and the left has never believed it. If the economy is stable at all, it is the stability of a top heavy ship which has had the good fortune to sail in calm waters for an extraordinary decade but may soon capsize in a stormy economic sea. The New Labour ship almost foundered on Northern Rock, but with the US housing market in deep trouble there is a potential maelstrom ahead.
Following the 1992 ERM collapse, Britain has experienced a long period of economic growth, generating jobs and rising living standards. But this has only been sustained by massive private borrowing to fund a long–running consumer boom. That borrowing has been underwritten by rising asset values, primarily house prices, now way above long term trend values and beginning, inevitably, to falter. Forecasts by international bodies now predict a UK house price crash. This will leave millions in serious negative equity, with outstanding mortgages above the resale value of their homes and mortgagors cutting their spending as a result. A sharp drop in consumer spending will lead quickly to rising unemployment, further depressing consumption and driving the economy downwards into recession.
And there is another associated problem because, in a recession, retailers cut prices to keep sales going. In such circumstances, consumers with cash still to spend tend to defer purchases in anticipation of prices falling, so driving the economy deeper into recession and raising the spectre of uncontrolled deflation, a phenomenon which hit Japan in the 1990s. For governments, such deflation is far tougher to control than inflation and will necessarily require government to use every instrument of macro economic policy to overcome. The British government will be forced to use monetary policy, fiscal policy and intervention in the money markets to force a depreciation of Sterling to counter recession, making the last 10 years of economic policy seem misguided and blinkered.
First of all, interest rates will have to be cut, and not simply tuned to counter inflation. There will be a gigantic hole in consumer demand which will have to be filled and which can only be filled if the costs of borrowing are brought down encouraging people to spend and businesses to invest. Such a cut in interest rates will also help to bring Sterling down to a more sensible parity making imports more expensive and exports cheaper and thus helping to revive the domestic economy.
Every economic crisis over the last 80 years has been overcome in significant part by a Sterling devaluation or depreciation, starting with the 1931 crisis which destroyed a Labour government and finishing with the 1992 ERM crisis which destroyed a Conservative government. The independence of the Bank of England has been a transparent nonsense from the beginning because when governments get into serious economic trouble, the Treasury will inevitably take control of interest rates once again, either directly or indirectly. Indeed, with the Treasury effectively ordering the Bank of England to extend unlimited loans to Northern Rock to stave off a major banking crisis, the Bank's alleged independence already looks pretty threadbare. If Northern Rock's shares continue to plummet, the sensible thing would be for government to buy up the shares very cheaply and nationalise Northern Rock as a basis for a fully publicly owned banking sector.
Thirty years ago, that great Labour MP Ian Mikardo moved a successful motion at Labour Party Conference calling for public ownership of the banks and financial institutions. It would indeed be ironic if the most right wing free market neo–liberal government in Britain's history were forced in effect to nationalise a bank, and possibly others in future. It would pile irony upon irony if the government were also to accept what may in any case be inevitable and establish a fully publicly owned pensions and savings institution as occupational and private savings institutions decline.
And finally, we come to fiscal policy, taxation and public spending. The October Pre–Budget Report was an exercise in whistling in the dark with no serious attempt to address the looming crisis. The Prime Minister grinned while the Chancellor gave a tax break to the richest six per cent of the population, a proportion which will reduce to an even smaller number with a serious fall in house prices. Such sops to the rich may soon have to be reversed if and when recession takes hold.
Fiscal policy can and must be used to revive the economy, with higher public spending directed to the pockets of the less well off and not to the rich. This is because ordinary families and the least affluent spend most or all of any extra income on day–to–day living, so pumping demand into the economy. The rich, by contrast, who have more money than they know what to do with, tend to save their millions rather than spend them. If a government simply raises a sum of taxation from the rich and hands exactly the same amount of money to the poor, net consumer spending rises, helping to drive the economy out of recession. If at the same time interest rates have been cut, mortgagors and other borrowers have more to spend. And with a depreciated currency the extra demand being worked into the economy will be directed towards domestic produce rather than imports, again helping economic recovery. If proof were needed that sterling is seriously over–valued one has only to observe the gigantic structural trade deficits being recorded month after month.
The left has argued such a case on many occasions in the past and invariably been proved to be right. The right wing neo–liberals are once again riding for a fall and a new era of government intervention and involvement in the economy is on the horizon. The left must be ready with a coherent programme of democratic socialist policies for the economy. The Left Economic Advisory Panel (LEAP) chaired by John McDonnell MP has been working on just such a programme as SCGN readers will recall.
Kelvin Hopkins MP
