Remember the old Chinese curse “may you live in interesting times”? It’s worth keeping in mind as we head towards April and the meeting of the 20 richest nations in the world: London’s G20 summit is going to be very interesting indeed. As Mark Bailey reported in his recent post “G20 Preview: Gordon and Goliath”, Gordon Brown and Barack Obama are both calling for a global fiscal stimulus. The likes of France and Germany, however, are rejecting talk of more stimulus, choosing to focus solely on bank regulation – specifically the regulation of hedge funds and tax havens.
Now I like a good campaign against hedge funds and tax havens as much as the next man, yet it must be said that Gordon is completely right to demand that global stimulus packages be pursued at the same time as international bank regulation. As far as Europe is concerned, a large influx of government public spending would work particularly well, as thanks to the free trade policies of the European Union any stimulus one country puts in place will immediately benefit their neighbours. This, however, is what concerns the likes of France and Germany: the fear that heavy national spending will simply leak out and end up as international spending.This particularly irks Germany who are already gritting their teeth at the prospect of having to bail out the troubled states of Eastern Europe (who, it turns out, are just rubbish at that capitalism malarkey).
But what the likes of Sarkozy and Merkel are forgetting is that with more and more Europeans losing their jobs, governments are facing lower tax revenues and higher welfare costs. The higher cost of paying benefits is particularly onerous on European governments, as unlike America the welfare systems of Europe are commendably generous (Britain excepted). Large stimulus packages, therefore, are essential to get people back to work and kick start Europe’s economy.
However, though Gordon Brown’s logic is sound his pan-European ambitions are leaving a bitter taste in the mouth – well, in my mouth anyway – because, despite his calls for a global stimulus, Britain has hardly had one worth the name. Indeed, so far the only “stimulus” we’ve had is last November’s £20 billion scheme, the majority of which went on a much derided cut in VAT. Let’s compare this with other countries, shall we?
First, let’s compare the quantity of our stimulus package with that of other countries. According to the International Monetary Fund’s figures, the United States’ stimulus works out, over two years, at 3.5% of its GDP. Germany’s stimulus package works out, again over two years, at 3.2% of its GDP. And Britain’s? A measly 1.4% of GDP for 2009… and nothing in 2010, since it doesn’t actually stretch that far. Great.
Now let’s compare the quality of our stimulus. We got a demonstrably ineffective cut in VAT which did very little to kickstart the economy and get people back to work. Compare this with America – their stimulus package included everything but the kitchen sink – progressive tax cuts, infrastructure funding, higher unemployment benefits, investment in education and health services, funding for renewable energy… If you want a fairer, European comparison then consider Germany: their stimulus package – all 50 billion euros of it – included money for roads, schools, public transport and hospitals as well as tax cuts for the poor and a generous payout to anyone who traded in their old car for a new, more environmentally friendly one (yes that’s right, the country that invented the automobile is more green than us). Fair play to Germany then – they may be putting a spoke in the wheels of Gordon’s sensible plans, but at least they’ve already passed a proper stimulus.
But it gets worse. Not only has the British government failed to put in place a proper stimulus, but the Chancellor Alistair Darling appears to be trying to convince the U.S. that the one we did put in place was actually da bomb. As the Times’ political blog ‘The Red Box’ reported on Tuesday, Darling has rather suspiciously changed his estimate of what percentage the stimulus is of Britain’s GDP from around 1% – his estimate in November’s pre-budget report – to last Monday’s claim of 3.4%, which, if you were paying attention earlier in this article, you’ll realise is roughly the same percentage of GDP as America’s stimulus package. How has he done this? By including the money lost from the government’s coiffers as a result of less people paying income tax and more claiming benefits. Yes, that’s right – he’s including money that should be being paid out anyway as part of a stimulus. Why has he done this? It’s hard not to come to the conclusion that this has been done to prove to America that we don’t need more stimulus and thus reduce the pressure on Darling to include another one in the forthcoming budget. I think maybe Gordon needs to have a few words with his Chancellor, don’t you?
One thing that’s very clear is that while Darling plays with the statistics, more and more people are becoming unemployed and as a result overstretched job centres are losing the ability to actually get people back to work. Here’s Polly Toynbee in The Guardian yesterday:
Insiders in Jobcentre Plus offices tell of the pressure from a surge in new claimants. A manager of a Jobcentre Plus in Essex tells me, “forget personalisation”, echoing others who have contacted me. Claimants just get the next adviser on the taxi-rank. First interviews are cut from 40 minutes to 30 minutes, and the “better-off calculations” have been dropped because they are taking too long: new claimants know they’ll be better off working. The fortnightly signing-on review has been cut from 10 minutes to seven minutes – and other areas report as little as five minutes…
“What used to be meaningful interviews have turned into fantasy conversations when you both know there are no jobs,” the Essex manager says. These interviews will grow more perfunctory with every passing month.
It’s clear, then, that we need a proper stimulus now. Actually we needed one months ago, but let bygones be bygones, eh? All will be forgiven if our number-fiddling Chancellor can pull off a massive stimulus in the forthcoming budget. What kind of stimulus are we talking about? Let’s see… investment in green technology would create lots of new jobs while also aiding in the fight against global warming and saving us money in the long term. A radical overhaul of our pitiable roads and trains will create even more jobs and also reap benefits further on down the line, since our pathetic transport system costs us millions every year. Higher investment in education will both create jobs in the short-term and enable kids to get jobs in the long-term. Raising the threshold at which people start paying income tax from the current £6000 to more like £10,000 – as suggested by the chairman of the Treasury Select Commitee back in January – would help those hit hard by the recession to get back on their feet. As for those hit hardest by the recession, there should be a significant boost to the job seeker’s allowance – do we really believe in this day and age that 60 quid can last you a whole week? In the long term this wouldn’t even cost the government anything if it was done at the same time as giving job centres more resources so they can actually, you know, put people back to work.
Those are just some ideas. I’m sure you can think of some more – god knows many have been floated by commentators more clued in than me , though whether the government’s listening or not is anyone’s guess. At any rate, one thing is economy-crushingly clear: Gordon Brown may be on the right side of the debate with his G20 call to arms, but so long as his strategy back home is in glaring contradiction to his strategy abroad how can he expect anyone to have faith in his ambitions? And here’s something he might want to consider: while a doomed effort to convince a stubborn Europe to take the right path is still admirable, even in defeat, sitting by while your people are crushed by a catastrophic economy is unforgivable. Over to you, Gordon…
March 23rd, 2009 at 21:48
Well I agree that a stimulus bill would not be amiss but I think you’ve missed some key differences between the US and the UK.
Firstly, you have to take the bailout into account, I think that was around 3% of GDP, I know you’ll say that a bailout doesn’t create jobs, not directly ( and at the moment not indirectly either) but it did cost the taxpayer an incredible amount of money so you still have to view it in terms of the the slice of the pie.
Secondly, the UK was already in much higher debt that then US, both debt per household and national debt as apercentage of GDP, making a stimulus package a less inviting option than the US.
It’s not just the debt in itself, the more debt the UK is in, the higher long term interests will be, making future borrowing from businesses higher and therefore prolonging the length of the recession and the recovery time.
This is compounded further by the fact the UK economy is probably on balance not as strong as the US’s, most analysts e.g. the FT have long argued we’re mediocre among developing countries, making a stimulus harder to justify on the grounds that it may not actually jump start an already sluggish economny. The UK is already predicted to have a longer recession than other countries, a stimulus may not help us much.
Another problem with a stimulus and raising public debt is that taxes would have to rise in the long term or public services be cut, or most likely, both, with the US Obama can at least point to some outrageous tax cuts for the super-rich that have cost the US economy and a war in Iraq, which makes the long term budget rosier, the UK doesn’t have that luxury, sure we have tax loopholes but they probably won’t be cut so easily any time soon and we already have an ok-ish progressive tax system.
Obama’s stimulus, focusing on infrastructure, had to take into account the fact Bush had left vast amounts of infrastructure woefully under-invested, the UK already spends a far higher percentage of its GDP on public services than the US, hence we’re in more like a perpetual stimulus – some would argue that has been part of the cause of the weakened economy but thats another story,.
That’s not to say I don’t agree with you on the need for a stimulus and the VAT cut was undoubtedly an ultra pants idea, jaw-droppingly so in fact, and makes me question whether I want a stimulus from a government who were able to conjure up such a terrible idea. I also agree that unemployment benefits will place the government in a difficult position if it can’t stop rising unemployment but Labour have created much of their own mess by over-spending and failing to address individual debt, making our recovery much harder than our continental neighbours ( whose national and personal debt is lower and will recover much quicker)
March 25th, 2009 at 14:45
I agree with you that britain can’t pile up debt in the same way that US can, put I do think concerns about the burden of debt – e.g. worrying about interest rates going up etc – just don’t make sense given the catastrophe we’re facing: to use an analogy, it would be like a fireman standing before a burning building and saying “we’d better not intervene, we don’t want to get the furniture wet”. I do think the debt burden is a worry, but a worry that shouldn’t be near the top of the list…
having said that, another stimulus could be largely deficit-neutral if the government
a)cancelled the remainder of november’s stimulus, which as steven byers pointed out the other day could be used to bump the tax threshold from six grand to eight grand…
b)kept on with plans for the 45p tax on those earning over 150k, which was originally meant to pay for the first stimulus but if that was halted could then be used for the second…
c) scaled back QE, which as we’ve seen today isn’t really working (although to be fair the latest news is probably more a result of mervyn king deciding to be a dick and scare the shit out of everyone).
March 26th, 2009 at 08:43
Wait you can’t parly agree and you an analogy like that, the analogy is totally bias! The UK will not be destroyed if we don’t pass a stimulus package, at worst we will have a longer recession either through actual contraction or through a prolonged and slow recovery but to say its worrying about the furniture being “wet” while the house is burning is over-dramatic to say the least, this isn’t the Wall Street Crash nor is it the Soviet Union’s shock therapy into capitalism.
Secondly, worrying about interest rates IS important considering that is a core part of economic growth, its when businesses start borrowing again that they’ll begin to re-hire, expand upgrade whatever, borrowing is fundamental to the business cycle which is why TARP efforts are so huge, so the economic cycle can be resumed, it was the collapse of this that actually caused the recession ( not in terms of the true cause but in terms that the others factors precipitated this critical factor)
I agree with you Mervyn king has been been poorly exposed in the last year, compared with say Bernanke but his spending warning is not without merit.
March 26th, 2009 at 12:35
I think you misunderstood my analogy, I was not asserting that the uk will be destroyed if we don’t have a stimulus package, the point I was making was that compared to all the suffering that can be alleviated with a stimulus, worrying about things like the future interest rate for businesses seems odd. it’s like how countries like germany are worrying about inflation while the economy crumbles around them…
and it certainly wasn’t over-dramatic; it may not be the great depression but that’s hardly a comfort: it’s still the worst crisis since the depression. Quite why we’re listening to the calls of bankers like mervyn king who got us into this mess in the first place, I just don’t know. given their judgement over the last few years, I would think that their warnings against a stimulus should be a ringing endorsement for passing one. all the financial “experts” currently warning against a stimulus failed to spot the following:
- the massive housing bubble
- the problems of the ridiculously over-leveraged and under-capitalised banks
- the risks inherent in the weapons of financial destruction (CDOs, CDSs etc)
- the comical mixture of outright fraud and incompetence displayed by our leading banks
what a good record!
also, if you want to get lending going again you have to actually have people willing to borrow money, which is where a stimulus comes in. there’s no point worrying about interest rates in the future if no-one can afford to borrow – this is very much a case of putting the cart before the horse
finally I’m not sure TARP’s a good example for your argument; the first tarp package completely failed to get the banks lending again. the jury’s very much out on whether the second will either.
March 26th, 2009 at 23:28
Ok I didn’t mis-understand the analogy, just we differ on how effective a stimulus package will be.
I think TARP very muchhelps my argument, true it hasn;t worked yet, but thats not the point, if they hadn’t had TARP major banks would simply have collapsed by now, there is absolutely no doubt about that, TARP has avoided worse rather than made things better, I know they said it would do both but we won’t see the lending aspect promised until financial markets recover, which will probably begin late summer a few months ahead of the main street economy.
Secondly, worrying about inflation is a larger issue for europe than for the US, welfare systems are far more extensive in europe:
A) less of this suffering
b) a much larger supply of money is in the system and buoys the economy’s, and Germany’s welfare is fairly significant as is the uk’s, so the stimulus argument is distorted, given as i’ve already mentioned we already have a higher state intervention as the norm, the us is thus starting from a lower baseline.
I agree with you that bankers have woefully failed, but in the UK, the left has to face up to different reality to there comrades in the US. Democrats can and to some extent rightly criticise Bush for his failure and pusuit of unchecked capitalism, if they’re more honest they will also point the finger at Clinton who shoulder some of the blame.
The net is wide, but the left in the UK cannot ignore the reality that a labour government has been in power and bear at least an equal responsiblity to the bankers. I expect bankers to be selfish and avoid regulation, but I would hope government, especially a left-wing one would have the sense to regulate it, to call time on the UK’s personal debt but instead the labour government cashed in on inflated growth records to run up its own huge debts, leaving us high and dry because it suited them. Sure mervyn king might have done more, but labour were running the country.
Most figures estimate UK unemployment to peak at 10% maybe a little more thats bad but in the great depression it was more like 25% and it was a decade of stagnation, if the US recover by the end of the year as many predict it will, and the uk maybe 6 months after you can’t compare the two phenomena, its sensationalist and premature to do so, the 80s is probably a better example.
March 26th, 2009 at 23:29
I don’t know why there are so many typos – my apologies.
March 27th, 2009 at 08:38
Also let me reiterate I do actually support a limited, very selective stimulus but nothing akin to the scale of the US one.
March 27th, 2009 at 16:49
OK, let’s assume you’re right about the threat of inflation and long-term interest rate rise, in that case why are you supportive of QE? QE carries these dangers as well.
however, not only is it weird to be worrying about inflation in a deflationary situation, but we actually need inflation now – indeed QE is meant to lead to higher inflation. if it doesn’t, it isn’t working…
the whole point of why this economic situation is so dangerous is that, wheras you can combat high inflation by raising interest rates, you can’t stop deflation with low interest rates because at some point you reach zero – and it becomes cheaper to hoard than it is to lend. that’s the liquidity trap, and the only way out is fiscal stimulus.
this is why economists like nobel-prize winning paul krugman are attacking both germany and the head of the ECB for their bizarre comments; they’re crowing about inflation while europe sinks around them and making Europe look pretty thick in the process. krugman has called for bigger fiscal stimulus package in europe: given a choice between him and nutters like the german finance minister, I know who I’m going with
finally the argument that europe’s large welfare system means there’s more money going around and less need for a stimulus (or the “automatic stabilisers” argument) is just silly. in that case, you should just sack all the workers… then you’d have loads of money going around! and before you call me out for that hypothetical, that’s not my point but the point of a reuters economist:
(http://blogs.ft.com/brusselsblog/2009/03/floodwaters-rise-up-around-the-europeans-on-noahs-ark/)
(krugman’s said something similiar, though I can’t remember where)
March 30th, 2009 at 22:04
[...] you Read Ed’s article on the need for stimulus packages in Europe you may have come across a debate Ed and I had over the [...]
April 2nd, 2009 at 11:28
[...] be any concrete commitments for an increased global stimulus. I touched on this in my post Fiddling while Rome Burns: Britain’s missing stimulus (in particular in the comments section of that post) but, briefly, here’s why the argument [...]