photo credit: vaviolino

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…

Well you can imagine my surprise at hearing this, given that I was under the impression that the deficit-spending, government-stimulus strategy being adopted by leaders like Obama was meant to stop another Great Depression, not start one. If I’d been drinking coffee, you can be sure that I’d still be wiping it off the TV instead of writing this. But I thought I’d see what Rogers had to say before coming to judgement on the man. Big mistake!

Analysis and conclusions come over the fold.

Let’s start with this Rogers quote:

The idea that you can solve a problem of too much debt and too much consumption and too much borrowing by more borrowing and more consumption and more debt to my mind is ludicrous and insane.

This is a pretty crazy thing for Jim Rogers to say. The “more borrowing” he’s referring to is that of the government – say, the US government – used to fund, for example, Obama’s stimulus package . The theory behind such a strategy is the following:  in a deep recession, the only way to stimulate the economy is to get the government to pump lots of money into it, piling up national deficits in the process. Any government spending by definition creates jobs and this helps to get the economy going again. The government has to do this because the private sector can’t: when no-one else is able to spend to get the economy going again it’s left to the government to step in as a spender of last resort. Crucially, the government’s borrowing is not, as Jim Rogers is suggesting, the same as the borrowing of the private sector. The government can afford to rack up deficits in the short term to fund anti-recessionary borrowing,  indeed they have to: if private credit is frozen, who else is going to step in?

This isn’t just one of many opinions: it’s the theory of legendary macro-economist John Maynard Keynes, whose work on the solutions to recession are accepted by the vast majority of economists. Now it’s true that you could probably find a few who disagreed, but it’s pretty evident from the interview that Rogers’  response was not that of a man who wanted to point out the defects in Keynes and respond with his own argument. Oh no. Instead it’s the kind of response you’d give if, having never seen a car before, you drove one to the petrol station and then some stranger came up and jabbed a hose in your bodywork . You’d think he was pretty mad, wouldn’t you?

Having said all that, let’s give Jim Rogers another chance, shall we?

Unfortunately everybody’s making the same mistakes we made in the 30s… the 30s started out as a typical stock market bubble – pop – and then a recession, but then the politicians got together and made mistake after mistake after mistake and it led to the great depression… I’m afraid it’s happening again.

This time it’s not just economists who might be puzzled at Rogers’ words, it’s historians too. The mistakes he is referring to must be the alleged ones of President Franklin D. Roosevelt, since it’s Roosevelt’s deficit spending which is being mimicked today by politicians. (He could of course be referring to Herbert Hoover’s mistakes, but then that would completely destroy his argument, so let’s give the man some benefit of the doubt.) This, then, is a bizarre thing to say by any standards. While it’s true that FDR’s reign was not without its economic blunders, it’s generally accepted by economists that his deficit spending helped to relieve the depression of the early to mid 30s. Indeed, if anything, modern Keynesians think that he should have piled up more deficits. In fact, the real blunder of FDR’s presidency came not when he was spending deficits but when he decided, in 1938, to reign in spending and balance the budget. This is generally assumed to have caused the second main recession of the 30s, and is universally regarded as maybe the biggest economic blunder of the 20th century. That recession, in fact, was only ended by the ultimate example of Keynesian Economics: the enormous deficit spending of World War II, which finally ended the Great Depression for good.

Again, Rogers isn’t articulating another economic viewpoint of the 30s here. He’s just being ignorant.

I could go on, but I think I’ve made my point (although I should give a shout-out to Rogers’ interesting assertion that the stockbrokers of London will soon be handing over their lambourghinis to the presumably rather non-plussed farmers of China).  As the interview drew to a close I reflected that it was sad to see Channel 4 news present this guy in the same way you would a well-respected economist. He’s not. He’s a well respected financier.

The kind of garbled, faux-economic mumbo-jumbo spouted by Rogers is, sadly, not an isolated case. Across the media spectrum, financial commentators and cable news Wall Street reporters are queuing up to offer their outraged opinions on what they see as Obama’s economic stupidity. For example, CNBC’s Jim Cramer claimed recently that Obama’s budget was “the greatest wealth destruction I’ve ever seen by a president”. I can only  assume the words “by a president” were inserted there to distinguish it from “the greatest wealth destruction I’ve ever seen” which is presumably the description Cramer’s saving in case  Obama follows his advice and does nothing to help the economy.

There’s an obvious conclusion to be drawn from all of this: finance is not the same as economics.

I can’t stress how important a point this is, because it’s one of the main reasons why the public debate about the actions of world leaders such as Barack Obama in combatting the global recession is fundamentally flawed. Instead of having a genuine argument on the economic merits of the various plans, the soapbox is instead often being left in the hands of people who show no interest in even the basic points of macro-economics – and this includes illustrious and important members of the world of finance.

Just as a Harvard macro-economist is likely to know know very little on the subject of  collateral debt obligations, credit default swaps and other bizarre financial contraptions, so too a Wall Street financier cannot be assumed to know his output gap from his liquidity trap. And if you’re expecting a basic knowledge of  Keynesian theory, then I’ve got news for you: the money men don’t care. Ask them how to invest your money and you’ll get a fairly solid reply (though you might come to regret it later). But ask them to defend their opposition to anti-recessionary government spending on solid economic grounds, and it’s like entering Alice in Wonderland. If, that is, Alice had  sweetened her rabbit hole experience further by indulging in a bit of LSD.

Once again: finance is not the same as economics. A lifetime of trying not to get caught when the bubble bursts is not equivalent to a degree in macro-economics. Just saying!