Tuesday, June 29, 2010

Spend a little, live a lot

After the weekend's lacklustre G20 and G8 meetings, it takes an economist to cut through the cant and tell it like it is. Paul Krugman does that in today's Guardian (a piece that first appeared in the New York Times.

The Nobel laureate is one of the world's leading economic thinkers. He has been consistently accurate in his analysis of recent events - often before they actually happened - so his is a voice worth heeding.

He argues we're on the verge of the third depression (the first being in the years after 1873 and the second in the 1930s following the Wall Street Crash. The first was long and the second was deep). And he lays the blame squarely at the door of policy makers and governments obsessed with cutting deficits.

He argues that the G20 is looking at and therefore treating the wrong symptoms. They are fearful of inflation when deflation is the biggest risk facing the world economy and they are tightening their belts (meaning, our belts) at a time when the world is massively underspending and therefore demand is too weak to secure a recovery. In the words of Aldi, we should rather 'spend a little, live a lot...'

This isn't just academic number-crunching, however. This is about the lives of millions of people across the globe as well as in our neighbourhoods who, as a result of government policy here and in the other G8 nations (especially in Europe), might never work again.

And he suggests that such policies don't really even satisfy the financial markets, even though governments (especially our hysterical chancellor) are constantly talking about fiscal rectitude being needed or the credit agencies and bond markets will give us the thumbs down. In fact, Krugman argues, the markets appear to be telling us that long-term fiscal rectitude is good but slashing spending in the short term, weakening demand and raising unemployment is not a recovery strategy that they want to invest in - hence the continued weakness of stock markets around the world, driven by fears for corporate profits.

And this comes on the day when Frank Field - for the second time called in  by a government to think the unthinkable about welfare reform - suggested that young men should have their benefits removed completely if they don't accept a job offer. The trouble is Frank, there aren't any jobs for these young men to be offered that would not result in them becoming homeless and indebted.

Welfare reform is vital but it has to go hand-in-hand with economic recovery ands the creation of jobs that pay wages sufficient to support a family - and minimum wage jobs in most of the UK do not come close to that when housing, travel and living costs are factored in.

However, it was heartening to hear Frank say that the new Government's decision to scrap the jobs fund (which guaranteed work to young unemployed people) wasn't very clever. It looks like unemployment is going to be the touchstone in the next few years as it was in the 1980s and early 90s. Plus ca change, hey?!


Anonymous said...

Interesting that you think economists tell it like it is when they all say different things! Krugman could be right but we should be okay then because Britain's public spending is destined to increase every year from now until 2015, rising from £669 billion in Labour's last year to £737 billion by 2015.

simon said...

Well, one assumes that those are the figures before the autumn spending round which promises a 25%cut in all departments except health and overseas aid - otherwise there's a lot of scary rhetoric in the air.
On page 52 of the Red Book there's an indication of scale of cuts in the Spending Envelope for Spending Review 2010 which posits quite deep cuts from the headline total.
We'll see, I guess