The Dismal Science

Economics is not an exact science. We are at last getting to realise this fact as one set of government figures after another is shown to be far from what was predicted. The pretence of authority behind economic forecasts has, for now, been shattered.

Of economists, Churchill once remarked: “If you put two economists in a room, you get two opinions -- unless one of them is Keynes, in which case you get three.”

Keynes, as it happens, is newly fashionable. Or at least a selective version of Keynes – we would say a parody of Keynes -- is newly fashionable. This doctrine says that if you pay one group of people to dig holes and another group to fill the holes back in, the economy will benefit. We should, it is argued, spend our way out of recession.

There is a superficial attraction to this argument. It is true that in the short term a crisis of confidence can lead to a downward spiral, hence it is better not to pull the rug on government spending at the point at which the resultant job losses will reinforce an already critical situation. However, economists of all people should know that a misallocation of resources – spending money inefficiently – will in the long run mean economic harm.

Think of it as being like spending on your credit card. If your salary were to drop suddenly you could maintain your lifestyle by putting more and more on the credit card and hoping that your salary increases sufficiently to pay everything off. This might work if the drop in salary lasts for only a short while. But at some point it starts to become unsustainable and you are left with mounting debt which needs to be paid off – and your resources are not adequate. You need to cut back or face bankruptcy. That is the situation that we as a country are rapidly approaching.

Or, to take another pertinent example, it is like the gambler who 'doubles up' each time he loses a bet. By increasing his stake after he suffers a loss he might well recover his losses and more, but sooner or later he loses massively. If this were not the case we would all be doing it.

Actually, these two analogies – loading up on credit and gambling – are quite pertinent to the present crisis. But let's just go back to that theory of digging holes for a moment.

Digging holes

The theory is that if the government pays enough people to 'dig holes' (or to do whatever the government happens to want to pay for), the income of those employed will be spent on goods and services in the wider economy. That in turn will support further jobs and more income down the line. In other words, it creates a virtuous circle.

The aspect of this that is missing from the equation is where the government gets the money from to pay people in the first place. It is from borrowing or taxes – and we know that borrowing ultimately means taxes, for at some point it always has to be paid back. The question is therefore whether the government's use of these resources is more efficient than any alternative use by taxpayers or private investors.

In short, can the government spend your money more effectively than you can?

We would argue that it cannot. There is a justification for the government bringing forward large scale infrastructure projects that help support future growth and there is an argument for limited short term spending where there are specific factors leading to a downturn which can be turned round very quickly.

In the current situation, however, the government is effectively spraying money indiscriminately to maintain current living standards – or the appearance of them. It is a scandalous waste. We will be paying for this waste for many years to come.

Yet there are some who argue that the present crisis is unprecedented, could not have been predicted and demands unusual measures. It is, in short, an exception to the rule.

If the crisis was so truly unpredictable we might have some sympathy for this argument but this is a story that has been going on since before the South Sea Bubble. Put simply, people start to believe that something is a one-way bet. They start to spend beyond their means and take risks that are not viable in the belief that they cannot lose.

When this happens with ordinary individuals it understandable as few people are qualified in economics and even if something seems too good to be true we can sometimes be forgiven for putting hope above good judgement. When it happens with governments and their advisers, however, it is inexcusable.

Could the crisis have been predicted?

Put simply, the present crisis resulted from two unsustainable 'bubbles' – the credit boom and the housing boom – with a few other factors (such as rapid rises in food and energy prices) as complicating factors.

Could these have been predicted? Go back a few years and you will find Gordon Brown being lauded as one of the finest Chancellors since Gladstone. The media, even Conservative-leaning newspapers, liked to trumpet the success of the British economy. Brown himself wheeled out his tired old mantra of “putting an end to boom and bust”.

Any responsible and competent economist would have seen that bust was just around the corner.

Economists are better at interpreting what has happened than forecasting what will happen. Nevertheless, there are indicators that can and should tell economists when certain aspects of the economy are moving seriously out of balance. They may not be able to say exactly when the crisis will happen, or how bad it might be, but they can warn of an impending crisis if steps are now taken to resolve certain issues.

The government clearly started to believe its own propaganda and most economists were muted. The boom appeared to be unending.

The New Party was founded in the midst of this boom to warn that the economy was being built on sand and that we needed urgently to curb the unsustainable boom in credit, help dampen down the housing boom and rein back government spending. Calling for the economy to be placed back onto a sound footing was the raison d'etre of the New Party.

The housing boom

We argued back in 2005 that the housing boom created a false sense of prosperity. It encouraged reckless credit as people took out second mortgages on their homes and destroyed work incentives as some people 'earned' more from rising house prices than they did through their jobs. We argued that restrictive planning rules combined with reckless lending from the banks – the now-famous 125% mortgages, for example – were driving up prices.

We also noted at the time that young people were being prevented from joining the housing ladder and rural communities were becoming mere commuter villages with their local populations being driven out.

We put forward ideas for limiting reckless lending and improving the supply of new homes in order to bring down price rises. Back in 2005, what we argued was a problem could only be seen by the gullible media as a huge bonanza.

The credit boom

Our focus on the unsustainable credit boom was another key aspect of our 2005 manifesto. We argued that private credit, riding on the back of the housing boom, was critically out of control. We also argued that government spending was far too high and rising rapidly when it should have been falling back as a percentage of income.

Had our prognosis been accepted by policymakers at the time, we would not be in such a dire situation now.

That was a time when Gordon Brown was still being called in some quarters – inexplicably, given his record – 'Prudence'. It was a time when he lectured other European leaders about the virtues of the British economy and assured parliament, despite the evidence, that he was sticking to the so-called 'Golden Rule' on government spending and borrowing.

Does anyone remember those days, just a few short years ago?

The energy crisis

We also argued, back in 2005, that we faced a major energy crisis. That was true then and remains true today. We will be reaping the harvest of government failure on this issue in the years to come.

But we have already seen some of the consequences of our dependency on oil. The huge spike in oil prices in 2007 was one factor helping to tip Western economies into recession, and when this happened the whole edifice of excessive credit and unsustainable asset prices began to crumble.

Over the next few years we are likely to become more, not less, dependent upon unreliable sources of energy. Apart from oil, our need for more gas will throw us into the arms of Russia, just as Germany and much of Central-Eastern Europe are now so dependent.

By the time the energy crisis really hits home, when we see regular blackouts and rising prices, this government will be history. It will have failed massively but will not be around to take the blame.

And the opposition?

So what of the opposition Conservative party? Did that party get it right on these issues?

On the economy and energy, the Conservatives have simply followed the prevailing wind. Back in March, David Cameron offered a dismal apology for his party's failure to predict the recession and their failure to warn of banking and corporate debt. Indeed. The Conservative party is part of the problem. It's time for a new party.

Home About Contact ------------------ Manifesto Policy Young People ------------------ Newsdesk Other Articles ------------------ Surveys Points of View Send to a Friend ------------------- Privacy Policy Terms & Conditions Site Map

	The New Party Articles
	The Dismal Science Economics is not an exact science. We are at last getting to realise this fact as one set of government figures after another is shown to be far from what was predicted. The pretence of authority behind economic forecasts has, for now, been shattered. Of economists, Churchill once remarked: “If you put two economists in a room, you get two opinions -- unless one of them is Keynes, in which case you get three.” Keynes, as it happens, is newly fashionable. Or at least a selective version of Keynes – we would say a parody of Keynes -- is newly fashionable. This doctrine says that if you pay one group of people to dig holes and another group to fill the holes back in, the economy will benefit. We should, it is argued, spend our way out of recession. There is a superficial attraction to this argument. It is true that in the short term a crisis of confidence can lead to a downward spiral, hence it is better not to pull the rug on government spending at the point at which the resultant job losses will reinforce an already critical situation. However, economists of all people should know that a misallocation of resources – spending money inefficiently – will in the long run mean economic harm. Think of it as being like spending on your credit card. If your salary were to drop suddenly you could maintain your lifestyle by putting more and more on the credit card and hoping that your salary increases sufficiently to pay everything off. This might work if the drop in salary lasts for only a short while. But at some point it starts to become unsustainable and you are left with mounting debt which needs to be paid off – and your resources are not adequate. You need to cut back or face bankruptcy. That is the situation that we as a country are rapidly approaching. Or, to take another pertinent example, it is like the gambler who 'doubles up' each time he loses a bet. By increasing his stake after he suffers a loss he might well recover his losses and more, but sooner or later he loses massively. If this were not the case we would all be doing it. Actually, these two analogies – loading up on credit and gambling – are quite pertinent to the present crisis. But let's just go back to that theory of digging holes for a moment. Digging holes The theory is that if the government pays enough people to 'dig holes' (or to do whatever the government happens to want to pay for), the income of those employed will be spent on goods and services in the wider economy. That in turn will support further jobs and more income down the line. In other words, it creates a virtuous circle. The aspect of this that is missing from the equation is where the government gets the money from to pay people in the first place. It is from borrowing or taxes – and we know that borrowing ultimately means taxes, for at some point it always has to be paid back. The question is therefore whether the government's use of these resources is more efficient than any alternative use by taxpayers or private investors. In short, can the government spend your money more effectively than you can? We would argue that it cannot. There is a justification for the government bringing forward large scale infrastructure projects that help support future growth and there is an argument for limited short term spending where there are specific factors leading to a downturn which can be turned round very quickly. In the current situation, however, the government is effectively spraying money indiscriminately to maintain current living standards – or the appearance of them. It is a scandalous waste. We will be paying for this waste for many years to come. Yet there are some who argue that the present crisis is unprecedented, could not have been predicted and demands unusual measures. It is, in short, an exception to the rule. If the crisis was so truly unpredictable we might have some sympathy for this argument but this is a story that has been going on since before the South Sea Bubble. Put simply, people start to believe that something is a one-way bet. They start to spend beyond their means and take risks that are not viable in the belief that they cannot lose. When this happens with ordinary individuals it understandable as few people are qualified in economics and even if something seems too good to be true we can sometimes be forgiven for putting hope above good judgement. When it happens with governments and their advisers, however, it is inexcusable. Could the crisis have been predicted? Put simply, the present crisis resulted from two unsustainable 'bubbles' – the credit boom and the housing boom – with a few other factors (such as rapid rises in food and energy prices) as complicating factors. Could these have been predicted? Go back a few years and you will find Gordon Brown being lauded as one of the finest Chancellors since Gladstone. The media, even Conservative-leaning newspapers, liked to trumpet the success of the British economy. Brown himself wheeled out his tired old mantra of “putting an end to boom and bust”. Any responsible and competent economist would have seen that bust was just around the corner. Economists are better at interpreting what has happened than forecasting what will happen. Nevertheless, there are indicators that can and should tell economists when certain aspects of the economy are moving seriously out of balance. They may not be able to say exactly when the crisis will happen, or how bad it might be, but they can warn of an impending crisis if steps are now taken to resolve certain issues. The government clearly started to believe its own propaganda and most economists were muted. The boom appeared to be unending. The New Party was founded in the midst of this boom to warn that the economy was being built on sand and that we needed urgently to curb the unsustainable boom in credit, help dampen down the housing boom and rein back government spending. Calling for the economy to be placed back onto a sound footing was the raison d'etre of the New Party. The housing boom We argued back in 2005 that the housing boom created a false sense of prosperity. It encouraged reckless credit as people took out second mortgages on their homes and destroyed work incentives as some people 'earned' more from rising house prices than they did through their jobs. We argued that restrictive planning rules combined with reckless lending from the banks – the now-famous 125% mortgages, for example – were driving up prices. We also noted at the time that young people were being prevented from joining the housing ladder and rural communities were becoming mere commuter villages with their local populations being driven out. We put forward ideas for limiting reckless lending and improving the supply of new homes in order to bring down price rises. Back in 2005, what we argued was a problem could only be seen by the gullible media as a huge bonanza. The credit boom Our focus on the unsustainable credit boom was another key aspect of our 2005 manifesto. We argued that private credit, riding on the back of the housing boom, was critically out of control. We also argued that government spending was far too high and rising rapidly when it should have been falling back as a percentage of income. Had our prognosis been accepted by policymakers at the time, we would not be in such a dire situation now. That was a time when Gordon Brown was still being called in some quarters – inexplicably, given his record – 'Prudence'. It was a time when he lectured other European leaders about the virtues of the British economy and assured parliament, despite the evidence, that he was sticking to the so-called 'Golden Rule' on government spending and borrowing. Does anyone remember those days, just a few short years ago? The energy crisis We also argued, back in 2005, that we faced a major energy crisis. That was true then and remains true today. We will be reaping the harvest of government failure on this issue in the years to come. But we have already seen some of the consequences of our dependency on oil. The huge spike in oil prices in 2007 was one factor helping to tip Western economies into recession, and when this happened the whole edifice of excessive credit and unsustainable asset prices began to crumble. Over the next few years we are likely to become more, not less, dependent upon unreliable sources of energy. Apart from oil, our need for more gas will throw us into the arms of Russia, just as Germany and much of Central-Eastern Europe are now so dependent. By the time the energy crisis really hits home, when we see regular blackouts and rising prices, this government will be history. It will have failed massively but will not be around to take the blame. And the opposition? So what of the opposition Conservative party? Did that party get it right on these issues? On the economy and energy, the Conservatives have simply followed the prevailing wind. Back in March, David Cameron offered a dismal apology for his party's failure to predict the recession and their failure to warn of banking and corporate debt. Indeed. The Conservative party is part of the problem. It's time for a new party.
	Tel: 020 7060 1262 \| info@newparty.co.uk © 2009 The New Party, 1 Northumberland Avenue, London, WC2N 5BW Website Design: E-Cat Partners