'WE SHOULD agree as a world on a monetary and fiscal stimulus that will take the world out of r… depression." Thus spake Gordon Brown at Prime Minister's Questions last Wednesday, creating shock waves as far afield as Washington ("He said the D-word!").
A damage limitation exercise was instantly launched from No 10, the modern, mass-media equivalent of an erratum slip in a book: for 'depression' read 'recession'.
When it comes to this kind of stumble-mumble, Gordon has previous. Remember his not
orious verbal slip last December when he remarked, a trifle hubristically, "we not only saved the world…" It was immediately explained that, instead of "world", he had meant to say "banks".
Thanks to his programme of creeping nationalisation, Brown is now more of a banker than a prime minister. If recession is indeed deepening into depression, as his Freudian slip suggested, then nobody on this side of the Atlantic bears more responsibility than Brown. His cack-handed bailout of the banks only assumes quasi-sane proportions when measured against Barack Obama's even more ambitious package of toxicity.
The Brown/Obama narrative might succinctly be characterised as How to Turn a Recession into a Depression. Just how far the British and world economies will plunge by the end of this "downturn" is difficult to foresee, but the clever money has to be on the most pessimistic prognosis. At the moment, technically, we are in a recession. In the third quarter of 2008 Gross Domestic Product (GDP) fell by 0.6% and in the fourth quarter by 1.5%, thus fulfilling the textbook requirement of two successive quarters of declining GDP that defines a recession.
This definition excludes other significant factors such as the unemployment rate and consumer confidence. The average recession lasts for a year, which is a luxury we shall not enjoy this time: this one will run and run. Optimists, however, seize on the fact that we are not (pace Gordon Brown) in a depression. For that, real GDP would have to decline by 10%. Only Finland and Indonesia have recently experienced full-blooded depression.
The British Chambers of Commerce is currently forecasting a 2.9% decline in GDP over 2008-2009, with unemployment rising to 3.1 million, or 10% of the workforce, over two years. So, a serious recession is expected, but not a depression. That, at any rate, is what the rulebook says, but it is arguable there are no rules any more: Gordon and Barack just tore them up.
The weasel word 'stimulus' denotes an irredeemably Keynesian mentality. What it means is that the malady – a bad recession we could just about have weathered – will be fatally aggravated by the cure that quacks have prescribed. Economic history never repeats itself; but it does have broad lessons. Of these the most instructive is that of the United States in the 1930s.
As with today's crisis, in 1929 it began with a collapse on Wall Street. The difference was that 1929 was a genuinely capitalist crisis, whereas 2008 was provoked by politically motivated intervention in the housing market by the Clinton administration. What followed 1929 was the New Deal, which exacerbated and prolonged the emergency. America's industrial collapse did not occur in 1929 but in 1937, when the New Deal was in its fifth year. Barack Obama has not learned that lesson. If he breaks the back of the US economy, we shall catch more than a cold in this country.
Yes, the bankers have behaved appallingly. But who permitted them to do so? The politicians who straitjacketed small businesses with endless regulation while exempting the financial institutions from what was really needed: not nanny-state regulation but expert supervision. Always it is the politicians who do the real harm – our last recession was caused by our joining the ludicrous Exchange Rate Mechanism.
Citizens, we are told, have been very naughty. In 2008 personal debt in the UK rose by 7.3% on the previous year, to £1.44 trillion. But why did normally responsible people feel the need to borrow? Because Brown had confiscated penal amounts of their earnings in taxation. Having filled the Treasury's coffers, they then resorted to the banks to replenish their wallets, to sustain the living standards they had a right to expect in return for their labours, had they not been mugged by the state.
If everything goes belly-up on both sides of the Atlantic, it will be the fault of Brown and Obama, with their delusions that more indebtedness can produce solvency, that public works programmes stimulate economies and that the state is a better steward of people's wealth than those who have earned it. Those are the fatal illusions that may lead us into a depression.
