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From The Times

November 20, 2008

Cameron may drown in his clear blue water

With the collapse of their poll lead, the Tories have reverted to type and adopted a thoroughly bad economic policy

Anatole Kaletsky

A few weeks ago it seemed as if Britain - for all its economic problems and the manifest political inadequacy of Gordon Brown - at least had a competent Opposition that would one day form a credible alternative government.

Now the tables have turned. The good news for the world economy is that Mr Brown has become a leader of global stature, filling the policy vacuum created by the clueless dithering of the Bush Administration and the surprising failure of Barack Obama to step into the breach.

The bad news for Britain is that the Tories have chosen this moment to self-destruct, leaving no plausible alternative to Labour, and nobody, apart from the redoubtable Vince Cable, to challenge Mr Brown's delusions of grandeur - or potential economic misjudgments.

Talleyrand's famous remark about the House of Bourbon - that they had “learnt nothing and forgotten nothing” - seems to apply with equal force to David Cameron's Conservatives after their repeated decapitations since 1992.

Last week George Osborne showed that he had learnt nothing, by foolishly identifying the recent weakness of sterling with the alleged weakness of the British economy and the Government's fiscal policy. In fact, the pound's decline is not a problem but a solution. It follows naturally from the Bank of England's aggressive rate cuts and the monetary freedom that Britain retained by staying out of the euro. This precious freedom is now reflected in the highly competitive exchange rate and ultra-low interest rates that will help to lay the foundations for recovery, just as they did in 1994-95 and 1983-84.

This week, Mr Cameron showed that he had forgotten nothing by suddenly reverting to the policies of John Major - not just the “strong sterling” totem, but the whole package, complete with empty promises of fiscal restraint, warnings about a “Labour tax bombshell” and contempt for Keynesian economics. These were policies that Mr Cameron used to advocate when he worked for Norman Lamont. The leader of the Tory “modernisers” was supposed to have forgotten all this nonsense when he left the side of the former Chancellor on Black Wednesday, but he has now reverted to type.

How can we explain this sudden throwback to the economic policies of the 1980s, that may well be remembered as the second-longest suicide note in history, after Labour's 1983 manifesto under Michael Foot?

The political motivations seem fairly straightforward. Mr Cameron's initial approach to the financial crisis was sensible: support emergency efforts to stabilise the economy and the banking system, while calling for important improvements in the detail, such as revision of the bank bailouts terms and abolition of the pernicious “mark to market” accounting that has greatly intensified the boom and the bust of the present financial cycle.

But frustratingly for the Tories, their leaders' voices were drowned out, first by the hubbub of the financial crisis and then by the unexpected chorus of adulation for Mr Brown. With the polls moving in Labour's favour, it seems that patience suddenly snapped on the unrepentant Tory Right and Mr Cameron felt obliged to placate it. By attacking almost every aspect of Mr Brown's economic policy and promising to do the opposite, he has certainly created “clear blue water between the Tories and Labour”.

Unfortunately for the Tories, their policies are thoroughly bad economics. “Unfunded” tax cuts and unbalanced budgets sound dangerous, especially when the country has a hangover from a decade of excessive borrowing and spending by homeowners. It seems sensible that, after such a binge, consumers should be encouraged to save. And it is obvious that any tax cuts or new public investments announced by the Chancellor next week must be paid for by future tax increases. But such analogies between household and government budgets are totally misleading, as any textbook of Keynesian economics explains.

The essential message can be summarised in three sentences: if an entire nation decides to cut spending and increase saving at the same time, the result is not an increase in saving but an increase in unemployment. This means that households can only increase their savings or reduce their debts if someone else spends and borrows more to keep the economy afloat - and in a recession that normally has to be government. And finally a government that spends and borrows in a recession can usually repay much of this borrowing without raising tax rates, because recovery automatically yields higher revenues and reduces spending on the unemployed.

By flatly rejecting this message, the Tories have put themselves at loggerheads with almost every government and central bank in the world, as well as Britain's business lobbies. But surely the same was true of Margaret Thatcher in 1981? After all, 364 economists famously wrote to The Times denouncing her public spending cuts and higher taxes - yet the economy started recovering almost immediately after the notoriously deflationary 1981 Budget.

But conditions today are different from 1981 or any part of the Thatcher era. Keynesian economics was at best ineffective and at worst dangerous from the 1950s until the early 1990s for two reasons: high inflation and the national obsession with stabilising or “defending” the value of the pound, either against the dollar, the mark or, before that, gold.

For the moment, the intensity of the global financial crisis has removed both these constraints. Inflation is no longer a threat because of the collapse in oil, commodity and house prices, soon to be followed by falling wages as unemployment rises. The currency constraint has been removed by Britain's decision to stay outside the euro, while worries about a long-term loss of confidence in sterling are implausible as the US, the EU and Japan face economic problems very similar to Britain's.

The only real constraint on a policy of fiscal expansion, is the possibility that paper money in general may lose its value - not just in Britain, but also in America, Europe and around the world.

At present investors and savers seem to trust nothing except bits of paper signed by governments, be they dollar bills, bonds or banks with government guarantees. At some point the world's savers, investors and bankers will presumably decide that assets of real economic value, such as houses, oil wells or shares in commercial enterprises are better stores of wealth than paper signed by governments. But when this happens the financial crisis will, ipso facto, be over, and inflation not deflation will again be the main threat.

That will be the time to hear from advocates of fiscal prudence - but until then the right policy will be to borrow and spend.

With banks afraid to lend and borrowers afraid to borrow, government must fill the void between current spending and full employment potential output. In these exceptional conditions the government should use the printing press (and rein in when the economy recovers). Anatole is right.

R Sandilands, Glasgow, UK

According to Kaletsky, who categorically failed to predict the credit crunch, we can borrow our way out of recession. Was he asleep during the 1970's? Did he fail to hear about the recession in Japan where they've been borrowing like crazy for year?

Richard Evans, London, uk

This is a very accurate piece.
I live in the North of England, which is still picking up the pieces from the disastrous economic strategies of the Tories in the eighties. For the long-term prosperity of all society another Tory government has to be avoided.

Dave, Doncaster,

What complete and total tripe Mr Kaletsky. Firstly, high inflation actually helps Keynesian economics since the inflation devalues the debt you write. Keynesian economics will fail because trillions of dollars of asset losses cannot be corrected by a few billion in fiscal stimulus.

Dave, New York, USA

The speed of events this autumn has indeed resulted in volatile polling fortunes for both major parties.
I do however fundamentally believe that many people will still think--"Give the other lot a go"-thus it is this silent force that will drive political change at the next election .

William Grierson, Kimpton, Herts

How about:
1. Cutting unnecessary government expenditure (Olympics?). 2. Unloading all the broke banks a.s.a.p. 3. Reducing the critically high level of tax when it is possible. 4. Flatly refusing to go into debt at any cost. 5. Trying hard not to lose a billion pounds a quarter bad government?

prziloczek, Wisbech, UK

How can you make no reference to Japan, Mr Kaletsky?

Dr K, L. Spa,

Amazing how many Times readers can't bear to read anything good about Gordon Brown. David Cameron can't admit as the rest of the world is admitting that Britain is once again successfully leading the world. Countries like USA don't follow Gordon for his charisma. Could it be his common sense then?

John Richmond Smith, Ringwood, United Kingdom

The excessive borrowing that Brown is suggesting is ridiculous, it will just lead to higher taxes later and make our recovery slower. It is this type of thinking that got the banks into trouble in the first place, I think it is correct and responsible that Cameron will only support funded tax cuts.

D Jennings, Sheffield, UK

Sadly Cameron and Osborne now have a good future behind them.

Crowther, Silsden, UK

You are wrong Mr Kaletsky. The Tories are quite rightly expressing the dangers facing the country. The UK government has taken on a massive contingent exposure through its policies to bail out and support the UK banking sector, which places us in a uniquely worse situation than other countries.

Henry Northcroft, London,

It is evident that the Conservative Party is lacking in the ability to keep scoring goals, The England football team was like this until a particular Italian coach arrived and sorted out the wheat from the chaff. I suggest we install the England team manager as Conservative opposition leader. Presto

Branston Pittle, Telford,

Mr Kaletsky will doubtless be satisfied when the interest repayments on our debts exceeds the Defence, NHS, Education and Home Ofiice budgets combined. His solution would be to borrow even more. I think white-coated gentlemen need to be in attendance.

Anthony Back, Wellington, Telford, England

The principle of borrowing in a recession only works if there was a corresponding surplus during the preceding prosperity. The catastrophic recklessness of the present administration has ensured that there is not. Borrowing cannot continue forever without creating hyperinflation.

James E. Petts, Burnham, England

Is it not a shame that Mr.Kaletsky should spoil such a beautiful case against paper money, by not including in his list of alternatives, the only storage of wealth that has stood the test of time?

Ingrid Hoermann, Vienna, Austria

Let us not forget that Mr Cameron was the main advisor to former Chancellor on Black Wednesday. So how are we suppose to trust him getting it right in future.

Harshad, London, UK

i applaud gordon this started in thatcher years sold of everything and put the ordinary man on the dole the social consequences are evident today . the greed that has followed is no great suprise, prehaps we can get back to values and stimulate the economy with public funds and keep people in work

susan o'rourke, lincoln, england

Spot on Anatole. What on earth are Osborne and Cameron thinking about? This is such a big error of judgment and economic understanding that it should damn them as politicians for the rest of their careers.

This is very disappointing. I was looking for economic & social common sense combined!

Alistair Nicholls, Manchester, UK

I am going to vote for the first politician who does NOT claim to be able to solve all the problems by making savings in beaurocracy.
They all promise until the day they get the keys to No 10 when they find it cannot be done. Trying to make gold from base metal.

Martin, Southend on sea,

The government borrows 40% of GDP during boom times.
The government borrows 60/70/80%+ GDP during recession.

Hands up all those who see a problem with this.

john, rye, UK

How can it be that Vince Cable is redoubtable and (presumably) plausible, and yet there is no 'plausible alternative to Labour'?

Nick Perry, Hastings,

The statement "because recovery automatically yields higher revenues" is absurd since you cannot know when or how much. Worse, in the fifth last paragraph, you use the lazy "ah, but.." argument to explain why it was OK for Mrs T to swim against the tide but not Cameron.

Storey, Glasgow,

"Japan face economic problems very similar to Britain's. "

This would be the Japan where the policies you are advocating made things worse?

David , London,

Time and time again has vindicated Anatole.
PS
Love the title !

Anth, Wetzikon, UK

About time Anatole Kaletsky got real and stopped promoting the failed economic policies of Brown. Very good article on MSN News by a Peter Hargreaves, which every one should read. Britain real picture is worst of all

Chris, Woodbridge, England

Cameron has at a stroke made a 'hung Parliament' a real possibility at the next election

John, Leighton Buzzard,

Brown's criticism of the Tories isn't unfunded tax cuts he is actually suggesting they are being completely reckless for proposing funded tax cuts.

We really have walked through the looking glass. With Brown clearly everything he ever said meant the exact opposite to what we thought.

Mac, Surrey, UK

Low commodity prices= low consumable prices=more buying capacity=more production=more jobs=economic recovery. You can't have socialized risk and privitized profit. Stop trying to "fix" things and let the market work. Please reread Mr. Smith and enjoy the blessings of the invisible hand.

Jay Johnson, Minneapolis, USA

The goverment has no plan as to how additional borrowing will ultimately be paid down. We are already running a large fiscal deficit. Cameron and Osbourne are just setting out the possibilites - slower public sector growth, smaller tax increases or devaluation/inflation. The election is in 2010.

Steve, London, UK

Sir, you were once a savvy inividual but your recent commentaries are so far from reality that your column is becoming an ever greater joke, which given the present scenario ceratily brightens the day. Cut the pomposity, look what Brown has done then realise to agree with him will break us all!

Robert D Marshall, london, UK

Yes but the charge against the Government, who are after all in charge, is surely more serious. When Bernanke slashed interest rates at the start of the year,to the derision of many, he had at least seen the approaching cliff. Our government claimed to be 'best placed' & did nothing. Now is too late.

Robert Cookson, Milton Keynes, UK

So a recession isn't the time to reduce government spending. Would you do it in a boom? I doubt it. So when do we start attacking the ridiculous level of unnecessary spending Labour has let us in for? It has to be done sometime - even you must agree with that. The sooner the better.

Alfred T Mahan, New Forest, United Kingdom

10xcsn. Gordon Brown may just pull off a miracle comeback.
Fouth down and 40 and he throws a hail marry into the end zone.
TOUCHDOWN, LABOUR......

jeff gamborne, russell, united snales

You obviously subscribe to the "let's take in each others' washing" school of economics. When the state of GB (Gordon Brown) implodes under bureaucracy, welfare and gold plated pensions that is all we will be fit for.

Tony Gee, London,

Mr Anatole Kaletsky is manifestly very uninformed. Gordon Brown himself has been openly admitting to seeking funds from the Chinese and the Saudis. This is not evidence of Brown's competence. Rather of the opposite. The word 'global' in Brown's vocabulary too is suspect. Which globe is the IMF for?

Muhammad Haque, London , UK

I can hardly wait until January for Mr Kaletsky's review of his 2008 predictions. One of the most entertaining columns in UK media. Thanks Timesonline!

Mark Newman, Singapore,

weak currency which arises from a weak economy - Gordon Brown 1992

Andrew Jones, h, west yorkshire

oh dear anatole, this one will get added to that very very long list featured in private eye of your dreadful predictive abilities

coops, london,

Uh-oh. This from the man who told us in January: "the worst is over for the global credit crunch".

Batten down the hatches. Cameron must be talking sense for once.

RR, London, UK

Borrow to invest and incentivise consumers to spend but targeted and with clear timelimits, that's the original Keynesian concept which was never followed correctly.
I doubt the £ fall will help little exporting UK much, Major/Clinton were right there: if you need FDI you must promote a stable $/£.

George, London, UK

Cameron & Osborne are blinkered and handicapped in necessary experience to meet the needs of people in this growing and deteriorating global predicament. They are becoming potentially dangerous and worrying.

John Begbie, Sunderland, Tyne & Wear

First of all, you repeat the Brownian lie that any Tory tax cuts will be unfunded - they will not be. Secondly, you don't see to aknowledge that there is a time for saving and cutting back. If it isn't now, and it wasn't when times were good, just when the hell is it supposed to happen?

David, Kent, UK

Borrow from whom? Nobody has trillions to lend, nor would lend them to us if they did. No, they have to come out of thin air, off the printing presses. Inflation is quiescent because the credit famine is slowing the speed of circulation of money, but when it relaxes . . . !

Spend, but wisely.

Noel Falconer MEcon, COUIZA, France

I've said it before and I'll say it again. Cameron should invite Vince Cable to cross the floor of the Commons and take the Tory whip and the shadow chancellorship. He talks a good deal of commonsense whenever he's been on TV and I believe his talents are wasted in the Lib Dem party.

Ian Dickson, Brighton, UK

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Anatole Kaletsky

Anatole Kaletsky writes for The Times Comment pages on Thursdays. One of the country's leading commentators on economics, he was formerly Economics Editor and is now an Associate Editor of The Times. He has won many awards for his financial and political journalism. Before joining The Times, he worked for 12 years on the Financial Times

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Eat Out From £5

Navigation - link to other main sections from here

If enjoyment and wellbeing are criteria then having sex is a sport

Cameron may drown in his clear blue water

With the collapse of their poll lead, the Tories have reverted to type and adopted a thoroughly bad economic policy