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Ray Goulding and Bob Elliot on the economy (see below).
On 14 August 2010 in this space I predicted that if the Calamity Coalition's budget cuts and tax increases were adopted, the UK economy would have negative growth (scroll down for the forecast itself). They were and it did: in the fourth quarter of 2010 the UK economy contracted by minus 0.5 percent. I was pleased that the not-so-ragged-trousered philanthropist George S[oros] denounced this outcome at Davos (people still attend this anachronism!!), though, bizarrely enough, did so while endorsing the "austerity program" itself (Guardian 27 Jan 2011, page 1).
Undeterred by apparently abject failure of policy, Chancellor George (Osborne) held his ground. With an insight that will no doubt result in a major reformulation of econometric forecasting models, he explained that the contraction resulted from snow in December (to be known by posterity as the Snowball Recession). It is true that snow fell in December in much of Britain (I was snowed in myself twice in the backwoods of Hampshire). Snow also fell in some other countries without resulting in an economic contraction. Preliminary estimates indicate that the US economy trudged through the snow at 3.7 percent during the fourth quarter (www.actionforex.com), up from 2.2 percent in the third quarter.
On the chance that Chancellor George might be mulling over why the US economy grew robustly and the UK economy contracted miserably, he might wish to note that the Obama administration implemented two fiscal expansions during 2009-2010. However, the madness of Chancellor George takes the form of a disbelief in the principle of cause and effect in economic matters.
It was plaintively suggested by the former national treasure Vince Cable that no "independent" forecaster had predicted such a severe outcome for the fourth quarter (there is talk of a re-make of Carol Reed's 1948 film Fallen Idol with Cable playing the title role of Baines, Ralph Richardson in the original, and Nick Clegg as the pre-adolescent Phillipe). Mr Cable is incorrect. Many made this prediction, including George Irvin (http://blogs.euobserver.com/irvin/about/). Cable is correct that no one with a substantial media exposure made such a prediction, which raises the question, why not?
That the UK economy would contract as a result of Coalition policies was and is blindingly obvious. The likelihood that exports or investment would compensate for the fall in public sector demand is not low, it is zero. Making the prediction that the economy would contract is what was called "a bird nest on the ground" when I grew up in Texas, a task so easy and profitable that only a fool would pass it up. Yet commentators in the press and broadcast media continued to refer to the possibility of avoiding a "double-dip" recession when it was clear we were in it. Predicting economic decline was "a mug's game", commented an apparently progressive academic economist at a Guardian meeting in November.
The failure is partly due to the contagion of the madness of Chancellor George, a madness that includes the belief that the economic equivalent of the laws of gravity have been repealed. The basic laws are quite simple and universal for capitalist economies. First, in the short run the level of aggregate output is determined by the level of aggregate demand. Adjustments in relative prices, the basis of Chancellor George's faux vision of recovery, at best occur slowly and unevenly.
Second, in the short run household expenditure is a function of current and anticipated income. There are no "consumer led" recoveries, because consumption expenditure in the short run is derivative from household income ("endogenous" or "induced"). Household expenditure can assume a semi-autonomous character, as in the United States in the 1990s and 2000s, but not in the short term, because its autonomy from income flows requires institutional accommodation such as refinancing mortgages that require time.
With these two basic laws in mind, predicting the UK contraction was, indeed, "a bird nest on the ground". Household income would fall due to the cuts and tax increase, resulting in a fall in household consumption expenditure, and - Hello! - the economy contracts (aka rocket science). Three decades of voodoo economics, for which several remarkably unremarkable men won Nobel Prizes, have successfully obscured the basic laws of macroeconomics, and done so for a purpose. The purpose has been to justify the unregulated rule of capital over society by discrediting the public sector as the regulator of the economy.
If anyone wants to hear economic sense rather than nonsense, I recommend attending the Progressive London Conference on 19 February, where one of the UK's most sensible economists, Victoria Chick will speak (details of the conference can be found at http://www.progressivelondon.org.uk/). In the meantime, I invoke the closing line made famous by Ray Goulding on the US radio programme The Bob and Ray Show, "write if you get work".
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