Published in full the text of David Blanchflowers take on Mervyn King's contradiction of the ConDems financial strategy from todays New Statesman.The Bank of England governor has directly contradicted the Chancellor's claim that the recession was all Labour's fault.
We may well look back at the first weekend of March 2011 as the point when the fortunes of Britain's coalition government changed. Over Saturday 5 and Sunday 6 March, we heard three speeches - from David Cameron, George Osborne and Iain Duncan Smith - that had nothing substantial to say and simply spread further economic disinformation and fear. There was also an awkward, off-stage, intervention by my old boss, the Bank of England governor, Mervyn King.
All in all, I get the sense that panic is setting in and that the economic mantra that the Conservative leadership has been trotting out since last year's election is being ignored. Evidence of this can be found in a YouGov poll, carried out on 3 and 4 March, in which the majority of respondents (56 per cent) thought the coalition was "handling the economy badly". Blaming the previous Labour government for all things bad on the economic front is no longer working.
In his speech at the Conservative spring shindig, Cameron declared war on the "enemies of enterprise". Upsetting six million public sector workers just as the austerity measures - read unemployment - hit probably isn't that smart. Earlier the same day, Duncan Smith told the conference that "it's not the absence of jobs that's the problem. It's the failure to match the unemployed to the jobs there are." Rubbish. There are five unemployed people chasing each recorded vacancy in Britain. Two years ago, the ratio was three to one. Duncan Smith appears not to understand that jobs for brain surgeons in Richmond aren't much use to an unemployed plumber in Rotherham.
The fear index
Meanwhile, Chancellor Osborne's speech - with its usual sarcastic, sneering tone - contained little to no economic analysis, but much political rhetoric. There were some weak promises about creating enterprise zones, but if they were such a good idea, why didn't he announce them in his Budget of May 2010?
The rest of the speech was punctuated with the usual platitudes: "We are on a hard road to a better future"; "We have to be realistic about where we're coming from - and optimistic about where we're going"; "We faced up to the task in hand"; "Our world will become a freer and richer place. But in the short term it adds to the challenge." He went on: "We are on your side. It's people who create growth." Really? I thought it was kangaroos.
He once again repeated the dangerous lie that "our nation was on the brink of bankruptcy". It wasn't. A chief executive of a major FTSE 100 firm wouldn't use such language, because if he did there would be a run on the company share price. The same rule should apply to the Chancellor of the Exchequer. As I have noted before, consumer confidence has collapsed since the leaders of the coalition started talking the economy down.
An update on the decline in confidence was published earlier this month by the European Commission. It charts what respondents in a monthly survey think will happen to unemployment over the following 12 months. A bigger number means that a higher proportion expect unemployment to increase. It is plotted in the graph below, alongside the unemployment rate. The series increased from May 2010 and jumped sharply in February 2011, from 51 to 56, the highest level since June 2009. There is fear. Consumers are expecting unemployment to rise, even though it has stayed pretty steady. This lack of confidence is likely to lead to lower consumer spending, which in turn will lower growth.
So far, so bad. But no worries, because Osborne is promising a Budget on 23 March that will be "unashamedly pro-growth, pro-enterprise and pro-aspiration". Perhaps. More likely is that it will be too little too late.
The Chancellor has hinted that he will help motorists by reversing plans for a rise in fuel duty of 1p above the rate of inflation. I recall, in January, the chief secretary to the Treasury, Danny Alexander, denying this would happen. Another coalition U-turn.
Repeat offenders
Enter Mervyn King, who used a newspaper interview directly to contradict Osborne's claim that the recession was all Labour's fault. He argued sensibly that, instead, the blame lay with the banks and the financial sector. Given that Osborne has touted the governor of the Bank of England as the font of all economic knowledge since King backed the coalition's austerity measures last year, this was an embarrassing intervention for him, to say the least.
My old pal didn't stop there. "Why do banks in general want to pay bonuses?" he asked. “It's because they live in a 'too big to fail' world in which the state will bail them out on the downside."
His assertion that "you need a credible plan to reduce [the deficit] over the lifetime of a parliament" is hardly a ringing endorsement of Osborne's claim that his is the only way to tackle the crisis. King was asked whether there could be a repeat of the financial crisis. "Yes," he replied. "The problem is still there. The search for yields goes on. Imbalances are beginning to grow again."
Any repeat of the crisis would plunge the economy back into recession at a time when Osborne had taken it to its knees. No wonder the governor is voting against rises in interest rates. This is a major blow to the government's claim that all is well and that the economy can withstand the austerity cuts and tax increases. Perhaps most important of all, King stated that the action taken to address the financial crisis, in 2008 and 2009, "prevented a repetition of the Great Depression".
That is the correct assessment, and the Federal Reserve chairman, Ben Bernanke, holds an identical view. Osborne and Cameron opposed those measures, so why should we trust them now? Mervyn certainly doesn't seem to.
David Blanchflower is NS economics editor and a professor at Dartmouth College, New Hampshire, and the University of Stirling.
