STAFF NEWS & ANALYSIS
And Next for Britain, the Semi-Slump
By Staff News & Analysis - July 21, 2009

Economists are uncertain about the likely path of recovery. For example, less than a year ago Britain's National Institute of Economic and Social Research was predicting that the UK economy would "escape recession", forecasting positive economic growth in both 2008 and 2009. … The US is six quarters into recession. Despite a substantial fiscal stimulus and very accommodating monetary policy there is little sign that recovery is imminent. … The Bank of England's timid monetary policy committee should not have sat on its hands last week; it should have expanded further its programme of quantitative easing. In the current circumstances, if we are to avoid the "dragging conditions of semi-slump", public spending cuts make absolutely no sense. The government should be increasing spending now – and by a lot – not least because it can borrow at such a low long-run rate of interest. In such circumstances, infrastructure and education are smart investments for all our futures. Most of the self-proclaimed experts calling for public spending cuts missed the recession in the first place. – Guardian

Dominant Social Theme: More powers are needed.

Free-Market Analysis: Here at the Daily Bell we have never much believed in green shoots and we can see from the above article that those who have been spotting them are retreating. But more than that, this article in Britain's Guardian blames the Bank of England for not doing enough to encourage such sprigs. In our opinion, the best thing the Bank of England could do is nothing. It's already done enough – and ruined enough. But that won't stop the stimulus camp from demanding that central banks in Europe, Britain and America pour even more money down the proverbial rat-hole.

This analysis of the crisis as-it-is-now is written by David Blanchflower. Who is he? According to the article byline, "David Blanchflower is a professor of economics at Dartmouth College and a research associate at the NBER. He was a member of the Bank of England's MPC from June 2006 to May 2009."

Given that he was a Bank of England associate it is probably to be expected that he calls on the bank to perform additional services. Here's what he wants: "So I have a question for Gordon Brown (pictured above left), David Cameron and Nick Clegg. What plans do you have to get unemployment down any time soon? If you want to transform a recession into a depression, go ahead and cut public spending. I would advise against it and so, I believe, would John Maynard Keynes. Voters want jobs."

Given the plethora of opinions on the Internet, it is pretty incredible that this is the best that Blanchflower can come up with. There is a good deal of consensus, certainly in America, that central banking was the proximate cause of the financial crisis. And there is an emerging consensus, among free-market types anyway, that any additional public spending is bound to be counterproductive, freezing the economy's mal-investments and choking off any chance of a short-term recovery. Blanchflower's point of view is exactly the opposite. He begins the article as follows:

'The duration of the slump may be much more prolonged than most people are expecting and … much will be changed both in our ideas and in our methods before we emerge. Not, of course the duration of the acute phase of the slump, but that of the long, dragging conditions of semi-slump, or at least sub-normal prosperity, which may be expected to succeed the acute phase." John Maynard Keynes's lucid warning, delivered in 1930, might equally apply today.

One wonders if this sort of point of view will win the day in Britain. If so, then the country is bound to go from bad to worse. One can see that the bailout fever inspired by Barack Obama is waning in the United States – which will eventually recover in some form from the financial crisis. But Britain, with a far less elastic polity and a far more powerful monetary elite than the United States may end up sticking with problematic central banking activities far longer. And the hole will be far deeper.

Of course, even within Britain there are those who see clearly what has occurred and what must be done. Here's something that appeared in the London Times not long ago written by the market-based philospher and economist Jamie Whyte:

Conventional wisdom contends that the current recession was caused by the free-market zealotry of recent economic policy and by excessively low interest rates. It is an absurd view, given that interest rates are not determined by market forces. Interest rates are manipulated by central banks with a government-mandated monopoly in the issuance of money.

Some of those still defending free markets protest that, contrary to popular opinion, banks were heavily regulated before the financial crisis. So they were. But this is quibbling. The role of central banks means that, at its core, we did not have a free market financial system. We had a command economy.

Command economies do not fail because the central planning agencies lack the powers required to bring about the best outcomes. They fail because, without market prices, nobody has the information required to adapt the allocation of scarce resources to the demand for them. They fail because central planners have an impossible job. The Bank of England should not get tougher or try harder. It should give up.

After Thoughts

There are those in Britain who do see that the country has wandered a long way down the wrong path. But the consensus of both right and left (see other article, this issue) seems to focus on providing more not less power to the very institutions responsible for the crisis. Ultimately, the more these ill-considered remedies are supplied, the worse-off Britain will be. And the snap-back will be prolonged and powerful – maybe even to the point of setting up the conditions for the return to the gold standard, a last resort that will likely look increasingly practical in both the US and the UK if Britain does not change direction.

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