Friday, 6 December 2013

What Chancellors Do and Don't Influence

The Commons hue and cry of the Autumn Statement has died down. It was clear that at some point growth would return, and when it did, Ed Balls would be left with egg on his face. And so it transpired. There is a problem with the Cost of Living, but it started under Labour, and isn't as bad as they make out now. Yes wages are falling relative to inflation, but there's plenty of other factors at play, as I pointed out to Andrew Neil, yesterday. Labour's narrative completely ignores things like changes to taxation which have offset it. Living standards fell in 2007,2008 and savagely in 2011 but have subsequently returned to growth.

For Labour to make a song and dance about Gas Prices is particularly egregious as most of the rise is due to either taxation or a rise in the wholesale price, neither of which the utility companies can do anything about. Good politics. Lousy economics. Of course this...

... is going to have a bigger positive effect on living standard than anything a chancellor might do. A strong pound, a result of the UK's economic stability (our debt is now cheaper to insure than the Americans' - AA not withstanding) is an unalloyed good thing, but this won't stop the BBC is going to start with its mercantilist wibble about exporters suffering.

The cycle of rise and fall in GDP is like breathing. Investment happens in 7-10 year cycles then there's a fallow couple of years as malinvestment is purged. Gordon Brown thought he'd ended boom and bust, but that turned out to be hubris. The mechanism by which 'the great moderation' happened, the Greenspan put, actually made the crisis when it happened much, much worse. Recessions are like forest fires in Mediterranean climates, not only natural, but vital to the regeneration of the species that live there. But if you try to prevent them, you allow build up a thick scrubby undergrowth that when it does burn, destroys the productive part of the wood.

So George Osborne is claiming credit for the recovery. He's as wrong to do so as Ed Balls is for blaming him for the stagnation post 2010. But that's a standard lie of politics, widely repeated because I think chancellors believe it themselves. But that does not make what Osborne is trying to do wrong. Every post-war recovery is associated with spending cuts, but if you listened to Labour, only state "support to the economy" can create growth.

The fact is state spending takes resources, not just tax, but people. If all the quality graduates are becoming social workers and diversity co-ordinators, they're not starting small businesses or working in manufacturing. It's no surprise that when the state stops hiring, good people find something else to do that doesn't involve standing in the way with a clip-board.

State headcount has fallen faster than at any point since demobilisation at the end of WW2. State spending is high, when you include debt service, welfare and pensions, but the discretionary bit is lower than at any point since (I think) the 1950s. And this is as it should be. Money transfers like pensions & welfare increase overall utility and don't take money out of the economy. Indeed the poor have a lower marginal propensity to save than the rich. The bit that does take money out of the economy, worthless state apparatchiks has fallen. The economy is bearing a lower burden of unproductive state prod-noses.

So you have commentators saying the recovery is unsustainable, that it's the wrong sort of growth. But these are the same people who said austerity was self-defeating and who confidently predicted a triple-dip. The truth is the economy's not that amenable, at least in the short term,  to manipulation by chancellors. And in the long run the economy's not even amenable to Federal Reserve Chairmen. This recovery will last a few years, then we will have another recession. And it won't be the chancellor's fault then either.

What this crisis and the recovery shows, as if any more evidence were needed, that economies function best when the state enables, but does not do, and otherwise keeps itself as out of the way as possible. Carry on George. You're doing a good job.

1 comment:

jerred seisyll said...
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