Why Fraser Nelson is wrong

Even deeper spending cuts and a rise in interest rates would risk a depression.

The Tory apologist Fraser Nelson in the Spectator thinks that I am wrong. I am not. I am afraid his critique is entirely unconvincing, showing no knowledge at all of basic economics. Following his suggestions would plunge the economy into depression. Let's deal with his comments in turn.

1. "Gordon Brown may have gone but advocates of his calamitous policies remain."

Exactly which calamitous policies are you talking about, Fraser? Making the Bank of England independent, staying out of the euro, saving RBS, Lloyds and Northern Rock from failing and preventing the British economy going into depression? As I asked Michael Fallon in an earlier blog: exactly what policies would you have implemented in 2008 and 2009? I do recall, also, that the Tories matched Labour's spending plans up to 2008 and argued for even less regulation.

2. "David Blanchflower, the 'chief exponent of borrowing more'"

My view is entirely consistent with the views expressed by the chairman of the Federal Reserve, Ben Bernanke, at his press conference yesterday, in which he said that dealing with the deficit in the medium term is a priority. Cutting too deeply and too quickly, as this government is doing, compromises growth. Investing in the infrastructure and giving firms incentives to invest and hire in the long run will lower the deficit. A growing economy generates revenues. As Larry Summers said at Bretton Woods, the whole idea of an expansionary fiscal contraction is "oxymoronic". The empirical evidence from the real world, rather than Nelson's made-up one, is that austerity in the depths of a recession doesn't work. In the US, when a similar policy was implemented in the 1930s, it plunged the economy into a double-dip recession.

3. "The GDP figures showed growth of 0.5 per cent in the first quarter, bang in line with City expectations. But Blanchflower is deploying a rhetorical trick. He bolts on Q1 of 2011 with Q4 of 2010, where growth was -0.5 per cent, so that he can claim 'zero growth over six months' -- thereby covering up the real story of 'contraction, followed by expansion'."

No rhetorical trick -- I am a data reader. The economy slowed in Q4 2010, in large part due to the weather, which should have resulted in a strong first quarter in 2011 but it didn't. The ONS argued that, without the weather, growth in Q4 2010 would have been flat, so one should have expected a decent bounce-back in the next quarter, with growth of at least 1 per cent if the government's policies were working. It is not unreasonable to examine growth over the past six months, given that the government took office in May 2010. The growth in earlier quarters was directly attributable to Alastair Darling's policies working, which have now, disastrously for the British people, been unwound. Growth in Q2 and Q3 will be horrible as austerity hits. Unemployment is going to rise.

4. "As Cameron said in PMQs yesterday, when Ed Miliband was in the cabinet, quarterly growth never exceeded 0.5 per cent."

That is merely a cheap shot, as Nelson well knows that the UK economy, just like every other major economy, was hit by a global financial crisis that started in the US housing market in 2006. Pathetic. Cameron should actually be ashamed of himself for coming out with such puerile nonsense.

5. "The spending cuts have not yet been applied. We have monthly state spending figures up until March 2011 -- and in each month Osborne has set new records. Month after month, state spending has been even higher than it was under Brown."

Nelson makes my case for me -- we have had no growth over the last six months. To this point, though, government spending has been supportive of growth, but that is about to change. Sadly, Osborne has no growth policy, only a policy to destroy growth.

6. "Now, there will be a fiscal contraction -- of only 0.6 per cent in the financial year just started. But it hasn't kicked in yet, so the cause-and-effect that Blanchflower is longing to find just doesn't exist."

I agree that there will be a fiscal contraction that will decimate growth and raise unemployment. Fiscal contraction hasn't kicked in yet but it soon will, so things are going to worsen quickly. I am not longing to see the economy collapse but the fault for that must be laid at Osborne's door. The cause of the lack of growth we have seen is Osborne's inept policies. As Martin Wolf said in today's FT: "How much of this economic weakness was due to the fiscal tightening? At least some, one must assume". The fact that it took Osborne a year to come up with a "Plan for (No) Growth" that impressed nobody says it all.

7. "As Cameron said in PMQs yesterday, the coalition is cutting just £8 for every £7 that Darling would have cut. This is not much of a difference."

The economy was growing under Labour and the growth rate has fallen sharply under the coalition, so that is a big difference. A major explanation for the economic problems we are facing is that coalition ministers have talked the economy down by falsely arguing it was bankrupt, when it clearly was not. Cameron, Osborne, Huhne, Clegg and Alexander in particular played the political game of trying to blame Labour for all economic ills and must now take responsibility for destroying what Keynes called "animal spirits".

Consumer confidence has collapsed from the moment the coalition took office. Yesterday the GfK NOP Consumer Confidence Index, which started collapsing in May 2010, dropped three points this month to -31. April has seen decreases across all five measures; public perception of the country's general economic situation over the last 12 months and over the next 12 months, confidence in their own personal financial situation over the last 12 months and over the next 12 months, and the major purchases index. Good news Nelson? I think not.

8. In the column, I said that "Over the past six months, employment has grown by only 65,000 -- far below the numbers needed to compensate for the cull of jobs the coalition has planned. Unemployment is set to rise."

Nelson's response: "On the contrary, the OBR forecasts that unemployment has already peaked (at 8.3 per cent, or 2.6 million, on the ILO measure) and will steadily fall."

That is just a forecast, Fraser -- you need to take it with a very big pinch of salt. Virtually all other forecasters including NIESR expect unemployment to continue to rise as growth disappoints. Plus, to this point, the OBR has been overly optimistic and has had to lower its forecasts. Recall in its latest forecast that the OBR expected growth in Q1 2011 to be 0.8 per cent. There is no evidence from anywhere in the world that the "expansionary fiscal contractions" that Larry Summers called "oxymoronic" can pull an economy out of a deep recession, especially when there is little room for monetary loosening. Unemployment is not going to "steadily fall".

9. "And as for the new jobs compensating for the 'cull' of public-sector jobs, again the OBR data tells a different story. Private-sector job creation is forecast to offset public-sector job losses, just as it did under John Major's post-ERM spending reform."

There is little likelihood that the private sector can make up for the job losses Osborne is planning. For this to happen, the private sector would have to create perhaps as many as 2.5 million jobs but from 2000 Q1 and 2008 Q1, the private sector created only 1.63 million jobs, mostly in the financial sector and construction. So exactly which industries are going to hire all of these people, Fraser?

10. "Osborne is not making the argument as well as he could be, and is slowly losing the support which he built around the time of his first Budget. This should seriously worry the government, and cabinet members should give Osborne backup in making the economic case."

Just like the NHS reforms, the problem is all about presentation rather than the policies themselves? The problem that should worry cabinet members, Fraser, is that the policies are rotten.

11. "Nick Clegg has led the way here: his speeches about the economy and the need for cuts have been original and refreshingly free of hyperbole."

That's the best you can do? Nick Clegg has led the way? You must be kidding. Clegg's speeches have certainly been "understanding of economics"-free. How about this from his speech to the Lib Dem conference in Sheffield in March: "By cutting the deficit decisively, we have restored confidence in Britain." No you haven't. Consumer and business confidence has been collapsing from the moment the coalition formed.

On 21 April, in his AV speech in London, he said: "In the days before and after the election, we watched as Greece descended into turmoil because of a sovereign debt crisis that could easily have spread to Britain if the financial markets lost confidence in us."

There is zero similarity between Greece, which is stuck in a monetary union, and the UK, which has its own currency and, thanks to Gordon Brown, its own independent central bank. Greece is characterised by endemic tax evasion, a poor tax collection infrastructure, parochial patronage policies, corruption and huge delays in the administrative courts dealing with tax disputes. This clearly does not resemble developments in the UK. Over the past 250 years, Greece was in default for 200 while the UK was in default for exactly none. We have never defaulted. Greece also has deep structural problems, mostly in product markets with oligopolies in almost every industry, closed professions, administrative and bureaucratic impediments to entrepreneurship alongside barriers to trade and exporting. By contrast, the UK economy is flexible, with fewer administrative burdens.

Need I say more? The coalition and its supporters like Fraser Nelson should stop talking the economy down.

12. "The MPC's job is to keep inflation under control: it has no remit over growth, nor jobs. It's odd that an economist like Blanchflower can write a piece about the UK economy without mentioning the No 1 economic problem: inflation. But he does offer us a glimpse into the way that too many MPC members think: not so worried about the plunging value of money and more taken by Keynesian arguments about debt stimulus."

It would be helpful if Nelson got his facts straight. According to the Bank of England Act, the objectives of the Bank of England are (a) to maintain price stability, and (b) subject to that, to support the economic policy of Her Majesty's Government, including its objectives for growth and employment.

The main factors causing inflation to be high currently are what the Fed in its statement this week called "transitory", driven by VAT increases, the depreciation of the currency and recent increases in oil and commodity prices. CPIY, which excludes indirect taxes, is 2.5 per cent and would be lower still if it included falling house prices. Raising interest rates would be George Osborne's worst nightmare as it would cause the economy to slow further -- and then the coalition would really be in trouble. Think about what it would do to people on tracker mortgages who would see a big increase in their payments, which would cause house prices and retail spending to collapse. Nelson has zero understanding of monetary policy.

13. "Osborne is enacting Plan B. Plan A was Gordon Brown's and it drove Britain to fiscal ruin with a debt legacy that will saddle a generation with higher taxes, poorer public services, or both. And, more importantly, Osborne is going as slowly as he dares with spending cuts: already, credit rating agencies have warned that any deceleration in the cuts agenda would put Britain back into the danger zone."

More hyperbole. The UK was never anywhere close to "fiscal ruin". Since when did the credit rating agencies set macro policy? The credit rating agencies rated all those sub-prime mortgages that failed as AAA, if I recall.

14. "To 'rethink' on deficit reduction now would make Britain the next target of the bond markets and send us into the A&E ward of trashed economies, joining Greece, Ireland and Portugal. Miliband was teasing Osborne yesterday for being premature in saying that Britain was out of the danger zone. He may have a point. Osborne cannot change course -- the only option open to him is to speed up his journey towards fiscal sanity."

To repeat, there is no similarity between the UK and Ireland, Greece and Portugal -- zero, zippo, none. These countries are stuck in monetary union and do not have an exchange rate that they can depreciate. They had no choice than to go into austerity, whereas the coalition did so as a matter of choice. The UK was hit especially hard by a financial market shock because it hard a large financial sector. The Labour government was able to borrow at low rates and bond yields, in all likelihood, are low primarily because of the £200bn of quantitative easing done by the MPC, rather than from the coalition's actions. That is the whole point of QE. Bond yields are lower in the US, even though they have not engaged in fiscal austerity.

The UK economy is stagnating because the government is cutting too deep and too fast. Cutting even faster is an absurd suggestion. I agree with Jonathan Portes, the Cabinet Office's chief economist until February and now director of NIESR, writing in the FT this week that there are realistic alternatives to the coalition's miguided and futile economic strategy that Nelson likes so much.

"None of this means that the UK does not need a credible fiscal consolidation plan; it does . . . There are many areas where scaling back or delaying the cuts would boost both short-term demand and longer-term growth prospects. A small but important symbolic step would be for the coalition government to follow the advice of the Organisation for Economic Co-operation and Development, and 'encourage participation in secondary education by reintroducing the education maintenance allowance'. Such a move would show that the government took economic evidence and analysis seriously. More importantly, it would demonstrate that it was prepared to prioritise the interests of both poorer British teenagers and the economy as a whole, over a misguided and futile desire to appear 'tough' on fiscal policy. Put simply, the UK is a large country, issuing debt denominated in its own currency. It has very long average debt maturities and therefore no serious issues over its long-term solvency. Countries such as ours have considerable freedom over fiscal policy in the short to medium term. We should use it."

So Fraser wants the MPC to raise interest rates to solve inflation and the government to cut spending even faster. There is a significant risk that such policies would plunge the UK into a devastating depression. That is simply dangerous economic buffoonery. Fraser Nelson is wrong.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

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The Taliban's succession crisis will not diminish its resilience

Haibatullah Akhunzada's appointment as leader of the Taliban may put stress on the movement, but is unlikely to dampen its insurgency. 

After 19 years under the guidance of the Taliban’s supreme leader Mullah Omar, the group has now faced two succession crises in under a year. But although Haibatullah Akhunzada’s appointment as leader of the Taliban will likely put stress on the movement, it shows few signals of diminishing its renewed insurgency.

The news pretty much ends speculation about former leader Mullah Akhtar Mansour’s death in a US airstrike in Pakistan’s south-western Baluchistan province, which was criticised by Islamabad as a violation of its sovereignty.

The Taliban would have prepared extensively for this eventuality. The fast appointment, following days of intense council, appears to be a conspicuous act of decisiveness. It stands in contrast to the two-year delay the movement faced in announcing the death of the Mullah Omar. It will be not be lost on the Taliban that it was subterfuge around the death of Mullah Omar that caused the fracture within the movement which in turn led to the establishment of an ISIS presence in the country.

The appointment is a victory for the Taliban old guard. As former head of the Taliban's judiciary and Mullah Mansour’s deputy, in many ways, Haibatullah is a natural successor. Haibatullah, described by Afghanistan expert Sami Yousafzai as a “stone age Mullah,” demonstrates the Taliban’s inherent tendency to resort to tradition rather than innovation during times of internal crisis.

The decision taken by the Taliban to have an elder statesman of the group at the helm highlights the increasing marginalisation of the Haqqani network, a powerful subset within the Taliban that has been waging an offensive against the government and coalition forces in northwest Pakistan.

Sirajuddin Haqqani, the leader of the Haqqani network who already has a bounty of 5 million dollars on his head, was touted in some Taliban circles as a potential successor, however the decision to overlook him is a conservative move from the Taliban. 

The Taliban’s leadership of the jihad against the Afghan government is hinged on their claims to religious legitimacy, something the group will hope to affirm through the Haibatullah’s jurisprudential credentials. This assertion of authority has particular significance given the rise of ISIS elements in the country. The last two Taliban chiefs have both declared themselves to be amir ul-momineen or ‘leader of the faithful,’ providing a challenge to the parallel claims of ISIS’ Abu Bakr al-Baghdadi.

Any suggestions that Mansour’s death will lead to the unravelling of the Taliban are premature. The military targeting of prominent jihadi leaders within group structures has been seen in operations against the leadership of ISIS, al-Qaeda in the Arabian Peninsula, al-Qaeda in the Islamic Maghreb, and other groups.

In recent research for the Centre on Religion & Geopolitics, we found that it is often less prominent jihadis that play an integral role in keeping the movement alive. Targeted killings do create a void, but this often comes at the expense of addressing the wider support base and ideological draw of militant outfits. This is particularly relevant with a relatively decentralised movement like the Taliban.

Such operations can spur activity. If the example of the Taliban’s previous leadership succession is to be heeded, we might expect renewed attacks across Afghanistan, beyond the group’s strongholds near the eastern border with Pakistan. The brief capture of Kunduz, Afghanistan's fifth-largest city, at the end of September 2015, was a show of strength to answer the numerous internal critics of Mullah Mansour’s new leadership of the movement.

In a news cycle dominated by reports of ISIS, and to a diminishing extent al-Qaeda, atrocities, it is important to comprehend the renewed brutality of the Afghan insurgency.  Data from the Centre on Religion and Geopolitics Global Extremism Monitor found a seventeen per cent rise in fatalities from March to April, marking the start of the Taliban’s spring fighting season. A suicide attack in central Kabul on the headquarters of an elite military unit that killed 64 people was the single most deadly act of terror around the world in the month of April, and the group’s bloodiest attack in the Afghan capital for years. Reports this morning of a suicide attack on a bus killing 10 staff from an appeal court west of Kabul, suggests that the violence shows no sign of diminishing under the new leadership.

All these developments come during a period of renewed impetus behind international peace talks. Last week representatives from Pakistan were joined by delegates from Afghanistan, the United States, and China in an attempt to restart the stalled negotiation process with the Taliban.

Haibatullah Akhunzada’s early leadership moves will be watched closely by these countries, as well as dissonant voices within the movement, to ascertain what the Taliban does next, in a period of unprecedented challenge for the infamously resilient movement. 

Milo Comerford is a South and Central Asia Analyst for the Centre on Religion and Geopolitics