Osborne’s figures don’t add up
The Conservatives are still without a plausible plan for recovery
I returned to New Hampshire this week to find that the leaves have started to turn. After such a wet spring, there is every prospect the colours of fall will be spectacular. But another event very close to home started me thinking about next year's general election in Britain. On 22 September Dartmouth College, where I work, inaugurated its 17th president, the Harvard-trained physician and anthropologist Jim Yong Kim. Everyone is excited about having an ambitious and articulate young president - damn, he is younger than me - with a family. It will be the first time for years that little kids have lived in the president's house; the college is making it childproof at some expense. Heard that before? He is the first Asian American to lead an Ivy League university. I'm a big fan.
Digging a deeper hole
I am particularly struck by what Kim has not said. He has decided to wait before making new policy. He is trying to work out how bad the finances are - we depend a good deal on our endowment and it has shrunk in this downturn. It's the same story across the Ivy League. So it is time to work out what we can afford - to wait, look, listen and learn. Good plan.
This made me think about the changing of the guard that looks likely in the UK. And the contrast. The next general election, like the US presidential election last year, seems to be the opposition's to lose. A ham sandwich could win this one. Maybe or maybe not? Plan A for the Tories was to say they were against Labour, to talk in platitudes and to promise to make everyone happy. Unfortunately, they can't confine themselves to this simple message, and they have had to start putting some meat on the economic policy bone. And there's the rub. Their plans are not credible.
The shadow chancellor, George Osborne (who has little or no experience in economics), and his leader apparently opposed the Bank of England's policy of quantitative easing, which puts them in a deep hole straight away. The Tories opposed the 2.5 per cent cut in VAT - though they didn't, if I recall, offer an alternative. Plan A was working then. Their policy for avoiding the greater recession was what? They were against deregulation and low taxes on the rich. Not.
Now their big proposal is to cut public spending, namely public-sector pay and jobs - though it isn't clear where the cuts will come from, if defence and the NHS are ruled out. MPs' food allowances, maybe, and ministers' salaries? That should save us a million or two. The Tories would also close the Financial Services Authority and return responsibility for financial stability to the Bank of England. And they plan to keep interest rates low.
There are many problems with their ideas. First, it is not wise in a recession to remove the automatic stabilisers that dampen fluctuations in the economy without any explicit policy action by government. The evidence from the Bank of England's Trends in Lending survey published at the end of September suggests this would certainly make things worse. Net lending to businesses is down, especially to small ones. Apparently, lenders have yet to detect any significant increase in demand for new lending. What is the Tory plan to get banks lending again?
Second, unemployment is rising, especially among the young. Young unemployed people tend to commit crime, so it is likely that property and street crime, in particular, will go up. Where exactly are the new jobs going to come from under your great new strategy, Mr Osborne? Not in financial services, construction or the public sector, for sure. I have an idea - how about security guards? Unemployment will explode under your "lack of a plan for jobs", Mr Osborne!
Third, the trade unions are unlikely to sit idly by, and they will have the sympathy of voters whose kids and grandkids can't find jobs. Unionisation rates are a lot higher in the public sector than in the private sector. At the end of 2008, according to the Department for Business, Innovation and Skills, 57 per cent of employees in the public sector were union members, compared to 16 per cent in the private sector. Strikes in the public sector are a certainty, if you cut hard. How will you conduct government when large parts of the civil service are on strike?
Fourth, in a recent speech, young Osborne said he wanted "monetary activism to keep interest rates low and stimulate the economy". I don't know if he has noticed, but interest rates are already at 0.5 per cent and are likely to remain low for a long time to come. What's more, the governor of the Bank of England, Mervyn King, doesn't want responsibility for financial stability; he was never interested in it in the first place.Fifth, what will Tories do about the growing number of households in negative equity, even across their heartland of southern England? If house prices fall by 30 per cent, from peak to trough, as many as three million households will be in negative equity. In addition, there could be four million or more unemployed, as well as the self-employed whose profits will be down, and the employees whose hours have been reduced and those who have been forced to take part-time jobs because they can't find full-time positions: many of these people will not be able to pay their mortgages.
All of this would impact the banks, which would then be in an even worse mess than they are now. And more supply-side reforms won't do it, sorry.
So it seems to me that the so-called Tory economic strategy is up that old creek without a paddle. The party doesn't have a plausible plan for recovery. Dream on, George.
David Blanchflower is professor of economics at Dartmouth College, New Hampshire, and at the University of Stirling. He is a former member of the Bank of England's Monetary Policy Committee