The election fast approaches, and economic policy is the number one issue for voters, as I suspected it would be, and as it should be. The final televised leaders' debate was on the economy. The consequences of a major mistake in economic policy are severe.
In deciding which party to back at the ballot box, voters should be mindful of the lessons provided by that annoying volcanic ash cloud. Flights were banned because of the possibility, however remote, of engine failure. The authorities could not take the risk that a plane might be damaged by the ash and, as a result, go down with a huge loss of life. Disruption is always better than death. Rare events - or black swans, as the scholar and Wall Street trader Nassim Nicholas Taleb has called them - happen. Caution is the best policy.
And so it is for economies. As with the volcano, the fallout from this once-in-a-century financial crisis may last a long time. Policymakers must not take the risk, however small, that the economy could go down in flames.
Two distinguished commentators have eloquently put the case for delaying public spending cuts. Martin Wolf, writing in the Financial Times on 15 April, argued that "the single most effective way to bring the public finances back under control is greater demand and higher GDP. This needs higher investment and net exports and more dynamic supply. Measures that seek to close the fiscal deficit, but destroy demand in doing so, will not help: fiscal austerity is just not enough."
On 22 April, also in the FT, Samuel Brittan concurred. "In the very uncertain subject of political economy," he wrote, "I am inclined to agree with Gordon Brown's government that too early a start on cutting the UK Budget would threaten a still precarious economic recovery."
The first official estimate of GDP for the first quarter of 2010 was published by the Office for National Statistics on 23 April. The growth rate of 0.2 per cent was well below expectations that had put it at 0.4 per cent.
The fragile increase gave a boost to Brown's argument that the stimulus should be continued for the foreseeable future. Labour and the Liberal Democrats agreed that the recovery would be put at risk by the Conservative Party's plan to cut public spending by £6bn in an emergency Budget in July. Vince Cable, the Liberal Democrats' Treasury spokesman, said that the economy was at risk of a double-dip recession even without spending cuts. He is right.
The monthly report by the 12 regional agents of the Bank of England, published on 21 April, confirmed that UK growth is anaemic. The report noted weakness in retail sales, the housing market, the construction sector, investment and employment intentions, and in pay settlements. Bank credit had improved only "marginally".
Even though, according to the most recent data, the claimant count has fallen, the unemployment rate has increased from 7.8 to 8 per cent. The number of young people under the age of 25 and in employment fell by 53,000 - 60 per cent of the total fall. The right strategy, going forward, is jobs, jobs and more jobs. The Tories' only strategy seems to be to destroy them.
After two leaders' debates, it looks as if the election might not produce an outright winner. David Cameron's scare tactic of claiming that a hung parliament will bring about an economic meltdown appears to have little foundation. Indeed, of the 16 countries that currently enjoy the top triple-A rating for financial stability, ten are run by coalition governments.
Arnaud Mares, lead UK analyst of the ratings firm Moody's, was reported as saying: "A hung parliament does not in itself have direct implications for Moody's UK rating. The three main parties broadly agree on the desirability of fiscal consolidation on a scale that, if implemented strictly over the course of the next parliament, would be consistent with the government maintaining its Moody's AAA rating."
Mansoor Mohi-uddin, managing director of foreign exchange at UBS, said that the pound may fall initially if the election results in a hung parliament, but his bank expects that the new government, whatever its hue, will pass a summer Budget showing how it will deal with Britain's public finances, and this should calm fears about sterling.
A bigger concern, according to UBS, would be "if any party wins an outright majority and cuts the Budget too quickly while the UK economy is fragile. This could induce the Bank of England to resume quantitative easing, which would be to the detriment of sterling."
Forget the euro, Nick
Fortunately, the Lib Dem policy of joining the euro seems to be off the table. Britain has benefited from having an independent central bank and a currency that it has had the power to depreciate. In particular, this has helped the country's manufacturing sector by making our exports more competitive. And Britain's central bank has been able to move quickly, unlike the European Central Bank, which still hasn't managed to sort out little Greece's tragedy. Greece's GDP is 3 per cent of the total in the eurozone. And if you can't deal with Greece, what about other financially weak governments in Italy and Spain, which account for 17 per cent and 13 per cent, respectively, of eurozone GDP?
Having to co-ordinate 16 different diaries, and bring together all those translators, pretty much rules out the possibility of flexibility. Unscheduled meetings take months to organise, so nothing happens. Calling in the International Monetary Fund to sort out the mess was almost inevitable.
Joining the euro would be very bad for the British economy. You need to shelve that idea, Vince, if you want to be part of any coalition. Put your PhD in economics to best use and persuade Nick Clegg that this is a non-starter.
Flexibility, not ideology, must drive our economic policies. We are perilously close to a position that would lead, later in 2010, to the new government being forced to consider an additional stimulus to pull the economy back out of recession. Especially if that wretched volcano erupts again.
David Blanchflower is Bruce V Rauner Professor of Economics at Dartmouth College, New Hampshire, and professor at the University of Stirling.