Welcome back to 1930s Britain
Cameron's claims of a new economic dynamism, but with no money, are just more weasel words.
I am writing this from beautiful Hong Kong, having arrived here late at night on a flight from Beijing. It was a pleasant shock to wake this morning to see double-decker buses driving on the left-hand side of the road so far from home.
I came to Beijing for the launch of Bloomberg's Chinese-language service and to sit on a panel to discuss China's role in the new world order. The throng of Chinese tourists at the Forbidden City somehow made it more real to us that China is a country of 1.3 billion people. The highlight of the trip so far was a visit to the Great Wall - something I have always wanted to do. The most comprehensive archaeological survey has recently concluded that the entire Great Wall, with all of its branches, stretches for 5,500 miles. We didn't walk all of it.
As for the awful traffic jams, I understand that the number of cars in Beijing is increasing by 2,000 a day and as a consequence air quality in the city is very bad. Most of them seemed to be German - BMWs, Audis and VWs were everywhere. From our hotel room on the 49th floor, we could only just see the ground because of the dense smog. It did eventually clear on the fourth day of our visit and then we had a great view across the city to the mountains. Next stop Singapore, where they also drive on the left.
The 20 October Spending Review was much as I expected. According to the Chancellor, George Osborne, the country had run out of money and was close to bankruptcy, and the cuts of over £80bn were fair. This was all spin. We were never close to bankruptcy; the country has not run out of money and the cuts are unfair.
The independent Institute for Fiscal Studies quickly showed that the poor would be hit hardest in the years ahead. The Deputy Prime Minister, Nick Clegg, bleated that the institute's comments about fairness were unfair, but nobody takes any notice of what he says any longer. Students in his Sheffield constituency, who were instrumental in getting him elected, are now, because of his flip-flop over tuition fees, apparently gathering signatures calling for the local election to be rerun, in the spirit of Clegg's own proposals to allow MPs accused of financial impropriety to be recalled.
Meanwhile, Britain's new Nobel prizewinner in economics, Chris Pissarides, my old friend and colleague from the LSE, quickly put to rest Osborne's claim that everyone from the Dalai Lama to the Pope supported his mad cull of jobs. "No one doubts that the Chancellor is taking risks with the recovery," Pissarides wrote in the Sunday Mirror. "These risks were not necessary at this point. He could have outlined a clear deficit reduction plan over the next five years, postponing more of the cuts, until recovery became less fragile. The 'sovereign risk' would have been minimal."
Unsurprisingly, support for the cuts is beginning to crumble as reality bites. A YouGov survey found that 44 per cent of respondents thought the cuts were too harsh, compared to 38 per cent who said they were about right. The majority, 55 per cent, said they agreed that "the government's plans to cut public spending amount to a desperate gamble with people's livelihoods".
There is a growing consensus against the cuts among commentators, from Martin Wolf and Samuel Brittan in the Financial Times to Anatole Kaletsky in the Times (none of whom can be called a left-winger), as well as from the first ministers, deputy first ministers and finance ministers of Scotland, Wales and Northern Ireland.
In addition, the Nobel Prize-winning economists Paul Krugman and Joseph Stiglitz have both written stinging critiques of Osborne's dangerous gamble. In the New York Times, Krugman warned: "The best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it."
By contrast, Osborne's expectation is that the private sector will step in to create lots of jobs and maintain growth. He hopes, too, that the Chinese will start buying British goods like gangbusters. Yet there is little sign that is going to happen any time soon, as it depends on an appreciation in the yuan. Despite his protestations, the US treasury secretary, Timothy Geithner, made little progress on that front at the recent G20 meeting in South Korea.
There was further bad news for the government from Markit's regional purchasing managers' index (PMI), published after the Spending Review, which showed a sharp deterioration in household finances. Negative sentiment about the 12-month outlook was most prominent among public-sector workers. Markit also found that "an air of anxiety continued to seep into the private sector". A decline in consumer spending would be one of Osborne's nightmare scenarios, as that would slam growth.
The GDP figures for the third quarter of 2010, published on 26 October, were much better than expected, with growth at 0.8 per cent, though they suggest the economy has slowed since the second quarter. The figures show that Alistair Darling's strategy was working well, contrary to what the coalition government has claimed. The question now is whether it will be blown off course by Osborne's austerity package. The puzzle remains why this growth figure is much stronger than suggested by the various business surveys, especially the PMI. Given that it is a preliminary estimate, it could still be revised downwards as more data comes in.
It seems likely that the economy will slow further in the fourth quarter, despite being boosted by spending brought forward to avoid the VAT increase to 20 per cent in January, and there is concern that GDP growth will be negative in the first quarter of 2011.
Cameron's claims of a new economic dynamism, but with no money, are just more weasel words. Success or failure will be determined by the data. The Q3 figures are a start. The worry is that it is downhill from here.
David Blanchflower is a labour economist and a professor at Dartmouth College, New Hampshire, and the University of Stirling