The writing is on the wall
The silence from the Tories' pals in business as the economy fails to hit George Osborne's targets s
Your humble correspondent has been busy. I was in Bonn, Germany, for meetings and then I headed to New York on one of Lufthansa's fantastic, huge new Airbus A380s. There, I debated with Thomas Hoenig, who recently retired as president of the Kansas City Federal Reserve. There are 12 regional Federal Reserve banks in the US, which alternate as voting members of the interest-rate-setting Federal Open Market Committee (FOMC).
Hoenig was the lone hawk on the FOMC who voted in a minority of one against monetary easing at all of the committee's meetings in 2010. Our debate was billed as a "battle of the dissenters". He is a nice man but sees inflation under every rock, so we didn't agree on much. It is now clear that his votes against easing were mistaken, given the rapid slowing of the world economy.
I then struggled from my house to the airport in Boston to fly to the UK, amid New England's worst ever October snowstorm. Almost unbelievably for this time of year, the plane even had to be de-iced. Some areas had more than 25 inches of snow.
Hawks in flight
On my arrival in London, my first engagement was to speak at a meeting, organised by the think tank Compass, at which economists who had written an open letter to the Observer were discussing their ideas for Plan B, an alternative to austerity. I was asked to sign the letter but did not, because there were certain policy prescriptions that I could not agree with. It is neither feasible nor practical to "direct quantitative easing to a green new deal", for instance. This is not the time to "increase benefits", as they wrote; it is a time to create jobs. I do not support the introduction of a financial transactions tax without international support, because it would drive businesses abroad. And the last thing we need right now is more taxes.
In the recent past, when such a letter attacking austerity was published, the Conservative Party organised a response from their business pals to say that all was well. The silence of the business community this time says a great deal.
We now hear little from those inflation hawks who, not so long ago, were calling for interest-rate rises even though the economy was tanking. And I have yet to hear from economists who think that the Chancellor, George Osborne, and the coalition government are on the right track. However, if there are any out there, please speak up and we can have a debate.
As it stands, another letter from business leaders pleading that the rest of us should embrace austerity would not be well received, in the light of the recent announcement that directors of Britain's biggest companies, such as Martin Sorrell of the advertising giant WPP, received an average pay increase of 49 per cent in the past year. My recommendation would be that it is probably a good time for these characters to start making large charitable donations to help those who are less fortunate than they are, rather than putting pen to paper. An Office for National Statistics (ONS) report that VAT takes more from the poor than the rich has merely contributed to the growing impression that we are not all in this together.
Meanwhile, the economic data keeps getting worse. First, the International Labour Organisation (ILO) warned that a jobs crisis caused by the slowdown of the global economy threatens to create a wave of social unrest around the world. The ILO's new social unrest index suggests that there is increasing discontent over the lack of jobs and that the poor are being hit disproportionately.
Second, Eurostat reported that the unemployment rate in the euro area had increased in September to 10.2 per cent, driven largely by a substantial increase in France. Incidentally, I fail to understand why the UK - along with Estonia, Latvia and Lithuania - is only able to publish unemployment rates for July, when every other major western country produces much more timely estimates.
The Organisation for Economic Co-operation and Development (OECD) also produced very downbeat estimates on the economic outlook ahead of the G20 summit in Cannes, France. On 31 October, it stated:
Much of the current weakness is due to a generalised loss of confidence in the ability of policymakers to put in place appropriate responses. It is therefore imperative to act decisively to restore confidence and to implement appropriate policies to restore longer-term fiscal sustainability at a pace that depends on the size of the fiscal challenge as well as the state of the economy and to strengthen long-term growth.
Yup. It sounds awfully like what the shadow chancellor, Ed Balls, has been saying.
If the mood were not uneasy enough, George Papandreou, prime minister of Greece, announced a referendum to approve a second national bailout agreement with the EU, raising the prospect of a full Greek default once again and spooking the markets.
David Cameron, writing in the Financial Times, argued that "we must counsel against pessimism", in a not-so-subtle attack on the Liberal Democrat Business Secretary, Vince Cable, who appears unimpressed with Osborne's stewardship of the economy. But the data does not inspire optimism. On 1 November, the latest gross domestic product figures from the ONS showed that the UK economy had grown by 0.5 per cent in the third quarter of this year and 0.5 per cent over the past 12 months. Let us recall that, in June 2010, the Office for Budget Responsibility forecast growth for 2011 of 2.6 per cent. It has not happened.
The CIPS survey from Markit on the manufacturing sector had an output balance of 48.4, which is the lowest since May 2009 and which, as Capital Economics has noted, is consistent with quarterly falls in manufacturing output of roughly 1 per cent.
So it looks to me as if output in the fourth quarter of this year will be negative. The calls for that Plan B are going to intensify. My worry is that it will be too little, too late.
David Blanchflower is the NS economics editor and professor at Dartmouth College, New Hampshire, and the University of Stirling