Sixty-seven years on, the heirs to Keynes return to Bretton Woods

Decades after the wartime Keynesian conference in New Hampshire, the world of economics again gather

For three weeks in 1944 the economic world came to New Hampshire to talk to John Maynard Keynes about the new economic order that was to be established once the Second World War was over. Representatives from 44 countries headed to the Mount Washington Hotel in Bretton Woods. The hotel sits in the pano­ramic valley below the mountain, which, at 6,288ft, is the highest peak in the north-eastern US and home to some of the world's worst weather: in April 1934, observers measured a wind gust of 231mph. It seems Keynes didn't much like the heat of New York in July.

I recall some eight years ago - before the hotel had been refurbished - coming to visit and being captivated by the Keynes Room (this is now sadly gone and all the artefacts are in storage). Indeed, on my visit it was closed off but I couldn't resist climbing over the barrier to take a closer look. As the only English professor of economics in the state, I thought I had a pretty good excuse if the alarm bells rang and the police arrived to arrest the intruder. But they didn't and nobody came.

On 8 April 2011, however, the world of economics did come to the Mount Washington Hotel for "Bretton Woods II" to discuss where economic theory goes from here.

Pain for Spain

New Hampshire, with its state motto of "Live Free or Die", seemed the right place to be for this conference, organised by the Institute for New Economic Thinking, which the billionaire financier and philanthropist George Soros helps to fund.

Speakers included Gordon Brown, Paul Volcker, Adair Turner, the economics Nobel laureates Joseph Stiglitz and George Akerlof, plus Ken Rogoff, Niall Ferguson, Robert Skidelsky, Larry Summers and Paul Volcker. A big chunk of the UK economics commentator pack was there, too. Me? I was there as a hack.

As the conference opened, there was the real possibility of a US government shutdown over the weekend, but at the final hour this was averted. However, the budget debate will continue; fortunately the US system is such that any deficit cuts take a while to be implemented, which means the likelihood of making a major macroeconomic mistake, as has happened in Europe, is minimised.

Speaking about events this side of the Atlan­tic, Rogoff, a former adviser to George Osborne, poured scorn on the idea that the European sovereign debt crisis was over now Portugal had asked for a bailout. Concerns that the crisis will spread to Spain persist and the European Central Bank's decision to raise interest rates this month did nothing to allay that fear. There are likely to be further rate rises that could impact on the Spanish housing market, not least because most home loans are based on variable-rate mortgages. House-price falls would be disastrous for many European banks.

Gordon Brown was the main keynote speaker and, strikingly, for the first time he apologised for the fact that the regulation of our financial system was inadequate. "We set up the FSA believing the problem would come from the failure of an individual institution. That was the big mistake . . . we didn't understand just how entangled things were." He added: "I have to accept my responsibility."

President Obama's ex-chief economic adviser, Larry Summers, focused some of his remarks on the UK and in the process caused quite a stir. He said: "I find the idea of expansionary fiscal contraction in the context of the world in which we now live to be every bit as oxymoronic as it sounds." Summers said he remains sceptical that a policy focused on improving "fiscal hygiene" would generate the confidence that a recovery needs. "I would be happy to say that if Britain enjoys a boom for the next two years from increased confidence, I will change my opinion," he said.

I don't think there is much chance he will have to, given consumer confidence has collapsed to levels below those at the depths of the recession in 2009. The British Retail Consortium (BRC) confirmed that retail sales values were down 1.9 per cent from March 2010, the worst year-on-year decline since the survey began in 1995. In addition, food sales fell well below the level of 2010 and non-food sales showed an even larger decline.

Stephen Robertson, director general of the BRC, noted that "uncomfortably high inflation and low wage growth have produced the first year-on-year fall in disposable incomes for 30 years. Mounting fuel and utility costs, falling house prices, higher VAT and the prospect of more tax rises and job losses left people unwilling to spend unless they really had to. These pressures aren't going away and the arrival of higher National Insurance is likely to compound them in the immediate future."

Slowing growth

The drop in the CPI inflation from 4.4 per cent to 4.0 per cent was a surprise, as the consensus among economists was for no change; it suggests that demand pressures are weakening fast. The biggest driver was a 1.4 per cent decline in food and non-alcoholic beverages - falling demand has pushed down the price of basic goods. The pound fell on the news, as did expectations of interest-rate increases any time soon. The drop in inflation killed off any chance of a rate rise in May which, in my view, was never going to happen anyway. It was unlikely the MPC would increase rates so close to the local elections on 5 May; members would not want to be accused of interfering in politics.

The labour-market data suggests that growth is slowing while wage pressure remains benign. Osborne's policies are unravelling: he needs to start reading the plan B the Cabinet Office has prepared for him when the economy goes belly up. Oxymoronic, indeed.

David Blanchflower is NS economics editor and a professor at Dartmouth College, New Hampshire, and the University of Stirling

David Blanchflower is professor of economics at Dartmouth College, New Hampshire, and a former member of the Bank of England's Monetary Policy Committee 

This article first appeared in the 18 April 2011 issue of the New Statesman, GOD Special