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We’ve just jumped off a cliff

George Osborne’s Comprehensive Spending Review is the biggest — and riskiest — macroeconomic experim

I was recently in Washington, DC for a meeting with members of the Federal Reserve Board as part of a conference on "structural change in the labour market". Half a dozen labour economists were invited along for a discussion on the major issues. Joblessness in the United States is of special concern to the Fed, especially in the light of the most recent data release, showing that non-farm payrolls fell 95,000 last month. Job creation in the private sector is insufficient to make up for losses in the public sector.

Of particular interest to me was a paper by John Haltiwanger, of the University of Maryland, in which he showed that the job creation rate in the US has fallen sharply every year for a decade. Americans simply have not been creating enough jobs; and the lack of credit availability is making things much worse.

I talked about the likely dire consequences of the coalition government's austerity package for the UK economy in general and the UK labour market in particular.

Vote of no confidence

For obvious reasons, I am unable to report details of the discussion with the board members. The minutes of the Federal Open Market Committee meeting on 21 September, released the day of our meeting, shed light on likely policy responses. The following statement stands out:

Many participants noted that if economic growth remained too slow to make satisfactory progress towards reducing the unemployment rate, or if inflation continued to come in below levels consistent with the FOMC's dual mandate, it would be appropriate to provide additional monetary policy accommodation.

The markets have taken these minutes as a strong indication that the Fed is about to engage in more quantitative easing. The same seems likely in the UK.

For me, the highlight came when, after the meeting, we went for lunch in the board's dining room overlooking the city. I had the pleasure of sitting next to Ben Bernanke, the Federal Reserve chairman. In May, at graduation exercises for the University of South Carolina, just over the border from where he was born, he had given an address on happiness economics, so we found we had many interests in common.

A Harvard economist said to me recently that the coalition government's fiscal deficit reduction programme is the biggest macroeconomic experiment in an advanced country in any of our lifetimes - and this was before the Comprehensive Spending Review on 20 October. He argued that no government, unless forced to, would be dumb enough to take such unnecessary risks with the well-being of the nation.

Every other country will be watching, he said, to ensure they don't repeat the same mistake as George Osborne's wildly unnecessary, misguided, doctrinaire and potentially dangerous spending cuts. They've let the Chancellor jump off the cliff first.

Everywhere I go around the world, I encoun­ter the same sense of astonishment among economists and policymakers (and I talk to many of them) that the UK government would ignore the risks and proceed to slash public spending and raise taxes during what is a once-in-a-hundred-years financial crisis.

I have no doubt that, because of the government's actions, Robert Chote, Graham Parker and my old pal Stephen Nickell, at the Office for Budget Responsibility, are going to have to cut the growth forecasts they inherited. That will put the government in a pretty pickle.

Already the data has spoken with a roar. The quarterly survey by the British Chambers of Commerce (BCC), conducted between 30 August and 20 September, was bad and "indicates that UK GDP growth slowed appreciably in Q3 2010". The BCC concluded that "reducing the threat of a double-dip recession must be the main policy priority".

The Nationwide consumer confidence index, which had picked up slightly in August from 57 to 61, collapsed to 53 in September. The expectations index has fallen by 47 points to 73 since February 2010, suggesting a growing anxiety among consumers about the strength of the recovery and their personal finances.

The biggest fall of all indicators in September was in the spending index, which dropped 14 points to 85 - its lowest level since November 2008. So much for the government's claims that its policy is intended to raise confidence.

Wasting youth

The British Retail Consortium reported that retail sales growth for September had slowed. The BRC's director general, Stephen Robertson, said: "Sales growth continues to be poor. We've now had six straight months of low growth thanks to persistently weak consumer confidence and worries about the future."

The Royal Institution of Chartered Surveyors' house price balance, which measures the percentage of agents reporting rising prices minus those reporting a fall, dipped from -32 in August to -36, the lowest reading since May 2009.

There is a lot of slack in the labour market. The Office for National Statistics announced in its October labour-market release that the timely claimant count increased in September by 5,300. The number of temporary workers who could not find a permanent job rose over the quarter by 38,000, as did the number of part-timers seeking full-time jobs (+65,000). Plus, there was an increase of 51,000 discouraged workers who were out of the labour force but wanted a job.

Of particular concern is that unemployment rates among those aged between 18 and 24 rose, according to both the ILO unemployment (+45,000) and claimant counts (+6,300). This is presumably not unrelated to the government having cut the number of university places. Joblessness is back to haunt our young people.

The cuts should provide a field day for the shadow chancellor, Alan Johnson, whom I wish well in his new job. My advice to him would be to oppose them tooth and nail - but he seems to have worked that out already. Happy to give any further assistance I can.

David Blanchflower is a labour economist 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 25 October 2010 issue of the New Statesman, What a carve up!