...a blog by Richard Flowers

Thursday, December 16, 2010

Day 3637: Before we have Plan B, Shouldn't we see if Plan A works? Plus… a Christmas Panto!


Master Gideon has suffered a series of disappointing economic statistics this week, just in time to spoil Christmas: inflation has increased from 3.2% to 3.3%; unemployment has increased by 35,000 to a rate of 7.9%; and November's High Street sales are up by just 0.3% on last year.

On top of this, it's been leaked that the Cabinet Secretary, Mr Gust O'Doomladen, has asked the Treasury to prepare contingency plans in case of further recession.

This has led to many calls for the Coalition to U-Turn and return to the Hard Labour model of, er, what was that again?

Look, I'm sure we EXPLAINED that thing were likely to get WORSE before they get BETTER…

Ironically, some of the self-same people who were saying that the BETTER-THAN-EXPECTED performance of the economy in the second and third quarters this year was REALLY the legacy of Hard Labour Chancer, Mr Alistair Dalek, are NOW saying that this is all the fault of incoming Minister for Living off the Trust Fund, Master Gideon.

The truth is rather more COMPLICATED.

Economies never turn around in MONTHS. It normally takes YEARS unless there is a Greece or Ireland style catastrophe in which case it takes DAYS, but it's never MONTHS!

The strong Coalition agreement and Master Gideon's emergency budget STABILISED the British economy and hopefully stopped it taking a dive off a cliff.

The Conservatories key demand in the Coalition agreement was to start the cuts THIS year, not leave them until next year. And cutting six billion pounds in spending SOUNDS like a lot of money, but in the context of a hundred and fifty billion pound overspend, or a total spend of over seven hundred billion it's chicken feed.

(Not that you can't feed a lot of chickens with six billion quid, and that a lot of chickens go hungry without it, but…)

So what the Coalition have done this year is less about actual change and more about setting a direction of travel and convincing the markets that we mean it by setting off with CONFIDENT stride along the route.

(And of course, CONFIDENCE depends on you APPEARING CONFIDENT, which is WHY Master Gideon and Mr Dr Vince and Mr Danny will go on SAYING that they have CONFIDENCE in the Coalition PLAN. It's NOT because they're being BLOODY MINDED but because they're NOT being BLOODY STUPID!)

So, anyway, it's NOT UNFAIR for Mr Dalek to get some of the CREDIT for those good months in summer. But it's ALSO his fault that things are going flakey NOW.

The drivers for INFLATION are the higher cost of food and clothes (and also furniture), which all depend quite a lot on IMPORTS. Droughts and floods and assorted climate change chaos has taken its toll of world crops, REDUCING SUPPLIES somewhat, and INCREASED DEMAND in China and also in India and Brazil and other rising economies has also pressed up prices. But we have ALSO been systematically DEVALUING our CURRENCY, undermining it with low interest rates and a quantum of easing (printing money).

I'm fairly sure we did warn you that stimulating the economy with imaginary money leads to inflation.

(And while I'm mentioning inflation, there was a VERY misleading statement on the news from a person from the IFS saying how the extra money going into education wasn't an above inflation increase now: strongly implying that LESS money was going in, rather than inflation having overtaken the increase we DID put in!

And then this morning we get SCARE stories saying "electricity bills could rise by £500 a year". Yes, over the next 20 years, it is claimed, an average bill of £1,157 could rise by over £500 because of the Coalition's green energy measures. Hang on… If inflation is 2% then, over 20 years, £1,157 rises to £1,686, that's a rise of…er… over £500. So the shock news is: government green energy plans mean bills could be exactly what they were going to be anyway!

What's tomorrow's headline? "Study shows that in ten years, people will be an average of ten years older! Calls to stop this Coalition policy of ALLOWING TIME TO PASS!!!"

But that's as may be…)

The rise in unemployment is almost entirely due to PUBLIC SECTOR jobs going, and not being replaced by PRIVATE SECTOR ones. I'm sure that the fact that unemployment has actually FALLEN in Scotland and Wales (with their more interventionist governments) compared to substantial rises in the English Midlands will be taken as a sign that the Coalition is wrong, but the fact that it has fallen in ultra-free-market LONDON as well would seem to belie that. It's unlikely that Bojo the Clown could be painted as a socialist.

There are a couple of significant points to think about though. First, and most important, these are actually HARD LABOUR'S CUTS.

In spite of the COINCIDENCE (or WAS it a coincidence?) in the timing of these announcements with the introduction of the Localism Bill and the admittedly tough settlements for local government, those are the amounts that they'll have for NEXT YEAR'S budget; the cuts this year are all coming out of Mr Dalek's last budgets.

(Or do you genuinely believe that local government is SO EFFICIENT that it can work out all the job cuts in two days flat?)

And second, the Coalition have actually acted to try and PRESERVE jobs by FREEZING PAY and RECRUITMENT in order that as widely as possible the contraction is by so-called NATURAL WASTAGE i.e. people leaving their jobs that would have left them anyway.

We had a DEEP and HARD recession and this year we started to bounce back. But, as they say in the City, even a DEAD CAT MONSTER will bounce if it hits the ground hard enough. After thirteen years of Hard Labour – and weighed down by all their DEBT – we may not be strong enough to achieve lift off on our own.

Rising inflation and rising unemployment are signs of this UNDERLYING WEAKNESS of the economy, not of ANYTHING that the Coalition has done.

That is not saying the Coalition are getting everything right. But neither does it mean we are getting anything wrong. It is simply TOO SOON to say.

In the LONG TERM there are HUGE problems with the Great British economy, which, it being Christmas, I shall explain through the medium of PANTOMIME…
Once upon a time, PRINCESS ROSE RED went into the ENCHANTED FOREST and came across the SEVEN DWARFS.

In those days, all seven of the little men would go down their mine and work work work the whole day through, digging up precious jewels. It was hard work, with constant danger of comic pratfalls and singing animals but it paid well and they were earning good money.

Princess Rose thought that she could help them out.

So she took two of the dwarfs out of the mine and gave them jobs in the "public sector" as Health and Safety Inspectors.

[Please, no "Elf and Safety" jokes, thank you.]

In order to pay their wages, Princess Rose raised a TAX on the other dwarfs. Now there were fewer miners mining so the mine was making less money. But there were the SAME number of dwarfs to pay. "Hmm, said one of the miners, "with all this extra tax to pay, I seem to be work work working harder than ever and getting less money for me! I had better put up my prices to protect my standard of living."

(And "quite right too," agreed Princess Rose.)

This caused RAMPANT INFLATION and made the mine less competitive. Unfortunately, some Chinese dwarfs came along and undercut the market, so the mine had had to close.

This made the dwarfs very UNHAPPY.

But Princess Rose told them that it was all the fault of the WICKED QUEEN because SHE was in charge now, and anyway Rose had had a NEW idea to help them out again.

Several of the dwarfs had been able to retrain and find work in the IT industry doing web design work. This earned them good money again.

But to help the others, Princess Rose employed ANOTHER two of the dwarfs as Health and Safety Inspector Inspectors, to make sure that the first two dwarfs were meeting their inspection targets.

[No, I said NO "Elf and Safety" jokes, thank you.]

Now there were only THREE dwarfs doing wealth-creating work, and their taxes were not enough to pay for the FOUR dwarfs in the "public sector". But that was okay, said Princess Rose, because she could borrow the difference from those nice Chinese dwarfs (who had LOTS of money to spare, now, thanks to their successful mine, er…)

And while we're at it, why don't you all go and borrow money from the nice EVIL VIZIER so that you can buy homes that you cannot afford. For the three little pigs had built three little houses, one out of straw and one out of sticks and one out of good red brick, but the EVIL VIZIER said that he could use his magic to make all the risks go away and everyone could be rich and there was no danger of the big bad wolf huffing and puffing and blowing and causing a global economic collapse.

"But won't we have to repay all this money one day?" asked Vincey, the most impertinent of the dwarfs.

"Oh no, we can go on borrowing money forever!" said Princess Rose. "For the Evil Vizier assures me he can create GOLD out of THIN AIR, and besides I have abolished boom and bust."

Unfortunately, this turned out to be a FAIRY STORY.

The Evil Vizier was ACTUALLY the EMPEROR WITH NO CLOTHES ON and the SUB-PRIME houses made of straw and of sticks were ACTUALLY worth bugger all when the big bad wolf came huffing and puffing.

In order to stop all of everyone's money from disappearing like a genii, Princess Rose had to borrow a whole lot MORE from the Chinese dwarfs in order to buy out the Evil Vizier, and she asked the Fairy Godmother to turn a Quantative Pumpkin into some extra money to tide things over (subject to it turning back again at midnight).

Everything would come right, she promised, if we could just keep on borrowing…

"Yes, Rose Red," said the Fairy Godmother, "you SHALL go to the Ed Balls."

[You may groan.]

And the dwarfs said: "we think we'd like the Wicked Queen back, please."

And the Wicked Queen said: "Mirror mirror on the wall, isn't THIS the FAIREST scheme of all!"

But Rose Red said "ooh, it wasn't MY fault, it was all the fault of the Evil Vizier and nothing to do with me, and ooh the Wicked Queen doesn't REALLY want to pay off the debts that we ran up with the Evil Vizier but REALLY just wants to cut the "public sector" as an attack on the poorest and weakest dwarfs, and ooh hasn't that Nick Whittington betrayed all the munchkins by breaking his pledge to the Lollipop Guild…"

[this metaphor's wearing a bit thin now, isn't it]

Look, the moral of the story is you need enough wealth creation in your system to cover what the Princess is spending if you're going to create the GROWTH that will take you to the GOOSE that LAYS the GOLDEN EGGS. You can't just count on the MAGIC BEANS to grow you a BEANSTALK, especially if you don't seem to know how many beans makes five!

To cut a long story short, it turns out that Rose Red was actually Rose BROWN…

And the Chinese dwarfs all lived happily ever after.

So, the Coalition's "Plan A" is to REBALANCE the economy, REDUCING the amount that the GOVERNMENT controls (i.e. spends) and ENCOURAGING PRIVATE sector growth through the New Green Deal and that same Green Energy Plan that the papers were scaremongering about (because cutting the amount we have to spend on importing energy is effectively wealth-creating – in a double-negative "cutting loss of created wealth" sort of way).

Failing that, we can always SELL DRUGS!

If Plan A WORKS then in a few YEARS' (not months') time, we can make a PROFIT re-privatising the banks that we bought AND give the economy a BOOST at the same time and see if we can't get it to TAKE OFF!

And if it DOESN'T work, THEN it will be time for Plan B. And Plan B is probably a General Election.

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