Gordon Brown should learn from the Medical Doctors

The Government yesterday announced plans to “help 500,000 people into work or training.” This was my rely to John Redwood’s postingWhat do we want? Jobs. When do we want them? Now.

 

 

You are right Mr Redwood in saying due consideration needs to be given to the relative success past schemes. However, this needs to be in the context of the current realities.

 

  1. The budget deficit is already ballooning, with a very real prospect of debt running out of control. Committing to endless schemes will mean massive rises in taxes just as a recovery may be getting underway. George Osborne should make a couple of visits to the IMF to get to know the place, and practice shuffling on his knees.
  2. Any employment schemes will prove most cost effective when the recovery is underway, not while the economy is still shrinking.

 

RULES-OF-THUMB need to be used in evaluating policy. At a minimum, any stimulus, business subsidy or job-creation strategy should follow the following criteria.

 

  1. It must have a reasonable chance of generating more economic benefits that costs. Preferably it should have the prospect of having a positive impact on the Exchequer.
  2. Each project should be, at most, an annual commitment with limits imposed. Reviews should be stringent and the plug pulled if costs run out of control, or if projected benefits are not materializing.
  3. The timing is crucial. If the time is not right existing policies should be pulled. For instance, stamp duty should be re-introduced until the market has started to recover. (Lord Lamont has admitted that it did not work in 1992 and it is not working now) Similarly, if job creation schemes are to be effective, they should only be enacted on a large scale once the economy has bottomed out, when the marginal impact will be greater.
  4. The government should be aware of its own limitations. To be effective means to be shrewd, ruthless of failure and focused on realities. As with any elected government, this conflicts with pleasing popular opinion and maintaining an image.
  5. Finally, the government should limit the difficulties it is imposing. It should critically look at the regulations that have little benefits but impose onerous costs, either temporarily suspending them, or removing them off the statute book.

 

However, the Rules-of-Thumb might be too complex in these panic-stricken times. Instead consider the analogy is with a doctor who he presented with a condition that has not been fully diagnosed. The doctor will first do no harm. Then she will diagnose the best she can, after which will then try various treatments, monitering the patient constantly. If a treatment does not show positive effects, something else will be tried. But with each treatment, the doctor will study and learn. The doctor would consult with others, and not introduce two treatments that known, or likely to, conflict. She was would also be aware of the side effects of dangerous drugs, such as using pain killers that may become additive.

 

 

 

 

Now for a “Quantitative Easing”

Following the Bank of England’s MPC cut in interest rates to the lowest level in it’s 300 year history, John Redwood MP posted the following comment under “The MPC and the BBC”

 

I see and hear in today’s media that “quantitative easing” is back on the agenda as a possibility “if all else fails”. I would urge all those about to broadcast or write on this subject to take the precaution of first reading the latest Bank of England Weekly statements. These show that quantitative easing is well underway. The Bank’s balance sheet has ballooned from well under £100 billion last September, to nearly £240 billion by the year end. Just picking up tittle tattle from “sources” can be very misleading.

Actual printing of bank notes has been more limited, but these are up over the year by more than 10%, well ahead of the fall in economic activity and price increases.

 

In response I posted the following

 

“The comments by WheresMyVote on 08 Jan 2009 at 4:06 pm  and  Acornon 08 Jan 2009 at 11:14 am    about the recent banking bill proposing to scrap weekly reports reminds me of the New Classical Macroeconomics of the 1980s. A “bastardized” form (as taught by some of my economics lecturers) was that “quantitative easing” would only work on the real economy to the extent that economic agents believed that monetary changes were in fact signals of real changes. This is why, when bringing down inflation in 1980s, money supply figures were headline news, so that the real impact on the economy could be reduced.

The Government, seems to have taken on board a cynical interpretation of “The Rational Expectations Hypothesis” in so far as hiding this quantitative easing, maximizes the “real” impact. It is ironic that some of the Government as students would have marched against the monetarist policies of a generation ago, seemed to have swallowed whole this aspect.

However, the “quantitative easing” will not work, as the cause of the downturn is fact that the previous boom was carried on far too long by artificially low interest rates. Businesses will not invest until the future becomes more certain. People will not buy houses until prices have fallen to affordable levels; until the job situation is clearer; and until they have reduce debt and saved a deposit. Banks would be imprudent to lend more to businesses in order to let their overdrafts escalate out of control, or for house purchase when the value of the house could soon be less than the loan.

The government must wait until the imbalances have cleared before acting. The current action of reducing interest rates and “quantitative easing” will only work in so far as they will further delay the necessary adjustment and make the reckoning more painful and drawn out. As Mr Redwood points out, interest rates should have been raised, not lowered and government finances brought under control.”   

 

With hindsight, if the MPC has micro-managed less and if the government had not further expanded and extended the boom by a spending spree, than we would have the means to offset the downturn. But then again, the downturn would not be as steep in the first place, so would be easier to combat

 

If the British economy is not to suffer irreparable damage, the action to take now is to lay the foundations for our future prosperity. Principally, it is to learn the following.

1)                          That intervention to stimulate the economy is to be reserved for severe situations. Avoiding minor downturns will only result in a bigger bust later.

2)                          We can never know the right levels of intervention, and popular opinion will usually lead to over-reacting. Therefore, a dogmatic conservatism should be engendered in both the MPC and governments

3)                          In a boom, we governments should always run a surplus. This means that a surplus, with a falling national debt, should be viewed as the norm not a pleasant surprise for a couple of years in a generation.

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