Wednesday, 7 January 2009

Open Wide, Britain...

Belated New Year greetings to all.

Let's talk about pain and especially the pain of economics and politics.

In economics, pain is a recession, it's falling GDP and a batch of other indicators. In politics, pain is about having to do unpopular things which makes you as the politician less popular and the other guy who promises and end to the pain more popular.

As the global economy has slowed and the consequences of declining activity have begun to imact on voters, so politicians have decided that the pain of the voter is more important than the pain of the economy. Worldwide, Governments have initiated fiscal stimulus packages of breathtaking size (in the billions of pounds or dollars) in an attempt to mitigate the worst of unemployment and to maintain some form of economic activity and, in particular, to restore the shattered banking system.

After almost universal approval across the political spectrum, some voices have begun questioning the wisdom of these actions. One of the earliest critics of the wholesale spending stimulus package has been 2008 Analyst of the Year, Allister Heath, Editor of the London morning free newspaper, CityAM.

He's no politician - indeed, I disagree with almost all his politics (he is a dry-as-dust Thatcherite) but his analysis of the economic runes and his understanding of the financial system is far beyonf my own and, I suspect, almost all other political figures.

Heath argues (if I'm not miscontruing his approach) that the stimulus will only lead to a massive resurgence of inflation in the medium term. The other aspect of this is that it does nothing to change the behaviousrs that led to the crisis in the first place. If all Governments do is to try to ameliorate the pain without attacking the underlying causes, we will be back here again one day soon.

The unpopular part of this (and where the political pain comes from) is the fact that people need to understand the consequences of getting into debt and over-borrowing. Of course, the financial system needs reforming so easy credit isn't handed over to the greedy and gullible and that banks are properly capitalised and their assets properly and robustly managed but at the same time individuals are responsible for their own actions. People took on huge financial obligations without either understanding or appreciating the consequences.

It may well be then that the economic pain is a necessity inasmuch as society's attitude to credit and borrowing needs to be changed. It won't be pleasant and indeed will be very unpleasant for a great number of people but if the outcome is a more sensible attitude to debt and borrowing the future may be more secure.

The problem with that approach for politicians is that the public pain is often vented against incumbent politicians. In this context, the fiscal stimuli packages and tax cut proposals are as much a calculated political measure as an economic response. If the pain of the recession can be mitigated, so the argument goes, the Government will reap a political benefit and the economic consequences can be dealt with later.

That response of postponing the pain is of course selfish and foolish. The next year or two may not be good but, rather like going to the dentist, it's not always as bad as our own imaginations make us think it will be and it usually does us good in the longer run.

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