We are now in a depression of roughly the same magnitude, but of markedly longer duration, than the Great Depression, of 1931-1934, which lasted 48 months. We are now 45 months in, and less than half the economy's drop in output has been restored. The last five quarters of data – which George Osborne must own – have generated derisory growth of 0.1 per cent.
There is little improvement on the horizon. The slight uptick in the economy observed at the beginning of the year now appears to have gone into reverse. The British Retail Consortium (BRC) reported this week that UK retail sales values were down 0.3 per cent on a like-for-like basis from the same month last year. The recent increase in oil prices will also mean that headline inflation may not decline as quickly as I for one had hoped, which means a smaller boost to consumption this year.
According to the closely watched Markit/CIPS Purchasing Manager's Index, services and manufacturing growth both disappointed: the latest eurozone data also showed that the UK's largest export market is also headed inexorably into recession. Along with the UK, 11 of the 17 members of the single currency bloc had negative growth in the latest quarter.
The idea that cutting public spending was going to lead to a dramatic growth in the private sector – so-called expansionary fiscal expansion – was always laughable. In a deep recession, the public sector does not "crowd out" the private sector, rather it crowds it in, especially when your major export market is diving and banks are not lending. Over the last 12 months for which we have data, employment in the public sector fell by 276,000, while employment in the private sector grew by 262,000, and total hours worked are down on the year by 3.3 million or 0.4 per cent.
I attribute a large part of the blame for the lack of growth since the Coalition took office to George Osborne, David Cameron and Nick Clegg putting party interests ahead of country. On numerous occasions the trio variously claimed the economy was bankrupt, that we had somehow run out of money, and that we were comparable to Greece, which is totally untrue. Lies, damn lies and politicians. The UK has its own central bank and can print as much money as necessary, plus the Government can borrow long at negative real interest rates. Such foolish talk has cost jobs and effectively has driven down the share price of UK Plc and lowered business and consumer confidence well before the majority of the cuts have been implemented. If a country is bankrupt, why would any firm want to invest here?
The MPC made two serious misjudgements about the impact of loosening monetary policy. The first was that they did not expect such a rapid pass-through of inflation as a result of the depreciation of the currency, which is down a fifth. To be fair to them, the literature had suggested that the response would be low and slow, but it turned out to be fast and deep. The other mistake was to believe that there would be a big import substitution effect, which would help the economy to rebalance away from its over-dependence on financial services. The idea here is that as the currency depreciates this makes imports more expensive and hence gives a boost to domestic production, which previously was uncompetitive. Cash-rich large corporations have been sitting on wads of cash that they are reticent to invest in the UK, for good reason, and the Coalition has given them little incentive to do so. Small firms are credit-constrained and can't borrow, the Merlin project failed, and the Chancellor's credit easing programme hasn't even started yet. Osborne, Cameron and Clegg scared import substitution away.
However, there has been some good news on the jobs front. Tesco is creating 20,000 jobs, and there was a big song and dance by the Government this week over the announcement that Nissan plans to build a new compact car, the Invitation, in Sunderland, with an investment of £125m. Nissan expects to directly create 400 jobs, but estimates that there will also be 1,600 additional jobs down the supply chain, supported by a government grant of £9.3m. In contrast, there was almost total governmental silence over the news from the largely publicly owned RBS that it is shifting 300 jobs in Edinburgh and London to India. BAE System's axing of 2,000 high-level manufacturing jobs, including 750 at Brough in East Yorkshire, continuing fears for 2,800 jobs at GM's plant in Ellesmere Port along with a loss of 1,200 jobs because of the closure of the retailer Peacocks suggests that the Nissan announcement is not enough. So why did Nissan get aid and not the others?
The relative importance of government employment in the poorer regions such as the North-east and the North-west means that the front-loaded cull of public-sector jobs has hit them especially hard. The now abolished regional development agencies would have been perfect to loan money to small firms as part of the credit easing programme. Recent work by John van Reenen and co-authors at the LSE suggest that government investment grants to smaller manufacturing firms in economically disadvantaged areas of Great Britain can increase employment, but that grants to big firms have no effect. They found the cost per job was $6,300, created largely from the pool of unemployed workers, suggesting that investment subsidies can be highly cost-effective.
The news from Nissan does suggest that giving firms incentives to hire and invest will get the economy moving again. So if £9.3m can buy 2,000 jobs, why not give £9.3bn as investment and job subsidies to firms in the disadvantaged regions, which, assuming the Nissan formula, could create 2 million jobs? Now there's a better idea for Osborne's Budget than scrapping the 50p tax rate. If not, why not?
David Blanchflower is professor of economics at Dartmouth College, New Hampshire, and a former member ofthe Bank of England's Monetary Policy Committee.
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