Outlook: Keynes is all the rage again, but is he really the answer?

Radio valuations; Refuelling spat

Come back Keynes, all is forgiven. That, at least, was the message from the United Nations' annual "Trade and Development Report", published yesterday. What's needed to get the world out of its economic funk is a good old-fashioned dose of Keynsian policy, the report says, by which it means lots more government spending, particularly in Europe. In apocalyptic terms, the report warns of dire consequences if decisive action isn't taken soon to restore stability to the capital markets, reverse the rise in unemployment, and get the world economy going again.

And those consequences are? A deepening of "the existing discontent with globalization among a wide section of the world's population, triggering a political backlash and a loss of faith in markets and openness, and leading to international economic disintegration with the burden falling disproportionately on the poor and underprivileged". Goodness. Could it really be so bad? The UN assessment reads more like polemic than serious analysis and, as with most polemic, it makes both some good points and some bad ones.

The model in the post bubble world for the successful application of Keynsian policy - that is for governments to spend their way out of the downturn - is Britain, and to a lesser extent the United States. Both have been prepared to cut interest rates to way below what would normally be required to achieve trend growth, and, more particularly, both have been prepared to run big budget deficits to help support the economy. However, only in Britain has the medicine been working just as the great master of modern economics would have predicted.

So far, Britain has avoided a recession, unlike almost every other developed country. Furthermore, something close to full employment has been maintained right through the downturn, and living standards have continued to rise. In the US the policy mix has been broadly the same, only there has been both tax cutting as well as higher federal spending, yet so far it's had little effect on rising unemployment, business investment has failed to revive, and the still nascent wider economic recovery continues to look fragile.

What's required, the UN suggests, is an internationally co-ordinated fiscal stimulus over and above normal stabilisers. Only by this means will the deflationary pressures building in the world economy be nipped in the bud. Up to a point, the UN is correct. More could reasonably be spent in the eurozone were it not for the constraints of the growth and stability pact. The pact is being reformed, so that the current straitjacket on public spending is removed, yet without parallel structural reform, particularly in Germany, the effect might be quite limited.

For evidence of this look no further than Japan, which has tested the limits of both monetary and fiscal policy in attempting to counter deflation, so far with virtually nil impact. Interest rates are close to zero and the budget deficit is of a size that would give the creators of the growth and stability pact a heart attack, but to no avail.

Meanwhile, in Britain, we are already seeing some of the downside of the application of Keynsian policy - strong wage inflation in the public sector plus growing evidence of a crowding out of the private sector in both labour and capital markets. Gordon Brown, the Chancellor, aims to balance the budget over the economic cycle as a whole, but if in countering the downturn he so pole-axes the private sector that the tax base is permanently weakened, he won't achieve it.

Keynsian demand management became discredited during the inflationary 1970s, but like an orbiting comet, he seems to have returned. The UN sees his teachings as a panacea. Up to a point there's no harm in it, but we are not yet, as the UN seems to suggest, on the verge of a 1930s style economic meltdown. The outlook for the world economy is not as bad as the UN paints it - really - and for the time being markets continue to offer a better solution to our economic ills than governments.

Radio valuations

There's a bid premium in the Capital Radio share price, yet it's hard to see why. The stock answer is that deregulation has opened up the market to foreign takeover bids and consolidation, so it's only a matter of time before Capital and other independents are gobbled up. Not on these valuations they won't be. For a company such as the US based Clear Channel, buying Capital would represent small change, but even so, the Americans would want to make a return on their money, and the UK radio industry is in too much of a state of flux for that to be relied upon.

The big uncertainty is digital, which creates the bandwidth for many more radio channels and implies a lot more fragmentation in what is already a quite fragmented industry. Index linking of the licence fee has allowed the BBC to chuck money at digital radio and TV in ever increasing quantities, but with the advertising downturn, scarcely anyone else has been able to afford it.

The switch to digital is bound to spawn new channels with national reach, yet it is impossible to tell at this stage who they might be, and whereas digital will undoubtedly expand the advertising market for radio, as it has done for TV, it probably won't be by enough to support the entire legion of different channels likely to emerge. At the very least, the existing commercial radio stations face an erosion of market share, both for audiences and advertising. So the case for buying Capital and other commercial radio assets on current valuations is far from obvious, for foreign bidders and existing players alike.

Refuelling spat

Mentioning Nimrod in the context of a military procurement contest for mid-air refuelling aircraft is a bit like uttering the word Macbeth inside the theatre. Nevertheless, one of the bidders for the RAF's £13bn order has indeed used the N-word and the gloves are off.

Robin Southwell of AirTanker, a man with a reputation for firing from the lip, has suggested that if the MoD selects the rival Tanker Team's used Boeing 767s, then they could end up with another Nimrod-style fiasco on their hands, and perhaps a bill for the taxpayer running into several hundred million pounds. The slur is given added piquancy by the fact that one of the Tanker Team's lead shareholders is BAE Systems, the company which brought us Nimrod One. Mr Southwell is also an ex-BAE director.

The dispute is further complicated by the fact that if Mr Southwell's full-frontal assault works and Tanker Team is vanquished, all is still not lost for BAE because AirTanker will supply the RAF with A330 aircraft from Airbus which is 20 per cent owned by, yep, BAE. Tanker Team has responded to Mr Southwell's criticisms by doing the rather un-British thing and questioning the safety of AirTanker's aircraft. Without going into detail, the allegation is that the A330 increases the risk of mid-air refuelling turning into mid-air collision.

This is what tends to happen when the stakes are this high, for whoever wins the RAF contract could be looking at a global market worth in excess of $100bn. For once, the MoD cannot fudge the issue, as it did over the choice of its new aircraft carriers, by selecting one consortium's design while commissioning the other to build it. Nor can it simply decide to do nothing, if only because the RAF's existing TriStars and VC10s are more than 40 years old and cannot fly for much longer.

The betting is still on Tanker Team emerging victorious, not least because it has the aircraft and has already begun converting some of them into tankers for the Italian air force, whereas the A330 design is still on the runway. But AirTanker has shortened the odds sufficiently to make it a gamble which way the decision will go when the Cabinet fires the button sometime around Christmas.

jeremy.warner@independent.co.uk

Comments