House of Lords Debate: Queen’s Speech (5th Day)
Robert Skidelsky
Hansard column: 389-391 | Wednesday, November 25, 2009

My Lords, it is a strange convention that the topic of most interest to the British people should be relegated to the fourth day of the debate on the Address. I know that it has always been the convention but I hope that it might be amended at some point.
 
I enjoyed the speech of the noble Lord, Lord Hunt; it was very gung ho. I kept waiting for the economic analysis-it never came. As your Lordships know, we have been living through the worst economic downturn since the great depression. The most important thing the great depression taught us is that if economies suffer a great dislocation or shock they do not automatically recover; they can stay depressed for a long time. John Maynard Keynes was the inventor of the theory of the stimulus: that is, the theory that they have to be helped back to rude health. Since 2008, Governments and central banks all over the world have been implementing stimulus policies. I would argue that in combination these packages have cut off the slide into another great depression and may well have been instrumental in bringing about the first green shoots of recovery.
 
However, a lot people who ought to know better are ready to say that the stimulus is no good, it only makes things worse and it ought to be stopped as soon as possible. Some of these benighted souls are to be found among the leaders of the Conservative Party. The shadow Chancellor has dismissed the stimulus as "a failure" and as "ill conceived". At the CBI on Monday, David Cameron said that recovery depended on cutting the Government's deficit. By contrast, the Prime Minister said:
 
"Choking off recovery by turning off the life support prematurely would be ... fatal to British jobs, British prosperity and British growth".
 
I do not always agree with what the Prime Minister says, but on this occasion he was absolutely right and I support him.
 
Everyone agrees that the deficit should fall and that we need a credible medium-term path to its reduction, but the fall in the deficit will come about as a consequence of the recovery of the economy and will not be the cause of it. If you try to cut the deficit now in the mistaken idea that it will boost confidence, you will simply be adding to unemployment. Do Messrs Cameron and Osborne want to hand the Government the slogan, "If you want higher unemployment vote Conservative"? That is what their pronouncements can fairly lead people to expect. I do not believe that they want this to happen, but they are economically muddled and the sooner they can resolve their muddle the better it will be for all of us.
 
The theory of the stimulus is that as the economy recovers the budget deficit will automatically shrink as the Government's revenues rise faster than the national income, a point made by the noble Lord, Lord Razzall. Not all of it will disappear-of course not; most of it will still have to be the subject of a medium-term financial strategy-but the basic point is that it will shrink as recovery occurs, and the same will be true of the national debt. This, in a nutshell, is what happens. It is not theory; it has happened many times in history already. We have had much higher national debt than we have now and, as the economy grew, it always came down, and the budget deficit tended to shrink as a result of the same process. The pace of the deficit reduction should be contingent on the pace of economic recovery. That is my first point.
 
The Opposition allege that the cost of government debt and of borrowing generally will go up unless the Government cut their spending now. In fact, the cost that the Government have to pay for their debt is at its lowest in almost 40 years. The 10-year gilt yield is below 4 per cent, well below the average of the past 10 years, and a mere third to a quarter of the levels in the 1970s and the 1980s. However, not only is it low now, but it is expected to stay low for years to come. It is evident that the markets are not experiencing the panic wished on them by many Conservative commentators.
 
Economists of a conservative bent also go on about the risks of inflation. This is given as another reason for cutting the government deficit now. However, CPI inflation, having dropped 3 per cent since June 2008, is still below its 2 per cent target, and the Bank of England expects it to decrease to 1 per cent after a short rise in early 2010. I take the view, therefore, as do many reputable economists, that the danger is still on the side of deflation, not inflation.
 
The biggest problem is that we may not have had enough stimulus. Despite a monetary easing of £200 billion, GDP has dropped by 6 per cent, or £80 billion, since the end of 2007. Monetarists, who have also come out of the woodwork recently, believe that flooding the banks with money will increase spending by a kind of natural magic. This is nonsense economics. Most of the extra money has gone into rebuilding the banks' balance sheets. In America, there has been a strong demand for short-term US treasuries offering a near-zero yield. That indicates a continuing flight to safety or, as Keynes would say, continuing strong liquidity preference. The best way to mitigate this flight to safety is to restore confidence in the economy; the best way of restoring confidence in the economy is for it to start growing again; and the best way to get it to start growing again is to continue with the stimulus and, if necessary, have another stimulus if this one is not enough.
 
If we want to print money, I would direct it not to the banks but into the pockets of the British people. This is akin to Friedman's helicopter money. Here are two ideas: first, we could have a temporary wage subsidy paid to employers to encourage them to take on more workers; secondly, the Government might give every household a Christmas present in the form of a voucher to be spent on British goods within three months. There are many other methods, but the object would be to get the biggest bang of spending per buck of money.
 
If we had a reasonable bipartisan politics, many good ideas would become politically possible which are now aborted by the duty of the Opposition to oppose everything that the Government do. I only hope that this duty does not abort the recovery.