Why David Blanchflower has it wrong

Gordon Brown may have gone, but advocates of his calamitous policies remain. David Blanchflower, the chief exponent of borrowing more, has a piece in The Guardian today which is worth examining. Written with his trademark chutzpah, it’s a very clear exposition of the Labour argument — along with its flaws. Here are some extracts, and my comments:

“In his budget speech last month, Chancellor George Osborne suggested that he was hoping for ‘an economy where the growth happens across the country and across all sectors. That is our ambition”. Sadly, to judge by Wednesday’s GDP figures, growth under this coalition remains just an ambition, a mere illusion.”

And why would that be? The GDP figures showed growth of 0.5 per cent in the first quarter, bang in line with City expectations. But Blanchflower is deploying a rhetorical trick. He bolts on Q1 of 2011 with Q4 of 2010, where growth was -0.5 per cent, so that he can claim “zero growth over six months” — thereby covering up the real story of “contraction, followed by expansion”. He continues:

 “The British economy has not grown at all over the last six months, it has flatlined and is stagnant, simple as that   By contrast, the economy grew by 1.8 per cent over the previous two quarters of 2010, when the previous Labour government’s policies still had a strong influence. This is not ‘good news’, as David Cameron astonishingly claimed at prime minister’s questions — where he was accused by the Labour leader, Ed Miliband, of ‘extraordinary complacency'”

Really? As Cameron said in PMQs yesterday, when Ed Miliband was in the Cabinet quarterly growth never exceeded 0.5 per cent. Was that disastrous?

“It is time the prime minister stopped the spin and recognised that the government’s economic policies are not working.”

The spending cuts have not yet been applied. We have monthly state spending figures up until March 2011 — and in each month Osborne has set new records. Month after month, state spending has been even higher than it was under Brown:

 
Now, there will be a fiscal contraction — of only 0.6 per cent in the financial year just started. But it hasn’t kicked in yet, so the cause-and-effect that Blanchflower is longing to find just doesn’t exist. As Cameron said in PMQs yesterday, the coalition is cutting just £8 for every £7 that Darling would have cut. This is not much of a difference.

“Over the last six months employment has grown by only 65,000 — far below the numbers needed to compensate for the cull of jobs the coalition has planned. Unemployment is set to rise.”

On the contrary, the OBR forecasts that unemployment has already peaked (at 8.3 per cent, or 2.6 million, on the ILO measure) and will steadily fall. Here is its projection, from last month’s Budget:
 

 
And as for the new jobs compensating for the “cull” of public sector jobs, again the OBR data tells a different story. Private sector job creation is forecast to offset public sector job losses, just as it did under John Major’s post-ERM spending reform:
 

 
Here’s Blanchflower again:

“The claim that the increasingly awful economic news is all down to Gordon Brown and Alistair Darling, and is not the coalition’s fault, doesn’t seem to be convincing the British public. According to the latest YouGov poll this month, 52 per cent of respondents thought the coalition government is handling the economy badly, compared with 15 per cent in May 2010 and 38 per cent last October.”

Here, he has a point. Osborne is not making the argument as well as he could be, and is slowly losing the support which he built around the time of his first Budget. This should seriously worry the government, and Cabinet members should give Osborne backup in making the economic case. Nick Clegg has led the way here: his speeches about the economy, and the need for cuts, have been original and refreshingly free of hyperbole.

“The only bit of good news is that the job of the Bank of England’s monetary policy committee should now be a lot easier: the poor growth data should take away any possibility of an interest rate rise this year.”

The MPC’s job is to keep inflation under control: it has no remit over growth, nor jobs. It’s odd that an economist like Blanchflower can write a piece about the UK economy without mentioning the no.1 economic problem: inflation. But he does offer us a glimpse into the way that too many MPC members think: not so worried about the plunging value of money, and more taken by Keynesian arguments about debt stimulus.
 
Blanchflower finishes his piece by saying:

“The times they are a changing, but not for the better. It’s time for a rethink, George, if you want to keep your job.”

This is the “Plan B” argument and it won’t work for two reasons. First, Osborne is enacting Plan B. Plan A was Gordon Brown’s, and it drove Britain to fiscal ruin with a debt legacy that will saddle a generation with higher taxes, poorer public services, or both. And, more importantly, Osborne is going as slowly as he dares with spending cuts: already credit rating agencies have warned that any deceleration in the cuts agenda would put Britain back into the danger zone.

Britain’s deficit is the worst in the EU alongside that of Greece. To “rethink” on deficit reduction now would make Britain the next target of the bond markets and send us into the A&E ward of trashed economies, joining Greece, Ireland and Portugal. Miliband was teasing Osborne yesterday for being premature in saying that Britain was out of the danger zone. He may have a point. Osborne cannot change course — the only option open to him is to speed up his journey towards fiscal sanity.