Somewhere in the hour-long spectacle that was today’s Budget Statement, Alistair Darling made a very interesting claim: “This Government, and others, have learnt from the historic economic mistakes of the interwar period, that countries cannot deflate their way out of recession.”
This is a fascinating statement for two reasons. Firstly, because history proves no such thing. In fact, I can think of very few, if any, examples where actively deflating the economy has been attempted. By comparison, inflation has been the stock response by governments across the globe for three quarters of a century, and the results have included the Winter of Discontent and Japan’s “Lost Decade”.
As for the inter-war period itself, a salutary lesson is provided by comparing the not-so-great depression of 1921-3 (Remember that one?) with the far longer and deeper Great Depression of 1929-1941. The economist Murray N Rothbard strongly argues that the crucial difference was that President Coolidge allowed the economy to rationalise itself and re-establish equilibrium pricing, whereas Presidents Hoover and Franklin Roosevelt sought to re-inflate the economy.
The second reason that it is a fascinating statement is that the opposition does not appear to be saying otherwise. David Cameron may have worked for the previous Tory administration, but there is no sign of him adopting its fiscal and monetary policies; nor is George Osborne a budding Geoffrey Howe. The Liberal Democrats’ Vince Cable publically advocates Keynesian economics. There is, in fact, no debate at all about whether “Quantitative Easing” and “Fiscal Stimuli” are the correct policies to follow – at least, not in Westminster.
And this demonstrates more powerfully than anything else the stifling consensus that seems to have settled on parliament. For an opposition to look emasculated in the face of a booming economy is understandable: it is hard to convince the revellers that the party cannot last. But as the UK suffers its worst recession since the War, one would have thought that somebody in opposition would suggest that the fault lay with the basic economic model underpinning Labour’s 12 years in office.
If so, one would be naïve.