Gordon Brown has claimed his management of the economy is the main reason why his Government should be re-elected. In view of his responsibility for the recession and the wreckage of the public finances, this is a breathtaking claim. For Mr Brown to claim credit for managing the economy during the recession is rather like a driver responsible for a major road crash claiming credit for taking the survivors to hospital.
The Brown storyline is that the recession was a one-off unforeseeable event, global in origin. It was created by greedy bankers who had to be rescued from their own folly. The truth is rather different.
The present recession was neither unique nor unforeseeable. A cycle of boom and bust has always been a feature of market economies: there were recessions in the UK as recently as 1975, 1981 and 1992 and a major stock market crash in 2001. As with earlier recessions, the bust of 2008-2009 was the result of a preceding credit-fuelled boomwhich artificially inflated the prices of houses, shares and other assets and securities. And although the consequences of the present recession were global, its origins were not. These origins are to be found in the lax way from 2000 onwards that the authorities in the UK and the US controlled the money supply and public expenditure, and regulated banking.
Just as the only way to escape a hangover is not to drink too much, so the only way to avoid a recession is to moderate the preceding boom. To do this, governments have at their disposal three instruments of policy, monetary – control of the money supply, fiscal – the power to vary taxes and government spending, and regulatory – the power to supervise the conduct of banks. Between 2000 and 2007, the Labour Government made major policy mistakes in all of these areas.
Monetary policy was kept too loose for too long. The Bank of England averted its eyes from the rapid expansion of the balance sheets of the banks. It ignored the bubble in house prices that its policies built up, targeting only increases in the prices of goods and services, and not the prices of assets like houses.
While he was Chancellor, Mr Brown made inadequate budgetary provision for the occurrence of a recession. Why did he fail to act? Perhaps he believed the siren voices of those American economists who told him that they had solved the problem of preventing recessions. Whatever the reason, as late as March 2007 he was still repeating his claim that “we will never return to the old boom and bust”. Martin Weale, Director of the National Institute of Economic and Social Research, has estimated that Brown’s rule of delivering a current budget balance over the cycle was too slack by about 3% of GDP.
The result of that error was revealed in the Budget of 2009. Large budget deficits will persist for almost a decade, long after the recession is over and the growth of the economy has resumed. This means that for years to come the country is condemned bothto an effective standstill in the provision of public services and to increases in taxation that will affect all families, not just the rich.
The third failed area of economic policy is in the regulation of financial markets. During the boom, neither the Bank of England nor the FSA exercised their powers to oblige the banks to keep more liquidity or to build up more capital. This was in large part because in 1997 Brown unwisely split responsibility for supervising the banking system between them.
The current British framework for financial regulation was created by Brown himself with some help from Alastair Darling: it is embodied in The Financial Services and Markets Act of 2000. Unlike, for example, Canadian banking regulation which restrained reckless lending by that country’s banks, so that none collapsed during the financial crisis, bank lending in Britain to people who couldn’t afford to repay their loans was not just tolerated but actively encouraged by the Government in the name of ‘social inclusiveness’.
The other major omission of Brown’s banking legislation is that it made no provision for the orderly liquidation of a bank in the event of its insolvency. This meant that the Government was forced into an emergency £50 billion bail-out of the banks in the autumn of 2008. Had that money been available for spending on infrastructure, it could have provided a more productive use of taxpayers’ money.
People may also remember Brown’s ill-judged decision to sell off half the nation’s stock of gold in 2002, when the price of gold stood at one quarter of its present level. It is said that when your neighbour loses his job that is a recession, whereas when you lose your own job, it’s a depression. Many people might think that when Gordon Brown loses his job, it will signal the beginning of a recovery.
David Simpson is a former Economic Adviser to Standard Life. He is also the author ofThe Recession: Causes and cures (PDF), which was published by the Adam Smith Institute in June 2009.