Thursday, 14 October 2010

Liberal Coalition and cuts and consequences

 Yesterday morning I caught most of the Radio 4's programme 'The Long View' . In 1919 the Government was led by Lloyd George and those of his supporters who had been given 'the coupon'  in the post WW1 election. Most of the cabinet were Tories as were the overwhelming majority of backbenchers. The Asquithian (Official) Liberals were in opposition.
As the BBC explains:

'In the early 1920s, in the face of mounting economic and political pressure, Prime Minister David Lloyd George committed the government to massive public spending cuts. Then as now it was a coalition government faced with the challenge of driving through savings. Lloyd George appointed the Geddes Committee to decide where the axe should fall.'


Now you can take your choice about the impact of the Geddes Axe. For some like- Professor Skedelsky a neo Keynsian ennobled by the SDP who now sits as a Crossbencher- argued that the cuts were likely to slow growth and make things worse. On his webite he writes:


'Next week the parliamentary battle over cuts will start up again. The chancellor, George Osborne, will say the government’s programme of fiscal retrenchment is necessary to “restore confidence”. Alan Johnson, his shadow, will say it threatens the “fragile recovery”. The government plans to cut public spending by 10 per cent over four years as part of its deficit reduction plan. This will extract 5 per cent out of a shrunken economy. It is the most audacious axe-cutting exercise in almost a century, double the size of the cuts in the 1930s, equalled only by the 1921 Geddes Axe, which cut government spending by 11 per cent in two years. Labour says it is too much, too fast'


On the programme Tim Razzel bravely argued that everyone must be holding their breath about this strategy as no one can know if it will work. He went on to identify the role of the Bank of England and quantative easing. In the 1920's there was a real push to get back to the Gold Standard and that had very negative consequences for the economy. 


The question must be ; 'is the debt so bad that this drastic action is needed?' Skedelsky again:


Here are some interesting figures. In 1919 the National Debt stood at 135% of GDP -as a result of heavy wartime borrowing. By 1920, after a year’s inflationary boom it was down to 130%. By 1922 it was up to 171%? Why? Because there had been a huge deflation and rise in unemployment in 1921. In the deflationary decade of the 1920s, the debt hardly reduced at all. Nothing could more clearly illustrate the fact that the debt falls when the economy rises and rises when the economy falls.


We don't know what lessons Lloyd George drew from these experiences. What we do know  that by 1928 he had been wholly convinced that a government's role in a recession was to borrow to finance investment and so provide employment and spending power to those whose lives were ruined by the depression. He argued that as the economy grew the debt would fall. This was the basis of the economic stimulus that the Liberals promised in the 1929 Manifesto; We can Conquer Unemployment.


It is interesting that one of the reason that we are told the cutting had to begin so quickly was for fear of the markets. Neo Keysians are, by and large, not convinced:



Of course there were the ‘markets’. But it didn’t seem to me the markets were putting pressure on our government to ‘balance the books’. After all they have been lending to Treasury long-term at 3% This is historically very low. It does not suggest any great fear of default or inflation. The markets can certainly make their displeasure felt, as Greece, Portugal, Ireland, and Spain have discovered. But it did not seem to me that a British government, of whatever stripe, faced this particular problem.

I thought I'd include the photos of my little statue of Lloyd George. I noticed it in a sale of garden ornaments 25 years ago. He is only 7 or 8 inches high but the rabbit appearing from behind his tail coat has amused children ever since. Let us hope we don't have to resort to mysterious magic to get the economy back on the road.




































































 








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