25 April 2008
Public debate about the current financial crisis has developed a hysterical tone because commentators have forgotten the events of recent decades that would put today's economic turmoil into perspective
During a recent conference, one of my academic colleagues, an unreconstructed Marxist, went off on a splendid riff about the current financial crisis. It was, my colleague said, the biggest crisis of capitalism since 1929 and on a par with it.
My first thought was: get a grip. Between 1929 and 1933 US gross domestic product declined by more than 25%, world trade virtually halted, crop prices dropped by 40% to 60% and millions of people were thrown out of work.
There is nothing even vaguely similar happening today. China and India are continuing to grow albeit more slowly than before at what would otherwise be regarded as phenomenal rates. Even the US is expected at worst to tip into a mild recession. The world economy, and those of most countries in the Organisation for Economic Co-operation and Development, is expected to continue to grow.
My second thought was that what my colleague was saying was actually not that far removed from some of the hysterical reporting in the media. There seems to be a sort of relativity effect going on here. Yes, there clearly is an economic and financial fluctuation taking place. But in historical terms it is fairly minor: less than a couple of decades ago we were having much bigger crises with much greater impacts on house prices, growth and employment.
Perhaps it is just because we have had such a long period of relative stability that when a flux does come along everyone starts yelling 'crisis'. To many people with short memories it must seem like a real crisis. Former prime minister Margaret Thatcher famously said of change: 'In two years, who cares? In five years, who remembers?' The really big economic crises of the 1970s seem a very long way away now, and even the swings of the early 1990s are remote to most people including journalists.
This problem with memory lapses and lack of perspective surfaced in another small way recently. I was struck that during the debate on Northern Rock, and all the talk about not having had a UK bank collapse for millennia, no-one mentioned Barings. The bank was founded in 1762 but fell in 1995 after dodgy dealing by rogue trader Nick Leeson lost it £827m.
That failure was triggered by just one unsupervised individual, while in the current crisis, whole institutions have built portfolios of dodgy deals. But it was strange that Barings merited not a mention in the media coverage I read.
The current situation is probably having more of a political than an economic impact. The government's reputation for economic and financial competence is taking a pounding and some very real difficulties are being created.
In October's Comprehensive Spending Review, the government gambled that although it was forecasting slightly lower economic growth and public spending in 2009/10, there would be an upturn in the economy before it had to call an election. That now looks less likely, and the lower than expected economic growth and tax returns will put even more strain on the already creaking public finances.
The cracks are already starting to appear. Last week it emerged that the Ministry of Defence is to scrap its policy of two-year procurement budgets introduced only four years ago and revert to annual budgets. The reason is apparently a £2bn budget shortfall and the department's need to shuffle the start dates of some large projects in an attempt to squeeze as much as possible out of the system.
This will probably be only the first in a series of painful readjustments to the new realities of public finances in the next few years. Despite the rhetoric of strategic planning, the government has in fact made all sorts of ad hoc announcements about spending over the past decade.
But these were nearly always about increases in spending; now they are about decreases. Whitehall and the recipients of its largesse are up in arms. The defence industry, for example, is complaining loudly about the scrapping of the two-year budgets. There will be more such furores to come.
This is not just a problem for the government. The Conservative Party is complaining about the public finances, accusing the government of piling up public sector debt. At the same time, it is pledged to match Labour's spending totals and is making dubious promises of extra spending in various areas.
The real issue for the Tories is not tax cuts, but what taxes they will put up to cut the public sector debt and borrowing requirement if they come to power with economic growth lower than predicted by the current government.
No-one has yet asked shadow chancellor George Osborne about this but as we get closer to an election they probably will. Osborne will be hard put to explain how he is going to have his cake, eat it and get someone else to do the washing up afterwards.
PFapr2008
