Economy: Growth

Lord Skidelsky Excerpts

Thursday 31st March 2011 Lords Chamber

[Lord Skidelsky]

My Lords, I listened with great interest, as I am sure we all did, to the attractive maiden speech of the noble Lord, Lord Wood of Anfield. He comes to the House from a notable academic and policy-advising background—Magdalen College Oxford, then No. 10 Downing Street. He will bring to our deliberations a much needed blend of theoretical rigour, practical experience and social passion. We got a flavour of all three in his maiden speech and it is certain that they will give distinction to his future contributions to our debates. I join other noble Lords in thanking the noble Lord, Lord Hollick, for securing this debate.

My proposition is quite simple: there is too little demand in the economy for robust growth, and the Chancellor’s policy of taking demand out of the economy is exactly the reverse of what is needed. The squeeze in public spending seems bound to stay, but there are two ways in which we can try to increase growth in the economy despite the cuts.

The first, referred to by the noble Lords, Lord Hollick and Lord Newby, is to set up a national investment bank with a mandate to invest in green projects, transport infrastructure, social housing and export-oriented SMEs. A limited fiscal commitment of, say, £10 billion over four years would allow the new bank to spend, say, £100 billion over that period with conservative gearing, provided that it was allowed to borrow. That is the key point. The Chancellor has taken a small step in that direction by giving the go-ahead to the green bank, but that will be allowed to spend only £3 billion and it cannot borrow until 2015, and even then only if the Government’s debt reduction target is being met, which I doubt will be the case. The Chancellor has lost a big opportunity to scale up the original idea. A principal merit of my scheme is that a national investment bank could create a new class of bonds, long term but with a slightly higher yield than gilts, which would suit long-term investors. It would thus be a way of mobilising pension funds for investment in the long-term future of our economy.

My second point is that we need to rebalance the economy away from financial services towards high-value manufacturing and creative services, two things mentioned by previous speakers. The banks have a key role to play in this, but for that we need radical banking reform. That has scarcely been started. I therefore support Mervyn King’s championing of a British Glass-Steagall Act to split the banking system into commercial and investment banks. We need to avoid like the plague repeating the situation when the core commercial banks were so riddled with bad bets foisted on them by their investment-banking masters that they ran out of money to lend to households and businesses—the very people requiring support in a recession. That is quite apart from the enormous loans and debts with which they have saddled the taxpayer.

This is not just a matter of rebalancing British banking to serve the needs of the economy; it is a matter of rebalancing power in the economy to serve the needs of the British people. As things stand, the banks are the permanent government of the country, whichever party is in power. Unless we can break their power, I fear that all that issues from our political processes and what we are saying in this House today will be a lot of,

“sound and fury, signifying nothing”.

Ireland: Financial Assistance

Lord Skidelsky Excerpts

Monday 22nd November 2010 Lords Chamber

[Lord Skidelsky]

My Lords, perhaps I may draw the Minister's attention to Wolfgang Münchau’s statement in today's Financial Times. He wrote:

“At a time of extreme fiscal tightening, moderate monetary tightening and weak global demand, I fail to see where Ireland will grow”.

Perhaps the Minister will explain how he sees that Ireland will grow, and how its programme of accelerated fiscal austerity as a condition of the bailout will encourage growth in the Irish economy.

[Lord Sassoon]

My Lords, I am not going to provide a commentary on the Irish economy. As I said when I repeated the Statement, Ireland will come forward with its own budget. It is for the Irish Government to explain their own economic policies in this difficult situation, and for the conditions of the loan to be appropriate to the circumstances.

Comprehensive Spending Review

Lord Skidelsky Excerpts

Monday 1st November 2010 Lords Chamber

[Lord Skidelsky]

My Lords, it is a sign of the jittery state we are in that a slower-than-expected slowdown in the rate of growth is hailed as strong evidence of recovery. Of course it is nothing of the sort. It marks the end of a period in which the economy has been supported by fiscal policy, with some help from the depreciation of sterling. The direction of fiscal policy has now been reversed. In their recent comprehensive spending review, the coalition Government confirmed that they will embark on cuts that will withdraw between 1.5 per cent and 2.5 per cent of nominal demand from the economy every year for the next four years.

The Government’s own independent watchdog, the Office for Budget Responsibility, has estimated that every 1 per cent decline in current government spending knocks 0.6 per cent off economic growth. I have never been able to understand how cutting the budget deficit in present circumstances is supposed to help employment and growth. The noble Lord, Lord Higgins, asked a very pertinent question: what do the Government consider to be the effect of the cuts on aggregate demand? Well, he did not get an answer. We are never told what the answer is. Instead, we are assured that private spending will miraculously spring to life on a wave of confidence induced by the Government’s very announcement of the deficit plan. Well, the most recent data show that in September bank lending posted its largest drop by more than £4 billion since January. If that is an indicator of the private sector’s new appetite for spending, I must remain sceptical about the newly fashionable doctrine of contractionary fiscal expansion, as it is known; the idea that if you contract the budget deficit, the economy will expand.

The present policy bears the strong personal imprint of the Chancellor. His rhetoric prepared the ground for it; he implemented it; and his political future depends on its success. Mr Osborne is not a reluctant cutter; he is an enthusiastic cutter; he is a conviction cutter. Normally I applaud conviction politics. It is rare enough for a politician to have convictions. But it is a great shame that the Chancellor’s convictions are so little-rooted in theory or in experience.

“Even a modest dose of Keynesian spending—say, increasing it by an additional 1 per cent of GDP—is a cruise missile aimed at the heart of a recovery”,

the Chancellor said in October 2008, barely a month after the collapse of Lehman Brothers, with the global economy going into a tailspin. No wonder Vince Cable said at the time:

“George Osborne is clearly way out of his depth”.

I wonder what Vince Cable thinks now. Mr Osborne is clearly a man of ability and determination, but I have to say in all seriousness that in his present position he is a menace to the future of the economy.

The Chancellor believes that any stimulus that needs doing should be done by monetary policy. In present circumstances, that means quantitative easing, or printing money. I do not accept the argument that the last quarter’s figures make this less likely. What matters for monetary policy is the state of the economy in six months’ time, not six months ago. So I expect that in due course the Bank of England will follow the Federal Reserve Board and probably Japan’s central bank down this path. The question is: will it work?

We have the experience of last year to go by. Between March 2009 and February 2010, the Bank of England injected £200 billion of liquidity into the economy. Over the year of quantitative easing, reserve balances at the banks quadrupled but the quantity of bank lending hardly budged. The same story is told by the money supply figures. In the years leading up to the crisis, M4—the Government’s preferred measure of broad money, including bank and building society deposits—grew consistently between 6 and 9 per cent year on year. However, in the past 12 months, M4 has grown at only 1 per cent and M4 lending has fallen by 0.7 per cent, the weakest number since records began in 1998. What has happened is that the “money multiplier”—the ratio of money supply to monetary base—has continued to fall as banks absorb the influx of money into their reserves without increasing their lending.

The same story can be told in other areas. Quantitative easing failed to bring down long-term interest rates—the spread between the bank rate and the long rate hardly fell. Nor was there any evidence of the so-called wealth effect—the argument that firms use quantitative easing to buy assets and the rising asset prices enable them to raise money by issuing new shares and bonds. There was indeed a rally in the stock market in 2009 but this was accompanied by a sharp decline in company flotations. Paper wealth went up but there was no effect on corporate issues, investment and activity as in the quantitative easing storyline.

The failure of quantitative easing should come as no surprise to a Keynesian. As Keynes said, if money is the drink which stimulates the system to activity,

“there’s many a slip twixt cup and lip”.

Quantitative easing is simply the expression of the monetarist view that, if you increase liquidity, money GDP will rise proportionately after a short lag. However, it is not the printing of money that causes GDP to rise but the spending of money, and the spending of money depends not on the quantity of bank reserves but on the willingness of the private sector to borrow and the willingness of banks to lend at rates of interest at which they can borrow. However many trillions of dollars or pounds Governments pump into the economy, this will not stimulate borrowing or lending if consumer demand is not there.

Ministers are constantly exhorting banks to lend. Banks say that there are no borrowers, by which they mean borrowers at the going interest rate. However, here is a suggestion for overcoming this blockage which is consistent with the deficit reduction programme. The Government should set up a national investment bank, which they would capitalise and mandate to spend £X billion a year on investment projects at interest rates low enough to fulfil the investment mandate. We are already promised a tiny prototype of this in the proposed green investment bank. Candidates for such investment would be infrastructure projects such as the high-speed rail link mentioned by the noble Lord, road building and repairs, house construction by local authorities, or projects to do with carbon emissions—insulating houses, solar panels and so forth. Lending by the investment bank would not affect the deficit and so would not spoil Mr Osborne’s austerity story. True enough, subsidised interest rates imply a lower expected return on equity than from current lending, but a lower return is still better than no return, which is what idle capital now earns.

There may be better ways but the goal is clear: to unblock the channel of spending when orthodox fiscal and monetary policy is, for one reason or another, disabled. Unless we succeed in doing that, we will be doomed to years of interminable recession.