Saturday, 3 July 2010

Cuts, its never that easy

Margaret Thatcher, Conservative party Conference, 1980

The subsequent 5 years resulted in unemployment doubling in the UK after this speech. After years of kicking the can a politician eventually got a grip making Britain competitive in the global market place once more. It wasn't easy. It wasn't pretty. It wasn't sadistic. In fact it was political suicide but Maggie held her nerve. 

Talks about public sector cuts with Prime Minister Cameron claiming that not only will the private sector take up the slack within his term - but actually there will be more jobs is ludicrous. Just as I expected, within a month of power I can see David Cameron is no Maggie. The Tories talk the talk, declare swaggering budget cuts but its all soundbites. Clegg, his coalition buddy, meanwhile states that "this won't be like Thatcher, we will do it differently", contradicting the recent budget given by George Osbourne which is much worse than anything Geoffrey Howe had to administer. 

There is no chance the Conservatives will be able to do what they state - they don't even have a majority government which is based on a shaky coalition. Even if they did it will take longer than a term. Back when Thatcher was in office, at the 1983 election unemployment was still rising (setting post war records), the pound was dropping like a rock and the economy was still in taters. It took well into her second term to see the effects of her earlier policies. 

The idea that the private sector will take up the slack is just political wordplay. Its takes years for these things to change, a change in peoples will, a change in peoples expectations. People expect the UK bubble to carry on. So until reality kicks in, people will want the politicians to maintain the mirage which will mean its the market that has to force the people into the correct line of thinking, just like it did with Thatcher. We are a way off this so Mr Cameron will play kick the can down the road until this moment.

What factors are different this time? For one Cameron has to contend with a stronger opposition, and competent at that. People didn't necessarily like Thatcher back in the early eighties, but they couldn't stand Michael Foot and Labour who had increasingly moved so far left they were within touching distance of Joe Stalin and Mao. It was the oppositions weakness that helped Thatcher pursue what she did. Labour was so broken, the party splintered creating the SDP which ripped its support base in two. Thatcher could have campaigned with Adolf Hitler as her minister for for Justice - she still would have won a landslide back in '83. 

Thatcher also had a majority from 1979 unlike the current government. You try and reduce public spending you have another recession. We've only just emerged from the worst depression since the all-mighty one back in the 1930's. People won't warm to this. Then the budget deficit gets bigger. It did with Thatcher - it will do the same for Cameron if this is the path he takes. This would bring into question with the public the competence of the Tories with the economic policies they are pursuing. I know and you probably know that its the right path to take but many who are told the Keynesian way of thinking will not see it that way. 

The Unions are coming, North Sea Oil and Gas is running drier by the day and higher interest rates are inevitable over the next decade. We haven't liquidated anything - just like the Japanese during their lost decade we have propped up the banks and ensured zombie loans are kept afloat. Like a junkie we tell everyone we are good for it - we just need more time. But time is our worst enemy.

The problem with the current coalition is how long will it last with cuts on the agenda? The Tories may be historically comfortable in this setting but how many grass root Lib Dem supporters are going to swallow the medicine? Defection of many to Labour is inevitable. And remember - "things were going 'well' under Brown". This could cast the Tories in the wilderness for a decade if they practice what they preach. There's only so long you came blame the previous government for the mess. Give it a year and people won't be seeing Labour mess but will instead switch their view to Tory mess. Just like Thatcher. People forgot the Labour mess in the 70's, they just remember the early eighties.

The G8 or now the more relevant force the G20, have been putting austerity on the agenda. I think a basic illustration of economics is required to contrast spend and stimulus versus austerity, using the classic economic Crusoe example (there has been many takes on this over the years). Peter Schiff gives an excellent example in his latest book which I will list below. 

If we imagine a desert island with three people. These people all catch fish in order to survive and feed themselves. The problem is they have to use their hands, which is very time consuming so they spend all their time catching fish to live. However one day, one person decides to build a net. He spends a day constructing this, therefore foregoing current consumption and going with no food for that day. He is the entrepreneur within this small community and doesn't know if his endeavour will succeed. For the sake of argument his net is a success and he is now able to catch more fish in less time. So much so that he now has more leisure time and can eat more, thus consuming more. 

A simple example but it perfectly illustrates elementary economics. The current Keynesian thinking is that postponement of consumption is a bad thing but yet as we saw above this was in fact good. It is how society accumulates capital goods, tools, that enable us to enhance our productivity. Savings - the foregoing consumption should be embraced not deterred. The entrepreneurs risk taking has also benefited everyone. We should reward those who figure our how to do things more productively or cost effective, we all benefit over the long term. 

You see our recent solution was for the government to spend more, to destroy capital, to expropriate wealth from individuals. Raising taxes, printing money, raising deficits will never solve the economic question. Just like state planning never did. All it does is take away the net from the individual, remove incentives for innovations such as the net and encourage us to consume more rather than increase our productive capabilities. If the net breaks we can leave it and continue consuming our way out of trouble. That's why no amount of Paul Krugman stimulus will ever be enough because its the wrong thinking in the first place. He is saying we need to run faster just to stay still. I say we need to be leaner and think smarter to run just as fast only this time at a stroll.

The video of Thatcher at the start was right. However the left always like to use slogans of themselves such as compassionate, open, fairness, yet when an individual states they support the Conservatives they are ironically labelled Tory scum - and for what? Thatcher put us back in the global marketplace. She embraced Asia's awakening which enables us to buy many consumer goods for practically nothing. We moved out of mines with many of us into flexible workplaces, hours that suit us, working from home in relative luxury compared to how our ancestors had to work. The fact is the left still can't swallow the reality that Thatcher destroyed their ideological way of thinking in this country. John McDonnell's unwise words regarding wishing to assassinate her was not for her policies but rather that people like himself have no place in politics where 30 years ago they were everywhere in parliament. Was it nice that people had no jobs back during the early eighties? No, but this is the problem with statist elites. They cause the problems, blame markets, then ironically when things get that bad look to markets once more to solve the mess they made in the first instance. We still seem to be looking for state solutions. We have recently had hard talk, yes. But talk is cheap, when action is taken then the backtracking towards Keynes once more will commence. 


  1. Funny how standing in a different place makes things look different!Thatcher destroyed the coal industry,made way for cheap Asian rubbish imports which destroyed other British industry and brought the working people to their knees.If her policies had been far-sighted Britain wouldn't be in the mess it is in today.

  2. It was the free market that killed Coal etc not Thatcher. Thatcher just let the free market do its job.

    We could have isolated Coal for example and not allowed cheaper coal to be imported. Same with our cars, Tvs etc. But this would have led to substandard products, continuing rising prices, and increasing poverty. We would be in a worse state if we followed this path.

    Now her policies didn't create the mess we find ourselves in - it wasn't the free markets fault but central planning metrics based on "price stability" (and deliberate Chinese Mercantile policy). With many consumer prices falling at a rapid rate Central Banks deployed loose monetary policy and created the ultimate credit boom. They let money into the system, and people borrowed money they could not pay back. Short term consumption hid the uncompetitiveness of many Western economies, politicians were happy to support the mirage. All this borrow and spend brought short term relief at the expense of the future.

    Meanwhile China for example made this problem worse by deliberately giving us more money to spend with.

    All of it caused by Government intervention.

    British people are not competitive enough thats the simple fact of the matter why many are struggling. Like you have said the working people can't compete with workers on less than a dollar a day (well they can - take that as pay but we all know you can't live in the UK on that).

    Economics is very simple. We had two choices. To live in autarky where we are a self dependant as a nation, something North Korea has shown does not work. Or trade with one another, in the global marketplace that makes everyone richer. Lets make the best use of talents and resources of one another. The Japanese have no oil so had to make innovative products, like electronics and cars, to trade with others who did for example.

    How can working people in this country regain competitiveness? Either cut wages - or increase productivity. Unfortunately benefit systems are used as a smokescreen to hide the ills. Short term fixes by creating credit booms are also preferred. The longer it goes on the harder it is to correct down the line. Let the free market choose what level of living we all have. State subsidy can never work.