Economics

The dawning of a new era?

‘Come on out! The dark is just beginning.’
Bob Dylan, ‘Can you please crawl out your window?’ (1965)

It used to be said, with what degree of accuracy I am not sure, that aboriginal Australians shunned the notion of calendars and instead marked the passage of time using natural disasters, such as an earthquake or flood, to bookend the period just passed and to mark the beginning of a new era.

The centre-left in Britain has been playing a similar game for quite a while now. Since about the time of the lady’s departure in 1990, it became obvious that the hated Margaret Thatcher was not some bizarre aberration but part of a wider response to the crises of inflation, unemployment and energy shortages that, in the mid-1970s, had spectacularly de-railed the post-war settlement and ushered in the era of what John Mortimer called ‘paradise postponed’.

Thus it followed that a fresh crisis could, in the same way, upend the new consensus based on free markets, labour ‘flexibility’, low inflation and a small State (in theory, at least), and revive the desire for full employment and government direction of the economy in the interests of economic security. Every reversal, it seemed (and I was more guilty of this sort of wishful thinking than most commentators) was the clap of doom for the post-1973 market order: the Far East ‘meltdown’ and Russian debt default of the late 1990s; the bursting of the dot-com bubble in 2000; the attacks on 11 September 2001 and the subsequent war on terror; the 2008 financial crisis and Great Recession, and now, of course, the economic shock of the coronavirus outbreak – or rather the shock occasioned by the official response to it across the developed world.

It is true that the measures taken in the UK and elsewhere to try to offset the shock have more comprehensively ripped up the rulebook than did the responses to previous crises. But before cracking open the Watney’s Party Seven, getting the Moody Blues on the turntable and updating our trade union membership subs, it may be an idea to pause and try to figure out just how close we really are to a return to the good old/bad old days (delete to taste).

First, the current measures – potentially unlimited public spending, the nationalisation of millions of pay packets, zero (practically) interest rates, paid leave for anyone unable to work (did you know ‘furlough’ was originally a seventeenth-century Dutch word? I didn’t), and State direction of loans to industry – are unprecedented since the wind-down of the war economy in the late 1940s. But, at the risk of flirting with illiteracy, how unprecedented are they?

Put another way, just how sharp a break with recent practice do they represent? To hear some commentators, one would imagine that, prior to Rishi Sunak’s Budget on 11 March, economic policy in Britain and abroad had represented thirty or more years of Gladstonian liberalism. This is simply not the case.

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The Black Monday stock-market crash of 1987 was met not with official indifference to, or even welcome of, the creative destruction involved but with interest-rate cuts and, in London, a Government scheme to underwrite the shares of what was then British Petroleum, scheduled for privatisation. When huge hedge fund Long Term Capital Management hit serious trouble in 1998, a bailout was arranged by the Federal Reserve Bank of New York. Two years later, its parent body, the Federal Reserve, aggressively slashed interest rates in response to the dot-com share-price crash, which had the effect of rolling debt over from the stock market to the housing market.

Then the financial crisis saw any number of banks across the world taken into public ownership and monetary authorities engaged in grand-scale money creation, for which the polite term is quantitative easing.

Now, it is true that the post-1970s era has seen much less intervention in terms of support for specific industries and for the jobs they provide than did the immediate post-war era. But on the financial interest and the owning class more generally, as opposed to the working class, welfare of positively Scandinavian levels of generosity has been lavished. From 1987 to the end of his term as Fed chair in 2006, Alan Greenspan’s readiness to respond to any serious stock market decline with additional liquidity gave rise to the expression the ‘Greenspan put’, a put option being an instrument allowing a stockholder to sell their shares at a guaranteed price.

In this light, the current measures are certainly many degrees more extensive than what went before, but there is little that is ‘unprecedented’ about the thinking behind them.

Second, how likely is it that the current crisis and the measures to deal with it will lead to the sort of sharp change in direction ushered in by the events of 1973 and after? The case for this rests, I think, on the notion that deep Government involvement in the economic life of the nation will be impossible fully to unwind even were there to be a public appetite for this to happen, which there probably won’t be. This assumes a sort of steady economic state, in which the newly-expanded public sector and its vast financial commitments remain stable.

But how likely is that? More probable by far is that Treasury profligacy will run into market resistance. Already the currency has experienced disfavour; the sterling/euro rate is down from €1.1670 on 13 January to €1.1400 three months later, while sterling’s dollar value fell over the same period from $1.2990 to $1.2471. And even with the Bank of England acting as a buyer of last resort, how long will the gilt market absorb the flood of Government paper that is heading its way?

Then there is inflation, quiescent for so long that we have forgotten what it is like when too much paper money is chasing too few goods and services.

Wishful thinking dictates that the current crisis will give birth to a new, kinder social-democratic Britain. More likely, I fear, is that a new generation of the true-believer free-marketeers of the sort that emerged in the 1970s will come to the fore, demanding an end to what they will call economic anarchy and a return to the ancient verities of sound money and fiscal discipline.

As Gerry Adams, reportedly, said in a different context: ‘They haven’t gone away, you know.’


 

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