The moribund recovery debate

This is my latest comment from Fund Strategy.

The debate about Britain’s economic recovery stepped up a couple of notches last week. Unfortunately it did not become any more illuminating.

In broad terms there are two sides to the debate. On one are those who argue that business should continue as before. The government should carry on with its austerity plans and the Bank of England does not need to engage in more monetary easing.??Last week the International Monetary Fund weighed in on this side of the argument with an endorsement of the government’s plans. It was so glowing that Martin Wolf, the chief economics commentator of the Financial Times, described it as a “love letter”.

On the other side are those who argue that substantially more monetary stimulus is needed. They also often argue that spending cuts should be imposed later and less harshly than in the government’s plans.

Adam Posen, an external member of the Monetary Policy Committee, argued the case for more monetary easing in a speech last week. He argued that a substantial cash injection was needed to get the economy moving again while contending that, in the present circumstances, inflation was not a serious risk.

On the fiscal side Ed Balls, a failed contender in the Labour leadership bid, argued that it is not yet time for harsh austerity. Alistair Darling, another Labour MP and an ex-Chancellor, took a more cautious line.

The problem with this debate is that it is constrained within narrow limits. Both sides assume Britain’s economic problems are primarily cyclical. Therefore, if fiscal and monetary policy are pursued correctly, recovery will eventually come.

In a sense they are following John Maynard Keynes’ famous dictum that “in the long run, we are all dead”. This is taken to mean that the focus should be on solving imminent problems rather than taking a long-term view.

Unfortunately this perspective means that chronic economic problems never get properly addressed. The lack of capital investment, low levels of research and development, overcautious business culture and other weaknesses are left unchallenged.

Under such circumstances a substantial stimulus, or even a huge one, may lead to a technical recovery. The economy can move, as it has done, from contraction to growth.

However, the recovery is likely to be weak. If the economy has not been restructured, with little “cleansing” of its productive base, it may drift forwards for a time but it is not likely to sustain much momentum.

An assessment of Britain’s structural economic weaknesses is more urgent than ever.