Gordon Brown or George Osborne: hopeful gamble vs. certain defeat
I have heard it said that in a crisis, one’s true nature shows through. In this economic crisis, Brown is revealing the Keynesian he kept under wraps so well for a decade. While Osborne is revealing the Thatcherite that the Tories have been so keen to hide since Cameron took over. As a result, the dividing lines in British party politics are becoming ever starker. And everyone, of course, tries to paint their analysis as somehow absolute and indisputable. The truth is that everything is in flux and getting increasingly difficult to control and predict. However, I still think Brown’s approach is preferable even with such high levels of uncertainty.
Brown is essentially taking a double gamble. The Pre-Budget Report next week will unveil the next step in an increasingly bold effort to reflate the UK economy through public spending and tax cuts. The risks inherent in this are that a) the economy does not reflate sufficiently and takes much too long to generate the higher tax revenue needed to pay off rising public debt and b) that rising public debt spooks the markets (now or at some point in the future) leading to an already fragile sterling plummeting further (the point Osborne made over the weekend).
Brown is hoping to lessen the risk for both of these by creating the momentum for an internationally co-ordinated reflation – a process he promoted at the G20 meeting in Washington. Such co-ordination will, he hopes, make the UK look less bold to the currency markets and increase the chance that economic stimulus in the UK is reinforced by stimulus overseas. If it pays off, Brown will not only have limited the impact of recession but will have pulled off a truly audacious economic plan: a world briefly declared safe for Keynesian type policies after decades of hostility from markets and international economic institutions.
Osborne, on the other hand, offers economic certainty. His policy of rejecting fiscal stimulus and just relying on monetary policy and micro-initiatives will certainly send the UK into a deep and long recession. At the moment, his approach is as good as doing nothing because cuts in the base rate are not encouraging the banks to lend (Libor is edging up again) and the initiatives proposed by the Tories last week were rejected as useless by the British Chambers of Commerce, The Federation of Small Businesses, The Institute of Directors and the Engineering Employers Federation (the CBI were a bit nicer).
Of course, Osborne argues that it is better to face up to the recession than build up public debt and create even graver problems. But this assumes Brown’s gamble will not pay off and we cannot say for sure that it will not. Under those conditions I’ll stick with Brown who at least “keeps hope alive” as the Rev. Jesse Jackson used to say.
There is one further very important aspect of the Tory policy which I find profoundly worrying. If national recessions across the globe deepen without any successful global rescue package based on reflation, most governments will not opt for the masochism of Thatcherite economics. Instead they will choose to reflate on a unilateral basis and will avoid currency and other risks through protectionist measures thus destroying the global free trade which the Tories themselves espouse and which could bring all sorts of unpleasant consequences. Personally I’d rather not experience a deteriorating international situation brought about by a protectionist trade war between the USA and China.
So it’s a gamble but my money is firmly on Brown.