Samuel Brittan

A theme heard among financial analysts is that governments and central banks are running out of “ammunition” to fight a setback in economic activity. Their view seems to me profoundly wrong. The issue here is not whether there is going to be a recession in the world or individual countries, but what governments and central banks could do about it. There are many problems about policies to maintain activity, but lack of policy instruments is not one of them.

Of course, things would be much easier if national authorities had used the recent expansion to strengthen their underlying positions, notably to put their budgets in order and at least to keep a weather eye on the growth of money and credit. There would then have been less of a problem of defeating a bubble mentality, and if there had been budget surpluses these could have been run down without engaging in scholastic arguments about contracyclical finance. Interestingly enough, on this criterion of past fiscal virtue the eurozone countries come off relatively well, despite constant lecturing that they should do better. According to Organisation for Economic Co-operation and Development estimates, they have reduced their combined fiscal deficit from about 3 per cent of gross domestic product earlier this century to little over half a per cent now, irrespective of whether one looks at the raw numbers or cyclically adjusted versions. By contrast, the US and the UK are still the bad boys, running deficits of 3 per cent and more.

The moral of these past errors is not to indulge in a ridiculous fatalism but to be sure before acting that there is a real danger of a downturn and that it is one that reflects a deficiency of nominal spending. The mere demands from financial market participants and corporate boardrooms for more money and plenty of it do not make out the case. But after these warnings, it remains true that there are still plenty of means of stimulating spending if required.

US three-month market interest rates at near 4 per cent still leave plenty of room for further reductions, as do euro rates. UK rates, at well over 5? per cent, leave even more room. By contrast, during the last deflation scare, when Federal Reserve member Ben Bernanke alarmed financial coelacanths by talking (hypothetically) of helicopter money, US rates were down to just over 1 per cent. Contrary to some alarmist fears, long-term rates did not move in the opposite direction, although they did not fall very much. In the last resort there is no law of the Medes and Persians preventing the Fed from operating at the longer end of the market.

One serious objection to monetary stimuli is that low interest rates now have their main domestic effect in encouraging consumer borrowing and loans for house purchase. This risks going back to the inflated debt ratios that have contributed so much to the recent bubble. This is a little less true for the UK, where cheaper money works partly by putting downward pressure on sterling and thus giving a welcome boost to exports at a time when financial markets are beginning to worry about the balance of payments deficit. Those who worry most about consumer indebtedness should support a major fiscal contribution to any stimulus.

Professor Larry Summers, US Treasury secretary in the Clinton administration that boasted of balancing the budget, now calls for a fiscal stimulus of up to $75bn. His more sensible critics, such as Prof Stephen Cecchetti, doubt whether Congress will allow it to be “timely, targeted and temporary”. With a big enough downturn, the risk would have to be taken.

Where would a fiscal stimulus leave budgetary guidelines such as those of Gordon Brown, the British prime minister, or the much-amended eurozone growth and stability pact? If any slowdown is modest and offset by an eventual recovery, these guidelines remain important to keep down the interest burden on the national debt and to leave room for investment. But if the alternative is output that would be lost for ever (as Christopher Dow maintained in his mammoth work Major RecessionsThere are reasons other than a mythical lack of “ammunition” for caution about an anti-recession package. The behaviour of commodity markets, including gold, reveals inflationary pressures. They suggest that there are now speed limits to world growth, owing ultimately to the pressures on the physical capacity of food, fuel and commodity producers to keep up with the new demands placed on them by the entry of emerging nations into the world economy. On the local European scene we have the re-emergence of the Bourbon wing of the German Social Democrats and its insistence on minimum wages in more and more industries. And if the foreign exchange markets are to be allowed to correct the overseas “imbalances” in the US and UK economies, a period of below normal growth there seems unavoidable. But if there really were to be a generalised lack of spending, national and international authorities would have the means to counteract it. There is no need to talk ourselves into a Great Depression.

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