As world economy slows, where is Gordon Brown when we need him?
by Douglas McWilliams
11 July 2012
With the world economy again slowing sharply, the time is right for a fresh stimulus, says think-tank
I am not a long-term fan of former British Prime Minister Gordon Brown, who has not received anything like the blame he deserves for the United Kingdom's current economic problems. But he got some things right.
As chancellor he kept the UK out of the euro, which today looks a pretty good call. And in 2008 he encouraged authorities around the world to boost demand by fiscal and monetary means, which meant that although the 2009 recession was deep, it was fairly short-lived. I suspect that he might have got more praise for what he did in 2008 had his aides not tried to spin the overblown idea that he had 'saved the world'.
Today the world economy is again slowing sharply. The United States and China are grinding to a halt. Europe is already in recession and growth is still falling. We estimate that world gross domestic product in the second half of 2012 could be up only 1 per cent year on year. If this leads to an inventory adjustment the world will be in recession in the early part of this year for only the second time since 1945. At the same time falling commodity prices mean that inflation is likely to drop sharply and could go negative in countries with strong currencies.
The monetary boosts that helped the world economy early in the year have lost momentum. The Chinese have cut interest rates and relaxed lending curbs, the US resumed Operation Twist – after four months of sharp monetary slowdown – the European Central Bank cut interest rates, and the UK announced the Extended Collateral Term Repo Facility as well as additional quantitative easing. These measures will probably help on balance, but are they enough?
The Centre for Economics and Business Research has never been averse to advocating Keynesian measures when the conditions are appropriate. We set these out in 2008 when we proposed a value added tax cut which the government then implemented.
First, there has to be a risk of a deflationary spiral. Second, the measures themselves have to be temporary and reversible. Third, the measures should have some benefit in themselves through either giving back in lower taxes money that people themselves have earned, or building public sector infrastructural projects that are actually necessary – they should not be used to increase welfare spending, government bureaucracy or to pay for vanity projects like Britain's HS2 high-speed rail project. And fourth, confidence and expectations have to be such that monetary measures alone are unlikely to be successful at stimulating economies.
To these we would now add a fifth condition. Most of the countries that might benefit from a stimulus are too small and/or too indebted to do so on their own. The leakages would mean the boost to demand for an individual country would be offset by the hit their borrowing would take from the bond market. These conditions apply to everyone except the US, China, Germany and possibly Japan. Any stimulus would therefore have to be matched across the G20.
Our modelling suggests that if each G20 economy were to boost demand fiscally by 1 per cent of GDP in the next six months, their debt would rise by only 0.16 per cent of GDP, and their GDP would rise by 0.8 per cent. This compares with a debt increase of 0.7 per cent and a GDP increase of only 0.3 per cent if, say, the UK were to act on its own. The leakages would be largely offset by the gains from the GDP boost in the other economies and the spillover benefits from their reflationary actions.
The best form of action would be tax cuts, to be paid for over time by better economies in spending. The right time is now – the longer a deflationary spiral has to bed in, the greater the amount of ammunition necessary to deal with it.
Britain is probably too small to play a role in negotiating this. No European leader is in a strong position to take the initiative, because of the horrific euro crisis, which still shows no sign of abating. So there has to be a deal between the US and the Chinese in the first instance. Chinese governments for historic reasons are very unwilling to be seen to be following a lead from western economies. But if the Chinese made a suggestion – could the west respond with matching action? Perhaps there is a role for Gordon Brown after all?
Douglas McWilliams is the chief executive of the Centre for Economics and Business Research
I am not a long-term fan of former British Prime Minister Gordon Brown, who has not received anything like the blame he deserves for the United Kingdom's current economic problems. But he got some things right.
As chancellor he kept the UK out of the euro, which today looks a pretty good call. And in 2008 he encouraged authorities around the world to boost demand by fiscal and monetary means, which meant that although the 2009 recession was deep, it was fairly short-lived. I suspect that he might have got more praise for what he did in 2008 had his aides not tried to spin the overblown idea that he had 'saved the world'.
Today the world economy is again slowing sharply. The United States and China are grinding to a halt. Europe is already in recession and growth is still falling. We estimate that world gross domestic product in the second half of 2012 could be up only 1 per cent year on year. If this leads to an inventory adjustment the world will be in recession in the early part of this year for only the second time since 1945. At the same time falling commodity prices mean that inflation is likely to drop sharply and could go negative in countries with strong currencies.
The monetary boosts that helped the world economy early in the year have lost momentum. The Chinese have cut interest rates and relaxed lending curbs, the US resumed Operation Twist – after four months of sharp monetary slowdown – the European Central Bank cut interest rates, and the UK announced the Extended Collateral Term Repo Facility as well as additional quantitative easing. These measures will probably help on balance, but are they enough?
The Centre for Economics and Business Research has never been averse to advocating Keynesian measures when the conditions are appropriate. We set these out in 2008 when we proposed a value added tax cut which the government then implemented.
First, there has to be a risk of a deflationary spiral. Second, the measures themselves have to be temporary and reversible. Third, the measures should have some benefit in themselves through either giving back in lower taxes money that people themselves have earned, or building public sector infrastructural projects that are actually necessary – they should not be used to increase welfare spending, government bureaucracy or to pay for vanity projects like Britain's HS2 high-speed rail project. And fourth, confidence and expectations have to be such that monetary measures alone are unlikely to be successful at stimulating economies.
To these we would now add a fifth condition. Most of the countries that might benefit from a stimulus are too small and/or too indebted to do so on their own. The leakages would mean the boost to demand for an individual country would be offset by the hit their borrowing would take from the bond market. These conditions apply to everyone except the US, China, Germany and possibly Japan. Any stimulus would therefore have to be matched across the G20.
Our modelling suggests that if each G20 economy were to boost demand fiscally by 1 per cent of GDP in the next six months, their debt would rise by only 0.16 per cent of GDP, and their GDP would rise by 0.8 per cent. This compares with a debt increase of 0.7 per cent and a GDP increase of only 0.3 per cent if, say, the UK were to act on its own. The leakages would be largely offset by the gains from the GDP boost in the other economies and the spillover benefits from their reflationary actions.
The best form of action would be tax cuts, to be paid for over time by better economies in spending. The right time is now – the longer a deflationary spiral has to bed in, the greater the amount of ammunition necessary to deal with it.
Britain is probably too small to play a role in negotiating this. No European leader is in a strong position to take the initiative, because of the horrific euro crisis, which still shows no sign of abating. So there has to be a deal between the US and the Chinese in the first instance. Chinese governments for historic reasons are very unwilling to be seen to be following a lead from western economies. But if the Chinese made a suggestion – could the west respond with matching action? Perhaps there is a role for Gordon Brown after all?
Douglas McWilliams is the chief executive of the Centre for Economics and Business Research
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COMMENTS
You're late. Gordon Brown has been arguing in print during the last two years for many of the strategies you've suggested here. Nobody spun "save the world". It was Warren Buffett who said the western world was 48 hours away from the end of paper money, until Brown intervened.
Unfortunately, the markets got him out - using News International - as they got out so many other European leaders in 2009 and 2010; in order to ensure that debt repayment took priority over education, policing, defence, social care - even over the performance of the economy itself. Their austerity programme was not only immoral, it has resoundingly failed, since no real progress can be made on debt for as long as austerity destroys growth.
James Ruddick - Cheltenham
