Wednesday, March 18, 2009

At last a choice.

I have been getting a little too one-eyed recently and allowing my dislike of New Labour and the sleaze around them to miss some important choices coming up ahead. The Tories and New Labour are beginning to split away in how to deal with the economic crisis. Up until now Brown, and Blair before him, have been following the economic ideas of Milton Friedman who inspired Thatcher and Reagan. This did not give David Cameron much room to maneuver. John Maynard Keynes, pictured, and his ideas were consigned to the dustbin of history. Now it's beginning to change. As Brown starts to look for Keynesian answers to the crisis Cameron has stayed true to Thatcherism.

As much as the Tories would rather not get tied down on policies before the election, and many of the voters will let their dislike of New Labour control their vote, the election will have an enormous effect on the standard of living of most British voters. Now I cannot pretend to be an expert on economics, but seeing that the experts have got it so wrong recently I will try and explain what I feel is the difference between the parties policies and the results this might give.

I will start with the Tories as this is the easy one. It's now clear that David Cameron will not try and spend his way out of the recession/depression. This is the pure laissez-faire much favoured in the past by the likes of Thatcher and Enoch Powell. Companies and banks in trouble will be allowed to fold. As less people are at work and able to pay tax, social services will be cut. The government will rely on charities to support the weakest. We will start to see deflation and a depression like that of the 1930's will occur. We will see strife on the streets. Those with considerable cash savings will benefit although house prices will tumble as more default on their mortgages. In the end the middle class will be hurt along with those underneath but the very rich will get away without too much pain. This will be explained by Cameron as not allowing future generation to be saddled with the enormous debt.

Now to New Labour. Brown and some of the others seem to have had a road to Damascus moment and are seeing the dangers in a Thatcherite answer to the crisis which following those ideas has led them into. It might be that some of these New Labour ministers can't bring themselves to break from old ideas and there are rumours that Alistair Darling may resign if forced to keep on spending. So what is the Keynesian response to the crisis? Basically it is to spend our way out of the recession. It will need money printed and acceptance of inflation to work. What they are attempting is to buy growth. This was how FDR pulled the US out of the depression, although the war may have contributed also.

What effect would New Labour's policies have? Well because of inflation, unless interest rates rise fast, those with cash savings will see the real value decline. It will be hard to see this policy propping up housing prices, or at least the real property value after inflation, but the fall could be less than that with depression and deflation. If we get the desired growth, then those in the middle class and lower may see a smaller drop in their standard of living than otherwise. Inflation will of course make the government debt smaller in real value. The danger is stagflation where we have the inflation but no growth which is a possibility as the damage to the economy is already so great. That could put us into a pre-war German-like situation. One of the problems that could lead us in that direction would be if the government was forced to protect the exchange rate or get finance for the government debt by raising interest rates.

So we are caught between a rock and a hard place and a decision will have to be made. The Tories would much rather we didn't think about the outcome of their policies while Labour has no guarantee that theirs will work. I know what way I'm leaning, but I suspect that Brown and Blair have created such a bad smell that it will make no difference.

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