Sunday 30 January 2011

One quarter doesn't make a recession

But it's half of one.

The fall in GDP in Q4 2010, coupled with more aggressive PR from Labour because of Ed Balls' appointment as Shadow Chancellor and Tom Baldwin's appointment as director of strategy (aka press manager) has changed the mood music around the coalition's attempt to get public finances in order. There's a bit more questioning of the approach: previously there was sympathy for the view that the priority was reducing the deficit, now there seems a bit more concern about growth. Mood music matters for two reasons:

- confidence is an important driver of growth. It's not enough on it's own, but it's necessary. The more nervous people (including companies) are about the future the less they will invest, spend, consume.

- although the "cuts" aren't big in themselves. they do change the direction of public expenditure. Big changes need some form of public acceptance to work. The coalition did get more votes than the opposition and has a mandate but it is fragile. It doesn't need to top the opinion polls to implement its policies but it does need at the least a grudging respect and acceptance. So far, it has this. But if we were to move into recession and there was much more questioning this respect and acceptance could disappear.

There are two problems for the coalition:
- One quarter of negative growth was always possible - but no-one expected it to be this one, the quarter before VAT increased, when people should have been out spending. The weather does seem to have made the difference, but the reason isn't relevant. The trouble is that if this quarter (Q1 2011), when there is a VAT increase as well as bad weather, also has negative growth then we are into two quarters of negative growth and a recession.

- They have not sold their approach recently, in fact for the last few months. They need to get on the front foot. I don't think it's enough to simply say, we must see the cuts through, we will not change course, The headlines need to explain why the approach is good for the economy. Even the Guardian (or at least one of their columnists) agrees that the state cannot do much to improve things. It's the private sector that will.

There are some positive points for the coalition:
- We won't know the final Q4 2010 figure until Spring, and it may improve;

- Subject to coalition breaking up, they won't face re-election till 2015. This is plenty of time for their policy to work. And if the world economy has recovered by then, the coalition will get the credit in Britain.

- Their approach is funadmentally right. They are at risk from external events - but fundamentally the interest burden (which I covered previously here) on our borrowings means the deficit has to be got under control, and the quicker that happens the quicker the recovery will come.

State of Play

I've just finished rewatching State of Play - the original TV series not the disappointing film. I thought it was (apart obviously from 24 series 5) the best thing I've seen on TV. A brilliant twisting tale about how the journalist heroes uncover details of political deceit and corporate corruption, even murder.

It made me ponder the phone-hacking scandal. The press is very powerful. I'd hate to be on the wrong side of it, especially if I didn't have the resource to protect me or the opportunity to benefit from any resulting publicity. It also doesn't always decide to follow things up and it can focus on irrelevancies. But there's no doubt that a free cynical and aggressive media keeps the body politic honest.

And is hacking into voice messages really different from rooting through dustbins? Or pretending to be someone else to get an interview? Or misrepresenting information to get hold of incriminating documents? (Things I admired in State of Play). No; this is a case of the end justifying the means. If a story is good enough then we should accept journalists have to overstep the mark to get the results.

There is a question about whether the News of the World's hacking (and I am sure most other papers do this as well) is focused on good stories; it's hard to imagine Kelly Hoppen, Sienna Miller, John Prescott or Gordon Brown having interesting messages, and the saga supposedly began with as tory about Prince Willaim's knee. But I suspect the underlying theme of such celebrity stories would be hypocrisy; they all benefit from publicity but they all complain when it's not good.

Hypocrisy underlies the News of the World story. The Guardian has made the most running; had it not been for the ex-editor being Cameron's press adviser, would they have bothered? They are after all the paper that linked with Wikileaks, relying on stolen information broadcast without care, to sell papers. Phone hacking is minor misbehaviour compared to theirs.

Monday 3 January 2011

2010 reprise

Last year I avoided making predictions but set out a few issues I thought would be important, and promised to review them at the end of the year.

Should you cut Government deficits in a recession?

I thought that the contrast between Eire - which had take action to sort out it's deficit but was constrained by being in the Euro - and the UK - which could devalue its currency but had out of control public spending - would be interesting. In the event the situation reversed: the UK got a new Government which took firm action that increased its credibility allowing it to continue borrowing and at lower interest rates. Eire got in a mess because its banks were in a much worse state than people thought and the Government provided a guarantee for all their debts. This has seriously damaged their credit rating - initially, things were looking reasonable but as the full horror of their banks unfolded they needed help. I suspect they would have been better allowing the banks to default (although protecting depositors) rather than hurting taxpayers, but that would have badly hurt banks in other European countries - especially Germany. And that would not have been popular.

So the question is unresolved: I remain convinced that sometimes you should cut deficits, and both the UK and Eire were right to do so, and will benefit compared with other indebted European countries. 2011 should show the result.

Does the public sector serve us - or is it the other way round?

I suggested that the public sector - and I really mean the management of the public sector - had forgotten why it existed, which is to provide efficient public service. (See last year's post for links to examples). I hoped that 2010 would be a year when the public started to take back control., accepting that the culture of low productivity and indifference to the public had taken years to create and would take years to disappear. I'm not sure there has been much progress on this; the flurry of press interest in this topic has largely disappeared and there will be a major media push by public sector unions about the unfairness of expenditure cuts, which will probably become the new story.

However, there is hope: Eric Pickles, the "Communities Secretary", has pushed for much more openness about Local Authority spending and the coalition has reduced the number of quangos if not had a bonfire of them. The philosophy of most of the coalition is to support localism, the Big Society, community involvement. Little things like giving local areas the power to determine housing needs rather than having them set by distant regional development agencies all help the trend towards reducing the power of the public sector. And a lack of money helps. So although there's been little progress the change of Government has kept the pressure on.

Is global cooling the new global warming?

I wondered if 2010 would become a year when it became respectable to be a climate change denier. I think it did: there has been an increasing realisation that the statistics and climate readings have been over-exaggerated by those with an interest in promoting expenditure on yet more research or in developing businesses on the back of fear of temperature increases. (Micheal Crichton wrote an interesting book "State of Fear" which suggest that Governments also wanted to promote the concept because by making people worried it allowed them to increase their control over the public. He also cautions about the politicisation of science - a timely caution many scientists ignored). As other topics which allow them to increase public worry - the economy, terrorism - come to the fore, Governments are less interested in climate change.)

I still think it sensible to invest in energy efficiency, and in the reduction of the use of coal, oil and gas, but for economic, environmental and energy security reasons. The hijacking of the debate by climate scientists has devalued these worthy objectives.

Labour or Tory?

I did make a prediction here: I thought there'd be a hung Parliament (because the swing to the Tories would have been to much to realistically expect) but I also thoiught the LibDems would support Labour. In fact, thanks to a focus on the importance of sorting out the UK economy by senior Tory and LibDem leaders, the coalition agreement was put in place and has lasted well so far. Selfish MPs on both the Tory and LibDem side like to rock the boat from time to time but absent a really serious disagreement on an unexpected item, the agreement looks likely to stick. Probably because the electorate would punish those who caused any break-up.

It's a relief to see a Government that cares about the economy in charge. Cameron has settled into the job - and where is Gordon Brown? It's interesting how quickly important people fade away if their bubble is burst (in all fields not just politics).

Internationally, I noted the importance of:

US Mid-Terms

I wondered whether Obama would have made progress in dealing with the mess Bush's team left behind, and whether that progress would be accepted by the US electorate. I think he did, but the electorate certainly didn't accept he had. However, I suspect he will do well over the next two years because the Republicans will either have to co-operate or be shown to be bankrupt of ideas. In either case, as the global economy picks up Obama will get the credit (probably unfairly, but that's fair as he's being unfairly blamed for things going wrong now).

I also said: "It usually takes two or three years for a change of Government to have any impact – so the problems in the first two or three years of a Government are usually those of the last one." Still true.


I wondered if a new regime to emerge. It nearly did. But the old one relied on the armed forces and brute force to keep it in place. I still hope that this basically civilised country can re-emerge as a force for good in the region: rebellion remains in the air and needs to be softly encouraged by the West.


My closing thought for 2010 was that it is hard to see a good outcome here. And that remains my thought: Pakistan continues to have deep divisions, an unsuitable Government, an intelligence service that faces two ways and an unnatural distrust of India fermenting its desire to see a destablised Afghanistan. Which in turn has a dodgy Government that doesn't control most of the country. The West has wasted billions here, has made itslef deeply unpopular and has no real plan for a constructive escape.

Thoughts for 2011 will follow shortly.