I stand corrected

15th July, 2009.  On a day when record unemployment numbers – especially youth unemployment – are announced, it is a relief to hear more voices in support of government action to compensate for private economic failure. As the Duke of URL notes below, Galbraith also understood how to deal with economic failure. Today in the Guardian, the blessed Danny Blanchflower makes a powerful case for a fiscal stimulus.

He of course has the record,  clout and credibility of one who called the crisis correctly – as a member of the Bank of England’s Monetary Policy Committee.

In 2008 he was named the ‘Business person of the year’ by the Daily Telegraph, in their Great Britons of 2008 awards on 30th December 2008. Citation said:

“Not only did David Blanchflower foresee the scale of the recession months before the eventual impact, he attempted to do something about it. He was the one Bank of England executive who consistently argued in favour of dramatically lower interest rates. He was the first policy-maker from the Bank, Treasury or Financial Services Authority to warn that the UK faced recession and the possibility of house prices falling by a third. Blanchflower has decided against taking up a second three-year term on the MPC; the Bank of England will be the weaker for his absence.” (http://www.telegraph.co.uk/topics/great-britons/)

I reproduce his comment piece in the Guardian below, in full.

And next for Britain, the semi-slump

British economic history warns us to beware false dawns. Those calling for spending cuts have got it wrong – again.

‘The duration of the slump may be much more prolonged than most people are expecting and … much will be changed both in our ideas and in our methods before we emerge. Not, of course the duration of the acute phase of the slump, but that of the long, dragging conditions of semi-slump, or at least sub-normal prosperity, which may be expected to succeed the acute phase.” John Maynard Keynes‘s lucid warning, delivered in 1930, might equally apply today.

It is instructive to look at the pattern of the great depression. The level of Britain’s gross domestic product in 1930 was not reached again until 1934. The annual unemployment rate of 1929, 8.2%, was lower than in every year during the 1930s, reaching a high of 17.6% in 1932. Today, we are probably out of the acute phase of the present recession, but the recovery is likely to be protracted.

Output for the first quarter of 2009 was revised down to -2.4%. That is the biggest drop since 1958, as the Office for National Statistics revised its initial estimate of 1.9%. In addition, the fourth quarter of the 2008 figure was revised down to a fall of 1.8% – as was the figure for the second quarter of last year, from zero to -0.1%, meaning the recession started in April 2008. Data from the Index of Production published this month also suggests little evidence of any recovery. Manufacturing output continues to decline and is at a 17-year low.

The 1980s recession began in the first quarter of 1980, and lasted for four quarters. The unemployment rate at that time was 5.8%; it did not return to that level for 20 years. From the third quarter of 1990 onwards, the economy recorded five successive quarters of negative growth. In the second quarter of 1990 unemployment was 6.9% and did not return to that rate for seven years.

And the current slump? Employment peaked in April 2008; since then Britain has lost 430,000 jobs. That unemployment has increased more than employment has fallen is of particular concern, because it shows that firms have stopped hiring, which particularly affects the young.

So, based on output, employment and unemployment, the recession started in the spring of 2008. We have already experienced four quarters of negative growth, with more to come.

Economists are uncertain about the likely path of recovery. For example, less than a year ago Britain’s National Institute of Economic and Social Research was predicting that the UK economy would “escape recession”, forecasting positive economic growth in both 2008 and 2009. On 10 June this year, the NIESR said, “The monthly profile points to March as having been the trough of the depression.” But on 7 July it had changed its mind again, arguing, “March can no longer be considered the trough of the recession.” A month is a long time in economics these days.

I continue to be struck by the similarities between the US and the UK. The American National Bureau of Economic Research called the start of the recession in the US when employment began falling in December 2007. Since that time US unemployment has increased by 7.17 million, whereas employment has fallen by only 6.46 million. The unemployment rate has risen from 4.9% to 9.4%.

The US is six quarters into recession. Despite a substantial fiscal stimulus and very accommodating monetary policy there is little sign that recovery is imminent. There have been several false dawns. The monthly decline in US payroll employment, for example, slowed in May but increased again to 467,000 in June. The Conference Board’s consumer confidence index, which had improved considerably in May, fell again in June. The job outlook section of the index was also more pessimistic. Those respondents anticipating more jobs in the months ahead decreased to 17.4% from 19.3%, while those anticipating fewer jobs increased to 27.3% from 25.6%.

The Bank of England’s timid monetary policy committee should not have sat on its hands last week; it should have expanded further its programme of quantitative easing. In the current circumstances, if we are to avoid the “dragging conditions of semi-slump”, public spending cuts make absolutely no sense. The government should be increasing spending now – and by a lot – not least because it can borrow at such a low long-run rate of interest. In such circumstances, infrastructure and education are smart investments for all our futures. Most of the self-proclaimed experts calling for public spending cuts missed the recession in the first place.

So I have a question for Gordon Brown, David Cameron and Nick Clegg. What plans do you have to get unemployment down any time soon? If you want to transform a recession into a depression, go ahead and cut public spending. I would advise against it and so, I believe, would John Maynard Keynes. Voters want jobs.

David Blanchflower is a professor of economics at Dartmouth College and a research associate at the NBER. He was a member of the Bank of England’s MPC from June 2006 to May 2009

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1 comment to I stand corrected

  • the.Duke.of.URL

    Ann, I completely agree with you about Blanchflower’s prescience about the current crisis and his current prescription. Your

    contention that jobs will bring in revenue and aid in mitigating the deficit, along with other factors, is on the money in my view.

    The idea

    that the market works in the arena of large corporations, which now include banks, is a fantasy – Galbraith’s argument about this is incontestable

    in my opinion thought this hasn’t stopped economists contesting it.

    The data I have for the ’30s shows that Roosevelt’s job creation

    program worked (though it would have worked better had he done more of it), and the data exhibits a kind of Millian test of this hypothesis. I

    suppose it is too much to expect MPs to look at data much less analyse it.

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