14 Aug 2012

Lord Lawson calls Nonsense - Is he Right?

Worse than the 1930s? Nonsense

From Lord Lawson
     Sir, It is being said in some quarters that the present UK recession is even worse than the slump of the 1930s.
     That is nonsense. It is certainly the worst since then, but it does not compare with the 1930s. In 1932 (the year of my birth, as it happens) UK unemployment was in excess of 22 per cent, and gross domestic product was was 25% down on 1930.
     Enough said.

-- Letters, Financial Times. 13 Aug 2012.

Dear Lord Lawson (Baron of Blaby),

The comparison of the Great Depression and the Great Recession is instructive. The underlying conditions of the current recession are indeed much worse than they were in the 1930s. Private debt levels, the primary driver of the asset bubble and subsequent collapse that caused the recession, are very much higher than in the 1930s. Professor Steve Keen has calculated that in the USA private debt levels peaked at 176% higher than the highest level in the lead up to the crash of 1929.

However the response to the crisis has been very different. The biggest single difference is that in the 1930s banks went to the wall. In the 2000's we spent a great deal of tax payers money to prop up the banks: in July 2011 the Audit Office estimated the amount peaked at over £1 trillion pounds, though in Mar 2011 we're owed about £450 billion (about 30% of GDP). In Oct 2008 the USA government gave $700 billion to bailout the banks. And so on. Does anyone really know the total cost around the globe of rescuing the firms that causes the crisis?

With the bursting of the bubble in the 1930s the government stepped aside and let the private sector take the brunt - leading to the levels of unemployment you refer to. However it meant that those who were going to bankrupt did so quite quickly and then the economy started to recover. In the UK the Labour government slashed spending and raised taxes causing deflation. However unemployment was very much lower in London and the Southeast - comparable to your time as Chancellor in fact. The UK recovered slowly and was helped by withdrawal from the gold standard, a devaluation, and the lowering of interest rates to 1%. While the USA with it's New Deal policies recovered more quickly and more strongly once the initial agony was over. Interestingly the USA is also recovering more quickly from this crisis.

In the 2000s insolvent banks have been propped up by the government - many people have pointed out that is is ideologically communist (or even national socialist) rather than capitalist but that's an aside. Although lending to the real economy has dropped to very low levels (contributing to the extended recession) there have been no runs on banks. People did lose their pension funds, but on the whole not their ordinary savings. As in the 1930s government policy has harmed rather than helped the recovery, producing a slow down that is already longer that the 1930s and shows no signs of recovery.  At present government revenue is falling so that they have to borrow more despite cutting spending by billions of pounds.

In the 1930s rearmament and WWII intervened. And after the war huge injections of capital from the US left the UK more or less on it's feet but with debts of more than 250% of GDP. But this was followed by a period of economic stability due to Keysian style economic policies and the Bretton Woods Agreement. This period of stability lasted into the 1970s. Our circumstances today are very different. The whole world, and most importantly our trading partners, are all experiencing the effects of this recession. The example of Japan suggests that 15 years of recession might by realistic. However Japan never faced the self-destruction of their major trading partner, as we watch Europe teeter on the brink of collapse. Greece must cash out, probably Italy as well, and most like Spain and Ireland. The cost to the UK and Europe is at present incalculable.

According to the present government's 2011 Budget Report tell us that private sector debt was 450% then. A McKinsey Report from Jan 2012 says "deleveraging has just begun", and indeed from their graph it seems UK total debt might be on the increase. And looking at this graph remember that in 2011 private debt was 450% of GDP - i.e. it accounted for at least 5/6ths of the total debt in the UK.

Note that our debt levels are considerably higher than Japan's in 1990. Indeed the UK is the most indebted country in the industrialised world.

Another major difference is that the world pulled together in the post-war years and implemented measures to protect the world's economies from rapacious bankers. Since the 1970's successive chancellor's but particular you and Gordon Brown, Lord Lawson, have dismantled those protections and left us vulnerable to the same kind of problems. Only this time the Neo-Liberals are so much more in control, so much more integrated into the system, into economic education and into government itself, that we are unlikely to walk away with the protections that Bretton Woods gave us for a time. What is far more likely is that the finance sector will be free to carry on and create yet another crisis before too long. We'll see token measures with lots of media coverage and claims from the incumbent in No.11 that everything will be different, but it won't be. Before long debt will fuel another speculative bubble and that too will collapse with disastrous consequences.

So is the current recession worse than the 1930s? Well, it's not over yet. I think we will have to wait until after the present recession is finished before passing judgement. It's clear that the present Great Recession is shallower than the Great Depression of the 1930s, but it may well last very much longer and do more cumulative damage to the UK economy over the long run.

It's simply too soon to say "Enough said."

Yours sincerely

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