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October 17, 2008

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Ted

If you don't think the UK economy is over-leveraged then you're in a small minority of economists. Using current mortgage arrears figures is pointless - the recession in the wider economy is only just starting. Unemployment has only been rising seriously for 3 months, so that's not going to show up in recent problem debt numbers. Some are predicting that unemployment is set to double by the end of next year. Mortgage arrears will only going to get worse from here, a lot worse.

Diversity

Clearly, no one in the Cameroons from David downward has any idea of the deep running and rigourous pragmatism that was Margaret Thacher's great virtue. The nearest thing to it in present day politics - though he starts from different assumptions and sonds very different - is Vince Cable.

Bob B

After reading Simon Jenkins on: Thatcher and Sons (Penguin Books, 2006), I'm not entirely convinced that your claims about Thatchite principles are altogether substantiated.

Besides, Tony Blair and Gordon Brown went along with the very Thatcherite principles they once claim to have rejected: social mobility went down, not up, during New Labour governance, privatization of state owned business assets (= selling the family silver) was vigorously pursued, and little was done to amend inherited industrial relations legislation. The empowering legislation for the Private Finance Initiative (PFI) was Conservative.

In the last resort, Mrs Thatcher as PM went along with Britain joining the European Exchange Rate Mechanism in October 1990.

The fact is that the Conservatives in Parliament were responsible for many of the factory acts in the 19th century:
http://en.wikipedia.org/wiki/Factory_Acts

Winston Churchill, as President of the Board of Trade, introduced the Trade Boards Act in 1908 - the Boards were constituted to fix minimum rates for timework and piecework in specific industries.

Historically, the Conservative Party has not been dedicated to preserving laissez-faire and free markets regardless but then, as I've remarked here before, Mrs Thatcher wasn't a true Conservative. She specifically acknowledged the inspiration she gained from Nicholas Ridley:

"Free-market economics was always Nick's passion. And he had a longer, better pedigree in that respect than most Thatcherites—or indeed I may add—than Thatcher herself. His first vote against a Conservative Government bailing out nationalised industries was in 1961. To be so right, so early on, is not to have seen the light—it is to have lit it...He would have been a superb Chancellor."
http://en.wikipedia.org/wiki/Nicholas_Ridley%2C_Baron_Ridley_of_Liddesdale

Even so, Nicholas Ridley opposed privatization of the railways, which was only carried through by the Major government after he had died.

anotherplanet

Chris must be living in a parallel universe. Pointing to arrears figures is a bit like claiming the house is in no danger because only the curtains are on fire.

InAny case, the current crisis explodes the neo-liberal myth that personal debt is simply a private matter. If enough individuals are encouraged to borrow 5-7x earnings and take out 100%+ mortgages in an era of cheap and easy credit, rising defaults will hit those individuals who were acting 'responsibly' as the banking system seizes.

Thereafter the idea that "... the only purpose for which power can be rightfully exercised over any member of a civilised community, against his will, is to prevent harm to others" starts to look a little more nuanced than libertarians suggest.

Bob B

"If enough individuals are encouraged to borrow 5-7x earnings and take out 100%+ mortgages in an era of cheap and easy credit, rising defaults will hit those individuals who were acting 'responsibly' as the banking system seizes."

Cheap and easy credit ??? Absolutely but John Redwood believes that: "[The UK authorities] have kept interest rates far too high for too long."
http://conservativehome.blogs.com/torydiary/2008/10/beat-recession.html

I posted up two pieces with supporting links showing why John Redwood didn't know what the hell he was talking about but these were never permitted to appear on the Conservative Home blog.

So much for open intelligent debate about economic policy at Conservative Home.

Tom

"Mrs Thatcher wasn't a true Conservative"

Churchill was hardly the truest of true blue, for that matter, as we all know. The fact is that introducing many modern Conservatives who joined the party or grew up in the 80s to the idea that there's another Conservative Party to that lead by Thatcher is akin to trying to persuade the Pope to give polytheism a try. After all, didn't Labour admit their mistake, throw everything overboard and see the light in 1994? Keynes is just a town in Buckinghamshire, what?

Cameron's problem, which is huge, is that his entire election strategy is based on persuading the voters that he could run a Thatcherite economy better than Gordon Brown (better being defined as 'at less cost to the taxpayer and with fewer cockups') - he was doing very well with this strategy, which after all doesn't involve changing anything, since the game board is basically where it was left in 1997. It just can't go any further if Brown stops playing by the same rules.

The modern Conservative Party is not set up for a battle of economic ideologies, since its younger members not unreasonably think they won that one twenty or so years back and don't have the intellectual language - they've been concentrating on US-import dog whistles about social breakdown, crime, immigration and the family. Nick Ridley has no heirs in the current party leadership - the mention of John Redwood (probably the nearest) sums that up nicely - we all know his flaws.

chris

I take the point that Thatcher was much more pragmatic and less of a free marketeer than legend has it - but I was referring to Thatcherites in the sense of free market types, not Thatch herself.
Also, we should distinguish two reasons for worrying anout high personal debt:
1. It's a sign that individuals are (irrationally) over-indebted, and that this will cause a downturn, as they rein in their spending.
2. High debt will exacerbate a downturn, as people will high debt will cut spending more in response to tougher times than they would if debt were lower.
Point 2 is true. Point 1, though, is highly doubtful, and data for Q2 seem to undermine it.

Bob B

Tom - I like your analysis but must say I find some of the posting in Conservative Home very worrying, not least that by John Redwood's many friends, as well as the poster who signs himself as "Friedmanite" and who evidently believes that "keynesian" economics is only about fiscal policy to fine tune demand management to maintain permanent full employment.

The fact is that what originally motivated Keynes was to develop a theory that could explain the slump of the 1930s when the prevailing orthodoxy at the time was committed to: (a) extensive wage cuts to reduce unemployment; (b) a belief that additional public spending funded by borrowing or additional taxes would be useless as there would be an equivalent offsetting cut in private spending; (c) the classical dichotomy - meaning that changes in the quantity of money affected only nominal prices and had no effect on real variables.

I've made several attempts to address these issues in Conservative Home - to no effect - and then got censored out when I tried to show why Redwood's claim that interest rates had been kept too high for too long was utter nonsense: how else except by low interest rates did we get Britain's mountain of consumer debt (£1.3 trillion) and the house-price bubble which, according to the IMF, reached relatively larger dimensions here than in America.

And we got those low interest rates because Gordon Brown in December 2003 redefined the BoE's inflation target - against the advice of the Bank - in terms of the CPI - which doesn't included house prices - instead of the RPIX, which does. The CPI and RPIX subsequently diverged until recently: interest rates would have had to be higher to curb inflation had the remit to the BoE remained unchanged. Apparently, Conservative Home regards that analysis - supported with citations - as heretical or offensive. They are nuts there so I shall remain a floating voter.

Bob B

Readers who might like to gain a fresh appreciation of modern macroeconomics from an independent and relatively authoritative source may like to know is that a new edition of Olivier Blanchard: Macroeconomics (Pearson Education, 5th edition 2008) has recently been published:
http://www.amazon.co.uk/Macroeconomics-Olivier-Blanchard/dp/0132079631/ref=sr_1_1?ie=UTF8&s=books&qid=1224358165&sr=1-1

What makes that of special, topical interest is that Olivier Blanchard became chief economist at the IMF on 1 September:
http://en.wikipedia.org/wiki/Olivier_Blanchard

chris strange

Correct me if I'm wrong, but wouldn't 1908 be before Churchill crossed the floor back to the Conservatives. Wouldn't he have been a Liberal at the time?

Bob B

"Wouldn't he have been a Liberal at the time?"

Yes, Churchill was a Liberal then but subsequent Conservative governments didn't repeal the legislation until the 1980s.

Bob B

Compare and contrast:

" . . After the Whitsun recess in 1904 [Winston Churchill] crossed the floor to sit as a member of the Liberal Party. As a Liberal, he continued to campaign for free trade. . . "
http://en.wikipedia.org/wiki/Winston_Churchill

"Of all the lessons to be learned from the meltdown of the world's financial system - a catastrophe that will impoverish every household in Britain - none is more urgent than that the Conservative Party should abandon the ideology that got us into this mess in the first place.

"I refer to the now discredited doctrine of free trade, which has been the Tories' central belief for three decades. It was only later adopted by Labour under Tony Blair - but it is now doing so much damage that it is time to get rid of it."[Daily Mail, 18 October 2008]
http://www.dailymail.co.uk/news/article-1078711/Free-trade-Sorry-Mr-Cameron-thing.html

Glenn

12 months ago I was looking at personal indebtidness.

The official view at that time was that the ratio of personal debt to personal assets had not budged much for 20 years. That is that people incurred more debt, but also had greater assets - housing, savings, etc.

Of course this position may well have deteriorated as the values of assets (houses) have declined somewhat.

There's lots of second guessing whether there is too much personal debt and what the individual response to this will be. We may well get some real exposure to this question and its resolution soon.

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