THIS is how the conversation kept going, until about six months ago.
Pundit: Aren’t you worried that unemployment will rocket if we cut public spending?
Free market economist: Not if the economy recovers, and in any case employment has been the one bright spot of this economy.
Pundit: But how can employment and the economy recover if George Osborne is cutting too far, too quickly?
Free market economist: His cuts are actually very small, monetary policy is supportive and economies can and do recover even when spending is being cut. That said, the problem is that taxes have gone up and there has been no supply-side revolution, which is prolonging the recession.
Pundit: But how could the private sector possibly create enough jobs fast enough to mop up all the public sector job cuts, even if the economy does grow? Unemployment will soar.
Free-market economist: The private sector can easily cope. Private sector job creation tends to be very strong in recoveries, and falling real wages will help this time around.
Pundit: Well, I don’t buy any of that.
Second pundit: But aren’t you worried that unemployment will rocket…and so on and so forth, ad infinitum. It was a dialogue of the deaf.
It turned out that the free market economists got it spectacularly right on jobs, and the left got it completely wrong. Employment has been the great success story of the UK economy, with jobs going up even before GDP growth finally took off. But with the exception of Simon Ward of Henderson, a follower of monetary aggregates, most free market economists (as well, of course, as the left) did not predict the extent of the recovery, or at least not its speed and vigour.
The reason, quite simply, is that they underestimated the demand-side boost caused by the chancellor’s various subsidised credit policies, as well as the more intangible benefit caused by the taming of the Eurozone crisis.
The problem, of course, is that the recovery is in part based on dangerous and unsustainable foundations. The current account deficit has shot up, suggesting too much demand and not enough supply; the mad help to buy and other associated policies are pumping demand into the wrong sectors; the budget deficit is improving but if current trends continue, the underlying shortfall would still come in at a crippling £109.4bn for 2013-14, according to Global Insight; and the whole unsound edifice continues to rely on crisis-level interest rates, which the Bank appears in no hurry to tackle despite the sad collapse of its forward guidance. The free-marketeers, in my view, are right to be very worried.
But regardless of whether we are in a bubble, or whether the government is right and the recovery will soon solidify and wean itself from monetary stimulus, we can all agree that the jobs market is performing extremely well, something that those who opposed the cuts failed to foresee.
There are 450,000 more people in employment, 172,000 fewer unemployed and 75,000 fewer 16-64 year olds not in the labour force compared with a year ago; 72.1 per cent of the population is in work, up from 71.5 per cent a year ago and 70.3 per cent two years ago. The highest employment rates since records began in 1971 were recorded in 1974 and the winter of 2004-05, in both cases hitting 73.1 per cent. Remarkably, we are just one percentage point away. Unemployment at 7.1 per cent remains far too high (and much higher than it was before the crash) and large numbers of people are suffering, including the young. But the trend is strong – and public sector employment is down by 52,000 over the past year to September, against a rise of 537,000 for the private sector, a genuine rebalancing. Only pay growth remains miserable. The bottom line is this: the free market economists called it right on jobs – unlike their more left-wing and Keynesian colleagues.