Not the economic equivalent of war

Allister Heath
There is something bizarrely enjoyable about Liberal Democrat conferences. It is the occasion to hear our so-called equalities minister, Lynne Featherstone, blame the world’s problems on men; and to listen to others being nasty to people who own or hope one day to own a nice home in London or the home counties. In their desperation to impose ever more punitive taxes, the Lib Dems are moving the political debate leftwards. The post-Tony Blair era is well and truly over; not since the early 1990s has the British left been so anti-wealth – and in those days, it was counterbalanced by a much more pro-capitalist Tory party than anything today’s Cameroonism can muster. It is hard to see how the present coalition makes any sense intellectually.

But the line I found the most intriguing came from Vince Cable: he claimed that the economic challenges facing the UK are the “equivalent of war”. Cable meant it partly to describe the magnitude of our problems and also as a justification for coalition government: there was a government of national unity during the second world war. But the analogy was misplaced – this is not a war and pretending that it is will merely retard the recovery. As F.A. Hayek, a Nobel prize winning economist, pointed out in his Road to Serfdom, wars involve the state grabbing huge powers over the economy. Huge amounts of labour, capital and land are diverted to producing weapons and fighting the enemy, meaning that people have less to spend on things they actually want. This usually involves rationing and extreme protectionism. The result is that capitalism almost dies, replaced instead by a centralised, dirigiste and deeply corporatist economy, where only companies with close links to the state profit and the rest wither.

Of course, wars are sometimes needed; pacifism is a stupid ideology. But what we need right now is the opposite of a war-like approach to the economy: we need less planning, less dirigisme, less regulation, less central direction of economic resources and much more individual initiative. We need a bottom-up renaissance. Sadly, and in large part because of statists such as Cable, none of this is happening. The government is still set to spend 50.1 per cent of GDP this year, according to the OECD; and more new rules are being introduced than are being repealed. No wonder there are growing fears that weak growth will make George Osborne’s plans to eliminate the structural budget deficit over the next few years impossible to meet.

Cable is only half right that the post-war pattern of rising living standards has been broken. Certainly the current deterioration is remarkable in its intensity. Average living standards often fall in recessions, especially severe ones: when there is less output, there is less money to go around. There was always going to have been years of pain – yet the present ongoing stagnation could have been reduced in length had the post 2008 response been different and more of the boom-time malinvestments that still plague the economy been purged faster. House prices have further to fall; he public sector is unreformed; insufficient amounts of debt have been written off; and the coalition is not making the economy more competitive. Falling living standards are inevitable short term – but if this decline isn’t reversed soon, it will be the coalition’s policies, not the legacy of the recession, that will be to blame.
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