We are barking up the wrong tree

Allister Heath
ANOTHER day, another set of strong global economic figures. UK manufacturing is expanding at its fastest rate since 1994, according to a key survey. US factory orders are accelerating and the Fed upped its growth outlook last night. The world is undergoing an emerging-markets led rebound; barring an implosion in the Eurozone or some other geopolitical catastrophe, 2011 ought to be another decent year, including for the UK, as I argued in this space yesterday. I’m more convinced than ever that Britain will expand by around two per cent.

But decent should not be good enough. This ought to be a new golden age, just as it is in Asia, Latin America and many other parts of the world. The continued hangover from the unwinding of the bubble is only part of the reason why we are still suffering so much and failing to grasp the opportunities that ought to be in our reach. The biggest problems are more deep-seated in nature: years of blunders on public spending, tax, regulation, education, welfare and infrastructure. Bogged down by the need to sort out the mess left by the previous government, and opposition to cuts from a public which has got used to living beyond its means, the coalition’s welfare and education reform agenda is faltering.

Britain’s commentariat and political classes have been barking up the wrong tree for months, obsessing with short-term growth figures that were always going to turn out better than they thought (and over which they have no control) and waging a misguided and destructive war against the City, rekindling the politics of envy. The result is that the real issues facing the country – how to try and cash in better on the emerging markets boom and the technological revolution by tearing up failed 20th century institutions; and how to reform policy to prevent another bubble – have been woefully overlooked.

So far, the coalition has semi-successfully undertaken emergency surgery on the UK, preventing it from going the way of Greece, though central government spending was still up an absurd 10.8 per cent in the year to November. But while fiscal policy is on the mend, tax policy is increasingly damaging to enterprise, monetary policy is much too loose and failing to control inflation, and the attack on the City is costing jobs.

Part of the problem is that the world remains enthralled to intellectually bankrupt ideologies. The worst is the belief that central banks can and should act to prevent all economic fluctuations or even stock market slumps by cutting interest rates or buying bonds; this has been pushed to a new extreme since the late 1990s and was one of the main drivers of moral hazard and excessive risk-taking during the bubble. America’s renewed QE policy is a perfect example of such extreme monetary activism; as a result, the global bonds market is in a dangerous bubble. Another idiotic belief is that debt holders should never have to bear any losses and that financial institutions should not be allowed to fail; again, this is fuelling moral hazard and threatening to bankrupt weaker governments, who are bailing out the credit markets.

So not only are we failing to capture enough of the benefits of the global boom but we are yet again laying the seeds for another bust at some point. Just think how good things could be today if policy-makers didn’t keep getting it wrong.