Bill Clinton had a sign over his desk that said:””It’s the economy, stupid”.”
It was there to remind him that although people claimed that the electorate were interested in other matters, it was the economy that mattered most. It is the economy that matters most to the people in my constituency and, I suspect, in most other constituencies. Even the anger that has been experienced over allowances, and before that over bonuses for bankers, is fuelled by people’s fear and uncertainty about their own economic prospects, and we should not forget that.
The sad truth is that although the economy is the most important issue for this country and our constituents, the Government have chosen to have a one and a half hour debate on it on a day when the local and European elections are distracting our attention. Until a few moments ago, the Government had not even been able to persuade a single one of their Back Benchers to support their position here. That is an astonishing rejection by the Government and their supporters of the importance of the economy.
The title of the debate also refers to “supporting business”. The implication is that direct intervention by the Government can solve the problems of business. At the moment, the principal problem in this country and the rest of the world is a shortage of demand for all the resources and people available to produce goods and services. As long as the principal problem is that shortage of demand, merely switching an element of that demand through the tax system to be spent elsewhere will not alleviate the problem. Money can be spent on the automobile industry, but it will be at the expense of money spent elsewhere. That may receive support from people in the auto industry, but it destroys jobs elsewhere. It is only measures to restore the aggregate demand in the economy to employ all the resources available that will ultimately support industry.
We should be considering measures that will restore the growth of demand and thus the growth of economic output and employment. In my view, the key to that is money. It may be an old-fashioned view, but money is very important. If people have money in their pockets, they will be inclined to spend it. If they do not have money, they will not be able to spend it. If they have inadequate supplies of money, they will save and scrimp to try to build up their money balances. If one person saves money, less money goes to other people, and the total output of the economy is not altered.
I think that the Government had the right intention with quantitative easing. We need measures to boost the supply of money in the economy. People may think that that is an unusual thing for me to say. I am a longstanding monetarist, and many of my monetarist friends are suspicious about printing money, because it can be a cause of inflation-especially if too much is printed. However, if there is an insufficiency of money-the collapse of the banking system threatened to destroy money-more money must be created. That is why it was essential for the Government to prop up the banking system. If banks collapse they destroy money in the economy. In a developed economy, money normally comes from banks increasing their lending. That is what creates additional money.
If I were to lend my distinguished hon. Friend the Member for Cities of London and Westminster (Mr. Field) £100, I would be £100 worse off, he would be £100 better off and there would be no increase in the money supply. If he, however, were to go to the bank and say, “Can I increase my overdraft by £100?,” that would create £100. There would be £100 extra in the economy-and when he spent it, as I am sure he would in due course, that money would circulate through the economy. Banks create money, but when banks are retrenching on their lending they destroy money. They call in loans and do not replace them, and there is less money in the economy. That is why it was necessary and right for the Government to do something like quantitative easing to ensure that enough money was circulating in the economy. It takes a little time for that to happen, but I think that it will happen. It might be part of the reason why we are seeing at least a slow-down in the recession and even some signs that it is bottoming out, even if we are not yet seeing a resumption of growth.
My hon. Friend’s question could be rephrased, “How are we to know when too little money has been printed, when too little money is available or when too much money has been destroyed by the banks’ retrenching?” We have to make a judgment. The Bank of England spelled out what it thinks is necessary and it will do it in a series of tranches. It is not proposing a Zimbabwean type of inflation, but an increase of a few percentage points in the supply of money. In general, an economy needs to see the money supply growing by a few percentage points more than the real growth that one hopes to achieve. We need to get back to that, and as long as the Bank does not overdo it, that is sensible.
By contrast, reliance on a fiscal stimulus seems likely to be less effective, and there is less scope for it in the British economy than might be desirable. If we started from a position whereby the Government had a very low deficit, or a surplus, it would be worth a try. It would be worth the Government’s saying, “Let’s give a fiscal stimulus by borrowing to spend.” However, when a Government start with a huge deficit, any further increase in that deficit is likely to destroy confidence, and as a result, have a negative rather than a positive effect on the total level of demand in the economy.
That is not just a theoretical point. The European Central Bank and economists from the European Commission have both separately carried out analyses of all the studies that have been published of attempts to use fiscal stimulus, in Europe and elsewhere, to stimulate the economy in the post-war period. They both show that on a majority of occasions when Governments have attempted to use the Keynesian weapons of borrowing to boost demand, it has had the opposite effect to what simple-minded Keynesians might have predicted. On half the occasions when Governments have boosted borrowing, that has led to deflation. On other occasions when they have reduced borrowing, even in a recession, it has led to a resumption of growth.
That is not something that should be too unfamiliar to us in this country. We have had three major recessions since the late ’70s. In 1976, the Labour Government faced a terrible recession with a huge and burgeoning deficit. The Keynesians among them said, “Let’s add to it. Let’s borrow even more, spend even more and try to get out of this recession.” Unfortunately, there was a run on the pound and they had to call in the International Monetary Fund-the only time the IMF has ever been called in to a developed economy-and the IMF said, “Stuff that for a lark. Forget about Keynes. Just get your books balanced again, raise your taxes, reduce your spending and that will restore confidence and get things going.” And it worked. I went to a seminar recently at which someone who was one of the Government’s chief economic advisers at the time said that they were astonished at how rapidly it worked, and how rapidly the economy started recovering thereafter.
In 1980-81 the economy appeared to be in freefall, with a decline in output. At the same time, there was a terrible deficit. The then Chancellor, Geoffrey Howe, had the courage to say, “We’ve got to get the public finances back into order if we are to restore confidence and resume growth.” Then 364 economists, led by the man who taught me monetary economics-or tried to, as I am happy to say that I did not imbibe all his views-published an open letter to the Chancellor saying that there was no reason in theory or in past experience to believe that if he persisted with his policy it could lead to anything other than an intensification of the recession. If we plot what happened, we can see that the economy was in freefall until 13 March, the day that they published that letter. From then onwards, a V-shaped recovery began. They were completely factually wrong. We know from experience that it can sometimes be right to get a grip on the public finances. That restores confidence and leads to a resumption of growth. The same applied in 1992.
That, of course, is why the Government, despite all their rhetoric and talk about an additional fiscal stimulus, have not introduced an additional fiscal stimulus on top of what is already happening through the automatic stabilisers. They are right not to take that risk. On the other hand the German Government, which is in a much better position, ought to be increasing spending, borrowing and trying to get their economy going. Other economies that are in that happy position should do likewise.
My argument was based on the fact of what has happened in the past rather than projections of what might be happening now. We shall see. It might provide an interesting test case if we come back in three or four years’ time and argue it out. The hon. Lady describes herself as a simple-minded Keynesian and me as a simple-minded monetarist, but if we are both simple-minded enough to say that we should look at the evidence, we will see that the evidence is clear. The evidence is not just what I have put forward; the evidence has been put forward by the European Central Bank in its study of studies and the European Commission in its study of studies, and the conclusion they have come to is that on a lot of occasions the Keynesian stimulus does not work and has a contrary effect.
I am relatively optimistic that a recovery might soon be under way, because we will see the normal inventory cycle reverse. When final demand for goods falls, as it fell after the Lehman effect with the collapse in confidence across the world, that is amplified as companies do not merely reduce their demand by the 10 per cent. fall-off in final demand but reduce their inventories, too. Back down the supply chain, the 10 per cent. decline in demand might become a 20 per cent. decline and then a 50 per cent. decline in demand for components. We have seen that across the world, and it is partly why the great manufacturing economies, despite the great strengths that my hon. Friend the Member for Macclesfield (Sir Nicholas Winterton) pointed out, suffer a particularly sharp downturn during that inventory cycle. It merely has to stop, in a sense, for it to reverse. When people stop reducing their inventories, that feeds back through the chain and produces a sharp rise in output, even if it does not go back to the level it was at before the crisis began. We may see that inventory cycle go through its normal process.
My worry is more for the longer term. Again, I just look at the evidence. What evidence have we for what happens when a modern developed economy experiences a banking crisis and a subsequent recession? The only such experience that we have is that of Japan. It did many of the things that we have done, but in a slightly different order, and some people say that it did not do them fast enough. It managed to avoid the worst of a recession, but it had 10 years of sluggish growth. My fear is that if we do not get rid of the overhang of both public and private debt as speedily as possible we, too, may first enjoy something of a recovery but then have quite a sustained period of sluggish growth.
That is why it is absolutely vital that the Government realise the supreme importance of getting a grip on the nation’s finances. We face the most enormous deficit; it is unbelievably large. Effectively, the Government are saying, “We will borrow to finance the entire military, education and law and order budgets, and much of the health budget, too.” If we closed down all the Departments concerned, it would just about eliminate the deficit, but I certainly hope that the Government will not close them down. We have to look for savings wherever and whenever we can find them.
I can tell the Economic Secretary to the Treasury that I have been responsible for the biggest-spending Department in Government, and I have seen the problems and pressures of trying to control public expenditure from within the Treasury. The single most important thing, and the first thing, that one must learn to do is to say no. Until we can stop inventing new ways of spending money, we will not get a grip on the total imbalance between our propensity to spend and our ability to raise revenue through taxation. The Government keep adding to the burdens. I get summoned, as Members do, to sit on little Delegated Legislation Committees. There was one the other day that proposed spending an extra £120 million on some benefit for expectant mothers. Even the Liberals, I am happy to say, thought that the measure was complete rubbish and voted against it, as did I. Nobody on the Committee thought that the benefit would do any good to anybody. I am generally in favour of feeding expectant mothers every kind of nutrient that they could need, but there was no support for the measure, and it was badly timed and badly focused. It was a pure gimmick-but it will cost £120 million. The deficit is made up of thousands of £120 millions, and we have to get a grip on them and stop giving the money away.
I apologise for going on for so long. It was a mistake for me to bring up a detailed issue. There are clearly arguments in favour of the measure concerned, but at a time of national emergency we ought to be saying, “Not now.” We have done without it for the past 50 years; we can do without it for the next five years. Until the Government learn to say, “Not now. No new projects or programmes. Let’s get a grip on the ones that we have,” we will not avoid the prospect of 10 years of sluggish growth.