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Douglas Carswell's Blog

21 JAN 2013

So, where's the growth?

Whether this Friday's economic data shows the British economy is actually shrinking or not, the outlook is not great.

The government continues to add £100 Billion plus each year to the national debt, spending vastly more than the state takes in tax. At the same time, the Coalition has pressed ahead with a massive monetary stimulus programme (low rates, QE) to engineer recovery.

The result of this stimulus policy? No growth.

It is becoming urgent that we understand why.

This administration, like the last, made the mistake of believing that this was just another one of those cyclical downturns. Sure GDP might be down, they assumed, but soon all that spare capacity would facilitate new growth. Don't cut spending too fast, chuck in a little credit to catalyse the recovery, and all would be well. Except it isn't.

Treasury group-think about the economic downturn, and how to respond to it, has been proved wrong. This is not just another of those regular recessions, and it'll take more than the print-money-and-pray approach to get things growing again.

What we in Britain - like many Western states - are suffering from is a long term misallocation of credit. Years of having central bankers conjuring credit out of nothing produced a frothy increase in output – what some economists call "malinvestment". Before we can recover, that froth needs to unwind.

Yet pretty much everything the government has done since the financial crisis, has delayed the necessary readjustments from happening.

Zombie banks have been kept undead, but not fully alive. Cheap credit has been extended, when more costly credit might have helped reduce the level of debt. Consumption has been stimulated, when what we need to do is live within our means.

One person's savings today means someone else's credit tomorrow. In order to ensure that credit is available in future, the government ought to have been encouraging more savings. Yet with low rates, we've spent years doing the opposite. No surprise that the shortage of credit remains.

Before we return to prosperity, we need to confront a fundamental truth. For decades, like many Western economies, our's has grown less competitive. For years, the decline in our underlying competitiveness has been masked by central banks generating mountains of cheap credit. Hence the problem of all that malinvestment.

Outside the Western world, the global economy is booming. We could be growing, too, if only we were prepared to ditch the credit stimulus approach and confront some of the underlying problems of un-competitiveness.

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