How many legs does a recession have?

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Not so long ago, it seemed that members of the UK government were positively gloating as the Eurozone entered recession and the IMF predicted that the UK would not. It was seen as one of those elusive Brexit bonuses. In those far distant times (at least a fortnight ago), a recession was seen as a really bad thing, one to be avoided at all costs. It turns out that, according to one of Hunt’s advisors, recession is a good thing after all, and that Hunt himself supports the idea that the Bank of England should deliberately cause one. Orwell has been replaced by Schrodinger: two legs are now simultaneously both good and bad, and the same goes for four legs. ‘Their’ recession is awful and we’ve been lucky to have dodged a bullet there; ‘our’ recession is a wondrous thing to behold.

In reality, whether the economic performance of an economy meets the definition of a ‘technical’ recession is about as useful a discussion, in terms of the impact on people, as the alleged theological debates of the past about the number of angels that can dance on a pinhead. An economy whose rate of growth over four successive quarters is 0, -.1, 0, -.1 has technically not been in a recession, but another economy which posts figures of -.1, -.1, +.1, +.1 has, since the definition is based on two successive quarters of negative growth. But it’s clear to the most casual of observers that the economy which was ‘technically’ in recession has actually performed rather better than the one which wasn’t. Arguing about whether the definition has been met or not is a diversion from debating and addressing the real impact on real people. Although I suppose that it’s easy to understand why they might want to divert attention.

The most immediate losers from today’s decision by the Bank of England are those who are buying their homes on a mortgage, and that’s where most of the focus has been, with some demanding immediate financial help for those impacted. The concentration of attention on that particular group probably tells us more about the financial position of those in politics and the media than it does about the real-world impact. But that impact goes wider than that: people renting their homes from landlords who have ‘buy-to-let’ mortgages will find the landlord’s increased costs being passed on at some point, and an increase in some rents for that reason will lead to an increase in the ‘market rate’, meaning that all tenants will suffer. Businesses which borrow money for investment (or even just as working capital) will want to pass on their own increased costs of interest as well. As Richard Murphy has pointed out, there are circumstances (like those in which the UK finds itself currently) where interest rate rises are themselves inflationary – the ‘cure’ for inflation is making the disease worse. But, as the saying goes, when the only tool in the box is a hammer, every problem looks like a nail.

The government has rejected any idea of assistance for those suffering the results – if the objective is to cause pain, then mitigating the effect is acting counter to the objective. And that’s the point. Although they don’t put it in so many words, it is now the deliberate objective of both the government and the Bank of England to make most of us poorer. (Not all of us, obviously – multi-millionaires will continue to get richer as economic resources flow in their direction.) It should be surprising that so few realise that making people poorer is deliberate policy, but in a week where it emerged that over 60% of people believe that halving inflation means that prices will either stay the same or fall, it’s a lot less of a surprise. If only we had an opposition party willing to say that it really doesn’t have to be this way; but Labour are committed to agreeing with the basic premises of government policy. Fine words expressing a bit more empathy with the victims of government policy isn’t the same as proposing an alternative.

Labour demands economic recession

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In the light of the latest figures for inflation and the consequent rise in interest rates, the Bank of England has come under criticism from one of the contenders for the Tory leadership, who is making vague threats to ‘review the Bank’s mandate’. This is being interpreted as a threat to the so-called ‘independence’ of the BoE which has allegedly operated free of government interference since being granted said ‘independence’ by Gordon Brown in 1997. But, as anyone familiar with devolution will be only too well aware, ‘independence’ to operate in accordance with a mandate laid down by government – a mandate which can be changed at any time – isn’t really ‘independence’ at all. And given that the Bank is wholly owned by the UK Government and that the Governor, Deputy Governors, and External Members of the Monetary Policy Committee are all appointed either by the UK government or else by the monarch on the recommendation of the government, that ‘independence’ is illusory.

Insofar as the one tool (raising or lowering interest rates) that they have been given in order to achieve the stated objective of managing inflation is the right tool for the job at all, it’s one which is predicated on an assumption that inflation is always the result of an internal wage-price spiral which can be broken by reducing the living standards of the comparatively less well-off. How that same tool is supposed to bear down on inflation caused by a sequence of international shocks, whether self-inflicted such as Brexit, or whether entirely outside the control of any UK Government such as the war in Ukraine or a pandemic involving a novel pathogen, is a question which the government seems reluctant to ask, let alone answer, and the Bank itself can only wield its hammer with increasing frequency and severity, whether it has any effect or not.

The mandate given to the Bank by the government – to use interest rates to maintain inflation at or around 2% per annum – is, and always has been, entirely arbitrary. The idea that 2% is the ‘right’ amount of inflation is little more than the considered opinion of Gordon Brown in 1997, and the idea that it’s the ‘right’ number for all times and in all circumstances is a very peculiar one, to say the least. But the issue goes further than that – whether the objective of monetary policy should be entirely based on controlling inflation is merely another considered opinion; there are alternative views. The government could, for example, give the Bank a mandate which also seeks to ensure full employment instead of merely using its blunt hammer to attempt to manage inflation. In short, there are good reasons for considering, from time to time, whether the mandate under which the Bank operates is the best one, given the circumstances at the time, rather than assuming that what might have looked ‘right’ in 1997 is always going to be so.

In that context, it was pretty depressing to read that Labour’s Shadow Chancellor is one of those criticising the idea that the Bank’s mandate could or should be reviewed at present, arguing that it's the wrong time because the UK is on the brink of a recession. Given that that recession is at least partly a result of the Bank blindly following a mandate which gives it little choice but to cause said recession, this is precisely the time to be questioning whether it’s been given the most appropriate mandate. Instead of which, the unquestioning support for financial orthodoxy from Her Majesty's Loyal Opposition amounts to a demand from Labour that the Bank of England must be allowed to cause a recession without interference. Vote Labour for an economic recession doesn’t strike me as being the most appealing message to be giving out.

One swallow...

Tweet I can understand why Plaid's political opponents are making so much fuss about this month's rise in unemployment in Wales, given that a number of my colleagues were so quick to seize on the good figures for the previous two months.

It was, perhaps, a bit premature for people to read too much into one month's figures, or even two months' figures, and I held back from doing so. Not because I don't think that Re-Act and Pro-Act are good schemes, nor because I don't think that the One Wales Government is, on the whole, doing a good job during the recession. In fact, there's a general consensus that One Wales is doing pretty well, within the limited economic powers available to it, and Plaid can take some pride in the performance of Ieuan Wyn Jones on the issue.

But a recession, and the recovery from it, is a complex business. Progress will never be smooth and even, and we should expect bad months as well as good ones. Those seizing on one month's bad figures as are misguided as those seizing on one month's good figures. The real test is in overall performance, and how well Wales fares over the whole period compared to the rest of the UK.

On that score, so far, One Wales seems to me to be successfully tackling the issue.

Did we get it wrong?

Tweet A couple of months ago, Plaid published a consultative document on the economy, called Recover, Reform, Renew. It was our attempt to set out a series of actions which governments should take in the current circumstances, but we also recognised that we do not have all the answers, and asked for responses.

Of course, there's no point asking for responses unless we're prepared to listen carefully to what is said. Governments may well run meaningless consultations, but it isn't a path we should follow.

That doesn't mean, of course, that we should automatically change our minds, just because someone says something different; but we should be prepared to do so if a good case is made. I have to admit that there are one or two things in the document which we produced about which I'm no longer convinced.

One very good example relates to the car scrappage system which the government has now actually introduced. It seemed like a good idea at the time – stimulating a major industry, and at the same time encouraging a move towards less polluting transport. And it had already been introduced in France and Germany as well.

It has since been pointed out that around one quarter of households in Wales are carless, rising to 36% in some of our most deprived communities. A scrappage scheme may well benefit the motor industry, and those who work in it. By so doing, it will, no doubt, help the economy to recover.

But using taxpayers' money to reduce the purchase price of new cars is effectively a subsidy to those who can afford to run a car anyway – and if we have money to invest in greener transport, might not investing that money in public transport do more to deal with social inequalities and transport deprivation? Would that also do more to reduce the environmental impact of transport systems – and if the investment being made in the right way, would it also do just as much to stimulate the economy?

As with many issues involving environmental considerations, it can sometimes be difficult to work out which is really the best option overall - and it underlines the value of more open discussion on policy options.

Cut business rates

Tweet I can't say that I was enormously surprised by the news yesterday about the scale of unpaid overtime being worked in Wales.

I've referred previously to the fact that an increasing number of companies expect employees to work 'whatever it takes' to 'do the job' – an attitude expressed clearly by the CBI Chairman, when he said that "people who are being paid for doing a job should make sure that job gets done". It sounds like a reasonable expectation, until we remember that many of the same employers have relentlessly cut numbers of employees, and piled the extra work on those who are left. The 'job' that people are being paid to do has, in many cases, simply grown – and the hours expected of the people has consequently grown as well.

Leaving aside that more general trend, in a time of recession it is easy to understand how businesses, especially those which find themselves operating on the margins of viability, are looking to reduce their costs, of which staff costs are a major element. It is also easy to see how employees, faced with an apparent choice between working longer hours or losing their jobs, are opting to try and save their jobs. But however easy it is to see how it is happening, it still leaves me feeling very uneasy that it is the employees - often the lowest paid employees - who are left to bear the brunt of the effects of the recession.

The free marketeers would no doubt argue that this is the inevitable result of market forces; either employees accept a worsening of their terms and conditions or else they lose their jobs. It seems that the Tories are very much returning to this sort of position - which did so much damage in the 1980's - with their obsession about balancing the public finances rather than intervening. I find myself much closer to the interventionist position of the current government, but I remain far from convinced that they are intervening in the right ways.

I am completely unconvinced about the marginal reduction in VAT as a solution to anything – I don't think it will make any significant difference to the viability of businesses, despite its huge cost. I think it's time to look at business taxes again. Not particularly Corporation Tax at this stage – after all, only companies making a profit pay that tax. But business rates is another kettle of fish entirely.

Like the Council Tax, this is a tax based on property values, and bears no relation to ability to pay. Businesses have to pay it whether they make a profit or not, and for many businesses, the sums involved could well be enough to make the difference between viability and insolvency. Long term, it needs radical reform, but a short term suspension of business rates, on either a general or a selective basis would probably do much more to allow businesses to continue trading through the recession than the cut in VAT. And surely it's far better to help businesses cut their costs in this way than to see them transferring the problems to their staff.