What if the cuts work?
OK, I know it sounds like a silly question – the cuts won’t work. We all know that. You don’t solve a deficit created by unemployment by cutting jobs. Etc.
But, let’s look at this as a hypothetical question. And it is a reasonable one. With ongoing speculation that there will be another round of quantitative easing, it is possible that, in crude GDP terms, we won’t see a double dip recession. In other words, if the money the government has taken out of the economy by cutting public services is replaced by printing cash and, effectively, giving it to financial institutions (by buying products off them), then we may see a continuation of GDP growth.
What would quantitative easing actually mean?
This growth would, presumably, stem from three things: the stabilisation on inflation, a new banking bubble, and potential devaluation of the currency. I have no truck with the first of these*.
The second way QE works (if it does) is increasing the access financial institutions have to cash, and so (potentially) kick starting their loans to businesses. This might not work. The owners of these institutions might just buy yachts in Bermuda, or stash the cash for another day. But even if it does increase bank lending, one of the main problems with the economy over the last few years has been that banks have been investing their cash (our cash) not in businesses which are doing things which create value, but in financial speculation – making money out of money. So, if we do see cuts, then quantitative easing, then growth, I don’t see any good reason why this won’t just mean that the government has successfully re-inflated the finance bubble. This would mean some nice short term headlines, but surely we’ve learnt that this isn’t a viable long term strategy? Unless, of course, you are a member of the super rich. In which case things have basically worked out fine.
The other way that QE might ‘help’ is that it could devalue our currency a bit (if it isn’t matched by an increase in economic activity). However, I really don’t see how this begger-my-neighbour intervention is likely to work in the long run. Devaluing the currency works, as I understand it, by increasing exports – it give British industries an advantage when compared with our major trade partners. That’s fine at a time when your partners can cope. But if we try to build our economy by screwing the rest of the EU, then surely that’s likely to come back and bite us? We can’t continue to build an economy on exports if we do it by screwing the people who are buying stuff from us – because soon they won’t be able to buy the stuff anymore.
So, if there is QE, we may not see a double dip recession. But that doesn’t mean everything will be rosy.
What does private sector ‘taking up the slack’ look like?
But, whether or not there is QE, let’s have a look at what the cuts ‘working’ means. Ali Thompson has pointed out, cuts so far haven’t meant more people on the dole; just people working fewer hours, for less pay, on shorter term contracts. If we believe the Tory logic that a private sector boom will ‘take up the slack’, then what will this private sector boom look like? Without investment in skills, and knowledge, and with less upward pressure on HR practice from the public sector, presumably we are looking at an increasingly de-regulated market of de-skilled, short term jobs, and the kind of lack of stability which forces mobility of labour, and so destroys communities. That’s what we’ve seen so far, and there doesn’t seem to be any strategy to change this.
So, just as there may not be a double dip recession, as measured by GDP, because there could be a massive growth in the wealth of bankers, it’s possible (if unlikely) that there won’t be higher numbers of people in the dole queue – but that doesn’t mean we won’t all be doing worse jobs, on shorter term contracts, for less pay.
…and what would it mean for public services?
So if it doesn’t come from a sudden random change in investment strategy from banks, such a private sector boom will likely come from the mass privitisation of public services. If the private sector is to ‘take up the slack’, presumably this will be on the back of asset stripping the public sector. We have already seen Rupert Murdoch’s News International plan to run a school in London. George Osborne has told us that “Anyone who thinks this spending review is just about reducing the deficit is missing the point” and Cameron has told us that these cuts are not a short term deficit reduction plan, but a permanent state of affairs. Which means that the people who signed our anti-cuts petition yesterday because they are disabled, and the cuts will leave them housebound without a carer, will never be able to leave home again. It means that the thousands of families forced out of central London will never be able to go home. It means that I will have to live in fear of losing a job, and so being turfed out of my house as job-seekers allowance is slashed and housing benefit plundered. It means that many will never be able to afford A-levels, never mind a degree from one of our gutted universities.
If the cuts don’t work, we are likely to see a double dip recession, and, possibly, a third great depression. We can then come together as a country, and ensure we don’t repeat these mistakes for generations. But if the cuts do ‘work’, then we risk a new consensus: a sort of stability, where an elite continue to inflate their bubble, most struggle on, and the worst off slip quietly into the abyss of a darker, colder, harder country. And climbing from that abyss could take more than a generation.
*Though I’m yet to be convinced that this is as good a way of delivering 2% inflation as pumping cash into the public sector. The Bank of England could, for example, buy bonds to build new university buildings – which have much bigger multiplier effects than banks. Also, I’m yet to fully get my head around the differential impacts of different levels of inflation on different groups in society, or on resource consumption…
I do think we really need to place the idea of QE in context. Firstly, if it was implemented and banks did gain the extra funding, would they use it to carry on speculating. Yes, but to what extent? With Basel III – will an increase in capital requirements prevent them from investing and instead placing the same into reserves? How far would other countries be prepared to do the same (we know Obama is implementing a round of QE as Bernanke advised him to)?
As we know, high earners are also high savers – they usually do not use the same money they earn simply because they do not have to. So even if a financial bubble did grow out of this, would it be able to reach the poorest? Will jobs be made out of this? That depends on whether small and medium businesses will be given loans – and in current conditions – it seems highly unlikely.
The main export Britain has is financial services, meaning that QE would only be useful for finance. This would also mean that there would be increased cash reserves, with little of it creating jobs, etc. Another bubble that may not improve the overall economy at all.
With the pound as weak as it is currently, I cannot see how QE will help us. We certainly can’t reduce our interest levels any further.
This is all based on a simple reason: the cuts cannot work is because although private industry may fill the gap where public services used to be, most people would be unable to afford to pay for them. This means less liquidity and therefore no growth.