Economics Views

December 22, 2010

In times like these, it helps to recall that
there’ve always been times like these.

Paul Harvey—what changes are perceptions of the extent of the unusualness!

Inflation in the UK is above par.
November’s inflation number was a little higher than expected. At 3⅓%, the increase in the CPI in Britain in the preceding twelve months wasn’t absolutely awful, just relatively disappointing. Other countries experiencing comparably fast activity and similarly soft currency had reported much lower figures.

Probably the result of public sector excess.
What was the problem here? Not the private sector, but the public one! The former had behaved responsibly, the latter irresponsibly. The one had kept pay rises restrained and productivity advances brisk. The other had been allowed to run amok. In the decade prior to the financial crisis, the public sector had experienced no financial discipline; and in the years thereafter, none either.

It can’t go on.
Predictably, Gordon Brown’s administration had turned a blind eye to the excesses prior to the poll. Less predictably, David Cameron’s had winked at them afterwards. It’s unlikely that the indulgence will last much longer, though.

There are substantial savings to be made in pensions.
If the fiscal deficit is to be cut by enough to comfort the financial markets, there will have to be a severe squeeze on public sector budgets. In the near term, that’ll mean cuts in employment levels and reductions in real pay. Later on, pensions entitlements will have also to be regularised.

They’re long overdue.
Why the disparity between the two parts of the economy has been allowed to persist for so long is reprehensible. The cost of public sector pensions is at least 40% of salaries; it’s barely 15% of the private sector number. Governments recognise the unfairness, but have usually lacked the courage to tackle it—understandable in an administration that’s on the way out, but very discouraging in one that’s newly elected.

But difficult to engineer in coalition.
Coalitions are difficult to operate, of course. It’s difficult to balance the aspirations of contending elements. The leaders may be relaxed, the grassroots are often at each others’ throats.

LibDems, unsurprisingly, are proving unreliable.
In Britain, the surprise is not that Tories and LibDems are irritated with each other, but that it was university tuition fees that caused the problem. What will happen when matters of genuine principle are at stake? The wars in the Middle East, for instance? The disaster that is Europe? It doesn’t bode well.

Obama, though not in coalition, is also having problems.
In the United States, the politics are also looking troubled. The economy is satisfactory—growth in line with potential, inflation low, and deficits moderating—but the administration is haemorrhaging support. Conservatives fret about public spending and quantitative easing. Progressives balk at the slow progress in dealing with the wars.

Likewise, much of the rest of the old world.
It’s somewhat similar throughout the old industrial world. Few Governments would survive a near-term election. Voters’ expectations haven’t yet been lowered sufficiently. For the moment, perhaps for another five years, incumbency will be a big disadvantage.

Markets may rise further, but clouds are gathering.
Stock markets, on the other hand, are temporarily well placed. Liquidity remains plentiful, corporate profits strong, and inflation moderating. It’s the medium term that investors have to worry about. It looks as if monetary conservatism may eventually become the norm. The Republicans in the States may impose their will on the Fed, the Bundesbank on the ECB, and China’s monetary hawks on the Central Bank in Beijing. If so, economies will falter and asset valuations retreat.


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