Tools for the recession

Professor James Foreman-Peck, Cardiff Business School:

Deputy First Minister, Ieuan Wyn Jones, maintains that the Assembly Government’s approach to alleviating the impact on Wales of the present crisis demonstrates the importance of devolution. His claim – reported on WalesOnline on November 4 – raises two distinct questions. First, what can any government really do about this global economic downturn? Second, are effective policy instruments currently within the devolved government’s powers?

Prime Minister Jim Callaghan’s announcement in 1976 that we can ‘no longer spend our way out of recession’ appeared to mark the end of confidence in Keynesian economic prescriptions. Yet, this may not be relevant because the principal cause of the crisis of the mid 1970s was a supply shock – oil price jumps – not a financial collapse, as now.

Some economists contend that a downturn triggered by monetary factors should either be addressed by monetary policies (over which the Assembly Government has no power) or left to take its course without state intervention (Daily Telegraph’s letter from 16 economists). What these economists neglect is that in a democratic society our political leaders must be seen to be doing something appropriate if they are to remain popular and therefore in power.

Look at the Gordon Brown’s recent bounce back in the polls. Leaders cannot say to the electorate now, as did the Telegraph economists: “Occasional slowdowns are natural and necessary features of a market economy”. Particularly this is so for a recession that promises to be the severest and longest since the Great Depression that began in 1929, despite the radical policies recently adopted by central governments particularly in the US and the UK.

If the Telegraph economists’ response is that elected leaders should have the political courage to resist interventionist measures, we could look back to the time when they did. Laissez-faire approaches to the economic crises in German and Japan brought to power in 1931-2 aggressive governments committed to addressing the immediate problem – and other real and perceived problems – with extreme measures. This had appalling longer term consequences for their countries as well as for the world as a whole. Without anticipating such radical reactions nowadays, we can still infer that economic crises impact on politics.

Granted that something must be done, what can the Assembly Government do? Anti-recession measures must be easy to implement immediately and fast acting. The Assembly Government cannot boost spending by cutting taxes, nor can they influence interest rates and the money supply. True, they can spend, but their budget is tightly controlled by the block grant from central government and the apparent lack of borrowing powers. Not surprisingly then, Ieuan Wyn Jones’s statement focuses on longer term development, such as new facilities opening to offset job losses elsewhere. Similarly the Wales Economic Summit proposes doing things that should be done regardless of the recession, such as paying Assembly bills on time and allowing SMEs into the procurement process. Even greater spending by Finance Wales is not in fact counter-cyclical, but avowedly developmental.

Probably the most genuinely anti-recession policy is the provision of more money for the Mortgage Rescue Scheme. Rising unemployment and tighter credit are rapidly pushing up mortgage repossession in Wales. Though still well below their 1991 peak they can be counted on to go on rising for some time. Second quarter annualised increase in repossession orders in county courts was 39 percent in Wales, compared with 31 percent England and Wales as a whole, and only 12 percent in London. Repossession and forced house sales when the market is depressed are generally painful and wasteful judged by most criteria. Bad luck or bad judgement in this area bear more heavily on poorer households. Households with younger heads are at greater risk of mortgage arrears because they have had less time to accumulate savings as a cushion against financial shocks. In the second quarter of 2008 there were almost 2,000 mortgage repossession orders in Wales.

Against this background WAG’s allocation of more funds to their Mortgage Rescue Scheme seems very timely. Under the scheme house owners with mortgage problems can sell their home or a share of it to a Housing Association, while remaining in it as a secure tenant. One difficulty is that the Scheme is expensive; the £5m allocated by WAG might help only perhaps 100 households. So while the scheme shows WAG’s heart is in the right place, it will hardly shield Wales from the recession’s impact.

In conclusion, we must put a rather different interpretation on Assembly anti-recession policies from Ieuan Wyn Jones. If the Assembly’s measures demonstrate the importance of devolution they do so by showing that insufficient powers have yet been devolved to cope with a strong global downturn. Alternatively we should decide that appropriate instruments for alleviating the crisis, such as taxation and monetary policy, could never be sensibly devolved to Wales and therefore the recession can only be effectively addressed at the UK level. Devolution is irrelevant.

Professor James Foreman-Peck

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