OVER the past few weeks, debates over British fiscal policy have been conducted under the shadow of George Orwell's "The Road to Wigan Pier", a powerful description of the poverty he found in the north of England in the 1930s. On December 3rd, George Osborne, the chancellor of the exchequer, in his Autumn Statement, announced plans to turn Britain's deficit, which stood at £108 billion ($169 billion) last year, into a surplus of £23 billion by 2020. Because the government does not want to raise taxes to fund these plans, public spending is forecast to fall from 41% of GDP today to just 35% by the end of the decade. That has prompted accusations that the government wants the country to go back to the late-1930s—and the Britain Orwell describes in his cri de coeur against poverty. The Office of Budget Responsibility, Britain's fiscal watchdog, stated that Mr Osborne's plans would force public spending down "below the previous post-war lows reached in 1957-58 and 1999-00 to what would probably be its lowest level in 80 years".... Continue reading
The best of all worlds
That is the happy combination America now enjoys, and it explains the stock market's euphoric reaction to today's meeting of the Federal Reserve. In the statement releaed after its meeting, the Fed hailed "solid job gains" and diminishing slack in the labour market. Projections of its officials put unemployment at or below its long-run “natural” rate a year from now. This is not an economy in need of zero interest rates. And, as officials had broadly hinted beforehand, they did start to prepare the way for rates to rise from zero where they have been since 2008. The statement no longer contained the two-year old pledge to keep rates near zero “for a considerable time.” Yet in dropping the statement the Fed went to great pains to reassure that rate increases were not imminent.
The dark clouds around the silver lining
Two lost decades?
The only stipulation was that they should improve their lending record to the private sector (which could mean their stock of loans to businesses declining at a slower pace). Despite these generous terms, banks were chary about accepting the offer, borrowing only €83 billion in September. The low take-up has continued in the second operation held this week. The ECB revealed today that banks borrowed only €130 billion. In other words banks have helped themselves to little more than half the amount that was available this year.
What's really there?
But a report published by the United Nations offers a broader indicator: “inclusive wealth”. It is the second of its kind; the first was published in 2012. The report, overseen by Sir Partha Dasgupta of Cambridge University, puts a dollar value on three kinds of asset: “manufactured” capital (roads, buildings, machinery and so on); human capital (people’s skills and health); and natural capital (including forests and fossil fuels). Statistical wizardry is required: to calculate human capital, for instance, the UN uses figures on average years of schooling, the wages workers can command and the number of years they can expect to work before they retire (or die). Philosophers blanch at the idea of valuing trees, streams and people in such a crude way.
How rich we really are
I think the Fed shares his view. Ironically, this is actually an exceptionally negative statement about the strength of the American labour market. Despite recent rapid job growth, there has been no recovery at all in the rate of participation in the labour force and only a very slight recovery in the employment-population ratio .