At this juncture the efforts of all parties to alleviate the financial crisis has focused on extracting the nation from the turmoil rather than any general questions of principle. Nick Clegg summarised this mood at Prime Minister’s Questions, saying “when the ship is sinking you send for the lifeboats, you don’t argue about who sailed it into an iceberg”. Her Majesty’s Loyal Opposition would not want to appear opportunist or opposing for its own sake, lest they be blamed for thwarting a rescue plan without very good reason.
Nonetheless when the dust settles and the immediate crisis gives way to a more lingering period of gloom it will become necessary to unravel the myths of the Age of Irresponsibility and articulate a new economic agenda for the coming years.
We must observe some basic realities. First, capitalism is neither discredited nor dead. It remains the only effective economic system available to humanity, and no alternative has emerged in the past few weeks that would have fared any better. The failures at the heart of the current crisis are ones that have been committed by both public and private sector alike, and there is nothing to demonstrate that full state ownership of the economy or its strategic sectors would have made much difference. The British government is just as culpable for excessive borrowing, failure to properly account for risk, hidden debts and regulatory failure as any single bank. Outside the narrow focus of the financial sector, the fundamentals of a market based around the private ownership of property remain, and with little to challenge them.
Second, there is no such thing as an absolutely “free market”. It is an abstraction that forms the basis of an economy from which reality dictates that we must on occasion deviate. Human limitation necessitates government intervention to preserve the good of the market as a whole. Interventions are required to limit contagion and panic, preventing irrationality bringing the system crashing down. They are also needed to protect the innocent and provide the investment required to get the economy moving once again. Intervention in times of crisis has been a part of capitalism since the days of John Maynard Keynes.
Faced with these basic economic realities, the basis for new economic policy ought not to come from some crude reworking of Marx or Smith, but a re-affirmation of fiscal conservatism. Briefly, this can be considered a commitment to living within one’s means in both the public and private spheres. It is wedded to a wider conservative intellectual tradition in its respect for traditions and acknowledgement of history, with a cautious approach to new ideas. In this analysis, it is also worth including the general conservative suspicion of social engineering as tending to hurt those it most desires to help.
In the United States it has become clear that the sub-prime mortgage crisis that helped trigger the financial downturn was the result of this social engineering. The Clinton administration, keen to get poorer people onto the property ladder, pressured banks into relaxing their rules on mortgage lending. As a result the banks took on bad debts that they knew were particularly risky. The poorest were encouraged to take on debts that they could not repay in the event of a downturn, encouraged by a government that saw this as the promotion of a public good. This social engineering reached its ultimate conclusion with the most vulnerable now facing a widespread threat of repossession as they default on debts many can never hope to repay.
A basic understanding of history would have helped rein in the excesses of state and private sector spending. The hubristic rhetoric of an end to “boom and bust” that inspired people to spend like there was no tomorrow should have been viewed with suspicion. Human limitations render any economic system liable to downward spirals fuelled by the combination of self-interest and fear. The historic phenomenon of the economic cycle must be respected, acknowledged and planned for accordingly. Instead the government entertained and promoted an arrogance that discouraged any preparation for the proverbial rainy day. The favouring of abstract idealism over prudence and the evidence of the past made us particularly vulnerable.
Likewise a respect for traditions and established practices within the financial sector would have limited the extend of the toxic assets plaguing western economies. Conservatism argues effectively against the radicalism of the social engineers who pressured banks into overly risky lending, favouring established practices that underpinned a stable financial system. More importantly, a traditionalist philosophy provides an effective critique of the complex systems of derivatives that concealed so much bad debt. The very novelty of these instruments and their application should have been grounds for suspicion. Rather than eagerly jumping on the bandwagon, banks should have been more sober in their approach, looking for hidden flaws and unintended consequences, and integrating these instruments gradually and carefully into the financial system. Their failure to do so gave rise to assets that failed to be properly assessed, and whose toxicity is only now starting to emerge. The fear gripping Wall Street and the City is the direct result of its failure to adequately assess these financial instruments for risk when they were first introduced.
At the levels of personal expenditure this form of conservatism would have urged far more sensible habits. The culture of debt that has left so many now facing greater financial hardship was inspired by these twin views of infinite economic growth and an abandonment of traditional cultural attitudes to personal debt. Had governments not been telling people that the good times would never end then it is likely that people would have been more circumspect about their own borrowing. The example set by government to private citizens and enterprises over borrowing will also have helped cause some of the present pain. Rather than abandoning our cultural disdain for debt, we should have preserved the tradition in favour of ill-conceived mathematical sleights of hand.
Fiscal conservatism calls on governments to live within their means. As established earlier, governments have to intervene in economies in order to preserve them. During these periods they have to increase public spending. This bails out businesses to limit the spread of contagion; funds the increased demands on welfare to accommodate those who become unemployed in a recession, and funds both tax cuts and investment in infrastructure required to stimulate growth. What differentiates this from socialist systems of market intervention is its temporary and limited nature. For such interventions to be effective, let along possible, it is necessary for governments to strictly limit their borrowing and spending during years of growth. They must maintain a system where ideally a surplus is run up or, more realistically, debt is kept at a low, manageable, level. This is necessary because the reduced company profits and employment levels during a recession lowers the amount of revenue governments can raise through taxation. The principle of this school of fiscal conservatism is that it makes governments save in the good times to provide for society in the lean years.
In this light the growth in public spending and borrowing, inspired by the ahistoric and idealistic approach to economics outlined above, moves from the imprudent to the disastrous. By spending so much the government has drastically restricted its ability to intervene effectively to deal with both the crisis and the recession: it lacks the funds to do so. This will be exacerbated by its failure to address the problems in its benefits system, which will be placed under significant strain as unemployment starts to rise. Unless the government is willing to seriously curtail public spending in favour of the affordable, the United Kingdom risks becoming bankrupt. That would hurt the economy so severely as to ruin our industry for possibly a decade or more. This is not an argument in favour of cutting essential services to finance generic tax cuts, but a basic proposition of government spending only what it can afford. The profligacy of the past eight years was entirely unsustainable and irresponsible and it will have to be drastically retrenched. Any effort to do so will be particularly difficult as downsizing departments has costs of its own in the form of redundancy payments and pension obligations. Nonetheless it is essential for the wider health of the British economy and the public finances.
In these difficult times the need for fiscal conservatism is more pressing than ever. It offers an account of the events that caused the crisis, an assessment of the failures that have hindered efforts so far, and offers solutions to limit the damage and rebuild the economy. Moreover it provides a set of clear and basic principles by which governments can operate if they wish for the next downturn to be less excruciating.
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