TransAtlantic musings

The occasion of a family wedding took me to the United States just before Valentine's Day. I had lived in the USA for a decade or so in the 1980s, and had been in San Francisco for a few days last Spring. But having now lived in one place--London--for so long brought both places into a start contrast with one another. And the fact that both countries are now in the throes of economic recession made this contrast all the more intriguing.

During my week in the USA I spent several days in the Pittsburgh PA area followed by a few more in my old home town of Asheville NC. The weather in the former was a fresh, vibrant cold and lots of snowfall while the mountain resort of Asheville was sunny and mild. The sense of recession in the USA seemed to me much more tangible than in England. It was a hot topic of conversation, with everyone wanting to know how people in England were reacting to and dealing with an apparently severe economic downturn. From a purely central and north London perspective the recession has not yet had much of an impact. Apart from when I am at work, lecturing on Macroeconomics, the topic is rarely one for conversation. Most people seem to be continuing with their lives as beforehand, with no immediate panic about the future. The Tube trains and buses remain as overcrowded as ever; the shops continue to sell their wares to the same numbers of people, although this recession seems unusual in that many retailers have actually reduced prices (unlike past recessions, where such price flexibility was not so prevalent).

In the USA I felt that many prices continued to be significantly cheaper than for similar products in the UK. This was most noticeable with cars and petrol. In the USA the latter is selling for just below $2 a gallon, while in the UK it is around £1 per litre, almost 4 times as much. A saloon car which might cost £10,000 or more in the UK is currently selling for some $7,000 in the USA. Food prices in supermarkets seem much the same in both countries, but it still remains significantly cheaper to eat out in restaurants in the USA than in the UK. These differences are much the same as I first noticed when I lived in the USA, more than 20 years ago. But the recession seems to be much more marked in the USA, and it may well be that the price differences are due to this. Certainly, the greater flexibility and much less dependable welfare situation in the USA means that it is a more volatile economy, more prone to the swings of the business cycle. While people in the USA are more fearful of the recession—understandably so, as so many people rely on their employers for provision of health care insurance—the USA is also likely to be the first country to emerge from the recession, and probably at a faster pace of growth than any other country. This reveals that the USA's strength—its economic flexibility—is also a source of weakness, enhanced by the much more market-dependent health care there.

So what of this recession? It has probably come upon us much more swiftly than almost anyone expected or predicted, but neither is it as bad as some commentators have argued. At least not yet. We are a long, long way from a second Great Depression like the 1930s, and the recessions of the early 1970s and 1980s seem much worse for any ordinary people who lived through them. And although it would be churlish to begin to talk of "green shoots of recovery", there is every possibility that we have seen the worst. Unless there is a major catastrophe to derail the beginnings of recovery, it would seem that the end of the recession will begin in September (at the earliest) or by early 2010 at the latest. This recession, like so many others in the past, followed on the heels of a banking crisis. Banking, like the entire financial system, can only operate on the basis of confidence, which has become seriously eroded in the past year. Confidence, like any form of trust, takes years to build but can be destroyed in a matter of minutes. Lack of confidence is reducing slowly; full confidence will take years to restore. But as long as confidence is not being further eroded there is every possibility that uncertainty in the general economy will reduce and we will see economic growth restored in the near rather than the distant future. Some of this will be engendered by the various "stimulus packages" (i.e. expansionary fiscal policy) being put in place by governments around the world. That so many of these involve the bailing out of lame ducks concerns me as a precursor to further moral hazard; I would have preferred to see the stimulus in the form of reduced taxes for individuals, rather than a recurrence of policies which failed to be effective in the 1970s. But that is a discussion for another time. For now I must sign off and relive the memories of a recent wonderful holiday in the USA, and dream of going back there again as soon as my bank balance permits.

Any interest in another rate cut?

So the Bank of England has decided to reduce the bank rate to !%, its lowest ever rate. The main motivation behind this is presumably to get people to increase their personal and corporate spending based on a lower cost of borrowing. And with a recession already under way there may be some who would argue that the Bank of England has to be seen to be doing something. Well, perhaps, but there are strong arguments to suggest that this rate cut will not achieve what the previous four have failed to do.

Almost all analysts are agreed that the root cause of the current almost-global recession is the "credit crunch", a liquidity crisis. What the Bank of England's decision seems to neglect is on which side of the market for loanable funds the problem actually lies. The credit crunch is a phenomenon whereby lenders are reluctant to lend due to increased risk aversion, a lack of confidence in the ability of the borrower to repay, which may be more apparent than real. On the demand side there is no lack of desire to borrow: indeed "retail therapy" has become almost a national sport. The lowering of the Bank's base rate will do little to stimulate consumer spending, in part because banks and other lenders remain overly cautious, and also because so many retail lenders continue to raise their interest rates. While the Bank of England makes history reducing tis own rate of interest, one of the key providers of credit cards, Capital One, has raised their rates of interest. I guess we all know what's in their wallet! Capital One has argued that it has become more difficult for them to acquire the funds which they effectively lend out to their credit card holders. It is in remedying this aspect of the credit crunch which the Bank of England should concentrate its efforts, rather than using the blunt instrument of interest rate reductions ad absurdum.

Basic macroeconomic theory tell us that in a recession, when the LM curve is virtually horizontal, monetary policy will be largely ineffective. Under such a scenario expansionary fiscal policy is much more effective. Unfortunately, instead of perhaps increasing government spending on long-term infrastructure projects this government has chosen to bail out the very people who have put us where we are: the heads of the banking system. While there is little doubt that a bail out of the banks was warranted--and certainly preferable to allowing wholesale failures--surely the price should have been the replacement of those who had done the damage? The bailout will do little in the short term to get aggregate demand rising. Given that it may be difficult for the UK government to spend more at this point, then we should look to permanent tax cuts to stimulate demand. A marginal cut in VAT will make no difference. What is needed is a significant cut in income taxes, preferably in reduced tax rates (not the future increases which Mr Darling has opted for). Cuts in corporate tax would help some struggling businesses, but without demand for their products it would do little to run round the economy and move it out of recession. The only remaining solution is to cut personal income taxes by a significant percentage. People are much more likely to spend if they feel they have more income than if they see some prices coming down marginally. If they chose to save any additional income it would have the added bonus of increasing the supply of savings available for borrowing, thereby reducing the rate of interest at a broader level than can be achieved by the Bank of England.

We have been here before, on several occasions in the past. We seem to condemned to repeat the same fallible mantra, which is why I have no interest in another rate cut by the Bank of England. Time for an election, perhaps?

The next Doctor?

Like many people I was surprised when the BBC announced the actor who would succeed David Tennant as Doctor Who. Not only had I never heard of Matt Smith, but when he appeared on Doctor Who Confidential in his first interview, he looked decidedly peculiar. Having watched the programme since it was first broadcast, I thought his looks best suited him to portray an alien rather than a dignified if erratic Time Lord from Gallifrey. This is a view I am now happy to rescind.

Last night I managed to watch the first episode of BBC's new cop show Moses Jones having Sky Plussed (is this a verb?) it on Monday. This slow-moving but atmospheric show set among London's Ugandan community has Smith as side-kick to the eponymous hero. With a convincing London accent, Smith showed himself to be an adept and accomplished actor. It was the realism of his acting without dialogue that convinced me that he would bring something of value to the legendary role of the Doctor. Of course, there are some four special episodes with David Tennant yet to be broadcast during 2009, to which I look forward with great pleasure.

Just one final comment for the BBC producers: why not bring back Paul McGann for a few special episodes of the eighth Doctor? He did a terrific job in the one-off movie, and it was always a shame that he did not do more shows. Time to dematerialise...

Keane to return

It was a great deal of pleasure and some schadenfreude that I welcome the return of Robbie Keane to Spurs. I was saddened when he decided to leave for Liverpool in the Summer, and felt the reasons to be somewhat shallow although not approaching the depths plumbed by Sol Campbell some years earlier. Keane had been reputed to have grown up in his native Eire supporting Celtic, so it came as something of a surprise to learn that learn that Liverpool had become his boyhood team.

During his earlier tenure Robbie Keane had been something of a talisman for Spurs: when Robbie played well so did the team. Even when he hit a poor run of form his energy, commitment and passion for the game always remained evident. There was never any doubt that a poor display would be a short-term temporary phenomenon, something which cannot be said of a great number of footballers in the top flight. I am eager to see if new manager Harry Redknapp will be able to achieve what others have failed to do in the past, and play a front line of Keane and Defoe, once the latter returns from injury.

There is an old adage that "you can't go home again". This has been the case for a large number of professional footballers returning to clubs they had previously played for after some time elsewhere. In this respect Spurs have a decent track record. Players as diverse as Teddy Sheringham, Jurgen Klinsmann, and Neil Ruddock have played for Spurs, then moved elsewhere, and then returned to Spurs to play successfully for a second time. With the return of Pascal Chimbonda, Jermaine Defoe and Robbie Keane to the Spurs' colours this trend seems likely to continue.

And so we welcome back Robbie Keane to the ranks at White Hart Lane. May he continue to average at least one goal every other game, and help us climb up the Premiership table to where we ought to be: in the top four. A win at Wembley on March 1st would not go amiss either. Come on baby, let the good times roll...