Douglas Carswell's Blog

Why we are in a double dip recession

Whether you believe ministers are doing a good job on the economy probably depends on why you think we're in a double dip recession.

Like most mainstream pundits, perhaps you think the double dip recession is basically due to austerity. Cuts in government spending, you assume, are sapping demand.

"Terrible!" you cry, if on the left, since you believe that by reversing such savage cuts, we can return to prosperity and growth.

"Unavoidable!" you declare if of the old right, because you believe that austerity is necessary given the scale of debt - even if it means an unavoidable lack of growth.

While the former believe that the government has got it wrong because it is not spending money it does not have, the old right believe our Treasury team deserve a jolly good pat on the back for trying to sort out the whole beastly mess.

But what if they are both wrong?

There simply have not been large enough cuts in public spending to account for the double dip downturn. And with the government this year spending way over �100 billion more than it takes in tax, surely we have a massive fiscal stimulus in everything but name.

The old right like to imply that the Eurozone might have something to do with the douple dip, too. Again, I am doubtful. If you look at the numbers it seems implausible.

We need a new, better explanation instead.

Perhaps we are in a recession not so much because of falling demand, but because of the great glut of credit that preceded the recession?

It takes a whole new way of looking at the economy to see that this caused chronic malinvestment. Which in turn misallocated resources, distorted prices and has yet to unwind. It is this new, analysis that might account for why the banks remain loaded up with bad debts, hindering recovery.

Perhaps, this "new right" analysis also explains how that bonanza of cheap credit masked a long term decline in our competitive position? Now we have neither the candy floss sugar rush of cheap credit, nor the ability to produce wealth. Hence the lack of growth that has confounded all the expert forecasts.

I do not attack government economic policy because it fails to be traditionally Tory, but because it seems so stuck in the past. The Treasury team don't seem to understand why we are still in recession. Nor, as a consequence, do they yet have bold, new ideas to deal with it.

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