No more boom and bust?


                 There have been two bad periods of boom and bust in the UK in the last thirty years. The first was the 1986-92 boom-bust cycle. The second was the  bigger boom-bust of  2005-10.

                 They have several things in common. Both owed much to the influence of European policy on our economy. The first was wholly created by shadowing the DM at a time when the pound wanted to go up. This caused the authorities to print too much money, allow too much credit, and keep rates too low, in a desperate attempt to keep the pound down. Entering the Exchange Rate Mechanism sealed our fate. Soon the pound wanted to go down as there was too much inflation in the system.  Then the government had to keep rates too high, destroy money and credit, and bring about a collapse.

                    The second was influenced by the idea of the independent Central Bank, again influenced by the German example. Perhaps the government  believed that giving charge of rates and inflation to the Bank gave them a licence to borrow large sums  to sustain rapidly rising public spending. They certainly did not follow the German example of prudence over public borrowing. Their banking regulation and other  policies put us through an even more violent banking cycle. First there was a massive build up of credit and debts. Then there was a sharp contraction in money and credit, which undermined some of  the banks.

                The good news is that the UK has also enjoyed two periods within the last 30 years when it has followed  a sensible economic policy. It shows it can be done. On both occasions it avoided magic boxes, European currency systems and independent Banks. Between 1981 and 1986 the UK economy recovered well from the 1970s boom-bust cycles. It entered a period of decent growth, low inflation and rising tax revenues. Public spending  went up every year, but fell as a proportion of National Output. Public borrowing was brought under good control.

                Between 1992 and 2000 the Uk enjoyed an even longer period of decent growth, low inflation, and public spending  rising whilst coming down as a proportion of the economy. Public borrowing was brought under control, and in the final Labour years some debt was actually repaid.

               So what can we learn from this? It is better to do what Germany did Рcontrol public spending  and borrowing and pursue an honest money policy with targets for money growth Рthan to try to hitch a ride by following the DM or joining the Euro. When we followed a prudent path right for the UK it worked. When we sought independent or magic box solutions we suffered from violent cycles.


  1. Disorganised1
    February 22, 2011

    Until house prices are put back into the RPI it will continue to fluctuate at the whims of the International banks.
    Taking house prices out of the inflation figures guaranteed that house prices would balloon, and young people would be driven out the housing market as salaries would not follow real costs. To enable lending the ration between salary and borrowing had to be allowed to increase, and encouraging buy-to-rent meant that housing supply would fall increasing prices.
    Obvious really.

  2. Peter van Leeuwen
    February 22, 2011

    Maybe so, but as a note of caution, the UK also shouldn’t keep such a large banking sector relative to its GDP and shouldn’t repeat the “light-touch regulation” (deregulation) that the UK used to grow its financial sector out of proportion. That is what Timothy Geithner says in this BBC clip (at 13:45 minutes into the interview) as contributing to the financial crisis.

    1. APL
      February 22, 2011

      “Timothy Geithner”

      Geithner having been in a position to restrain reckless banking practices which have led us to where we are, chose instead to reduce the capital required to run a bank.

      (This background contributed -ed) to the collapse of Bear Sterns, Lehmans not to mention AIG.

      As such one should bear in mind that this man is trying to re-write his part in the recent financial debacle.

  3. Peter van Leeuwen
    February 22, 2011

    The clip I refered to but forgot to include:
    (Timothy Geithner ‘very impressed’ by Osborne)

  4. Mick Anderson
    February 22, 2011

    Those charged with looking after the Countries finances have a nasty habit of looking at economic theories and cherry-picking only the bits that they like. They’ll take a sentance of Keynes that suggests Public spending should rise during a recession having ignored the chapter that says you should run a surplus during the corresponding boom. The same people will completely ignore Hayek because it doesn’t suit their politics.

    Unfortunately there is no sanction against those who muck up the economy, either those in the “independant” BofE, the politicians who set poor policy and waste tax-payers money, or those bankers who demanded to be bailed out when they lost the bet (yes, I put bankers last in the list for a reason – they didn’t cause the deficit). A General Election every five years doesn’t give the Public nearly enough influence over the situation.

    Equally, Mr Osborne has not yet put any real mark on the Public finances – it all still looks very much like Mr Browns profligate approach. The promise of 20% tax increases verses 80% cuts to resolve the National Debt has turned into 0% cuts and 110% tax increases, the extra 10% to pay for even more spending….

  5. Mike Stallard
    February 22, 2011

    This makes so much sense. Sweden and Norway prove you are right. Iceland and Spain say the same thing.
    Our problem, actually, is that the current British government doesn’t seem to treat this as an urgent priority. As you have already pointed out, they are actually increasing their “spend” (why not edit this to “extravagance”?)

  6. lifelogic
    February 22, 2011

    “So what can we learn from this?”

    A much smaller state and sensible control of the money supply and interest rates. These to be fixed for the UK’s needs not for some daft EU or other political agenda.

    Also do not let, big state deluded fools, like Major, Blair and Brown anywhere near the levers of power and abandon the mad green energy policy which pointlessly push up energy costs for no good reason. The BBC too helped greatly in pushing these daft political agendas as they still do now with the hugely exaggerated green one.

    Alas the voters have little influence on any of this and the state sector at all levels still grows bigger while slowly killing the private sector that it feeds off.

    1. lifelogic
      February 22, 2011

      The solution to council housing is to charge the market rent for the houses. Not as seems to be proposed to kick people out when they earn too much. That way the state is not unfair competition for the private renting sector, and people will choose move on naturally. Also they will not have a perverse incentive not to earn too much and trun down overtime or promotions. If people have no money they get help with rent anyway.

      It is grossly unfair that some get a house subsidised by perhaps £200 per week (untaxed) when others in similar jobs do not.

      1. Iain Gill
        February 22, 2011

        yes people in need should be subsidised not particular houses or housing providers

      2. Bazman
        February 24, 2011

        Maybe state workers pay should be also be brought into line with the private sector too by this reckoning?

  7. Will J
    February 22, 2011

    The dotcom boom?

  8. Electro-Kevin
    February 22, 2011

    A threat far more pernicious than European policy is that of the no-win-no-fee lawyering which explores it to its full potential.

    Daily Mail readers exclaim “Health and safety gone mad.” Well I am a H&S rep for ASLEF and I can tell you that it is nothing of the sort. I’m also a youth group chairman and from that perspective too I can tell you it’s not “Health and safety gone mad.” either. Both employers and service providers (be they voluntary or public sector) are hamstrung and scared witless by avaricious lawyers and their greedy clients spurned on by daytime TV advertising and cold telephone calls.

    End no-win-no-fee and you bring back some much needed strength and confidence to the people who can get this country back on its feet again.

    1. D K McGregor
      February 22, 2011

      Yes , easy to do and an effective way of encouraging business. But, take money away from lawyers, in the UK , it can’t be done.

    2. foundavoice
      February 23, 2011

      Electro-Kevin – I don’t agree. If the law was properly defined and was reasonably applied, the no-win-no-fee lawyers wouldn’t have cases worth pursuing. The principle that we have a duty of care for ourselves and others is pretty much universally accepted. The problem is that it has been manipulated through weak legislation to extend to what is beyond reasonable or practical.

      The key role no-win-no-fee lawyers give us is that it allows plaintiffs access to the law otherwise would not be able to i.e. those not rich enough to employ lawyers or those poor enough to receive legal aid.

    3. lifelogic
      February 23, 2011

      No win no fee actions and courts and tribunals systems where even if you win the case you loose on costs and wasted time are a complete outrage. (sentence left out) Do not the human rights act not apply to protect us from this (bad system -ed) or only for prisoners and similar?

  9. Richard1
    February 22, 2011

    I would be interested to hear your views some time on targets for money growth – how to set them, what the measurement should be – since this is an area of policy which seems to go wrong frequently, as does inflation targeting. Austrian economists say the only way of avoiding government-generated money supply and credit growth is to link the quantity of money to an objective standard, such as gold. I know from previous posts you are against that. But how should a responsible government & central bank address this – after all, what we really want is a currency which holds its purchasing power so rational investment decisions can be made.

  10. zorro
    February 22, 2011

    This is a very reasonable analysis. Unfortunately though, under the Tories we still had the housing boom in the mid to late 80s and the inability to maintain house price control has been an enduring and major weakness in the UK economy. The massive expansion in credit pumped into bricks and mortar could have been better invested in industry and technology to improve our overall economic standing. Silly house prices have encouraged people to borrow recklessly, suck in imports, ruin our trade balance and overspend. The only ones to have profited have been the banks, but in the long run it has cost the taxpayer very dearly, and we are sorely in debt for decades to come.
    Of course, the government has been the biggest of spenders. I haven’t got the time to expand, but I remember seeing an analysis that if from 2000 onwards (perhaps even 2002/3 onwards) we had kept public spending to just the CPI rate (perfectly possible with competent management) we could have abolished income tax. We could also have tackled some of the perverse incentives with benefits/low paid jobs, and have put in place a sensible health care insurance system which would have put a dent in central government spending even more. Can we please turn the clock back?……:-(


  11. Anand
    February 22, 2011

    Well deduced Mr Redwood, however how much of a factor did things like North Sea Oil, Priivatisation and PFI contribute to percieved stability in the 80’s and 90’s?

    Our problem has always been, whether provately or publicly supplied, service provision has been not fit for purpose and/or bad value for money to the taxpayer.

    From the volume and quality of social housing, to the waiting lists on the NHS to run down schools.

    And I place a majority blame of parasitic whitehall legal consultants and well intentioned but ultimately stupid ministers of the day.

  12. StrongholdBarricades
    February 22, 2011

    Strange how both “cycles” resulted in inflated asset prices.

    So having noted that, why isn’t our central bank task with controlling asset prices?

  13. Martin
    February 22, 2011

    Had UK governments followed sound money we would probably have had a currency that would in value have kept close to other sound money countries.

    What is the present policy? Interest rates less than the Euro Zone but inflation is double the Euro Zone. The last government expanded money supply in a boom. I can’t help but think we are ignoring both Keynes and Friedman.

    I notice you did a lecture about the future of the Euro. A similar lecture on Sterling might be too much of a horror story for publication.

    The old faithful Housing Market stuff still dominates the UK economy. Many know about house prices, few about manufacturing costs. Improving our manufacturing would help us sort this economy out too.

  14. Denis Cooper
    February 22, 2011

    You only cover the last thirty years including the failed attempt to keep the pound close to a set rate against the German Mark, but before then it had already been found that it was not a good idea to try to fix the exchange rate of sterling against the dollar.

    In general it’s very difficult for a country to defeat the markets and dictate the external value of its currency for decades. It only takes a small average annual divergence between the economies of two countries for a fixed exchange rate between their currencies to gradually get badly out of kilter with economic reality, and if the legal currency exchange markets are not allowed to correct that then a black market will appear.

    One might also ask why a government should even take it upon itself to attempt to tell the world what its currency is worth, rather than allowing the world to form its own judgement.

    In practical terms it must be better to allow the external exchange rate to float freely so that stresses are constantly being relieved in small movements, rather than allowing them to build up to the point where there is a sudden seismic shift.

    That still leaves the problem of how to conduct monetary policy if not by attempting to maintain an external exchange rate, and while working to a set target for internal general price inflation was actually pretty successful in the UK for about fifteen years, as pointed out in this 2007 submission of the Bank of England to the Treasury Select Committee:

    it’s since become very clear that it leaves a lot to be desired.

  15. Euan
    February 22, 2011

    There is another factor you didn’t cover. In the eighties and nineties North Sea oil and gas were in full flow. Now it is declining very rapidly and we now have no coal industry to speak of making us a net importer of energy. This will lead to increasing large amounts of national wealth being spent on keeping the lights on. Anyone that doesn’t think that’s important should take a look at what happened to America after 1970 when it passed peak oil. Increasing deficits every year until today when it has truly gigantic overspending financed entirely by printing money and debt. American people are unwilling to face the reality that they are broke just as we are. If the UK doesn’t take radical steps to put it’s finances back in order our economy will be in dire straights.

    1. Mark
      February 23, 2011

      For the second half of the eighties, and all the nineties, government oil revenue was modest because prices were very low. Even in the early eighties, the revenue was not that great as production was still growing and there were depreciation allowances for new fields, especially after allowing for the added oil imports that were needed to beat the miners’ strike.

      The revenue since 2000 has been the equal of the early eighties and more, because much higher prices have offset lower production.

    2. foundavoice
      February 23, 2011

      Euan, the Americans are very aware of their fiscal overspending. The debate there is ferocious.

  16. sm
    February 22, 2011

    Yes. Honest government, sound finances, proper taxation not inflation as a tax.

    But think ahead about a government that may not be so honest. Create a balance of powers which slows down or stops this dishonesty. Constitutional law can be powerful, it is not easily changed.

    I used think it was odd armies owning banks when i went on foreign holidays.

    1. Callie
      February 22, 2011

      Why do we have to think ahead? Gordon’s government could only be called honest by someone who lived at the bottom of a well for 10 years. The coalition is hardly practising sound finance either- spending has gone up under the Cameroons.

      1. sm
        February 23, 2011

        I don’t disagree, but its difficult to change the past. There must have been more than a few comfortable in the wells ūüôā

  17. Andrew Lilico
    February 22, 2011

    You have been one of the few politicians to recognise the weaknesses of independent central banks and the connection between central bank independence (or quasi-independence) and loss of public spending control. You will probably recall my arguing this point back in the late 1990s in the European Journal, and more recently here:

  18. HampsteadOwl
    February 22, 2011

    ” Between 1992 and 2000 the UK enjoyed an even longer period of decent growth, low inflation, and public spending rising whilst coming down as a proportion of the economy.”

    Is that why, slap bang in the middle of this period, you challenged the leadership of the incumbent prime minister, in a manner that almost certainly ensured an even bigger defeat for the Conservatives than would have happened anyway?

    Reply: My challenge boosted Conservative’s poll ratings during the course of it. They went back to where they had been before the challenge after it. The two main reasons were my wish to save the pound at a time when the PM would not rule out joining the Euro, and disagreements about honouring our election promises from 1992 including on tax.

  19. Bazman
    February 22, 2011

    Often depends on personal circumstances before and during the boom. Age is a factor, if you can remember the previous ‘boom’, you should be wary that it is just a ‘boom’ and plan accordingly. I once met a men in his fifties that was now not going to pay off his mortgage until he was seventy five, if he gets there. The reason being “I never thought house prices would stop rising” Totally forgot 1989. Another younger man saying “House price rises, more lovely money!” Then correcting himself because of my look. I remembered the last boom and paid of my house as quickly as possible taking advantage of the low interest rates as well as investing money into the house while prices where lower for everything and saving some cash. Just as well as I do not now have a job. It ain’t rocket science, just being savvy in your circumstances if you get the chance. Many for many reasons often out of their control they cannot be. The not so Ragged Trousered Philanthropists, and the more than Forty Thieves have stacked the cards against people who have already got a bad hand.

  20. Javelin
    February 22, 2011

    I’m going to repeat my prediction that the UK economy is not going to recover until house prices rise – and they are not going rise until they fall. High house prices do nothing for the economy, they are virtual wealth. If the young cannot afford houses they will become disenfranchised, they will blame the old they will not be motivated. Not only must the young support the baby boomers in retirement they must pay for university and houses. The numbers just don’t add up!!! If there is one thing to believe in it is the energy of youth. Look at the middle east. Who is not to say an Internet political party, with no infrastructure, will motivate the young to sweep the current stale politics aside.

    1. Javelin
      February 22, 2011

      Just wanted to add … I think a lot of politicians are looking at the wrong thing at the moment. The baby boomers have been pretty abusive of their position and have loaded way too much on the younger generation. Something you may not find significant, but I see as fundamental is that sudents at art college know more about media and computers than their lecturers. I see this repeated across almost all aspects of academia. The Internet is creating a very distinctly different culture, art life and mentality. You saw a glimpse of it in Egypt. The current political parties have reached a tired synthesised state and I can see a new form of politics appearing on the internet. Who is to say politics won’t change drastically in the next 2 years, let alone 10 years. I would forget boom and bust as a major worry and wonder where politics is heading.

  21. Stephen W
    February 23, 2011

    Dear God. This piece should be printed off and stapled directly to the forehead of every frontbencher of every party.

    Basically economic prosperity comes from doing things properly and not trying to take crazed shortcuts. You’d think our good politicians would get this eventually.

  22. Mark
    February 23, 2011

    When Blair came to power in 1997 household borrowing totalled £500bn. By 2000 that had increased to over £600bn. It hit £800bn in June 2002 and £1,000bn in June 2004, £1,250bn in August 2006, and £1,450bn in July 2008, by which time £800bn was being funded by borrowing abroad Рsomething that started in 2000.

    I think the last boom didn’t start as late as 2005: it had been going on since almost the moment when the ink was dry on Brown’s tripartite non-regulation of banking. The inflationary growth was staggering – and much of it went into house prices.

    We still await the corresponding bust. House prices stand above an air gap at present: as prices drop further falls will not add many new people to negative equity, but they will make existing negative equity holders much deeper victims. This is because prices rose very rapidly during the boom.

  23. Mike Fowle
    February 23, 2011

    I am no economist (it shows), but have taken a keen interest in politics for years. Membership of the ERM seems to be universally despised now, but it did squeeze a lot of inflation out of the economy and provide a sound launch pad for the following time of prosperity. Of course, if we had stayed in, as Tim Congdon remarked in answer to a question: when will the recession end? On present policies, never…. Gordon Brown was, IMHO, deliberately dishonest when he promised again and again on coming to office that he would not follow a tax and spend policy. I predicted that his end to boom and bust would end in the worst bust we had ever had, and so it proved. Lavish public spending always creates an illusion of prosperity – I remember it well from the 1960s.

    Reply: But it was shadowing the DM which created the inflation to squeeze out!

  24. John McEvoy
    February 24, 2011

    ” Then the government had to keep rates too high, destroy money and credit, and bring about a collapse.”

    And the man directly responsible? Step forward the then Chancellor of the Exchequer, John…. Major.

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