A New Tory Economics?

But Phillip Blond is too soft on Cameron and Osborne:

The financial crisis has changed everything. Economic blue water has opened up between Labour and the Tories. David Cameron has broken with Labour's spending plans and derided the idea that more debt can be the basis for future growth. Gordon Brown has accused the Tories of reverting to Thatcherism and doing nothing in the face of recession.

With their lead dramatically narrowing in the polls, Tory anxiety is further compounded as they feel they are losing the economic argument even though they are on the right side of it. George Osborne is largely correct in his critique of Brown's legacy and policy. The rise in debt since Labour's 1997 victory has been astonishing. Personal debt rosefrom £570bn to more than £1,511bn; total private sector debt has gone up from 133% of GDP in 1997 to 227% now.

As any good Keynesian would tell you, with a hugely indebted private sector government must eschew tax cuts and needless expenditure and prioritise the relaxation of monetary policy. Why? Because it is imperative to get short and long-term interest rates as low as possible. Only then can the indebted avoid default and the private sector reinvest. Government borrowing increases long term interest rates on which most company debt in the UK is based. Thus public sector borrowing crowds out private sector recovery.

Britain risks a real divergence between the base rate and the real short and long-term rates of interest levied on private sector debt. Without lower real rates, fiscal stimulus will fail as it will generate the very contraction it was intended to avoid. In evading this outcome Osborne is clearly a better Keynesian than Brown. Moreover, Cameron demonstrated this week a grasp of the difference between fiscal and monetary policy and therefore the inverse relation between public borrowing and the real rate of interest.

That said, there really is a problem with Conservative economic policy. It needs to break with the past if it is to create an alternate future. Ever since Thatcher, both parties have extolled the virtues of neoliberalism and trickle-down economics. Blair and Brown, ardent converts, augmented the downward trickle of wealth with putative acts of state redistribution. Both left and right believed that serving the interests of the rich also served the needs of the poor. Under the guise of prosperity for all, the market state adroitly combined monopoly and speculation. It leveraged wealth upwards and created the conditions for the current meltdown.

The new Tory social critique gained popularity as it explored and deplored the consequences of this neoliberal settlement. But in economics Conservatives have retained a vestigial loyalty to the Thatcherite paradigm. That is why their attacks on Brown ring so hollow: voters know that the problems did not begin with Brown's chancellorship. They intuitively grasp paradigm shifts and believe that the Tories are still working within the economic framework that initiated the crisis.

Burdened with debt and broken by speculation, voters want an alternative to the economic orthodoxy of the last 30 years. The irony is that Conservative social thinking should allow them to dispense with this ideology. Instead, they sound as if they plan to practise Thatcherite austerity in the face of a deepening and deflationary recession.

But there is an alternative: an organic conservatism that cares for all. Cameron's revivified "one nationism" is after all what lies behind the party's revival. Both he and Osborne require a Clause 4 moment. They need to break with the economic logic of neo-Thatcherism, censure it as an approach that has only served the interests of the top 10% and stand behind their nascent alternative: a conservatism that inveighs against monopoly interests and restores markets, power and wealth to all parts of the community.

The lesson is clear: keep people in their homes, introduce anti-foreclosure policies, threaten controls if the banks continue usurious interest rates, construct measures to keep people in their jobs, and create the conditions for private sector recovery. And most important, having secured a permanent low-interest environment, accept the need for stimulus. With central bank rates approaching zero, consider using government bonds in the form of low-cost business tax credits to finance a massive retooling and rebalancing of the British economy for the 21st century. Cameron needs an economics that runs parallel to his own "one nation" intuitions.