If Economics Was an Olympic Sport the Chancellor Would Be Asked to Hand the Vest Back

26/07/2012 10:51 BST | Updated 24/09/2012 10:12 BST

If economics were an Olympic sport, George Osborne would be asked to hand his team vest back after a performance that sits somewhere between woeful and utterly incompetent.

The news that the UK economy has gone deeper into a double-dip recession under his watch looks to have finally ended the cosy relationship which the chancellor had previously enjoyed with the City and British business, with numerous calls from both demanding that he 'do something' to reverse the tide.

That 'something' would of course involve not just a change of course economically - hard for this government to do when it's under the cosh for fear of being labelled weak - it would also by necessity involve an ideological step-change.

For make no mistake: the economic policy being followed by this government is more the product of ideological blinkers than economic theory. How could it be otherwise when in economic terms the policy being followed makes about as much sense as putting indicators on a submarine?

Since the economic crisis first hit these shores at the beginning of 2008 the glaring weakness in the economy has been a lack of demand. Britain's deficit has been a result of more government borrowing to fill the gap of plunging tax income due to rising unemployment, businesses going bust, and a concomitant increase in people claiming benefit.

But rather than takes steps to tackle the causal factors responsible, this right wing government has focused almost entirely on the symptoms - i.e. getting the deficit down by slashing spending, including benefits, with no thought for how it will only deepen the depression rather than produce a recovery.

As the US economist and nobel laureate Paul Krugman asserts: "Economics is not a morality play."

Yet this has been precisely the approach to the depression by Osborne, Cameron, Clegg et al. In this morality play it has been overspending, a jamboree of consumption, which has led us to the mess we're in. Now, in order to clear it up, a national exercise in economic self flagellation is required. Clearly, given the lack of comparable measures introduced to dole out some of the resulting pain to the rich, this national exercise is to be restricted to the poor and ordinary working people - the undeserving poor as opposed to the deserving rich - revealing that this has been a Victorian morality play.

And yet it's really very simple when you strip away the government's rhetoric over the need to cut spending. Bringing down the deficit requires growth; growth requires a resurgence of spending; and a resurgence of spending requires the introduction of demand into an economy that is currently starved of demand.

This is where the locus of government intervention must be as the investor and lender of last resort to get the wheels turning again. Investing in infrastructure projects such as housing, roads, transport, the emerging green economy, schools, hospitals etc, will create jobs, which in turn would get people off benefits and back to paying tax and spending in the real economy, thus producing a multiplier effect. Businesses do not create jobs; this is one of the great myths of modern political and economic discourse. Consumers create jobs.

But no one should be in any doubt that the obsession with deficit reduction on the part of the government is really an obsession with keeping the markets happy. I'm not sure I recall anybody in Britain electing the markets to decide the nation's economic policy, but deciding it they most clearly are. However, even here it doesn't take a leap of logic to understand that of more importance to the ever-mystical bond markets is the introduction of measures designed to lift the economy out of depression and thus make the prospect of a decent return on their investments in the UK economy stronger over the short to medium terms than it is at present. With interests rates at zero and unable to be reduced any further, this means the implementation of a fiscal stimulus to introduce the demand already mentioned.

The billions paid to the banks via Quantitative Easing have barely touched the real economy. Banks are refusing to lend because by now there are no customers to stimulate business into borrowing to expand. When it comes to the many small to medium businesses which need to borrow to cover the gap between their inputs and outputs, by this point these have either gone to the wall or been forced to contract.

Which brings us back to the question of ideology.

The financial and banking meltdown which hit the global economy four years ago was an economic 9/11. And just as that terrible event gave the Bush administration its pretext for going to war in Iraq, its economic equivalent was the pretext needed by the Tories to set about rolling back the state in Britain. The savage attack unleashed on the public sector, the attacks on benefits, pay and conditions across the board, has been accompanied by the demonisation of each of the aforementioned demographics. In other words, the economic crisis has seen class war declared in order to push through the structural readjustment of the economy and with it society in general, with the public sector, a necessary ballast of demand through good times and bad, declared the enemy within in the process.

This is the context in which the latest damning figures, namely a 0.7% contraction in the economic activity across the board over the last three months, have to be considered.

If Team GB perform as badly at the Olympics as this government has when it comes to running the economy, the country can look forward to ending the games with no medals and demands for those responsible to be replaced.

Step forward an early general election.