Economics

Hiring Mark Carney may just be George Osborne’s best move since becoming Chancellor. Britain badly needed a break from the failed economic consensus which still hangs around the Bank of England like a bad smell. In August, The Spectator implored the Chancellor to mount a global search. When Carney ruled himself out, I gave up hope and resigned myself to Paul Tucker, who would be likely to keep Britain on its current Faustian monetary path paved with freshly-minted banknotes. Instead, Osborne has succeeded in hiring one of the best-qualified of all the Queen’s 137 million subjects — from a country that knows a thing or two about economic crises and how to handle them.

The IMF's growth downgrades will make tomorrow’s newspaper headlines but the more striking point is its decision to massively rewrite British economic history. As Citi's Michael Saunders notes (PDF), the IMF now believes that UK economy was massively overheating in the boom. What we had thought was normal growth was, in fact, crazy exuberance.  Britain's economy was more overheated by any in the G7, the IMF now tells us. Things were worse in 2007 than in the ‘Lawson boom’. Had we known about this overheating, of course, it ought to have been remedied by an interest rate rise. The asset bubble might never have been blown and the cheap debt party (in which the bankers were bartenders, not organisers) might never have got so out of hand.

In a recent piece Stephanie Flanders, the BBC's economics editor, pondered how the UK economy could be adding jobs while, according to the figures, shrinking by 0.7% during the second quarter of this year. As she put it, this is a conundrum that "Britain's finest economic brains simply cannot explain". Well, I can't explain it either. But, perhaps because I'm not any kind of economic brain, I wonder if all this measuring and collecting of information now does as much harm as good. In one sense, of course, it seems obviously good that government collect data so it knows what's going on. But that comes at a price: it encourages governments to tinker and interfere even more than they might already be predisposed to tinker and interfere.

While our economy was contracting by 0.7 per cent, America's was growing by 0.4 per cent, according to the first estimate just released by the US Bureau of Economic Analysis. But, as the graph below shows, those 2012 Q2 figures just represent a continuation of the divergent economic paths the two countries have been on since 2010. In America: steady if unspectacular growth. In the UK: stagnation followed by a second recession. P.S. The Americans report GDP figures as 'annualised growth rates' — that is, the percentage GDP would grow by if it grew for a whole year at the same rate as it did in the quarter — which is why you'll see a figure of 1.5 per cent in US reports today. On that metric, the British economy contracted at an annualised rate of 2.8 per cent in Q2.

Today’s GDP figures are far worse than expected. They mean that the economy has now shrunk for three consecutive quarters. The figures have destroyed the optimism created by the fact that employment and tax revenues are rising. Politically, these figures are undoubtedly a blow to the coalition. Labour is out trying to pin the blame for the continuing recession on the government’s economic policy. The Treasury is countering that the figures confirm that ‘the country has deep rooted economic problems’. In a sign, though, of how serious the GDP fall is, the government is conspicuously avoiding suggesting any external reasons for it — such as the Eurozone crisis, the weather etc. What is clear is that the economy needs fundamental reform.

Milton Friedman would have been 100 later this month, and there is likely to be much commemoration - much of it nostalgia for an era where the right had a clear idea about how to get out of the mess the left had left. I always believed that Friedman's ability to articulate - his gift for aphorisms and jokes - was his greatest single talent. The arguments for the basics of human liberty are made all the time, but no one has quite made them with as much force and effectiveness as Friedman. His 1970s series Free to Choose remains, in my view, the most powerful TV documentary ever filmed - and the episode about school choice is horribly relevant to the mess we're in now.

‘I’ve never seen a government document with a Laffer curve in it before’, declared Ed Balls last week. Well it looks like he might be seeing a lot more of them, if George Osborne gets his way. Yesterday, as James noted, the Chancellor told the Treasury select committee that: ‘I think the Treasury can now, and I've asked this to happen, start undertaking some real research into dynamic scoring, and what the broader economy effects are of changes to taxation’. Now, it’s hard to get all that excited about something with a name like ‘dynamic scoring’. It was never going to make the front pages, especially when there’s a ‘pasty tax’ to get worked up about.

Will George Osborne have a better chance to abolish the 50p tax than this month’s Budget? It would be unpopular, so it’s the kind of move he’d be unlikely to make before an election. The Lib Dems have something they want to trade: permission to raise the tax threshold towards £10,000. And two recent reports, by the CEBR (pdf) and IFS (pdf), have reinforced that this tax is losing money. At the heart of the 50p tax is a deeper question: is Osborne a transformative Chancellor who will change the terms of debate? Or is he doomed to operate within parameters set by Gordon Brown? I look at this in my Telegraph column today. Here are my main points:   1.