Jesse Norman: We need to reexamine the basis of economic policy itself

Jesse Norman is PPC for Hereford and South Herefordshire.  His new book, Compassionate Economics, is launched today by Policy Exchange.

The government's £20 billion economic stimulus is a desperate attempt to stop a riptide of red ink feeding into deflation.

Yet already it is hard to see how Gordon Brown's fiscal package can make much difference in the face of a deep recession.   Such at least is the view of our biggest retailers, according to Robert Peston.

They're right.  A temporary 2.5% drop in VAT is irrelevant when high street prices are being cut by 20%.  The general public are also unlikely to go out spending when they are already aware of the inevitability of future tax rises, as they and the next generation work to pay the bill. 

And it's far from clear who precisely Mr Brown expects to go out and spend.  The very rich may not notice, those in the middle are likely to repay personal debt instead, and the least well-off already need to spend every penny they have.

So what does it all mean?  Two things, I suggest.  The first is that, stripped of all its Scottish rhetoric, this budget is as much about party politics as national economics. 

One might think this critical moment, above all others, a time for statesmanship, honesty and clear vision.  In fact what we have had is a deeply political attempt to paper over the cracks and keep the disintegrating Labour electoral coalition together.  Take a bow, Lord Mandelson of Foy.

But the second possibility is more interesting.  This is that the government genuinely, but wrongly, believes the package will make a real difference, and believes this because it misunderstands economics itself.

This may seem absurd.  But in my new book Compassionate Economics, published today, I argue that in fact it is true: British government is in the grip of an outdated 1970s textbook conception of economics.   

This dismal economic gospel treats human beings as purely self-interested, endlessly calculating costs and benefits, and highly sensitive to marginal gains and losses.  It regards the human world as static, not dynamic: as a world of fixed social engineering, not one of creation, discovery and competition.  It is extremely mathematical, and normally expressed not in language but in the equations of calculus and statistics. 

Moreover, it is not a neutral policy tool.  On the contrary, the present approach has served to legitimate much of the bad policy-making, centralisation and state growth that have weakened the UK economy. 

It makes the present government's obsession with top-down tinkering and micro-management seem not merely legitimate, but positively required. And at the same time, it has encouraged a politically useful but unwise belief in unfettered financial markets. 

These ideas have helped to push us into the greatest economic crash of the past fifty years.  And they are not helping to get us out. The stimulus is likely to fail.  The new top tax rate will raise "approximately nothing" according to the highly respected Institute for Fiscal Studies.  And as Peston also notes, a longer grace period on repossessions may well hurt, not help, economic recovery.

Time for the government to have a long period of rest, I think.  It could be usefully spent in acts of private social reparation -- and in the classroom.

Compassionate Economics by Jesse Norman is published today by Policy Exchange and the University of Buckingham Press.

The book is launched tonight at Policy Exchange, Clutha House, 10 Storey's Gate, Westminster at 6pm with speakers John Redwood MP, Jon Cruddas MP and Prof Julian LeGrand of the LSE.