Where's the risk?
"Don't put the recovery at risk" could be an election slogan for all three of Britain's main political parties. The debate is over what, exactly, the greatest risk to the recovery will turn out to be.
We know Labour thinks the danger lies in squeezing the budget too quickly - before the economy is really back on its feet. For the Conservatives, it's the opposite: that by delaying too long in cutting the budget, the UK will lose market confidence, thereby pushing up the cost of borrowing for the government and the rest of the economy - and stunting the recovery that way.
Nick Robinson asked Gordon Brown to be honest about those risks in his press conference a few minutes ago. As ever, he got a long reply rather than answer. But our prime minister did admit, eventually, that timing the squeeze was a judgement call, and it certainly is.
Vince Cable had to tackle this basic issue in his big economics speech this morning. He said:
"Delaying action on the budget risks a secondary infection: a sovereign risk crisis leading to higher borrowing costs. But treatment that is too abrupt - sending off the sickly patient to do 200 press ups in the gym - risks a fresh heart attack: a relapse into recession. Treatment has to reflect the patient's condition."
At this point some of the more cynical of you may be thinking: typical Liberal Democrat, sitting on the fence rather than taking a definitive view. But Cable is right that there is too much uncertainty about the recovery to take a dogmatic view on policy for 2010 and 2011. I suspect that most investors - and ratings agencies - accept that as well. But any prospective governing party does need to show clearly how they will bring the deficit down and, crucially, how the pace of deficit reduction would respond to different economic conditions.
The Liberal Democrat shadow chancellor doesn't exactly provide that in today's speech. He does set out "five objective economic tests for determining when and how quickly the big budget correction should be attempted: the rate of growth; the level of unemployment; credit conditions; the extent of spare capacity (and therefore, inflation risk); and - crucially - the borrowing conditions in international markets."
But this sounds a lot more precise than it actually is.
In truth, there are no "objective" estimates of the extent of spare capacity, let alone inflation risk. Once again, it's a matter of judgement. In the US, officials at the Federal Reserve don't think that the crisis has made any permanent dent in the country's economic capacity. As a result, the amount of "spare capacity" in the economy is thought to be well over 10% of GDP.
In Britain, we're thought to have less to play with because the Treasury reckons that 5% of national output has been permanently lost in the crunch. But no-one knows what the truth will turn out to be. Not even Saint Vincent Cable.
The "right" answer on whether to when to start squeezing the budget is even less clear. Last month the FT asked 71 top economists whether they thought the government should tighten this year - or leave it til 2011. Thirty-three said wait. Thirty-one said make a start this year. (Though, it should be said, a large majority thought that the tightening from 2011 onwards needed to be faster and deeper than the chancellor's current plans.)
We do know there are historical precedents to support both sides. If you think the risk lies in cutting too soon, the great examples are the US in 1937, when premature tightening by Congress and the Federal Reserve helped make the Depression a lot Greater than it would otherwise have been, and, much more recently, the case of Japan.
This chart, from a recent IMF paper [1.43MB PDF], tells the story: the Japanese government raised taxes fully seven years after their financial bubble burst, the economy went straight downhill again (though, as the chart reminds us, the timing was made worse by the fact that the Asian Financial Crisis started a few months later, in the summer of 1997).
That's the chart that has even small 'c' conservative economists wondering whether a tougher squeeze is the right call for the UK in 2010. But there are just as many precedents on the other side: in effect, nearly every emerging market debt crisis of the past 100 years, and certainly most of Britain's previous economic crises, have come from governments putting off the day of reckoning too long - and thus making the eventual bill that much larger.
As the Conservatives correctly note, monetary policy could play the role of insurance policy, staying looser, for longer, if an incoming government tightens more in the early years of the recovery than Alistair Darling now plans. But, the Bank is already in the realm of extra-ordinary measures, with its policy of quantitative easing.
There may be no "objective tests", but you could have a clear rule suggesting how, exactly, you would allow good or bad economic news to affect your targets for the structural budget deficit.
Alistair Darling has gestured very vaguely in this direction - but none of the key players has laid down a clear plan.
If the recovery is as weak as many expect, privately, even senior Conservative advisers admit that there will be a limit to how quickly an incoming government can cut. We also know that the faster they want to act, the more they will need to rely on tax rises. Though probably inevitable, that's not an edifying prospect for Tory high command.
I'll be saying a lot more about this in the next few weeks. Suffice to say that, for all the parties, this is indeed going to be an election about economic risk. The bad news for all of us is that there is plenty of it to go around.