Words of wisdom

Look at the following comments and guess when they were written:

• "For more than a year now, a recession has been developing, and is clearly now accelerating. It began when life went out of the property market. The downturn has been compounded by an overdue reduction in net borrowing by households which is now reducing consumption."

• "I think the seizing up of financial markets may well result in a collapse in lending in the US to the non-financial sector so large that it causes a recession deeper and more stubborn than any other for decades — and deeper than anyone else is expecting."

Difficult, I know. But go to the top of the class if you guessed January 1991 for the first comment (about Britain) and January 2008 for the second one.

The comments show how little things change, although what was called a "financial squeeze" in 1991 is now usually dubbed a "credit crunch".

Both quotes are from Wynne Godley, an 82-year-old British economist and former professional oboe player. Godley has been one of Britain's most insightful (and unconventional) economists over the past 40 years.

The first quote is from a fascinating collection of articles written by Godley between 1988 and 1992, and republished by the New Statesman magazine. The second is from the Financial Times new year's survey of economists for 2008.

Godley, seen as a permanent pessimist by some, has consistently warned about the dangers of unsustainable long-term trends, such as excessive borrowing by US consumers. His analyses have also emphasized the interplay of the different economic sectors (government, the private sector, foreign trade).

From the obvious statement that net borrowing by all economic sectors taken together must equal zero - for every borrower there must be a lender - Godley derives fascinating conclusions. For example, he explains the need for increased government deficits if there is a reduction in net borrowing by households and firms (as in 1991 and now).

At the end of 2007, in a paper called "The U.S. economy: Is there a way out of the woods?", Godley wrote: "We conclude that at some stage there will have to be a relaxation of fiscal policy large enough to add perhaps 2 per cent of GDP to the budget deficit."

How right he was.