I recently attended a dinner party where the host announced that he was serving us ox-cheek. While some of us fell silent, grappling with the idea of eating a cow's face, others congratulated him on his thrifty inventiveness. We then regaled each other with stories of competitive frugality. 'Mine is cheaper than yours' was the theme of the evening. It really felt quite appropriate. After many years with the focus on growth, leverage and consumption, perhaps it was time to reassess, rebalance and adopt more prudent financial habits.
Spending less, paying down debts and saving for the rainy day that for some has already arrived is a sensible personal financial strategy in a downturn. Faced with an increased likelihood of unemployment, a precipitate fall in the value of your house, your overdraft curtailed and endless stories in the media of economic gloom, what else is a rational person to do? And yet this is contrary to how the Government wants us to behave. We're supposed to spend, spend, spend to create demand for goods and services that will keep businesses alive and the economy going.
Keynesian orthodoxy, earnestly embraced by Gordon Brown and most other western leaders, requires that we behave in a way that may be contrary to our immediate personal interests but is our contribution to economic recovery. The Paradox of Thrift may be an interesting economic theory but, like many others, it does not take real human behaviour into account. Keynes believed it 'utterly harmful and misguided' to save in a recession, since by doing so we contribute to the closure of shops, factories and firms and so cause more unemployment.
But isn't this asking a bit much of an individ-ual whose pension fund may be in tatters and whose investments are on the floor? Or what about a recent graduate whose job offer has been withdrawn - or even the economically 'worried well'.
I am reminded of the dilemma encountered a while ago by parents over whether to give their child the MMR vaccination, in the face of lurid press reports of a link with autism. It did nothing to encourage parents to be told that it was essential for 'herd immunity'. They needed reassurance that their child wouldn't be harmed, and until this was given, social altruism would not take precedence.
Similarly, no amount of VAT cuts or zero interest rates will encourage people to go on the kind of spending spree the Government would like until they feel that their jobs are safe and their financial futures secure. They may have been comfortable with high levels of credit-card and other debt when house prices were rising, but, today, bricks and mortar do not provide the underpinning for spending that they once did.
Business too is taking a cautious approach. This doesn't feel like the right time to build a glitzy new corporate HQ or invest in expansion projects, even if the longer-term business case warrants it. M&S, a market bellwether, has prudently trimmed its portfolio of Simply Food outlets, shedding more than 1,000 jobs. At the moment, the mood is to hunker down, cut costs, conserve cash and hope to ride out the bad times. How different from not so long ago, when CEOs came under pressure from the City if their companies' cash reserves were deemed too high. They were expected to return cash to shareholders or pursue acquisitions at almost any cost. Balance sheets were 'inefficient' if they were not leveraged to the maximum.
Now, many of those highly geared businesses are struggling to meet interest payments or to sell off assets often acquired at a premium, as nervous, over-exposed banks take fright and sharply reduce lending. Foxtons, once the most successful of London estate agents and sold at a huge premium in 2007, is now having trouble servicing its debts. The acquisition of Jaguar Land Rover by Tata in March 2008 has left Tata struggling to repay a $3bn bridging loan by June. It is no wonder, then, that job losses are being announced, graduate recruitment schemes abandoned and training budgets cut. People may be a firm's greatest asset in good times, but when the chips are down, they're a flexible source of cost-savings.
So banks are not lending, companies are contracting and people are not spending. Risk aversion, prudence and frugality - these are rational short-term responses to a serious global recession but will in the longer term make it much worse. Only government can resolve this paradox. It must do so by commissioning large capital projects to get the economy moving and provide employment. Unlike the business sector, government has access to unlimited liquidity to finance projects through public borrowing. In the last resort, it can even engage in 'quantitative easement' - printing more money.
It is government's responsibility to act altruistically on behalf of us all and counter the understandable but dangerous retrenchment by banks, companies and individuals in this crisis with large-scale state spending. As President Obama and our own PM have both declared, not only is this the most effective policy to combat the effects of the worst post-war recession we have experienced but it is also a huge opportunity to invest in the nation's infrastructure.
We badly need investment in schemes such as super high-speed broadband, better rail links and more clean energy projects. It is in these sectors that the seeds of economic recovery will be found and it is government that must give the kick-start to this. And quickly, or else we'll all be eating even more obscure parts of the cow.
- Baroness Kingsmill CBE has been a non-executive director of plc, private, charitable, arts and government boards. She is a non-executive director of British Airways.