Can the UK economy become dynamic again and does it matter if it doesn’t?

The Government has finally announced a nuclear power station building programme. Typical of Labour’s record on infrastructural projects it is far too late, too little, underfunded and came in the form of a statement in the House of Commons with no opportunity for a debate or a vote to give it democratic legitimacy, no doubt opening the way for endless legal challenges from the anti-nuclear and nimby lobbies.

It appears to be the very least that the government could do in the face of the expected power supply shortages in the future and the commitments it has made to cut carbon emissions. What it is not is part of any concerted plan to reinject dynamism into the UK economy. We are still lacking any overall vision for how the UK is going to become economically vibrant again. Of course there are  people, some of whom I debated at the Battle of Ideas Conference recently(see here for audio record), who argue that economic growth is a dangerous or futile objective.

In my previous blog I argued that economic growth is a good thing for social, cultural and philosophical reasons as well as the more obvious economic ones. I was struck at the Conference last weekend by two reactions against this point of view from people who did not fall easily into the categories of anti-growth viewpoints I was attacking.

First there were people who agreed in general that global economic growth was necessary, but that this should be mainly in the developing countries. Their argument is that we in the west have pretty much got what we need and we do not require faster growth rates. Secondly there were those, including Martin Wolf, who argued that even if we wanted to it is not possible to reverse the relative or perhaps even absolute economic decline of the UK and countries like it.

The two viewpoints are complimentary in arguing that faster growth, more economic dynamism, is either unnecessary or even if it is then it is not possible. If these views are not challenged and an alternative economic route mapped out, then the UK is condemned to stagnate with no prospect of changing itself in any fundamental way.

The recession has shocked many people in the west and shaken their confidence in the market system and added to a sense that economic growth is problematic. There is an increasing sense that we have reached a ‘new normal’, a position where slow or flat economic growth is likely and perhaps even desirable. There is a danger that this lack of confidence becomes a self-fulfilling prophecy. 

With a General Election in the next six months it is time to put on the table what we think should be on the economic agenda. If you have any views about what the economic policies of the next government should be then please feel free to respond. In future blogs I will examine why a fatalistic approach to growth and dynamism in the west is wrong and how we can begin to tackle it.

Economic growth and its discontents

Speech given by me at Battle of Ideas Conference 31 October 2009 in debate with Lord Skidelsky and others

Continued economic growth is important because it means that the productivity of labour increases, we get more for less, we get more control over our lives and we become less vulnerable to the vagaries of nature and of fortune.

The whole idea of economic growth is under attack from many quarters. Sociologists such as Richard Layard represent an anti-consumerist trend. Layard argue that economic growth and its consequent material benefits do not make us happy. I would like Layard to do a survey of the millions made unemployed through this recession to see how much happier they are now that they have lost the benefits of a wage. Do we really think that poverty will make us happier?

Environmentalists argue that economic growth is inducing climate change and irrevocably damaging the world around us. These people are in reality scientific progress deniers. They do not believe that we can grow our way out of problems. Yet it is China, the fastest growing economy in the world, which is adopting and developing alternative forms of energy at a faster rate than anywhere else. It is economic growth that is making this possible.

There are also those who argue that scientific and material progress are too prone to risks and dangers to pursue safely. They question whether such things as GM foods, nuclear power or the pharmaceutical industry are not doing more harm than good. Their campaigns against scientific progress slow down and discourage investment and development delaying the benefits that progress can bring.

All of these trends have one thing in common. They represent a loss of belief in humanity and its  ability to change, adapt and grow economically and materially. Why is continued economic growth so essential? I would argue that there is a necessity argument but also  philosophical and social reasons why we need to push for further and faster economic growth.

When is enough enough? Not yet! The average global wage according to the World Bank was around £5000 before the recession began. This means that were growth to stop now and everybody to receive the average wage we would all have the standard of living of a UK pensioner without any savings. Just to get to the reasonable but not luxurious average wage in the UK of £25,000 would mean a fivefold increase globally. This means that we need of necessity further economic growth to raise the average standard of living.

Of course, many millions of people in the developing countries are way below even the average wage and require a bigger leg up. But even in the developed western economies there is still a need for the creation of extra resources. Poverty, deprivation and lack of sufficient services exist in many areas of life. My father-in -law for example was recently refused a life saving operation from the NHS essentially because it was too expensive.

From a philosophical point of view it is important that we understand how inimical anti-growth sentiments are to the whole tradition of western civilisation. The Book of Genesis says that man shall have dominion over nature and urges us to ‘go forth and multiply’. We are turning our back on what has enabled us to crawl from the swamps and into the relative comfort of the modern world, our ability to tame the hostile environment we found ourselves in. David Attenborough made this about turn explicit when he blamed the Bible for climate change earlier this year.

Many of the discontents that people have with economic growth are connected to failures of the market economy rather than growth itself. The market is often an inefficent producer and distributor. It is a system based on production for profit rather than to meet the needs of society. The market can create environmental problems and pollution. It is unstable and contains within it continued recessionary tendencies as we are experiencing now. It is often wasteful and irrational and it produces and reproduces inequality because of the division between those who own wealth and those who do not.

But the problems of how the market economy works should not blind us to the benefits of continued economic growth. We could end up throwing away the growth baby with the market bathwater.

Anti-growth sentiments turn reality on its head. Far from creating problems all human civilisation, culture and progress have been built on economic development. The most economically dynamic and successful countries have always been the most innovative, the most culturally dynamic and the most progressive in every way. The alternative is also true, that economically stagnant or backward countries have less going for them across the board. Turning our back on growth means turning our back on what makes us most human, our ability to exercise dominion over the world we live in.

The market is not capable of being rational,but people are

The news that George Soros is creating and financing a new economic thinktank  called the Institute of New Economic Thinking (INET) should not be a surprise given both the destitution of modern economics and Soros’ own conviction that traditional economics is ‘a dogma whose time has passed’. As I have argued before there is little doubt that rational or free market theories have been discredited by the reality of the financial crisis, although this does not mean that we have really been living through a period of free market economics.

However, while a reassessment of the way forward for economics is way overdue, it seems unlikely, given its brief ,that this new Institute will help very much. For a start, as Anatole Kaletsky makes clear in the Times today, it will be heavily influenced by the Behavioural Economics school of thought. This rightly rejects the spurious rationality of mainstream economics but replaces it with a view based on the belief that people are basically irrational and the future unpredictable.

To gain a genuine understanding of unpredictable reality, some unorthodox economists may employ new mathematical techniques of non-linear dynamics and chaos theory. Others may revive the literary and anecdotal traditions of the great economists of the past, building on the work of sociologists, psychiatrists, historians and political scientists disdained by the present orthodoxy. INET will try to support these new schools of thought.

As I said in my review of a book by influential behavioural economists, 

We can agree with the BEs that the market, or capitalism, is not rational in the way that rational market theorists claim. The most singularly irrational aspect of capitalism is that decisions to invest are made by individual or groups of capitalists rather than by or in the interests of the majority of people. If the prospects for profitable investment look poor, because the expected rate of profit is too low or too risky, then money flows elsewhere. In the past ten years money flowed instead into apparently safe areas such as financial derivatives based on assets like housing etc . This created an unsustainable asset bubble which inevitably crashed and burned. Phil Mullan calls this the over financialisation of the western economies, the tendency for money to try to beget more money without going through the process of productive investment in new businesses.

Crises in the financial sector are an inevitable outcome of the over financialisation of western economies. The exact day when they will happen cannot be predicted, but the continuous instability and the tendency towards crisis contained within it will always remain. But it is not inevitable that we have to have economies of this sort. The danger of Behavioural Economics is that it condemns us to a future where the vagaries of the market are a given and the only question is how to manipulate and control the activities of the irrational people engaged within it.

Once we accept that human behaviour is irrational and the future unplannable and unpredictable then we have taken out what is unique about humanity, its ability to consciously and collectively organise and influence the future. One bright spot about the current recession is that it has revealed the bankruptcy of the prevailing economic orthodoxy. It would be a great shame if the vacuum thus created were to be filled by those who have the most disdain for human rationality. This weekend I and many others will be debating the future of the economy with experts such as Lord Skidelsky, Martin Wolf and Paul Mason at this event. Come and join us.

After the recession-the return of Keynes or the end of economics?

Robert Lucas, the University of Chicago economist, joked last year that “everyone is a Keynesian in a foxhole’. At first glance it certainly seems that the idea of government intervention to maintain economies in trouble has made a comeback. In the past year various governments have nationalised banks, introduced major stimulus programmes, prevented industries from collapsing, subsidised employment and printed money in order to combat the financial crisis.

Yet as Sean Collins has argued in his excellent review of Keynes: The Return Of The Master by Robert Skidelsky, whom I shall be debating next week at  this event  , the ragbag of anti-crisis measures put together around the world was not the product of any widespread conversion to Keynesianism. It was instead an ad hoc programme of state measures aimed at one thing-staving off financial collapse and its perceived consequences.

The Keynes they like is not the proponent of permanent state intervention to guarantee full employment. He is instead the man who said ‘in the long run we are all dead’. In so far as Keynesianism means anything today it represents the short term managerial approach to running economies which characterises the UK and other developed countries. Why has there been so much state intervention from governments which have been arguing for ‘light touch’ regulation for the past ten years? Because there is no alternative on the horizon.

The recession has effectively destroyed, at least for the time being, the belief in free markets that has governed most of the developed world since the discrediting of Keynes in the 1970s. As Sean Collins argues however, we should not go along with the thesis that the past thirty years have been about actual free markets. During this period the state has continued to intervene in the economy, although in different ways.

Nevertheless we have reached a point where economics itself has been discredited. As Daniel Yergin argues there are so many explanations for the recession that no coherent narrative has emerged. This vacuum is being filled by another legacy from Keynes. His belief in both the power of psychology and the essential uncertainty of the capitalism economy have become more influential in response to the recession. Both of these points are highlighted by Skidelsky in his book.

The falling back on psychological explanations for the crisis amongst behavioural economists is a rejection of real economics. The crisis has in roots in economic stagnation in the west, the consequent financialisation of western economies and global imbalances created by the relative dynamism of the BRICs. To ignore these causes and point to crowd psychology reduces the problem to one susceptible by state manipulation of people’s activity. In this sense it fits with the short termism we spoke of above. It represents an inability to face reality and think through what it would mean to create more dynamic western economies.

The elevation of uncertainty as a major problem is also wrong. Keynes, writing in the 1930s was obsessed with the threat of capitalist collapse. Faced with the Depression and looming global conflict this was not an unreasonable fear. It is to Keynes’ credit, in contrast with many who followed after him, that he understood that economics is about politics. His argument for full employment was that it was necessary to stave off revolution.

In fact one thing the recession has shown us is that capitalism is in general very stable and quite predictable. We are in the midst of a major recession but as I have noted before there has been very little social response. This is because capitalism is at root a system of social relations. No matter how bad the economy may get, as long as there is no organised alternative it will bounce back.

Emphasising the uncertainty and risks involved in capitalism today can only have one effect, one which Skidelsky himself recognises,’uncertainty imposes a kind of permanent fearfulness about the future which puts a damper on economic progress’. Skidelsky also criticises some of the behaviouralist economists, like Shiller, for ‘panic’ in the face of apparently irrational human behaviour in the run up to the recession.

There may be opportunities, due to the crisis within economics, to debate what kind of economy we need. This would entail rejecting the panic and uncertainty brigade and arguing for a longer term more strategic approach to the economy, more planning, more debate about where we want to go and above all more leadership.

Mandelson’s ‘industrial activism’ to boost innovation-too little too late

I am finding it increasingly difficult not to like Peter. He is a key fixer in a long tradition of manipulative politicians going back to Francis Walsingham under Elizabeth the First. There is an element of pantomime about him, somebody the public likes to boo or hiss when he appears on the stage. He has chosen to throw his weight behind the project to stop Labour sinking without trace. There is something quixotic and admirable about this, whatever one thinks of Labour.

 Listening to him speak at this event yesterday it became clear that he is converted to a policy of ‘industrial activism’, that is the government taking a leading role in the nurturing and development of innovation and investement. This new initiative on bioscience looks on the surface like a good idea. It is important for the state to use its resources and authority to enable economic development as I have argued before on these pages.

The problem with Labour’s  current attempts to move from financial to real engineering is that they are too little too late. The sums of money being made available by the state for assistance to new businesses and innovation are tiny relative to the scale of the problem. Nor is this just a problem at the  state level. As a society the UK has little appetite for risk. As Mandelson pointed out in his speech, investment in research and development in the UK is lower than for many of the UK’s competitors.

Labour has come late to industrial activism. For most of the past twelve years the main focus of government activity has been on boosting spending on health and education. This extra spending was financed largely by the expansion of financial services and an increase in debt, in other words through spending the money that Chinese people have been earning.

At least in part, the focus on health and education was in response to market research which indicated that these were the areas that people in the UK were most concerned about. It is all very well for governments to respond to the wishes of its electorate. To some extent this is both inevitable and desirable. However there is another part of government responsibility which Labour has largely evaded, that of leadership. There are key areas of the UK economy which have required investment and support, such as nuclear power stations, better roads, investment in GM and other new technologies, which the government backed off from because they were unpopular. Rather than trying to win the arguments for these various key projects the government caved in, often ordering lengthy inquiries and further tests rather than risk making itself unpopular.

The Stevenage bioscience project which Mandelson announced yesterday is aimed at boosting the development of the UK’s drug industry. Yet the pharmaceutical industry has been vilified over the years in many quarters and its products, such as the MMR vaccine, held up as public dangers. When Blair was confronted with this vilification he famously declined to say whether he would give his son the MMR vaccine, thus encouraging those who irrationally opposed its use.

The UK government going forward has to take a more activist role in planning the shape of the UK economy. Its role has to encompass persuasion and leadership to convince an often sceptical public of the long term benefits of innovation in energy, technology and science.

Does debt matter? Why the Tories are ’sending a message’

The British political classes are going through one of their occasional bouts of masochism, with party leaders vying with each other on the theme of who can cut public spending faster and more effectively. Spice is added by talk of leaks and secret plans; and ideology by arguing about the balance between tax increases and spending curbs. My own bottom line is that all this is in response to a largely imaginary budget crisis. If we have a normal economic recovery the red ink will diminish remarkably quickly.  Samuel Brittain

Samuel Brittain’s article hits the nail on the head when it comes to the debt question. The UK’s debt is only a problem if you do not believe that the economy can grow its way out of the present recession. Behind the current competition amongst the political parties to be the most bloodthirsty cutters of public expenditure lies the same fear, that the UK cannot become a serious growth economy again.

Tory Shadow Chancellor George Osborne has spoken of the need to regain the confidence of international investors and credit agencies, saying  ’it was a “statement of facts” that three agencies, Moody’s, Fitch and Standard & Poor’s, had all voiced concerns about Britain’s ability to pay off its record debts.’ If Osborne’s intention is to really cut the UK’s debt then the measures announced so far will hardly affect it. They amount to a saving of only £23bn out of a deficit which will be closer to £200bn. While recognising that his proposals will not solve the debt problem Osborne claims it is necessary to show credit agencies  that the UK is ‘deadly serious ‘ about tackling its debt.

In other words Osborne is ’sending a message’ to the world in classic New Labour fashion, rather than making efforts to tackle the real problem, which is the expected low growth economy we will have in the UK. In fact Osborne’s speech was almost entirely lacking in any proposed measures to create new areas of growth in the UK economy.

In the absence of plans for growth Osborne can only offer austerity. His way of expressing this  in his speech to the Tory Conference was to appeal to a shared need to accept cuts in living standards. Hence his repeated assertion that ‘we are all in this together’. The Tories have no doubt been encouraged by the lack of any social response to the recession. They must belive that people here are willing to accept real cuts in living standards over the next few years.

Yet there are reasons to think that they may be deluded if they believe that they can push through an austerity programme very easily. Firstly, for most people in the UK the recession has been so far relatively pain free. While those losing their jobs have been hit hard, many of those still working have benefited from zero inflation, low interest rates and cuts in prices of many essential goods. There is little evidence that people have so far embraced austerity.

Secondly most people feel deeply alienated from the political class. The MPs’ expenses affair was an expression of this. The Tories, if they form the next government, may find it very hard to mobilise support for unpopular measures.

Will this be a jobless recovery?

 

Between 1999 and 2007 manufacturing jobs in the UK fell from 4.5m to 3.3m. In the same period jobs in the financial and business services sector grew from 5.3m to 6.5 m, and jobs in the public sector grew from 8.4m to 9.9 m. The Financial Times claims that around two thirds of jobs created since 1998 have been in the public sector. Most strikingly, within that figure, of the 1.07 m jobs created in the public sector,963,000 were taken by women in health, education, social care and social administration. There are at least 10 areas of the UK, all outside London, where 40% or more of those working are in the public sector. 1

There is good reason to fear that whatever the eventual shape of the UK recovery it will not bring with it many new jobs. As a result we may have to live with a much higher level of structural unemployment than has been the case for the past ten years. The two main areas of job growth in the UK in the past ten years were across the public sector, particularly in welfare and education, and in financial and business services. None of these sectors is likely to play the same role in the next ten years, if for different reasons.

The public sector now looks as if it will be, if not necessarily cut back as severely as the bloodthirsty rhetoric might suggest, then at least contained. Financial and business services may stabilise but are unlikely to regain the dynamic growth of the boom years.

Neither is the long term decline in manufacturing jobs likely to be reversed. The UK’s role in manufacturing is predominantly in areas of high productivity with high skill levels. Even with more investment and more support and encouragement from government, which would be very welcome,  manufacturing is unlikely to add a huge amount of new jobs.

Both the Tories and Labour are proposing ways of trying to reduce unemployment, but these are mainly on the supply side, through for example attempts to get people off of sickness benefit. Forcing people back to work only makes sense if jobs are available for them to do, and at decent wages. The main effect otherwise is the traditional role of the unemployed as the reserve army of labour which helps to force down the wages of those in work.

The proposed extension of the retirement age to 66, although welcome for other reasons, will also have the effect in the medium term of adding to the ranks of the unemployed, particularly the young.

Unemployment is now nearing 8% of the adult population of working age. It is estimated that it will reach at least 3 million by next year. With benefits also likely to be squeezed this means misery for millions. This is the reality of the austerity plans both parties have in store for us.  Far more discussion is needed  about what kind of economy the UK could have which could gainfully employ the unemployed.

 

 

 

 

 

 

1 http://postrecession.files.wordpress.com/2009/01/whitepaper6.pdf

 

 

After the recession-winners and losers

Every economic crisis creates its own winners and losers. At the level of any domestic economy a recession is often the last straw for an outmoded business, sometimes even whole industries can be swept away. This recession looks as if it might deal a grievous blow to the printed newspaper business as advertising revenue has dwindled. In the UK online advertising spend has overtaken tv advertising for the first time. The main benficiary in each of these cases case has been the digital industry and so the recession acts as a midwife to change. Such developments as these are seldom reversed.

It is important to remember that recessions only speed up developments which are already under way. We are only at the beginning of the process of change hastened by this recession. In fact, many of the actions taken by western governments have been attempts to prevent change, the propping up of the US car industry by the Obama regime being one example. It is also possible that western governments saving banks from bankruptcy may turn out to be a mistake in the longer term. As the IMF has pointed out, the empty hole at the centre of the financial system created by toxic debt has been painted over, not filled in. Trouble has been stored up for the future.

At a global level we can now also see how the recession has revealed a changing balance of power. The credit crunch has laid bare the dependence of the US economy on finance from China and other nations. It has also shown how undynamic most western economies currently are compared with these emerging nations. The emergence of the G20 as a body of international governance is an expression of these changes.

The UK is now in danger of being left behind. It appears increasingly marginalised from both its Atlantic and European allies. There is a measure of incompetence in the way foreign policy relations have been handled, for example over the Lockerbie affair which has annoyed the US. But the UK’s problems are based in the relative decline of its economy. It is  overdependent on the financial sector and an absence of any Plan B now that this source of growth has been threatened has created a biq question mark over its future. The movement of the headquarters of HSBC from London to Hong Kong may well be a straw in the wind, expressing both a shift  away from the UK as a leading financial centre and towards China and the east as its replacement.

The announcement of a new Franco German pact is a sign that the UK is seen as outside the mainstream of European developments. The UK faces a public spending deficit which threatens its  ability to stay at the top table internationally. Already Trident is being questioned and the UK’s willingness and ability to participate as a US ally in foreign wars is also being potentially undermined.

Does the UK’s relative decline matter? If other parts of the world are becoming more economically dynamic does it matter if this one part of it is in decline? Obviously it matters to us as citizens of this country if our living standards are to deteriorate. But I think there is also a greater issue at stake. Currently the most dynamic economies in the world are the least democratic. Perhaps this will change, perhaps it will not. Here in the UK we should recognise that the survival of democracy and its extension depend upon continued economic progress. A declining and stagnant economy tends to foster a declining and stagnant democracy.

If G Brown saved the world why can’t he save himself

What an ungrateful nation we are. New Labour has poured billions into public services over the past ten years. More recently, Gordon Brown claims to have saved the world during the financial crisis by bailing out banks and cutting VAT. Yet Labour is trailing in the polls and its Conference is a dire affair, devoid of politics, deserted by the lobbyists, destitute of any idea of how to stop the tailspin the party is in. It would be a hard hearted person who could not take pleasure in that.

Many blame Brown’s personality for all this. His dour demeanour and inability to communicate effectively are turning people off. Yet if we examine Labour’s record it is easy to see why this is a political problem of Labourism rather than the fault of one individual-however unattractive he may be.

Over the past ten years Labour had a tremendous amount of luck, as Tony Blair now admits. It took advantage of the huge global growth in financial services, based in the City of London. The City was a successful financial centre because of the ‘light touch ‘ regulation begun by Margaret Thatcher and encouraged by Brown himself. This is the same ‘light touch’ , by the way, now blamed by many for the crisis itself.

The boom in the City enabled Labour to extract huge amounts of tax which it spent on public services, particularly the NHS and education. During the same period Labour ceased to be a political movement in any traditional sense . It cut itself off from its traditional working class  roots in societyand became instead a narrow managerial clique.

Labour’s continued popularity became largely based on its ability to continue to fund the expansion of public sector jobs and services. The problem with this is twofold. Firstly, it assumed a continuing growth in the main source of the the UK’s wealth, the financial sector. After the financial crisis that is no longer assured.

Secondly, Labour’s relationship with the UK population was based upon the successful delivery of services. Yet there is still widespread dissatisfaction with health and education provision and a general sense that the money has not been well spent. There is a broader isue behind this which is to do with the way in which we have become a mass of service consumers rather than an active and engaged polity. This is the flipside of the way that Labour has become detached from society.

The decline of Labour as a representative political party has created a kind of politics based on consumer satisfaction surveys and market research. The Tories are ready to carry this on so we should not expect very much change even if there is a change of government. The Tories are also hamstrung by the fact that they will not have the same ready access to tax revenues that Labour had.

Labour was lucky, now its luck has run out. From an economic point of view the biggest mistake made during this period was to spend the windfall from the City on consumer services rather than investing in upgrading the UK’s infrastructure on a wider scale. Better roads, railways and more nuclear power stations amongst other things would have left a longer lasting legacy.

Finding water on the Moon, an inspiration to us all

Readers of this blog will know that I have a deep interest in space travel. (Although I am not terribly good in aeroplanes so I cannot imagine I will be first in line for a moon trip). So it was exciting to read this morning that an Indian space probe appears to have discovered water on the Moon.

NASA has plans to build a permanent manned colony on the Moon within twenty years, although the Obama regime has been pouring cold water on these plans as the country’s economic crisis has deteriorated. If the plans were to go ahead then the presence of water would make a huge amount of difference to the viability of a permanent presence there. As today’s report indicated, availability of water would not only provide drinking water and enable crop irrigation but also permit the extraction of oxygen for breathing and hydrogen as an energy source.

A second reason for being excited about this discovery, if it is verified, is that it was made by an Indian lunar mission, its first in fact. As an emerging nation India has jumped ahead in the exploration stakes, not only of the US but also its main emerging rival, China. How inspiring it must be for the Indian people to know they are responsible for this discovery.

It is the inspirational aspect of space travel which is probably the most important aspect of it. As John F Kennedy understood, space travel has many potential economic benefits and acts as a huge boost to innovation, but its capacity to uplift and inspire stands above all of that. For an emerging country like India this success will encourage developments in other areas of life. It gives everybody a lift.

It may also be a harbinger for the 21st century in other ways. The inclusion of China and India in the G20 intergovernmental talks this weekend, and the raised status of this grouping, show how quickly emerging nations have become central to the governance of the world. The emerging rivalry between India and China, added to the international cooperation which the space programme demands, could give space exploration the edge which the rivalry between the US and the Soviet Union did in the last century. That rivalry pushed technology to its limits and landed men on the Moon. Perhaps this time we will cast our net far deeper into space.