Holiday readings

 The past 9 months have been full of change and incident. The global economic crisis has shaken the political elites of many countries. In the UK our own government has barely survived. We are now left with the consequences of the recession, rising unemployment and economic stagnation. Over the past six months I have tried to respond to the many problems and questions about the future of the UK which the recession has highlighted. My overall approach is best summed up in this article I wrote in The Times.

This blog is taking a break until September. For those of you who wish to deepen your understanding of the crisis and what lies behind it I would draw your attention to what I consider to be the most helpful articles I have read on this subject.

This article by Gavin Poynter and this one by Phil Mullan explain how the crisis is rooted in the changing material conditions of the western economies over a period of time.

This article by Sean Collins which explains what is specific about this recession compared to previous ones.

This article by James Heartfield and this one by Gavin Poynter which look at the interpenetration of the state and the private sector in the UK.

And finally the white paper I wrote as the recession began late last year and which kicked this blog off.

Happy holidays!!

Will the UK retain its global financial role and withstand the threat from China?

  

The Government remains confident in the UK’s position as a major international financial centre over the medium- to long-term 

 

 

 

 

This statement of belief is contained within the document Reforming Financial Markets which outlines the government’s response to the financial crisis. It is clear from this and elsewhere that whatever desire there may be to rebalance the UK economy towards ‘more engineering and less financial engineering’ in Mandelson’s words, there is still a widespread hope that the financial services sector can get its dynamism back.

It is easy to see why the government hopes that this will be the case. The financial services sector contributed directly to the boom of the past ten years through the growth of jobs in that sector and the prosperity it brought , particularly to London and the south east. It also paid a large part in financing the growth of public spending during that time. The decline of financial services is now contributing to the decline in tax income and adding pressure to the crisis in funding the public sector.

Creating an alternative dynamo for the UK economy outside financial services would require a level of effort from the ruling elite in the UK which seems way beyond its current capacity. Better to cross their fingers and hope for business as usual.

Financial services in the UK have a lot going for them and there is a strong historical incumbency factor which works where markets are concerned. However there are two main reasons to question the continued dependence of the UK on finance. The first is whether the financial services market in the west can recover full stop. There are still strong reasons to believe that the global financial crisis is far from over.

The second relates to the aspirations of China. As Martin Wolf has pointed out, China is historically unique as a developing world power in that it is simultaneously the world’s most dynamic growing manufacturing power as well as the fastest growing exporter of capital. It is this combination which has created the global imbalances which lie at the heart of the current crisis.

China has now set itself the task of turning Shanghai into the leading global financial centre by 2020. As the article cited makes clear, there are still major obstacles in the way of doing this. However, one has to be very optimistic to hope that the future dynamism of the UK economy depends upon outperforming the Chinese in this area.

 

 

 

Mars Attack-why we need a manned mission to Mars

This blog has already said most of what it wanted to say about the moon landing long before the 40th anniversary. So let us discuss Mars instead.

Here are ten reasons why we should support a manned mission to Mars as soon as possible.

1. Because it is there.

2. Because setting ourselves this task would prove that we humans have not lost our fundamental urge to explore the world around us. The Times today argues that curing cancer is the modern equivalent of the moon landing. Keeping people alive longer is a laudable mission, but space travel speaks to a different set of human ambitions. It does not have to be one or the other.

3. Because it would require an enormous amount of courage on the part of those taking part which would inspire the whole world. As Buzz Aldrin, one of the moon walkers in 1969 said recently

I believe that a mission to Mars would need a commitment to a permanent settlement of people who have signed up to spend the whole of their career on the planet…we are talking about pilgrims, the sort of people who left (England)on the Mayflower.

4. Because it would require international cooperation on a vast scale.

5. Because in the course of solving the numerous scientific, human and technological problems that currently stand in the way of such a trip we would discover many new things about our world and about ourselves.

6. Because a colony on Mars would be a stepping stone for the exploration of the rest of the Universe.

7. Because we would be taking a calculated risk at a time when risk taking has a bad name. A Mars mission would challenge the safety first culture which dominates many cultures today.

8. Because if any natural disaster affected the earth we would need somewhere to escape to.

9. Because if we do not do it the Chinese will anyway. Not being involved would prove that we in Britain had abandoned any pretence to being of any significance in the modern world. As Buzz Aldrin says, ‘a vibrant nation explores or expires’.

10. Because a colony on Mars would change our perception of ourselves in the Universe.

Who can bring about change? the problem of agency.

Some readers of this blog have suggested that it has become an unofficial Dave Cameron adviser. In the limited dealings I have had with shadow Tory ministers it is clear that they are thrashing around to come up with answers for the problems created by the recession. But for reasons that are well rehearsed on this blog, the Tories are hardly more likely than Labour to be able to tackle the deep seated problems of the UK economy. The Tories have modelled themselves on the short term, presentational and market research driven approach pioneered by New Labour. They have no coherent plan for the future nor any vision for where the UK should go. In short they are as trapped in the present crisis as the party they wish to replace.

All of which raises a very painful dilemma. If New Labour is done and the Tories represent nothing new, how is it possible to affect the political and economic agenda? In the past there were two ways of thinking about capitalism. One was that the market was fine and should broadly be left to its own devices, with some support from the state. The other was that it could not consistently develop the economy, was crisis ridden and exploitative and should be replaced by some form of socialist society. In the latter case the agency for change was seen as mainly supported by the working class.

The demise of the socialist project has left only the market option on the table for the time being. And now even those who own and run the economy are doubtful that the market on its own can deliver. The need to give huge  amounts of state support to the financial and manufacturing parts of the economy have shaken belief in the market amongst the capitalist class itself. Even the Financial Times ran a critical series earlier this year called ‘the future of capitalism’. The employing class has little confidence in its own system and is open to the suggestion that market led economic growth is dangerous for the environment and damaging to society’s peace of mind.

In that sense it is pointless to try to model any response to the recession around what appear to be the interests of either the working class or the employing class. As agencies for positive change and progress they are, at least temporarily, bankrupt. So what is the point of maintaining a critique of the options on the table if there is no obvious agency for change? I do not have any easy answer to this question. However I think it is important that some people do stand back and try to look at the problems facing society as a whole, to attempt to create some coherent picture within which others can understand what is really going on.

As this is not a narrow class based approach it may mean that some possible solutions appear to be to the immediate detriment of some working people or some employers. For instance, the suggestion that defunct industries should not be propped up by the state. But, in this case for example, it is to the greater good of society as a whole that productive industries replace unproductive ones. Growth and prosperity depend upon innovation and investment in new dynamic industries not old failing ones. Nobody benefits from economic decline. Challenging anti-growth sentiments in society at least put the issue of the need for material progress on the agenda. Any revival of  political activity in any section of society which supported that would be welcome. For the same reason it is also encouraging when people stand up for their own interests and combat attempts to impose austerity.

What’s the plan,man?

Still nearly a year away from an election and sunk in recession, the UK is drifting through both a political and an economic crisis. Reports from inside the civil service indicate that Labour’s loss of direction is causing civil servants to sit on their hands and wait for a Tory government to sort things out. Yet as Martin Wolf  argues convincingly in today’s Financial Times, the recovery from recession is going to be very hard work.

The UK lacks a strategy for the future or any kind of vision of what we want to achieve collectively. Politics has become short termist and tactical. (The most influential book on Tory thinking is called ‘12 Months To Renew Britain’). There are some very important questions which require answers in order to develop a proper long term answers.

The first is, what’s the plan? New Labour had ten years of relative success based on the boom in financial services. Tony Blair now admits they were lucky. The financial services sector is not going to recover to play the same role as it did before. So what does any incoming government think is going to be the driver of the UK economy? And what are they going to do, through tax incentives, infrastructure improvements, educational policies to encourage whichever parts of the economy offer the most promise?

Is it possible or indeed desirable, for example, for the UK or any developed economy to reverse deindustrialisation? All western economies have seen a continued growth of services relative to industrial production. Yet service industries are notoriously people heavy and so tend to have lower levels of productivity.

Is it possible to reverse the trend for the state to play a greater and greater role in the economy?As James Heartfield and others have argued, the role of the state in the UK economy has encouraged flabby business practices and protected weak businesses from going under. Large chunks of state spending go back into the private sector. Is there a better way of doing this or should the state move out of  many of the areas it currently manages?

What is the legitimate role of the state? There are many things the state should be doing, to develop a modern infrastructure or education system for example which it is not doing well enough. At the same time as the state cannot operate on the big issues it seems to want to micromanage our daily lives through interference and intrusion on a massive scale. How can this be reversed? We need to have clarity on these questions when discussing what public spending we need and what we do not.

These are serious issues facing the UK. In the run up to next year’s election they should be the focus of discussion and debate for anybody who is dissatisfied with the lack of vision being shown by the main political parties.

No such thing as ‘business as usual’ after the recession

In a post last week I argued that the talk of green shoots in the economy was nonsense. The hopes of a return to ‘business as usual’ are slim for reasons explained there.  A report in today’s Financial Times bears out the more likely scenario of a period of stagnation. The general hope is that the regime of low interest rates brought in after the banking crisis will encourage more economic activity. There is little sign of this happening yet. Yet this seems to be the total strategy of our political class.

In the same Financial Times report an analyst had the following to suggest about the future;

Financial services and the City of London will take the lead. There will be takeover bids, management buy-outs and innovative investment products,One of the biggest areas of financial engineering will be how to get around the 50p tax rate.

How grim does that sound? The phrase ‘innovative investment products’ sums up everything that is weak and wrong about western economies. Rather than focussing on productive investment in new industries the search is on for new and better ways of making money out of financial instruments. It is all about reflating the financialisation bubble by finding new asset classes which can be leveraged.

Yet this ‘business as usual’ approach is all our political leaders have to offer. The real problem now lies not so much in the economic sphere, but in politics. Last week’s G8 summit had little to say and nothing to do about the recession. We appear to have entered a period of policy drift towards the economy, at least in the west. Stagnation in the economy and stagnation in politics has at least a silver lining. It should open a space to debate new and better ways of thinking about our economy and how it can be improved.

The uncertain state of the G8

Compared with the drama of the G20 in April, the G8 meeting in Italy is a curiously muted affair. At the end of course there will be, as there always is, a joint statement from all involved saying something anodyne they can all agree with. But the overriding feeling coming out of the meeting is of drift.

The leaders gathered together on the site of an earthquake are themselves a curious bunch. For a start the G8 does not include China or India, the two most economically dynamic countries in the world, although the leaders of both countries were there to start with. It  includes countries whose presidents are both hugely popular at home, Obama being one and Berlusconi, for unfathomable Italian reasons, the other. Also present by contrast is Gordon Brown, currently on political death row. Whatever their individual current strengths or weaknesses  the problems they, and we , face were clearly contentious.

Firstly on the economy, there were no concrete proposals nor any clear agrement on what if any steps need to be taken to help the world out of recession. The G8 in this area resembles a group of generals who have sent their troops out to fight and are waiting for news from the front. There is an unmistakable feeling that everything that could be done has been done and now it is time to wait and hope for an upturn. Meanwhile the real underlying tensions between the debtor countries and those supplying the credit continue to simmer away.

Secondly, the debate over global warming is following a similar pattern. The main developing countries are objecting to pressure to cut emissions in a way that would hinder their economic growth. This issue is rapidly becoming a source of protectionist pressures in the US which reflects broader tensions between the US and China.

Altogether the world’s leaders look unsure and uncomfortable about how to deal with both the near term and longer term problems facing the world.

What future for business? Risk taking and innovation after the recession

This is an edited version of my speech at this last night.

Whenever there is a panic in society, for example around swine flu, I usually find myself on the side of those saying ‘calm down, its not as bad as you think’. I generally take the view that as a society we are too risk averse and liable to panic. However, as far as the recession has been concerned the opposite is the case.  The recession now appears to have been a bad dream about greedy bankers and corrupt politicians from which we are awaking. The concensus appears to be to forget about it as quickly as possible and get back to business as usual. I feel like Cassandra, condemned to tell the truth but to be disbelieved, because there is no ‘business as usual’ and here are three reasons why.

The first is that the damage done by the recession is deep and likely to be prolonged. I say the damage done by the recession rather than the recession itself because technically the recession, defined as consecutive quarters of nagative growth, may be over or almost over, but the damage will linger on:

1. Unemployment is continuing to rise
2. Toxic debt has not been removed from the system
3.  Banks are not lending
4. The securitization business, provider of investment finance, has disappeared
5. World trade has collapsed
6. Global capital flows have slowed dramatically

Secondly, for the UK there is no business as usual for three main reasons. For the past ten years financial services have been the main driver or the economy. there is very little chance that this will return. Also the crisis in public sector finance, affected badly by the reduction of taxation from the finacial services sector and the costs of propping up the banks, will mean big challenges for the public sector in terms of employment and services. Lastly our political class has run out of ideas and lost a large amount of authority. This will make any hard choices difficult for it to take.

Thirdly, real change in the economy will require inevitably some risk taking and more innovation. Yet even before the recession the UK had the lowest Research and Development and Venture Capital investment in the developed world. The recession, according to the Future Foundation, has made business even more risk averse.

We are culturally a safety first society. We view new developments in science and technology with suspicion and hostility. We are over protective to an absurd degree of our children and ourselves. Is it possible to imagine that this kind of attitude will foster and encourage a dynamic econopmy?

Take the banking crisis. We have capitalism which cannot stand on its own two feet and a state which cannot act decisively. The banks have been protected from their own recklessness by a state too feeble to either force them to face the market or to take complete control. Instead we have a half way house which allows the banks to stop playing their role as providers of credit. Some people see the banking crisis as an example of taking too much risk. But there is a big difference between taking a calculated risk and sheer recklessness and stupidity.  The creation of toxic debt began as an attempt to spread and minimise risk. It became reckless once the people buying the debt stopped checking on what they were buying. This was just plain stupid.

There is not one part of our society , business, politics, culture, which has not become more risk averse. The way to challenge it in the first instance is through politics, something anybody can play a role in. We have to renew our democracy as the prelude and the process of renewing our economy and our society.

Reboot Britain-Innovation requires more than tweeting

The Reboot Britain Conference yesterday organised by NESTA had promise, focussed as it was on the need to transform the future of the UK, a project I am very keen on. In particular it was looking at the power of the web to shape better public services. Did it deliver on its promise? I was struck by several things.

Firstly, what people now consider ‘innovation‘ is mainly the ability through social media to communicate with each other more. Social media are now becoming the focus of hope for the future in every area of life. The capacity of social media to really change things is overestimated while the lack of any substantive polices for change is underestimated.

Secondly I heard almost no discussion or even mention of the recession. The tone was relentlessly upbeat and the emphasis was on ‘optimism’. The whole event felt like some kind of strange religious sect which attempts to operate outside of normal reality. There was a strong sense that if only we could convince ourselves that the recession was over then it will be.

Thirdly, politics and politicians are not only held in contempt, but hold themselves in contempt. The Conservative MP Jeremy Hunt, who opened the proceedings, spent a lot of his speech making jokes about corrupt MPS and lauding social media as a way of keeping MPs under control through greater transparency. Any discussion of the content of politics was entirely absent from the day.

Fourthly, even clever economists like Gillian Tett view the causes of the recession in non economic terms. In her case she interprets the behaviour of bankers in organisational terms as being about lack of effective structures.

Lastly, the CEO of NESTA, Jonathan Kestenbaum, has decided that the Tories are going to win the next election. His introduction to Jeremy Hunt was the most effulgent suck-up I have heard for some time.

Making the trains run on time

Following the de facto nationalisation of the East Coast Rail line, no doubt David Miliband will be popping up to tell us this is another example of New Labour radicalism, alongside the nationalisation of the banks. What really happened is that another deal that the government did with the private sector has unravelled as soon as it looked as if National Express, the company concerned, would have to make some hard choices about how to run the railway during a downturn.

What does this episode tell us? Firstly it confirms the point made by James Heartfield in his essay on the state and the economy, that the state and private industry have become more and more interpenetrated. A key aspect of the deal between the government and National Express was that the government would pick up 80% of any losses. This is not free enterprise by any stretch of the imagination. It is effectively a state subsidy to a private industry, as are many of the big government related projects, particularly in the IT sector. This process is likely to go even further as the government struggles to provide key services during the recession.

The state certainly does have a key role in the management of big infrastructural projects such as the railways. But the current system where neither the state nor private enterprise take full control is the worst of all worlds. It is possible for the capitalist state to run big infrastructural projects successfully, as anybody who has travelled on French high speed trains or driven on their motorways knows. In Britain this ability appears to have been lost.

As it stands the system we currently have allows neither the market nor the state to operate effectively. The deal with National Express allowed them to walk away just as they should have been bringing their management skills to bear in keeping the railways going through a recession. Even with the 80% subsidy against loss, rather than tackle the difficulty choices, of how to cut costs, improve service and productivity, they simply gave up.