George Monbiot is right about one thing-we should draw the election battle lines around economic growth

Humanity is no longer split between conservatives and liberals, reactionaries and progressives, though both sides are informed by the older politics. Today the battle lines are drawn between expanders and restrainers; those who believe that there should be no impediments and those who believe that we must live within limits.George Monbiot

The debate about economic growth has a peculiar character to it. On the one hand there are the plainly anti-growth forces of the environmentalists, as embodied in the shape of George Monbiot, with their quasi mystical commitment to Gaia. On the other are those, like myself, who believe that continuous economic growth is the salvation of mankind. Then there are many who struggle to accomodate a sense of limits within a recognition that economic growth is desirable. Broadly speaking these can be characterised as being in favour of sustainable growth. I am fascinated by the interplay between the living reality of the  stagnant  economies of the advanced countries, including the UK,  and the prevailing orthodoxy of sustainable development.

Maurice Saatchi recently summed up succinctly a common view amongst the UK elite about our economic prospects

…during a recent visit to the London School of Economics. I asked if any professors thought it was possible, by an act of will, to increase the long-run trend rate of growth of UK GDP. The answer was: “It can’t be done.” Or at least that to do it would require preconditions so daunting that no realist could contemplate them — more investment, higher productivity, a different culture, a new education system, etc. That list is the dog-eared trump card of those who see such ambition as a touching illusion. For them, the growth rate of the UK economy will always be the “trend rate”. It is like the weather. You can complain, but you can’t change it.

There is a distinct convergence between the kind of people Saatchi was describing and those who believe in sustainable growth. As I have argued before, it is convenient that climate change offers both a justification for accepting what Saatchi calls ‘trend growth’ in stagnating western economies and an excuse for not looking for ways to change it. It is this pessimistic outlook which explains why so many are ready to jump on the ‘share out the misery’ response to the recession exemplified in the Tories championing of austerity.

We seem to have moved from TINA (there is no alternative to the market) to there being no alternative, stagnation is inevitable (NASTI perhaps?). There is an exhaustion of ideas at the heart of the political establishment which leads to fatalism about the economy. But we should remind ourselves that the economy is not something external to us. It is the sum product of our daily activity. It is influenced by our ideas and energy. It is what we are and who we are.

In the run up to the next election it is vital that a challenge is launched against the prevailing orthodoxy of NASTI. We should be arguing for:

*an end to negativity around economic growth. We need to create the infrastructure and support necessary to encourage a more entrepreneurial society.

*Government should be bolder in defending new technologies and scientific breakthroughs which have the potential to make us healthier and live longer.

* Government needs to play a greater role in modernising our transport and communications systems.

What next for UK banking? Not learning from the past apparently

I was at this event yesterday jointly organised by the New Statesman and Barclays Bank and addressed by representatives by the three main political parties. John Varley, the Chief Executive of Barclays Bank, began by arguing that banks should adopt more social responsibility, by which I think he means not to get into the same mess as last year again.

Two things struck me from the discussion. The first is that there is hardly a cigarette paper’s difference between the three parties on the issue of banks or by implication in their understanding of the recession. They all supported the populist tax on bonuses (described privately to me by one senior banker there as ‘puerile’). They all agree that there should be more competition in banking, better management of risk  and better regulation. One wonders yet again why there are three parties when there are virtually no policy differences between them. The cosy atmosphere was upset only marginally by John Snow asking why no bankers were in jail yet.

The second problem is that in this discussion, supposedly about the future of banking, there was disappointingly no discussion about the role that banks could be playing in the regeneration of the UK economy.  The whole discussion was about  not repeating the mistakes of the past rather than tackling the problems of the future. Lord Myners, Labour’s  Financial Services Secretary to the Treasury, mentioned in passing that there no longer appeared to be a blockage in banks financing business, although the cost of credit was perhaps too high. The banks say that there is less demand for credit from business. If there is little demand for credit this should warn us that the economy is unlikely to see a fast recovery from the recession.

The main lessons from the recession appear to be passing the parties by. The financial bubble, as I have argued before, was not the product of too much risk taking but too much risk aversion. Investors were seeking ways of making money through apparently safe new financial ‘products’ rather than through investment in apparently riskier new industries and new technologies.

The government now effectively controls two of the major banks in the UK. It would be a good idea if it could enter into some major planning exercise to encourage investment from these banks in the kind of infrastructural projects that the UK desperately needs. It would also be a good idea to encourage these banks to set more investment aside for innovation and those areas of the UK economy which have the most promise.

None of the parties is facing up to the real problem facing the UK economy, what is going to be the engine of growth if financial services does not recover its dynamism, a prospect which appears to be receding all the time. Banks have a role in solving this problem, but the leadership has to come from politicians and there is precious little sign of that at the moment.

Why climate change is a convenient excuse to justify economic stagnation

Dictatorial African leaders such as Meles Zenawi from Ethiopia have been quick to take advantage of the Copenhagen talks to argue that climate change is the cause of their countries’ problems. This has rightly provoked an acid response from oppositionists in  Africa who say the problem is more lack of regime change than climate change.

The climate change debate has been honey in the mouths of forked tongue African dictators. It has provided them the perfect foil to avoid detection and accountability for their corruption and mismanagement of their societies, and a convenient opportunity to divert attention from their criminal state enterprises. Global warming has proven to be the perfect substitute for the old Bogeymen of Africa– colonialism, imperialism, neo-colonialism and poverty. Why is Africa reduced to becoming the “beggar continent of the planet”? Global warming! Why are millions starving (euphemistically referred to as “severe food shortages” by officials) to death in Ethiopia? Climate change. African dictators are using global warming as their new preferred ideology behind which they can hide and ply their trade of corruption while expanding their thriving kleptocracies.

The same leaders are looking for more aid from the west in order to ‘introduce anti climate change policies’, the latest euphemism for bigger cars and fatter Swiss bank accounts. Climate change is the latest convenient tag to avoid their own share of responsibility for the poverty and desperation of many of their countries.

So much for the rather transparent attempts of failing third world leaders to exploit climate change. But let us also consider how convenient it is for western politicians that climate change is at the top of the agenda. Western economies have suffered for years from stagnating growth. After the current recession there is a palpable fear that the future offers even slower growth, permanent high unemployment and a shift in the economic balance of the world from west to east.

The consensus response to the threat of climate change is that we need moderation in economic growth  and redistributionist rather than developmental economic policies.  These calls for sustainable growth fit very nicely with the lack of dynamism that infects western economies. How convenient that there is now a compelling reason why seemingly intractable economic stagnation can be turned into a virtue. Even a mainstream pro market economist like Martin Wolf puts reducing demand at the top of his list of ways to tackle climate change.

It is also very convenient  that the same climate change agenda points the finger at the fastest developing countries, such as China,  and leads to calls for them to slow down. Not because they represent a major threat to the strategic and economic power of the west, perish the thought, but because they are threatening the planet of course.

I am not proposing a conspiracy theory here by the way. It is more that the western elites  have lost belief in their ability to be dynamic and to lead economic growth and development. This lack of belief is built into reality, it is evident all around us in the decaying infrastructure and failing public services that we all experience. How comforting it must be in that situation to be told that this kind of stagnation is a virtuous thing rather than a sign of political and economic bankruptcy.

The climate change issue does represent a crisis, but not the one that is commonly understood. The real crisis lies in the loss of a belief in human progress and our collective ability to continue down the path of economic development. It represents collective exhaustion in the political and intellectual classes and needs to be thoroughly confronted by any of us who retain belief in the unlimited potential of humanity.

We need real growth not sustainable growth

It is not clear how the UK will earn its living in the years to come        Financial Times  3/12/2009

A new survey of the state of the UK’s economy has drawn a bleak, if not surprising , picture of the weaknesses of the UK economy as we begin to come out of the recession. The survey, carried by the FT today and over the next few days, reveals that despite all the claims of New Labour to have turned the UK economy into something more dynamic the truth is that the long-term trends of sluggish growth and the disappearance of manufacturing have if anything gone faster under New Labour than before:

  

• Growth since 1997 has averaged just over 2%, slightly less than in the previous 20 years
• Manufacturing has shrunk from 20% of the economy in 1997 to 12% now
• The growth areas of the UK economy have been business and financial services, real estate and public services-all financed directly or indirectly from the proceeds of the financial bubble.
• Around 2/3 of jobs created under New Labour have been in the public sector-which bodes badly for employment prospects if public spending is cut

To add to the ominous character of this survey a timely piece of new research by two academics at Kent University has looked at the experience of recessions around the world over the period 1960-2000 and concludes that deep recessions such as the one we are currently experiencing have profoundly negative impacts on productivity for years after the recessions are over. 

Our main findings show that, cumulatively, from the last year of the recession up to fours years after, recessions have significant negative productivity effects. These effects, however, arise as a combination of different mechanisms. Recessions tend to increase the level of frontier TFP (technology growth and efficiency) but decrease the rate of technical progress. The combination of these two effects is a fall in frontier productivity relative to the one that would have prevailed without a recession. Recessions also increase significantly technical inefficiency in the economy. Finally, deep and long-lasting recessions tend to have larger impacts on productivity, although the mechanisms differ from standard recessions.
  

 There are key debates to be had still about to what extent the UK needs to restore manufacturing as opposed to services, and also whether cuts in public spending are necessary and in what areas. However, one thing is crystal clear, that whatever route the UK has to take to recover a growth dynamic it is going to be very hard work. The dawning recognition that this is the case, and the absence of any coherent plan to achieve it,  must be one reason at least why those arguing for a more sustainable (ie environmentally focused ) economy are influential today. For a clear explanation of what the sustainable economists have in mind for us this new report spells it out. 

   The traditional function of investment, framed around increasing labour productivity, is likely to diminish in importance. Innovation will still be vital, but it will need to be targeted more carefully towards sustainability goals. Specifically, investments will need to focus on resource productivity, renewable energy, clean technology, green business, climate adaptation and ecosystem enhancement. These are precisely the kind of targets that emerge from the consensus around a global Green New Deal. Foregoing consumption growth seems inevitable if we are to sustain this enhanced need for ecological investment. 

 The necessity of ‘foregoing consumption growth’ in favour of saving the planet is, in this context, a convenient way of also avoiding the issue of tackling the stagnation of advanced economies such as the UK’s. The question of how to create a turn around in the UK economy should not get sidetracked by the sustainable growth lobby. The solution to all our problems, including environmental ones, involves greater control over our environment, through scientific and technological breakthroughs and through greater productivity of labour, which creates more human time to focus on new challenges rather than slogging away at the old ones.