Leadership, and the lack of it

13 02 2009

When Franklin K Roosevelt became President in the depression he said in his inaugural speech,
‘I shall ask the Congress for the one remaining instrument to meet the crisis—broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe.’
The lack of clear leadership at the moment in the world,as Anatole Kaletsky points out in the Times today, is the worst element of this recession.

 

 

 

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The UK economy after the recession-Part 7

13 02 2009

 

 Proposed ways out of the recession

More regulation

The Financial Services Authority will be beefed up in response to the credit crunch. It is planned to take on an extra 218 jobs giving it a total of 3000. It is clear that for the time being at least the message is that the finance sector needs to be both externally and internally policed more thoroughly,

In terms of finding the new people the banking downturn has helped only a little since the worst hit sectors include traders and bankers and neither group is exactly what the regulator is looking for. Those it does want-risk managers, product controllers and compliance officers-are still needed by the banks. In fact, the FSA wrote to the industry earlier this year warning them against making any cutbacks in these areas.[1]

This is as clear an example of closing the gate after the horse has bolted as one could wish to find. It is very doubtful whether more regulation could have prevented the credit crunch. Everybody was swept up in the bull market and dissenting voices were usually ignored. The issue of regulation now is largely irrelevant to getting us out of the recession.

Capital projects

It is already clear that attempts to move forward government spending on capital projects are limited by the extensive regime of planning agreements and consultations that have become an integral part of modern government. This means that projects such as new nuclear power stations or the extension of Heathrow can get bogged down for years. When Franklin Roosevelt became President and had to tackle the depression in the thirties he asked for one thing,executive power. Governments have to be prepared to override objections and cut through planning procedures if they wish to really make a difference in this area.

Focus on the digital and creative industries

Stephen Carter has been appointed to oversee the development of digital development in the UK. The government sees this as a key part of the future development of the UK economy. The report Innovation Nation[2] and more recently the NESTA report, Attacking the Recession[3], attempt to develop a strategy for innovating the UK out of its current difficulties. Neither report deals with the risk averse, over regulated nature of our society and the climate of low expectations which make a culture of innovation unlikely to develop.

 

Green new deal

What about a “Global Green New Deal”?…The industrial and service sector-led growth “at any cost” may have hit its limits – in terms of job creation and in terms of its ecological footprint on the world’s increasingly scarce nature-based assets. Gross domestic product as a measure of real wealth and as a bell-weather of economic success or failure may also have had its day in its current, narrow configuration.[4]

An emerging response to the recession is to call for a Green New Deal.  This response has the advantage that it appears to offer a way out of the recession by encouraging a switch to investment in green technologies rather than a return to the credit based boom of the past decade.

Some environmentalists go even further,

Unless economic growth can be reconciled with unprecedented rates of decarbonisation, it is difficult to foresee anything other than a planned economic recession being compatible with stabilising the climate[5]

While it is unlikely that the call for more recession will achieve great resonance outside the ranks of hard core environmentalists, there will be resonance for seeing the recession as an opportunity to speed up green economics, which could end up with declines in growth rates and consequent reductions in living standards.

Lord Stern, who produced the Stern report for the UK government on the economics of climate change, explains it like this,

We will have to pump up demand – by cutting taxes and increasing transfer payments and making investments that can take place quickly and are labour-intensive – all of those will matter. But we should be thinking about these things in a way that can start to drive forward a form of growth that is really well-founded and sustainable.[6]

Currently in the UK what the treasury defines as Environmental goods and services grew from £16b to £25b between 2001-4, employing 400,000 people.[7] However Stern recommends that,

it extends to new types of cars and other transport, new building materials and designs, energy transmission systems, new packaging for retailers, the redesign of manufacturing techniques, different farming methods, and a host of other developments in nearly all sectors of the economy

[1] FT December 1 2008

[5] Tyndall Centre for Climate Change Control

[7] The UK economy, analysis of long-term performance and strategic challenges march 2008 HM Treasury p33






The ‘tarnished’ spirit of free enterprise

11 02 2009

http://2.bp.blogspot.com/_djgssszshgM/SYXCzpR0MbI/AAAAAAAAAyY/VYle3udsueo/s1600-h/CalvinHobbs.BMP





The recession is a crisis of politics

11 02 2009

 One way of understanding the recession is to see it as economics catching up with politics. I mean this in the sense that, just as politics and political leadership have been in decline for many years, now business leaders, bankers and  economists have all been revealed along with politicians as lacking any real grasp of what is happening and what can be done to resolve it.

The latest part of my white paper on the UK economy after the recession looks at the weak and narrow political responses to the recession and how these are feeding public apathy.

https://postrecession.wordpress.com/2009/02/11/the-uk-economy-after-the-recession-part-6/

 





The UK economy after the recession-Part 6

11 02 2009

Political responses to the recession

For a long period after the financial crisis began the government’s only intervention was to bail out Northern Rock. There was no attempt to boost the economy through fiscal means, as the US government attempted via tax rebates in early 2008. Nor was there any recognition of the need to cut interest rates until the autumn of 2008. The predominant attitude was that the market should be allowed to sort itself out, thus continuing the managerial approach to the economy which has typified New Labour.

The failure of leadership during the recession has roots in the decline of politics. For example, an out of touch political establishment was afraid that inflation would provoke struggles for higher wages, thus leading to a delay in making interest rate cuts beyond what was desirable.

Since the onset of the recession proper in the last quarter of 2008 most public discussion has largely taken place around the issue of consumption rather than production, with the emphasis on stimulating consumption via public spending.

 Too little consumption?

The essential message can be summarised in three sentences: if an entire nation decides to cut spending and increase saving at the same time, the result is not an increase in saving but an increase in unemployment. This means that households can only increase their savings or reduce their debts if someone else spends and borrows more to keep the economy afloat – and in a recession that normally has to be government. And finally a government that spends and borrows in a recession can usually repay much of this borrowing without raising tax rates, because recovery automatically yields higher revenues and reduces spending on the unemployed. 1

 

Now that the recession has become real, the government has been panicked into action on both the fiscal stimulus side and on interest rates. Almost overnight its rhetoric shifted from ‘hands off’ to a fully fledged neo-keynesianism.

Amidst a lot of talk about ‘putting the fire out first’ the government’s explicit approach is to restore lending to 2007 levels and to try to pump up the housing market again. Critics of this approach, such as Tory leader David Cameron, have focused on the likelihood that this will lead to necessary cuts in public spending in the future.

Or too much?

In partial reaction to the neo Keynesian response to the recession has been claims that the problem is the opposite, too much consumption. Some politicians and sections of the middle class press in particular have been in the forefront of championing personal austerity as a response to the recession, arguing that the need for sustainability has been given a new imperative.

The focus on consumption does not help to clarify the serious weakness at the heart of the UK economy. As we have seen earlier in this paper, most of the growth in the UK economy in recent years came in the financial, housing and retail sectors. Now that these sectors have been badly damaged it is a dangerous strategy to pin hopes of recovery on them. Instead, the focus should be on where productive investment should take place and how it can be encouraged.

 


Public response

The most alarming feature at present is the fatalistic public mood. The slump is being discussed as if it were a natural catastrophe like the arrival of the comet that destroyed the dinosaurs.2

Given the semi-paralysis of political leaders it is hardly surprising that the overwhelming public response so far to the recession has been passive acceptance. As long as this is the case then it is unlikely that public debate will turn to finding ways out of this catastrophe and looking to the future.

This passivity has gone side by side with an outburst of hedonism and escapism, rates of sexually transmitted diseases shot up in Canary Wharf once the downturn set in.3

Also the 118 telephone directory services reported that they had experienced ‘a sharp increase in number requests for sex shops, lap dancing clubs and escort agencies’.4


 

1. Anatole Kaletsky the Times 20 October 2008

2 Samual Brittan Financial Times January 2 2009





The ‘reindustrialisation’of Britain

9 02 2009

Interesting article in the FT today about the ‘reindustrialisation’ of Britain.http://www.ft.com/cms/s/0/e6528e46-f603-11dd-a9ed-0000779fd2ac.html

This raises several issues worth discussing. This and other reports looking at the future http://www.nesta.org.uk/attacking-the-recession/ while honourable in trying to find a new dynamism for the UK economy,are infused with low expectations about what we should be aiming for. In the FT article Labour peer Lord Bhattacharyya says,’I can envisage a lot of smaller firms springing up in fields concerning green technology, for instance solar energy production, or electric vehicles.’ The NESTA report sets the goals of innovation as ‘green energy, environmental services,biotechnology and services for an ageing society.’

This spirit of  low expectations and sustainability is one of the main problems we need to confront if the UK is to recover a sense of innovation and spirit. In the past, nations set themselves the tasks of conquering space or curing cancer, thus inspiring large numbers of people to make breakthroughs in all areas of technology and science. Science and innovation flourish best when set free from unnecessary constraints and limitations.





British jobs for British workers?

6 02 2009

As indicated below https://postrecession.wordpress.com/2009/02/06/the-uk-economy-after-the-recession-part-5/ Most of the jobs created over the past ten years in the UK have been in either the public sector or the business services area, focussed around finance. At the same time, jobs in manufacturing shrank.

With the near collapse of financial services and the probability of big cuts in public spending coming down the line it is not hard to see what will happen to most of the jobs that were created in the past ten years. Big rises in unemployment amongst women workers in particular are very likely.

The recent furore around British jobs for British workers has not helped to clarify the real problems of the UK economy. In fact, one of the main stimuli to the UK economy in the past ten years has been the influx of immigrant labour,often to do jobs that UK workers would not do. Instead of resorting to job protectionism we should be looking to where the new jobs of the future can be created.

NESTA, the National Endowment for Science, Technology and the Arts, has produced a pamphlet setting out its ideas of how to do this. While I disagree with much of what they say,which I will return to in future blogs, it is at least an attempt to look beyond the current firefighting and deserves attention for that reason alone. http://www.nesta.org.uk/attacking-the-recession/