Austerity or growth-Cameron flips and flops

23 11 2009

David Cameron appears to have realised, as I predicted, that his party’s call for austerity is not terribly appealing. He is now talking af the need to promote economic growth. At this stage there is no substance behind the talk and it seems to be as rhetorical as his earlier call for austerity.

There are really only two main ways in which government can influence what happens in a market economy. The first is at the level of political leadership. This means that government sets an agenda for the nation, and creates a legislative framework to enable the agenda to operate. In that sense focussing on the need for growth is a step in the right direction. However, even at this level it is important to identify what the barriers to growth are that need to be overcome.

In the UK, some of these are historical and structural and to do with the shape of the UK economy, particularly its over-reliance on financial services. Some are to do with social and cultural factors, particularly the culture of risk aversion which has enveloped our society in the recent past. One of the main dangers as we creep out of the recession is that the lessons we learn may make us even more risk averse at a time when boldness is at a premium.

A new report from the Confederation of British Industry (CBI) for example predicts that businesses will adopt ‘a more balanced, less risky pathway to growth’. This may seem sensible in the aftermath of a recession, except that it contains the wrong assumption that it was risky behaviour which created the recession in the first place. This has now become the default position of those who have tried to explain the recession, that it was the product of risky behaviour in the financial sector.

It is vital that we do not allow this interpretation to remain unchallenged. The bubbles in the financial and housing sector which preceded the recession were the product of a stagnant economy, not caused by risky behaviour. Real productive investment in the UK and other western economies was seen as too long term and risky and has declined in favour of speculation. The bankers were responding to a demand for risk free investment with high returns hence the boosting of both the housing sector, seen as a one way bet, and the slicing and dicing of investments to spread the risk.

The second area in which governments can affect what happens in the economy is in the areas they have direct control over such as education, civil administration, health and infrastructural projects. The main danger here is that without an overall plan of how to revive the economy, decisions will be short term  and based on trying to placate public opinion. Here we can see the dangers of the weakness of the political class at its most exposed. Without the confidence to make long term decisions, which may be unpopular, the decline of the UK threatens to become a self fulfilling event.

What all these factors mean when put together is that collectively there is little belief that we can become a dynamic economic nation once again. One can sense that behind the flip-flopping of Cameron on the economy lies a genuine lack of belief that major change can be effected. In the absence of  clarity on this issue it is very unlikely that real political leadership in the form of agenda setting will emerge.

Advertisements

Actions

Information

2 responses

15 12 2009
What next for UK banking? Not learning from the past apparently « UK After The Recession

[…] 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 […]

12 04 2010
Ten questions to ask your candidates about the UK economy « UK After The Recession

[…] 10. What do you see as the cause of the economic the crisis, greedy bankers, greedy people or the over reliance on the finance sector? […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s




%d bloggers like this: