Can the market (or the government) deliver fast economic recovery?

1 07 2010

For the past 30 years, the economy has been driven by public sector, finance and housing. So what will take their place? The strict answer is that nobody needs to identify where future growth will come from — that is the whole point of a market economy. Provided the cost of money is low enough to provide cheap capital and ample incentives for entrepreneurship, new industries will arise to replace declining sectors.   Anatole Kaletsky in the Times

Kaletsky was writing prior to a day of discussion involving the government and the heads of 100 or so top UK enterprises on what needs to be done to revive the UK economy.  It is quite unusual in the UK for pundits to openly state their belief  in the power of the market, unaided, to bring strong economic growth. Bear in mind that the main growth area of the UK economy in the past 10 years was the public sector, not the private sector, funded by a combination of taxation of the financial bubble and debt.

Why should the market succeed now, when it has failed in the past? The conclusions of the top CEOs at the Times conference were summed as follows, what the UK needs are:

International tax competitiveness

Financial stability

Investment in infrastructure

Education and training for the low carbon economy

Deregulation and labour market flexibility

It would be hard to find a group of businessmen anywhere at any time who did not produce exactly this list of priorities. Lower wages, lower taxes and less red tape figure high on any businessman’s wish list. Of course, this begs the question of how the infrastructure projects and better educational standards also requested would be paid for, as infrastructure and education are almost always executed by governments and paid for out of taxation. Financial stability, given the interlinked nature of the world’s financial system, is not really within any government’s gift, as we have had amply demonstrated over the past two years.

The problem with this list is that it does not address the specific problems of the UK, and other western, economies. The question of what is going to provide the motor for growth in the UK economy, for example, is a question well worth asking. If the only answer is that the market will provide then we have cause for concern. As I and others have argued before, in the UK  market capitalism has proved to be heavily dependent on the state for its survival. In fact, one of the most positive things to come out of the discussion was George Osborne’s recognition that the UK government should be positively assisting sectors of the economy which show potential. This is in contrast to Vincent Cable who is going out of his way to say there should be no return to the 70s policy of ‘picking winners’.

On the question of infrastructure, it was disheartening to hear that the government has decided to axe the Infrastructure Planning Commission which was set up last year in order to shorten the planning process for large infrastructural projects. It appears to have become the victim of nimbyism from Tory MPS who fear that their rural constituencies will have nuclear power stations and high speed railway lines imposed on them. The coalition remains lukewarm at best about major infrastructural projects such as new nuclear power stations and high speed railways.

The government now claims that its fiscal austerity package will lead to more jobs rather than fewer over the next five years. Public spending cuts will lead to hundreds and thousands of job losses and inevitably weaken the economy.  It is taking a huge gamble that the private sector can pick up the slack. There is no evidence of any upsurge of entrepreneurialism or appetite for investment in new industries in the UK. If the state is not even prepared to take the lead in pushing through modernisation of the UK infrastructure, something which nearly always requires state coordination, it does not bode well for leadership in other areas of the economy.

Over the past two years economic issues have dominated politics in a way not experienced since the 80s. The world’s financial system has been shaken and the weakness of many western economies exposed. Despite all of this, what little debate there is on the economy remains rooted in the past. The only area for discussion appears to be whether fiscal stimuli should be withdrawn now or later, a rerun of the debates during the recession of the thirties. Yet we all know that the thirties recession was only finally resolved through the massive destruction wrought during world war 11, not through any economic policies.

*** This blog will be taking a break from now until the end of the summer ***