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 ***

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4 responses

6 07 2010
Neil Craig

“For the past 30 years, the economy has been driven by public sector, finance and housing.”

The public sector isn’t a driver of the economy but a brake since it produces nothing, indeed has negative productivity. Housing has been massively restrained by the aforementioned public sector. Without “planning” restriction we could be mass producing modular housing at 1/4 of the present cost. Financial services do produce some real if intanhible wealth.

The market can easily deliver fast economic growth – after all it is producing 10% growth elsewhere – if government would just get out of the way & let it. The market would be building lots of nuclear power plants if allowed giving us electricity at 1/4 the present price. It would be producing new technologiesm such as GM, which government suppresses. It would be building the new infrastructure we need & which gets drowned in oceans of bureaucratic inquiries.

There is absolutely no question whatsoever that we could , right now, be experiencing the 10% growth China & India are. Nor is there a single politician who is not totally corrupt who denies it.

On the other hand there is barely a single politician who is not a wholly corrupt parasite.

8 07 2010
JJ Charlesworth

I generally agree with Neil Craig’s sentiment, but I wonder – if it were that simple, why have such measures not been pursued, or why are they so difficult to realize currently?

There has always seemed to be a big mystery at the heart of the debate around state spending as a part of the economy, as it has grown and business become more dependent on it. If it produces no value, where does the value derive from, on which business depends, which is supposed to produce value? Actually, there seems no convincing argument against growing the financial sector as hard as possilbe – after all, the more it grows, the greater the tax revenue that can be poured into public service spendind and the economy of business dependency on state contracts. Admittedly this offers the queasy picture of an economy largely driven by finance tax revenue, with two ‘dependency cultures’ – the public sector consumption (public services staff salaries, healthcare consumption, benefit payments and the rest) and the private sector (outsourcing of contracts). Yet it is rare to come across any analysis that differentiates between sectors of activity according to which are less or more embroiled in the recycling of tax revenue. The UK economy cannot simply be some form of perpetual motion machine, endlessly recyclying revenues – value has to come from somewhere.

Yet there is also an orthodoxy to the idea that the financial sector has ‘grown too big’ which should be challenged. It should not be a case of either/or finance or manufacturing – if the rise of finance is only relative to the stagnation of other forms economic activity, we should be vocal in pushing for more financial activity and revenue, while demanding the same of other forms of economic activity.

But the production of value would be much assisted by exactly the advances Neil suggests – a quartering of energy prices would, for example, catapult the potential for new forms of investment – but only if planning and other regulatory brakes are substantially rethought; the Chinese build a city of a million people in the time it takes us to decide whether we need one new runway, or a new fleet of nuclear power stations. Clearly this makes a country and its economy slow, unresponsive and undynamic, regardless of its pretensions to wanting new technologies to drive the recovery. it is that lack of dynamism, largely sponsored and policed by the state and those vested interests that profit from the status quo, which is the block to a greater economic recovery – regardless of the form of new economic activity it might eventually take.

5 08 2010
DesB

No real issues with the assertions here, except the rather odd take on the 1930s. What pulled Britain out of the depression (more a continuation of the general post-wwi malaise) was the loosening of the money supply. Observe the growth figures for the period, the end of negative growth & the end of the gold standard are mere months apart!

It would seem that economic orthodoxy was the key to the period, Britain “took its medicine” there & then and the old industries suffered but even when the US economy stumbled in 1937 it barely impacted the UK growth trend that had be continuous since 1933. This also rather vindicates Kaletsky; the source of growth was the unforeseen new industries that sprang up in a climate of easy capital, and a bit of protectionism…

Bringing in the experience of the Great Depression can be informative, but there is a great deal of received wisdom surrounding it, most of which is spurious.

2 10 2010
Neil Craig

JJ I suggest that the answer to the big mystery of why government doesn’t work to maximise economic, or any other, success was answered by Mencken when he said “The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.”

Our government is not run in our interest. It is run in the interests of those already in power, government workers & their assorted lobbyists/cronies. Those in power rarely want a dynamic society where wealth & power are not rigidly stratified & limited. Our government could certainly get out of recession any time it wanted.

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