No such thing as ‘business as usual’ after the recession

13 07 2009

A4RV6XKCAPJ8QUICAODS7G9CAIJ0SH9CAIS17XWCA94EVAWCA883A8BCAAWO43PCACETBCZCA43UX79CAPYACCWCA13AZ5NCAFG0QZOCABS0UF6CA42JYAJCA4NPJXWCAACY2YSCAEDRHC2CAX66BIWCAQQIXPPIn a post last week I argued that the talk of green shoots in the economy was nonsense. The hopes of a return to ‘business as usual’ are slim for reasons explained there.  A report in today’s Financial Times bears out the more likely scenario of a period of stagnation. The general hope is that the regime of low interest rates brought in after the banking crisis will encourage more economic activity. There is little sign of this happening yet. Yet this seems to be the total strategy of our political class.

In the same Financial Times report an analyst had the following to suggest about the future;

Financial services and the City of London will take the lead. There will be takeover bids, management buy-outs and innovative investment products,One of the biggest areas of financial engineering will be how to get around the 50p tax rate.

How grim does that sound? The phrase ‘innovative investment products’ sums up everything that is weak and wrong about western economies. Rather than focussing on productive investment in new industries the search is on for new and better ways of making money out of financial instruments. It is all about reflating the financialisation bubble by finding new asset classes which can be leveraged.

Yet this ‘business as usual’ approach is all our political leaders have to offer. The real problem now lies not so much in the economic sphere, but in politics. Last week’s G8 summit had little to say and nothing to do about the recession. We appear to have entered a period of policy drift towards the economy, at least in the west. Stagnation in the economy and stagnation in politics has at least a silver lining. It should open a space to debate new and better ways of thinking about our economy and how it can be improved.

Vauxhall Motors- my part in its downfall

3 06 2009

Vauxhall cars



                                                                                                                                                       General Motors has gone bankrupt and is nationalised; its UK subsidiary, Vauxhall Motors may very well be in trouble.  This news reminds me of my own part in this historical drama.  

Life on the factory line

In the winter of 1969 I worked for six months on the nightshift at the Vauxhall Motors factory in Dunstable. Having just left school and after a failed attempt at becoming an accountant, I decided to set up a music promotion business. Along with an old school friend we decided to raise the capital by working at Vauxhall’s for six months and saving all the money.

Vauxhall assembly lineA brief induction later, I found myself on the engine track with a rubber mallet in one hand and instructions in the other.  My job was to bang a cork seal into a slot every time an engine came by. I hadn’t the slightest clue what the purpose of the seals was and only a vague idea of how the internal combustion engine worked.  And that was about it: the track prodded the engines along and I kept banging the cork seals in. Sometimes the seals did not go in straight, but nobody ever seemed to notice. There were rumours of  a ‘quality control’ unit somewhere in the factory which sorted these things out.  It was too noisy to talk to anybody else and the other workers were too far away up or down the track to make it worth the effort. If you wanted to use the toilet you had to put up your hand and wait for a charge hand to come and relieve you, so to speak.

Eventually I found that the best way of dealing with the tedium was to escape into a kind of dream state. Occasionally it all got too much for somebody along the line and a spanner, often literally, would be put in the works.  The track would come to a halt and we all had a sit down and a chat. Most of the men who worked there were doing it because they had failed at something else. Very few had been there for long or were planning to stay. When demand waned and the track was stopped we were all given a paint brush and a pot of paint and told to paint the factory (I was not shown how to do that properly either). 


Less of a mollusk, more of a man

Working on the factory line was not the worst job I have ever done and the money was good.   The most remarkable thing was that an untrained, unskilled  and uninterested person like me, could play a role in the production of cars. This is the beauty of the system of mass production which ruled the industrialised world throughout the 20th century.  John Kay in today’s Financial Times disparages this type of production thus:

On an assembly line, barely skilled workers would be employed to manufacture cars… Mass production and piece-rate incentives created a workforce with little pride in the quality of the product.

But he is missing the point. It was precisely because of the way that production was organised that enabled workers to slot in with little training, and which gave opportunities for many to find jobs they otherwise would have struggled to do.  It also enabled mass production and mass consumption of goods, like cars, which would have otherwise been beyond the pockets of most people.

Karl Marx made a similar point a long time ago in quoting the feelings of one factory worker he met;

I never could have believed, that I was capable of working at the various occupations I was employed on in California. I was firmly convinced that I was fit for nothing but letter-press printing… Once in the midst of this world of adventurers, who change their occupation as often as they do their shirt, egad, I did as the others. As mining did not turn out remunerative enough, I left it for the town, where in succession I became typographer, slater, plumber, &c. In consequence of thus finding out that I am fit to any sort of work, I feel less of a mollusk and more of a man.

Of course it is far better that these kind of processes are more mechanised now in advanced production.  This frees up labour to work elsewhere. But it would be wrong, as John Kay, does to implicitly sneer at the same kind of mass production which is still taking place in China and other developing countries. Kay says;

Mass production is now an activity for low-income, low-cost locations.

Chinese factory workers have often come from back-breaking peasant subsistence farming. No doubt they too are feeling less like mollusks and more like men.

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Barriers to innovation and change

22 05 2009

My closing speech at the Battle for the Economy conference

Taking risksWe have to frame this discussion within a cultural and a political context. Our society has become tremendously risk averse at every level. Common sense tells us it is unlikely that we can create a more dynamic and innovative economy when we are afraid to send our children to the park on their own, and how likely are these over protected children  to become confident risk takers as they grow up?

This may seem too much of a generalisation, but if you look at the specifics of what is happening in our economy you can see the links.

Take first of some of the better commodity producing  parts of our economy, the bits which actually make new things. Foremost in these are aerospace, pharmaceuticals, bioscience and energy. Each of these industries has been subjected to intense criticism for their supposed threats to us as consumers or to the environment. The aerospace industry is held responsible for global warming , as is the energy industry. The pharmaceutical industry is held in deep suspicion of selling us drugs which cause more harm than good. The biosciences have been held back by fears of Frankenstein food amongst other things. Many of these negative sentiments have been allowed to go unchallenged by our political leaders, sunk as they are in the mire of market research led policies.

How likely is it that these industries can attract the best and brightest young people to work in them or the support they need in universities or from investors when they are held in such low esteem?

Almost every time a crisis has arisen in public confidence the instinct of our political leaders has been to cut and run: Tony Blair over the MMR scare and nearly the whole political class over nuclear power and GM food. This has helped to create a lack of trust in science  and an irrational approach to what are the most exciting areas of development in medicine and other things.

The lack of leadership has encouraged this mood of anti-science and anti-progress, so much so that when swine flu broke out in a school down the road from me local opinion was divided between those who didn’t believe some scientists’ claims that  it  was a real threat, and those who took heed of this warning, but did not believe that Tamiflu was safe and not a dangerous kin to thalidomide, for example.

Secondly, also stemming from our over inflated sense of risk is the belief that economic growth in itself, whatever the source,  is problematic. There are even people who say that recessions are good for us and for the planet. These anti-growth sentiments fly in the face of reality, as all human progress is built on material prosperity. Yet they are very influential.

Thirdly, many of these anti-growth feelings are wrapped up in the idea of the Green New Deal, which seeks that progress and development be restricted to areas that can be proven to do no harm to the planet. This narrow criterion threatens to divert investment down narrow channels and hold up progress elsewhere.

Any threat to the environment or indeed any other challenge we face, is best dealt with by encouraging scientific and economic development on a broad front. Often scientists and technologists come up with solutions to problems they were not themselves originally looking for. To narrow down the areas of scientific endeavour too much risks those serendepitous discoveries.

Even on the terms of alternative energy itself, encouraging economic growth offers the best way forward. China creates 16% of its electricity through renewable sources, compared with 4% in the UK. This is  because China ‘s demand for energy to fuel its rapidly growing economy is such that it is prepared and able to experiment and innovate on a grander scale then we are here.

Finally, in the UK we have lower than OECD levels of both VC investment and R&D, but this is not because there is an absolute shortage of investment money available. Rather, risk aversion is what dominates large investors. The roots of the financial crisis lay in the fact that vast sums of money were recycled through financial instruments with a view to spreading and avoiding risk, incredible as it now seems.

There may be a case, as people like Lord Drayson are arguing, for diverting more of our State resources into encouraging innovation, but science and innovation need to be unwrapped from the risk aversion which surrounds and infuses them at the moment. Perhaps some of the money which is going into authoritarian measures such as ID cards, or the extension of CRB checks could be diverted into encouraging productive investment instead. In other words, this is a politicial and cultural problem about priorities, not an economic one, and so it needs to be tackled at that level.

It is clearer than ever before that there is a close connection between the failures of political leadership and the problems of our economic set up. You cannot tackle one without the other. The good news is that unlike, for example, a cure for cancer, the cure for our political problems lies in our own hands in the here and now.

Michael Martin and greedy bankers, the search for scapegoats continues

20 05 2009

Latest casualty of UK recession politics: Michael MartinApparently, the decline of our political parties is down to the Speaker of the House of Commons, Michael Martin; and we already know that the recession was caused by Fred Goodwin’s exorbitant bonus payout.  Now that we have rounded up, or at least identified the culprits of the dual crises of the economy and politics we can breathe easily.  Or so the story goes…

Of course this is nonsense. Nothing has been less edifying over the past six months, during which the recession has gained momentum, than the search for scapegoats. The recession was not caused by greedy bankers, but by a fundamental imbalance in the world economy which came to a head in the financial sphere. The crisis over MPs’ expenses is a largely self-inflicted predicament; as soon as politicians laid the blame for the recession on ‘greed’ they set themselves up for a fall.

The search for scapegoats continues to be a hindrance in facing up to the real problems of the economy, and of politics. Public anger over the recession is understandable and it is true that our leaders , both in the political and the economic realms, should be called to account. However, scapegoating individuals seems to me an attempt to evade true accountability and in the process we are making little headway.

Say no to the politics of austerity

1 05 2009

Conservative leader David Cameron at a party conference, after delivering his 'age of austerity' speech

David Cameron has now formally identified his party as the party of austerity. He went even further in his speech to the Conservative Party Spring Conference by claiming that we are now in an ‘age of austerity’. He has identified four things that an incoming Tory government would do:

First, a return to traditional public spending control. Second, a new culture of thrift in government. Third, curing our big social problems, not just treating them. And fourth, imagination and innovation as we harness the opportunities of technology to transform the way public services are delivered.

Open season has been called on public spending. Politicians and media commentators have begun a feeding frenzy about which bits of the public services need to be cut first. There are calls for public sector pay cuts, ending public sector pensions, cancelling Trident and so on. 

But there are two things to consider here. Firstly, why are we suddenly in an ‘age of austerity’? We are in a recession, no doubt. But recessions come to an end. Why are we not in ‘age of economic opportunity’ or ‘potential economic growth’. After all, technology and science are taking us into new and ever more productive ways of making things and communicating ideas. The instinct of our political leaders to don the hair shirt at the first opportunity shows their own lack of confidence in creating a positive vision for our society.

Secondly, we need to take a step back and consider what we really want the state to do and what it would best be left out of before launching into a ‘cut this, cut that ‘ debate based on the prejudices of whichever commentator we are listening to.  Politicians are left floundering at present because they have got used to delivering policies based on focus groups rather than on any politicial vision for our society.  In a crisis such as the one we face leadership is necessary to lift people out of a narrow focus on the here and now.  The instinct of Cameron and others is to race for the lowest common denominator, hence the ‘age of austerity’. 

There is no doubt that a review of public spending priorities would be a good thing, there are some state activities which we could well do without. Take the new Independent Safeguarding Authority which at the cost of £84 million will  safety check 11 million adults who have contact with children thus exacerbating mistrust between adults and children even more than is the case now.

The question of the role of the state is one of the key issues we will be debating at the May 16 Battle for the Economy Conference.

Every recession is different

29 04 2009

This is the message of Sean Collins’ excellent new essay, The ‘credit crunch’: another Great Depression?  where he looks at the difference between the slump in the 1930s and the recession today. As he quite rightly points out, every recession is different and therefore demands a different approach in terms of a resolution. Collins lists the following aspects of this recession which mark it out from the 30s: 

1) As the post-war boom ended, the major economies encountered significant problems of stagnant profitability in productive industries. These problems were not fundamentally addressed by the recessions of the 1970s, 1980s or the early 1990s, and remain to this day. Extreme examples of the holdover of unprofitable businesses are the American car manufacturers GM and Chrysler.

2) As the economy grows, so too will the credit and the financial sphere. However, a trend in the major economies is for this sphere to grow at a faster pace than the real economy. Especially noticeable since the 1987 stock market crash was the trend for stagnancy in production leading to surplus capital, which found outlets in an even more extensive expansion of credit and a greater development of (and reliance on) finance as an income-generating area. This development explains the stock market and housing bubbles, as well as the proliferation of financial instruments.

3) A turning point was the end of the Cold War in the late 1980s, which, among other things, lessened international tensions and weakened labour movements. In the global arena, we see greater export of capital and goods from the developed countries, and the expansion of production in emerging markets. A significant development is the opening up of new points of production in China and other parts of Asia.

4) The easing of tensions following the end of the Cold War also gave the market system much more room to manoeuvre, without the need for destructive, cleansing recessions. This allowed capitalism to survive without traditional boom-bust cycles, otherwise known as the ‘Great Moderation’ and ‘SAD’ (stable, anaemic, durable) period. Many have welcomed that recessions became milder and less frequent, but the downside was that growth was muted. Another self-imposed constraint in this period are ‘green’ measures that restrict expansion. 

5) The wide expansion of credit, including debt-fuelled consumption, was not sustainable. No one could anticipate when the limit of the credit system would be reached. But now we know: it was precipitated by the US sub-prime crisis, with domino effects across finance and into other sectors.

6) The problems in the productive sphere in the major economies continue today (and arguably more in the US and UK than in Germany and Japan). The ‘deleveraging’ effect from the credit crisis has not fully played out, and is likely to be destructive. In particular, the fallout from this severe asset-based recession will now curb both key drivers of previous 10 to 15 years of economic activity: bank lending/financial activity and consumer spending, leaving a question mark over future sources of growth.

Read this alongside Gavin Poynter’s analysis of the UK economy and you get a very compelling case for the specificities of the problems we face.

At The Battle for the Economy conference in London on May 16 (2009) we will be attempting to tackle some of the issues raised by Sean and Gavin. Lazy comparisons with the past are out, as are false hopes that the underlying problems will just go away.  Our politicians are ducking many of the central issues and at best they are offering us a future of austerity – it will be a great discussion so buy your tickets now.

Sharing out the misery

22 04 2009

A recent study by Keep Britain Working has found that many workers have responded to the threat of job cuts by proposing that their own pay and benefits should be cut in order to save the jobs of others.  While I have no idea how sound the methodology of this survey is it does chime with anecdotal evidence.  How can we understand this apparently altruistic response, for which one struggles to think of a historical precedent?

There is a positive element of solidarity in not wanting to see your colleagues lose their jobs.  Perhaps there is even the fear that if you accept the redundancies of others then you may well be next.  However, whilst in previous recessions there has been a similar and quite strong tendency to fight for the defence of jobs, in the past people simultaneously fought to defend wages.  One need only go back to the UK Miners’ Strike in the early 80s to see that.  During this period, workers tended to focus on forcing employers to not make redundancies, cut pay or close businesses.  It would seem then that the virtual elimination of organised labour as an effective force in society today plays a significant role in fuelling a widespread mood of acceptance that cuts have to be made somewhere for us all to survive.

The prevailing popular reaction to the recession in the UK has been passive acceptance with underlying anger, where the anger has been directed mainly at bankers or foreign workers.  Very little active hostility or organised resistance has been directed at the government or at employers.  This recession is increasingly being seen as the product of greed in the City and perhaps also greed in general.  In light of that, we can see how the willingness to take cuts in living standards is the flip side of this diagnosis, in the sense that people now feel that a period of austerity is a necessary antidote to the age of greed.

The unwillingness of people to fight for what is in their best interests, which for many of us means the maintenance or improvement of living standards, shows how low our self-expectations have become.  Current discussion about the public sector and possible cuts in public spending will now take place within this milieu of virtuous and necessary austerity and prudence, in no small part influenced by our modern-day preoccupations with what is good for the environment. 

Perhaps it is time to focus our efforts elsewhere and create a different agenda which puts development and growth at the centre of our discussions on the recession, the economy and the future.  Let us put our time to better use and quit trying to work out how best to share out the misery.