Ten key aspects of developed economies, post recession

20 12 2010

There are times when the ideas of the world’s rulers and the institutions through which they govern are adequate to the needs of the era, and there are times–like the present–when they are not.   Walter Russell Mead

1. The shift in economic weight from west to east has been accelerated by the recession and its outcomes, leading to growing tensions

The latest G20 meeting took place in South Korea, a symbolic recognition of the growing importance of the east both from the venue and from the fact that the G20 itself, containing the dynamic eastern growth countries, is now the main international economic forum. The global imbalances between developing countries which helped to fuel the credit boom remain in place. Tensions over currency valuations between the US and China reflect both the interdependence between the two countries and their long-term divergence.

Low interest rates in the US and elsewhere lead to investment money pouring into China. This continues to stimulate the Chinese economy and promotes exports back to the US. This continues to make US exports less competitive. The US tries to combat this through more stimulus to the domestic economy and therefore the requirement for lower interest rates persists. The US would like China to allow the value of its currency to rise, something the Chinese have resisted up until now.

China is by far the largest holder of foreign exchange reserves, with stockpiles of $2,454bn at the end of June, around 65% of which is dollars – almost 30 per cent of the global total. In addition China holds 22% of foreign-owned US government debt or$843.7bn. As Hillary Clinton said recently in relation to China ‘how do you deal toughly with your banker?’

2   The US remains the global consumer of last resort

While the US continues its slow decline as a global power it remains the only one with a global reach. It also continues to play its role as the global consumer of last resort. 70% of US GDP is consumption based and its recovery from recession is based on increased domestic consumption not exports.

3. Political incoherence is encouraging the pursuit of narrow national self-interest

Most western economies are struggling to get out of the recession. This has led to a breakdown in international cooperation and the pursuit of what Philip Stephens calls ‘a pinched nationalism’ of countries that have ‘lost confidence’ in their future.

As Sean Collins argues

The underlying pressure comes from the fact that the major economies have not seen a robust recovery, and countries are pursuing their national interests, defined narrowly.

In particular the loosening of US influence has encouraged a breakdown in international cooperation between debtor and creditor nations

 4.  The eurozone may buckle under the pressure

Nowhere is the breakdown of political cooperation clearer than in Europe, whose eurozone countries constitute together the second biggest economy in the world. The long-term contradiction between countries whose currencies are linked but which have separate political systems has come to the fore. Germany, which is the main dynamo of the European economy, has now decided it is no longer going to bail out the weaker peripheral countries, the so-called PIGS. These economies can only exist in their current form on the basis of continued economic support from Germany and other large European economies.

This pursuit of a narrow self-interest by Germany could lead to the break up of the eurozone.

5. There has been insufficient restructuring of developed countries to create the conditions for growth

Wikileaks revealed that even the Governor of the Bank of England, Mervyn King, recognises that the UK economy has not been restructured enough to create the conditions for a new growth spurt

As Sean Collins has argued, even the kind of limited restructuring that General Motors has undergone in the US, under US government control, is both atypical and probably inadequate to return GM to its dominant position in the car market.

6. Big corporations are saving not investing

The main outcome of the recession for big western corporations is that they are sitting on piles of cash. In Europe cash now comprises between 9 and 10 per cent of assets on balance sheets and may break 12 per cent in two years time, a third higher than the peak of the previous cycle. As the graphs below illustrate, this cash hoarding is at the expense of investment

The opportunity to take advantage of the new growing markets in developing countries is being spurned due to conservatism and risk aversion.

 

7. Austerity not growth is the watchword

With the exception of the US all western economies are being subjected to austerity packages. While these are being justified on the basis of the need to appease global bond markets there is no doubt that governments really have no idea of what else to do. George Osborne, the UK Chancellor of the Exchequer, recently had to abandon plans to produce a white paper on growth because there were insufficient ideas to put into it. Austerity is the only policy they have, which leads to a decline in domestic demand, a dampening of international trade and probably an increase in protectionism.

8. The recovery,such as it is, is jobless

Austerity policies and the absence of investment has led to a situation that while most economies are now growing slowly, this has not led to an increase in employment.

9. The debate about our economic future is painfully inadequate

Both free market and neo keynesian economists have been discredited by the recession. Economic debate is now characterised by its pessimism, and a general belief that slow or even no growth in the west is both impossible to avoid and in some cases desirable. The door has also opened wide for those who have psychological explanations for economics, the behaviouralists. David Cameron’s attempt to switch the focus of the economic debate from ‘growth’ to ‘happiness’ is a sign of how bankrupt the economic debate has become.

10. The absence of opposition leaves considerable room to manoeuvre

The absence of any political opposition or economic alternative to austerity means that the elites have plenty of room to manoeuvre in managing their domestic economies: indeed, there is even some popular support for austerity measures.

On that note I would like to wish you all a merry Xmas and a very happy new year!!

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Our aim should be a growth economy not a balanced one

17 11 2010

 * This is a seconding speech I made alongside Richard Lambert from the CBI against the following motion at this debate organised by the Royal Academy of Engineering, 

 This House believes that a manufacturing sector accounting for at least 20% of GDP will provide the only basis for a balanced UK economy

Many myths have grown up around the problems of the UK economy post recession-not the least of which is that the recession was apparently caused by some unemployed scroungers in Newcastle. But before we consider what kind of economic policies we need and how we should shape the future we need to avoid falling for the myths rather than the facts.

For example, we all know that it was the financial services sector that provided much of the dynamism of our economy in the past 15 years. It was the fastest growing sector, the motor of the economy, and had enormous positive knock on effects for the rest of the economy, not the least of which was to enable the state to create nearly a million new jobs. Even today, post recession, living standards in the UK are far higher than they were 15 years ago.

The financial crisis has been interpreted by some as a sign that we should look for a different way of organising the UK economy, hence today’s debate. There has been a growing distaste for the financial services which created prosperity, summed up by Vince Cable’s attack on the ‘spivs and gamblers’ in the city, and a more general sense that greed is to blame for our problems.

But it would be a mistake to conclude that what has happened over the past two years was because of an over reliance on the financial sector or the product of outrageous greed. The problem with the financial sector was not its dynamism per se, but that ultimately it fuelled a bubble which then burst-as bubbles tend to do. The problem was  not the dynamism which it brought to the country, ie the growth itself -which most of us enjoyed the benefits of- but the fact that it was based on a credit bubble and was ultimately unsustainable. Had the bubble not burst we would I am sure all still be happily doubling up on our credit card bills and inflating our house prices.

The point is that it would be a mistake to infer from the financial crisis that any one type of business would be necessarily immune from this kind of bubble. Currently it looks as if there is a bubble emerging in the BRICS, the developing countries, as huge amounts of money are moving into manufacturing and other businesses there. We saw in the recent past how a bubble emerged around the digital industry at the time of the dot-com boom and bust. There is nothing about the specific character of any  industry which can guarantee stability or prevent bubbles. The problem of investment bubbles is a general one, outside the scope of this debate

Secondly, the idea of balance is itself problematic, as it implies that balance is more important than growth. The concept  of a balanced economy has two major problems. Firstly it runs against the tide of globalisation. The world economy has become globalised and operates increasingly through an international division of labour. Countries which develop a particular area of expertise, such as the Finns in electronics or indeed the UK in financial services, can then sell their products globally.

Secondly, balance also carries connotations of the status quo ante, of going back to some prelapsarian state  when the making of things rather than money was virtuous, almost a romantic idea of how economies work. At this stage it is far more important for us to be trying to identify what we can bring to the world market in a better way than our competitors, to identify what can provide the engine of growth we need to break out of the current stagnation. Balance also contains within it the idea of sustainable growth, code for a slow or even stagnant economy. Consciously or unconsciously it is an endorsement of the lack of dynamism of our economy and offers only a further diet of austerity.

Of course, it may turn out that manufacturing can play this locomotive role , or the digital sector I work in and which the Coalition Government is very keen to push, but it might also continue to be the expertise we have in financial services, on a non bubble basis. Or indeed it could be a combination of one or other of them.  Indeed, I must confess an enthusiasm for engineering more generally, I would certainly like to see more large-scale infrastructure projects being backed by the state for example.

To sum up, it would be a mistake to put arguments for promoting manufacturing in order to achieve balance in front of arguments for growth. We need to focus on value, however it is created. Better a one-sided growth economy than a balanced stagnant one.





Austerity blues or going for growth?

20 10 2010

The discussion dominating public debate about how far and how fast we should be cutting the fiscal deficit is a giant displacement activity, which has dangerous consequences. The real problem facing the UK, and other western countries, is how to regenerate economic growth.

Whenever there is a sharp economic recession,  governments respond by artificially stimulating demand in the economy, through increasing public spending, interest rate cuts or tax cuts. Once the crisis starts to recede these emergency measures are gradually withdrawn. Almost all of the current public debate about the economy is about the speed of withdrawal of the stimulus. Nobody knows what the right speed is so this one will run and run, at least until the economies are back to normal.

However, it is what constitutes normal in this regard that we should be most interested in. Most western economies have seen real economic growth rates stagnate over a long period of time. Indeed it is this very stagnation which helped to fuel the spectacular credit boom that ended, at least temporarily, two years ago.

There are two ways in which the current preoccupation on cutting the fiscal deficit is dangerous. One is economic and one is social. The economic danger is that by focussing on public spending cuts we are ignoring the need for the state to actually invest far more in key areas of the economy than is the case now. The state plays a pivotal role for example on giant infrastructure projects which private business shies away from. In the UK this includes amongst other things new roads, railways and nuclear power stations. An obsession with cutting public spending does not create an atmosphere which is very conducive to more long-term spending commitments. Indeed it is often the longer term projects which get cut first as they have a smaller political constituency to offend.

The social danger is that the focus on cutting public spending is incredibly divisive and demoralising. Most people in the UK are now indignant either about how far their benefits are going to be cut, or why the benefits of others are not being cut more. While this creates short-term divide and rule advantages for the government, as people are blaming each other for what is going on, it has longer term dangers. An introverted obsession with minor changes in universal benefits or the funding of education does not help us address the bigger problem of how to inject a shot of dynamism into the UK economy. We are not yet asking the right questions about the future of the UK. If all our energies are devoted to holding on to meagre state benefits, rather than working on the bigger prizes that real economic growth can bring, then there can only be more stagnation to come.

*This blog also appeared in The Independent

** I will be chairing a debate on this subject at The Battle of Ideas next week





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 ***





What next for UK banking? Not learning from the past apparently

15 12 2009

uk after the recessionI was at this event yesterday jointly organised by the New Statesman and Barclays Bank and addressed by representatives by the three main political parties. John Varley, the Chief Executive of Barclays Bank, began by arguing that banks should adopt more social responsibility, by which I think he means not to get into the same mess as last year again.

Two things struck me from the discussion. The first is that there is hardly a cigarette paper’s difference between the three parties on the issue of banks or by implication in their understanding of the recession. They all supported the populist tax on bonuses (described privately to me by one senior banker there as ‘puerile’). They all agree that there should be more competition in banking, better management of risk  and better regulation. One wonders yet again why there are three parties when there are virtually no policy differences between them. The cosy atmosphere was upset only marginally by John Snow asking why no bankers were in jail yet.

The second problem is that in this discussion, supposedly about the future of banking, there was disappointingly no discussion about the role that banks could be playing in the regeneration of the UK economy.  The whole discussion was about  not repeating the mistakes of the past rather than tackling the problems of the future. Lord Myners, Labour’s  Financial Services Secretary to the Treasury, mentioned in passing that there no longer appeared to be a blockage in banks financing business, although the cost of credit was perhaps too high. The banks say that there is less demand for credit from business. If there is little demand for credit this should warn us that the economy is unlikely to see a fast recovery from the recession.

The main lessons 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 ways of making money through apparently safe new financial ‘products’ rather than through investment in apparently riskier new industries and new technologies.

The government now effectively controls two of the major banks in the UK. It would be a good idea if it could enter into some major planning exercise to encourage investment from these banks in the kind of infrastructural projects that the UK desperately needs. It would also be a good idea to encourage these banks to set more investment aside for innovation and those areas of the UK economy which have the most promise.

None of the parties is facing up to the real problem facing the UK economy, what is going to be the engine of growth if financial services does not recover its dynamism, a prospect which appears to be receding all the time. Banks have a role in solving this problem, but the leadership has to come from politicians and there is precious little sign of that at the moment.





Democratic reform and the Titanic

1 06 2009
Asset bubbles + zombie political parties = ?

Asset bubbles + zombie political parties = ?

The news that the last survivor of the Titanic, Lillian Gertrud Asplund, has died reminds us that rearranging the deckchairs on that doomed vessel has since been a metaphor for wasting time on trivial things while disaster looms. The current discussion on democratic reform falls into that category. Whatever may or may not be the merits of proportional representation, the discussion about them at this point is almost entirely irrelevant to the real problems we face. The debacle over MPs’ expenses is partly the product of underlying anger about the recession, partly a response to politicians lecturing us about personal morality for years, and partly their own fault for making greed the official cause of the recession itself. These are all symptoms of a political crisis and not causes.

These contingent factors have precipitated a crisis in public confidence in the parties. But the bankruptcy of our political culture is the culmination of a long process of deterioration in politics, not the cause of it. The political parties have had their political blood drained away over the years: zombie parties propped up by bubbles in the economy

The problem of the emptiness of politics is not going to disappear simply because we vote for MPs in a different way. Neither is it right to see this crisis simply as a distraction from dealing with the economy, as the head of the CBI reminds us today. It is the crisis of politics that has led us into this recession and that has also caused the weak and vacillating response to it. The recession has exposed the problems for all to see and it is this public exposure that is now bringing down the political parties.

The second part of Sean Collins’ excellent essay on the difference between the 1930s Depression and today ends by making the point that the US President FD Roosevelt, whatever his failings, at least tried to attack the cause of the Depression in a bold and experimental way. This kind of openness to experimentation does not mean making Esther Rantzen an MP, it means throwing off many of the conservative ways of thinking and operating that have become part of our way of life.

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Politicians pay the price for the recession

11 05 2009

Since the recession began, it has felt to me as if economics was coming into line with politics. What does this mean? Since the collapse of the left in the 80s the sphere of ideological disputation in political life has diminished consistently. Politics in the UK has come to be defined as a narrow contest between parties who disagree on very little and who conduct their politics via market research led focus groups. The idea of politics as a place where there is a battle of leadership to determine what direction the country should be going in has faded away. Instead, we have an increasingly personality led and cliquish political class which has shifted to the margins of what most people feel is important in their lives.

Over the past ten years, political leaders, Gordon Brown especially, made a virtue of their support for the expansion of financial services, the housing bubble and the vast increase of credit based consumption . The absence of any alternative to this approach did not matter as long as the bubbles kept inflating.  Brown was able to claim that he had brought an end to boom and bust, although unfortunately as we now know the boom was built on the expansion of credit, paid for by the Chinese and others.  Growth did not happen because the UK had developed a new productive economy, but because the Chinese and other productive developing countries could not find a domestic use for their profits.

The collapse of the financial bubble revealed that the UK economy had not been built on solid ground, rather, as Tony Blair has since admitted, Labour was lucky. Its rule coincided with the availability of cheap credit. The narrowness and introverted character of our political life combined with a blind faith in the market,  encouraged a lack of proper examination of what lay behind the financial and housing bubbles.

Politicians here and elsewhere reacted with shock and disbelief when the recession began.  For a long time they could not believe that their faith in the explosion of financial services could have been wrong. When they did begin to react they tried to avert attention from their own complicity in what had happened by trying to pin the blame on greedy bankers.  This should have been the time to launch into a proper debate about what went wrong and to try to work out a new approach to the economy. Instead, having blamed ‘greed’ for the recession they set themselves up perfectly for their current humiliations over their expenses.

Now we are in a very dire state. We have a political class which is lacking in ideas and credibility. We have an economy which has lost its driving force. What can we do about these problems? These and other issues will be at the core of the discussion at the Battle for The Economy next weekend.