The ‘battle of the economists’-sound and fury signifying nothing

22 02 2010

It has been said that the politics of academia is the most vicious and bitter form of politics, because the stakes are so low. The phrase comes to mind when considering the exchange of views between different groups of economists this week. First a group of twenty wrote a letter to the Sunday Times arguing that fiscal tightening, or cuts in public spending as it really is, should start sooner rather than later. This was jumped on by the Tories as proof that Labour was threatening the long term credit worthiness of the UK. Then today two groups of economists, headed by lord Skidelsky and Lord Layard, had letters published in the Financial Times refuting the first group. Skidelsky and Layard argued that early fiscal tightening would lead to a plunge back into recession. This argument is interpreted as support for Labour.

The onset of the recession has left the economics profession effectively discredited. The numbers of economists who predicted the recession were so small that they are the stopped clock part of the economics profession. If you predict recession for long enough then you will eventually be right. Neither the free market economists or the neo Keynesians have any remaining intellectual credibility.

This intellectual paralysis has contributed to a situation in which serious global analysis of the causes of the recession has been inadequate. Most discussions have focused on the symptoms of the crisis, such as the credit bubble, rather than the causes. As a result the current position of most economists on recovery is to cross their fingers and hope for the best.

The current ‘controversy’ over fiscal tightening revolves in effect around whether the small cuts now proposed by the Tories for the next financial year, around £2 billion-a lot of money for you and me but a drop in the ocean for the UK economy, should go ahead or not. That this relatively tiny amount should be so controversial indicates how limited the debate about the UK economy really is. What is even worse is that the wider discussion of the future has been boiled down to how far and how fast public spending should be cut.

In reality all the participants in this discussion know that even if it was desitrable that large cuts in public spending should take place over the next year or two it is not a realistic option. It would require a huge effort of political will of which there is no evidence that it exists. Everybody understands that it ios only the massive supprt given to the economy through support for the banks and through pubblic spending which is keeping the UK economy afloat.

The main underlying worry in all of this is that there is no plan to get the UK economy back to growth. As the Financial Times commented on the spat between economists, there is no alternative to continued state support for the economy. It argued that major cuts now, which nobody is suggesting anyway, would lead to a further contraction of the economy,

It is not clear what forces could offset such a contraction. Easier monetary policy would be of limited use: domestic credit growth is not a route to sustainable recovery and exports are unreliable. At a time when most of the world wants to export its way out of trouble, who is going to buy all those British goods?

In other words the only option on the horizon is to wait for help from the world economy, which is essentially ‘unreliable’.

The dispute between economists is significant only because of its insignificance. The identification of  one side with Labour and the other with the Tories shows just how narrow the differences between the parties are on the central question of the economy.

A version of this article also appeared on Spiked

http://www.spiked-online.com/index.php/site/article/8226/





The Tories shrink before our eyes

3 02 2010

The(Tory) MP was unable to identify many points of difference between the Tory plan and Labour’s proposals to rebalance the economy and put the finances back on to a stable footing. But he stressed the contrast with the government’s economic record – a point the Tories will drive home as they seek to blame Gordon Brown for the recession and the painful corrective measures it has made necessary. Financial Times

Here we are a few months from a general election and it is increasingly obvious that on the biggest issue facing the UK, the future of the economy, the main opposition party has nothing different to offer from New Labour. The Tories are saying in essence that they would manage the economy better than New Labour, but the policies would be the same.

The Tories tried to differentiate themselves last year by saying that they were the ‘austerity’ party. Even at the time I pointed out that this would be both unpopular and also that big spending cuts would be very difficult to implement. Now that Cameron is backing away from the austerity message the Tories are revealed as having nothing to say that could not come from the mouths of Brown or Mandelson.

Why is this a problem? There are two reasons. Firstly, the UK economy is at a turning point. Business as usual cannot be the solution. The financial sector is unlikely to recover its position as the locomotive of the economy. Indeed, as populism continues to rule government’s attitude towards bankers and banking and debts remain unpaid, there may be more bad news to come from the financial sector. Short termism still rules economic policies. There is an absence of both strategic thinking about the long-term development of the UK economy and also the kind of entrepreneurial attitude which is required to lead the UK out of the hole it is in.

Sir John Rose, the CEO of Rolls-Royce, has written today about the potential strengths of the UK economy. There is much in his article to agree with. Yet Rose misses out the key element of  the lack of political leadership that is required to ensure the kind of transformation he is asking for. Which brings us on to the second problem.

In a recent study of British Social Attitudes the percentage of people in the UK who saw voting as a duty had fallen from 64% in 2000 to 56% in 2009. There has been a continuous disengagement with politics and the political process for some years. The recent scandal over MPs’ expenses was both a symptom of disillusionment with politics and a reinforcement of it.  If political parties cannot differentiate themselves on the question of the economy, which is central to everybody’s lives, then there is even less reason to vote.

Finally this seems to sum up the bankers bonus issue as succinctly as anything else I have read on it.

barroom





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.





Does debt matter? Why the Tories are ‘sending a message’

8 10 2009

images1The British political classes are going through one of their occasional bouts of masochism, with party leaders vying with each other on the theme of who can cut public spending faster and more effectively. Spice is added by talk of leaks and secret plans; and ideology by arguing about the balance between tax increases and spending curbs. My own bottom line is that all this is in response to a largely imaginary budget crisis. If we have a normal economic recovery the red ink will diminish remarkably quickly.  Samuel Brittain

Samuel Brittain’s article hits the nail on the head when it comes to the debt question. The UK’s debt is only a problem if you do not believe that the economy can grow its way out of the present recession. Behind the current competition amongst the political parties to be the most bloodthirsty cutters of public expenditure lies the same fear, that the UK cannot become a serious growth economy again.

Tory Shadow Chancellor George Osborne has spoken of the need to regain the confidence of international investors and credit agencies, saying  ‘it was a “statement of facts” that three agencies, Moody’s, Fitch and Standard & Poor’s, had all voiced concerns about Britain’s ability to pay off its record debts.’ If Osborne’s intention is to really cut the UK’s debt then the measures announced so far will hardly affect it. They amount to a saving of only £23bn out of a deficit which will be closer to £200bn. While recognising that his proposals will not solve the debt problem Osborne claims it is necessary to show credit agencies  that the UK is ‘deadly serious ‘ about tackling its debt.

In other words Osborne is ‘sending a message’ to the world in classic New Labour fashion, rather than making efforts to tackle the real problem, which is the expected low growth economy we will have in the UK. In fact Osborne’s speech was almost entirely lacking in any proposed measures to create new areas of growth in the UK economy.

In the absence of plans for growth Osborne can only offer austerity. His way of expressing this  in his speech to the Tory Conference was to appeal to a shared need to accept cuts in living standards. Hence his repeated assertion that ‘we are all in this together’. The Tories have no doubt been encouraged by the lack of any social response to the recession. They must believe that people here are willing to accept real cuts in living standards over the next few years.

Yet there are reasons to think that they may be deluded if they believe that they can push through an austerity programme very easily. Firstly, for most people in the UK the recession has been so far relatively pain free. While those losing their jobs have been hit hard, many of those still working have benefited from zero inflation, low interest rates and cuts in prices of many essential goods. There is little evidence that people have so far embraced austerity.

Secondly most people feel deeply alienated from the political class. The MPs’ expenses affair was an expression of this. The Tories, if they form the next government, may find it very hard to mobilise support for unpopular measures.





The summer is over, what has changed and what needs to change?

2 09 2009

images[6]After a six week break I am returning to the fray, refreshed, reinvigorated and ready once again to try to make sense of the complex economic environment in which we live. The first thing to do is to draw up a balance sheet of what has happened in the intervening period before setting off into the future. So here goes:

1.As we explained back in May, while there are some signs that the technical recession, two or more quarters of negative economic growth, may be coming to an end, this does not mean that our problems are over. The financial crisis has to some extent been stabilised, but not resolved, through the massive and coordinated actions of central banks across the world. However the real impact of the recession is only now beginning to be felt. Unemployment is continuing to rise across the world and consumer spending is falling in most places. Real hardship is being visited on millions as a result.

2. The underlying causes of the recession have not been tackled,although there is increasing recognition in some quarters that this is the case and that we are storing up trouble for the future. The prevailing sentiment is that we should return to business as usual as fast as possible. While many see that there are problems with this approach, in the absence of any alternative plan this view will of necessity prevail.

3. There is an  intellectual void in the sphere of economics which is being filled by the irrationalities of the behavioural economists. The conclusion that many in the elite are drawing from the recession is that the view that the market is rational, which has prevailed for the past thirty years, can no longer be accepted. The problem is, as I argued in my review of a book by leading behavioural economists, that rather than this leading to a search for a more rational way of understanding and managing the economy, many are now saying that this proves that there are no rational explanations for human economic behaviour. This view and its consequences was summed up thus by Gillian Tett,

However, the unpleasant truth is that there is never going to be any complete intellectual system to explain how financial systems should work. ..That is not an easy idea to sell to politicians, voters or even regulators. After all, as Lord Turner points out, a world without a reliable compass is frightening, exhausting and time-consuming to navigate: “For the regulators of the world, once you have accepted that you don’t have an intellectual framework of ‘more market is always better’ you’re in a much more worrying space, because you don’t have an intellectual system to refer each of your decisions.”

4. In the UK the political parties are beginning to prepare for the next election in which the state of the economy is going to play a key central role. This discussion will take place in an  intellectual vacuum, or at best an intellectual climate in which the irrational is celebrated over the rational. The terms of the ‘debate’ will be over narrow issues, such as whether to call cuts in public spending ‘cuts’ (Tories)or ‘tough decisions on spending’ (Labour)

To sum up, we are entering a darker economic period with no intellectual framework nor any effective political leadership to help steer us through it. In these circumstances it is vital that more people focus on trying to comprehend the present as well as working out alternatives to what is on offer. This will remain the focus of this blog in the months before the next general election in the UK.





Who can bring about change? the problem of agency.

17 07 2009

thumbnailCATV6JYWSome readers of this blog have suggested that it has become an unofficial Dave Cameron adviser. In the limited dealings I have had with shadow Tory ministers it is clear that they are thrashing around to come up with answers for the problems created by the recession. But for reasons that are well rehearsed on this blog, the Tories are hardly more likely than Labour to be able to tackle the deep seated problems of the UK economy. The Tories have modelled themselves on the short term, presentational and market research driven approach pioneered by New Labour. They have no coherent plan for the future nor any vision for where the UK should go. In short they are as trapped in the present crisis as the party they wish to replace.

All of which raises a very painful dilemma. If New Labour is done and the Tories represent nothing new, how is it possible to affect the political and economic agenda? In the past there were two ways of thinking about capitalism. One was that the market was fine and should broadly be left to its own devices, with some support from the state. The other was that it could not consistently develop the economy, was crisis ridden and exploitative and should be replaced by some form of socialist society. In the latter case the agency for change was seen as mainly supported by the working class.

The demise of the socialist project has left only the market option on the table for the time being. And now even those who own and run the economy are doubtful that the market on its own can deliver. The need to give huge  amounts of state support to the financial and manufacturing parts of the economy have shaken belief in the market amongst the capitalist class itself. Even the Financial Times ran a critical series earlier this year called ‘the future of capitalism’. The employing class has little confidence in its own system and is open to the suggestion that market led economic growth is dangerous for the environment and damaging to society’s peace of mind.

In that sense it is pointless to try to model any response to the recession around what appear to be the interests of either the working class or the employing class. As agencies for positive change and progress they are, at least temporarily, bankrupt. So what is the point of maintaining a critique of the options on the table if there is no obvious agency for change? I do not have any easy answer to this question. However I think it is important that some people do stand back and try to look at the problems facing society as a whole, to attempt to create some coherent picture within which others can understand what is really going on.

As this is not a narrow class based approach it may mean that some possible solutions appear to be to the immediate detriment of some working people or some employers. For instance, the suggestion that defunct industries should not be propped up by the state. But, in this case for example, it is to the greater good of society as a whole that productive industries replace unproductive ones. Growth and prosperity depend upon innovation and investment in new dynamic industries not old failing ones. Nobody benefits from economic decline. Challenging anti-growth sentiments in society at least put the issue of the need for material progress on the agenda. Any revival of  political activity in any section of society which supported that would be welcome. For the same reason it is also encouraging when people stand up for their own interests and combat attempts to impose austerity.





What’s the plan,man?

15 07 2009

A8XEFT1CAXT4P7TCA1JOBWCCAJXXQ6PCADUCE7FCAE9O5HFCA2AB2C1CA7RY56NCAUP751PCACXR496CAOP464QCA32RQJMCAHWA3EHCABORIQTCA60IOB9CA95NVCGCA2Q5ZWXCAXXBXCXCAOWF5TWCAX8VIECStill nearly a year away from an election and sunk in recession, the UK is drifting through both a political and an economic crisis. Reports from inside the civil service indicate that Labour’s loss of direction is causing civil servants to sit on their hands and wait for a Tory government to sort things out. Yet as Martin Wolf  argues convincingly in today’s Financial Times, the recovery from recession is going to be very hard work.

The UK lacks a strategy for the future or any kind of vision of what we want to achieve collectively. Politics has become short termist and tactical. (The most influential book on Tory thinking is called ’12 Months To Renew Britain’). There are some very important questions which require answers in order to develop a proper long term answers.

The first is, what’s the plan? New Labour had ten years of relative success based on the boom in financial services. Tony Blair now admits they were lucky. The financial services sector is not going to recover to play the same role as it did before. So what does any incoming government think is going to be the driver of the UK economy? And what are they going to do, through tax incentives, infrastructure improvements, educational policies to encourage whichever parts of the economy offer the most promise?

Is it possible or indeed desirable, for example, for the UK or any developed economy to reverse deindustrialisation? All western economies have seen a continued growth of services relative to industrial production. Yet service industries are notoriously people heavy and so tend to have lower levels of productivity.

Is it possible to reverse the trend for the state to play a greater and greater role in the economy?As James Heartfield and others have argued, the role of the state in the UK economy has encouraged flabby business practices and protected weak businesses from going under. Large chunks of state spending go back into the private sector. Is there a better way of doing this or should the state move out of  many of the areas it currently manages?

What is the legitimate role of the state? There are many things the state should be doing, to develop a modern infrastructure or education system for example which it is not doing well enough. At the same time as the state cannot operate on the big issues it seems to want to micromanage our daily lives through interference and intrusion on a massive scale. How can this be reversed? We need to have clarity on these questions when discussing what public spending we need and what we do not.

These are serious issues facing the UK. In the run up to next year’s election they should be the focus of discussion and debate for anybody who is dissatisfied with the lack of vision being shown by the main political parties.