Happiness is (about to be) overrated

11 01 2011

I have to be careful here. A few years ago I spoke at a discussion on happiness and passed the flippant comment that I had not been happy since 1963 (a reference to Philip Larkin as I am sure you all know). After the discussion I was approached by a man who,  identifying himself as a therapist,  offered to help me with my ‘problem’ of unhappiness.

So to be clear, this piece is not about my own state of mind, which those who know me well will confirm is that of a sunny optimist who can only see the bright side of life. It is rather about the intention of the UK government and others to find a new and better way of measuring the wealth of nations, not through the present measure of growth, GDP, but by adding in some as yet undefined way of assessing the happiness or state of well-being of the nation.

Tim Harford, in his excellent summary of the current discussion, makes the point that all of the information that the government purports to want to find out in its new ‘happiness’ initiative is already available from numerous other official surveys. So, if the information already exists, why has the government decided to make a public issue of surveying ‘happiness’ at this moment in time?

The ‘happiness’ debate is a product of the coming together of two different but connected social phenomena. One is the pervasive sense of ‘limits’ which imbues much of contemporary society, the idea that we are reaching the end of the road of exploitation of the earth’s natural resources, that we need to learn to be more sustainable and less dependent on material growth.

The second is the recession and  the very real impact on our lives, here in the west, of the cutbacks in living standards which we are beginning to experience. When we face a future of stagnant  growth and financial pain how tempting it must be for those in government to try to convince us that growth is not what we need, or indeed that it may even be a hindrance to our happiness and well-being.

I am not suggesting that this is simply a cynical ploy by Cameron and others. They undoubtedly have been influenced, as have many people in our society, by the idea that the value of material wealth is overstated and that we should all be looking to other aspects of our life for solace. (Although, I  doubt that this will lead Cameron and his wealthy chums to forswear their own vast riches along the path to a supposed happier existence.)

It would also be wrong to dogmatically assert that all that matters in life is money. Of course, there are many aspects of our daily life which give us pleasure and a degree of contentment that do not depend on money. Most of us get a sense of well-being from achievement and a feeling of control over our lives. But I am opposed to a happiness index precisely because  those kind of things are not measurable in any meaningful way, they are mainly subjective and often temporary and individualised.

The importance of economic growth and its measurement, in GDP, is that it is measurable. It gives an approximation of how dynamic a society is, how much wealth is being created, how productive its people are being.  Wealth creates possibilities which do not exist otherwise. If you look at the world today the nations which have the most human longevity and the best health are the most developed ones. Generally speaking those countries also have the most stable and democratic institutions and the most flourishing cultural activities. This is because wealth creates spare time and spare cash, time and money which can be used to pursue other things than the mere struggle for subsistence that occupies much of the world’s population even now. Economic development  transforms the nature of work from being dangerous, long and tedious to safer, better remunerated and less time-consuming.

The development of a bandwagon around the ‘happiness’ debate at this time is a tacit recognition by the ruling elites in the west that they have lost faith both in their belief in economic development and in their ability to maintain economically dynamic societies. They would like us all to stop pushing for more, to accept austerity and to learn to love it. It is an acquiescence to stagnation at every level in western society. They would like to encourage us not only to accept this stagnation but to call it happiness.

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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!!





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 ***





Why austerity won’t work

2 06 2010

Before we all put on the hair shirt and make a virtue of cutting public services the question has to be asked, will it work? Will  cutting public spending help the UK economy to revive? Is austerity necessary to keep the creditors, in this case those who lend money to the UK government,  from the door? Or is there something else going on here?

To understand what is at issue here it is first of all necessary to separate out the question of government borrowing from the problems facing the rest of the economy. The current obsession with the government deficit is because the overall amount that the government has to borrow to finance its operations has grown as a proportion of the economy over the past two years. This is due to a widening of the public spending deficit, that is the gap between what the government raises in tax and what it spends.

The main reason there is a higher deficit is that the recession led to a drop in government revenue from tax. As the recession hit, less people paid income tax as they were unemployed or took pay cuts and companies were paying less tax on lower profits. So the immediate question is, now that the economy is coming out of recession why not wait until the public spending deficit narrows again? And why does public spending have to be cut instead of more borrowing to finance the gap until income balances expenditure again?

The answer to the last question is that it does not. There is no reason why the current level of the deficit is any more or less sustainable than a higher or lower figure. In the abstract there is no level of government debt which is unsustainable. In fact Japan for example has had a much higher ratio of government debt for many years than the UK economy has now without it leading to any kind of crisis. People only fear lending money if they do not think they will get it back. The doubts over the UK economy are whether it can grow fast enough to repay the debt.

The fear is that money markets will stop lending to the UK or raise interest rates on their loans to a point where they become unsustainable. But even this fear has to be tempered by the fact that the average length of loans to the UK government is 13 years. This means that only around 7% of the loans have to be rolled over each year and thus being open to hikes on interest rates. There is therefore no immediate danger of the UK government being unable to finance public spending at its current level, even if that means having to pay a higher rate of interest on a small portion of the debt.

So why the obsession with cutting the deficit? Given that the problem was created in the first place by a fall in economic output, would it not be better to focus instead on how to grow the economy back to the point where current public spending is sustainable again? This is where the real debate should be, and where the real problems lie.

Some people argue that public spending is so high that it ‘crowds out ‘ investment in the private sector. In other words that taxes taken from the private sector and spent by the government prevent real investment taking place. There are two problems with this argument.

The first is that there is no shortage on money in the private sector which could be used for investment. The UK’s private sector is swimming in money. Nor is there a shortage of labour, the other necessity for economic growth to take place. Chris Dillow makes the point that adding together all those who could be available for work the real number of unemployed in the UK  is closer to 6 million, and that does not include those who are on incapacity benefit mainly because they get more money. So if there is no shortage of labour and no shortage of capital why can there not be faster growth? This is a subject which we have looked at in detail in previous articles . But suffice it to say that the reasons have almost nothing to do with too much spending in the public sector.

The second problem is that there is a strong case to be made that, as James Heartfield has pointed out, such is the intertwined nature of the private and public sectors in the UK, that lower public spending is likely to impact negatively on the private sector rather than positively. Around £80 billion of government spending goes straight back out to the private sector in the form of government contracts. In addition, the state supports private industry in many ways, through transport, communications, training, education, health and even direct subsidies. In fact, the first round of public spending cuts last week fell heaviest on some of the schemes that Labour had brought in to help promising parts of the private sector.

In the absence of belief in, or any plan for, faster economic growth the focus inevitably turns towards saving. When George Osborne talks about retaining the confidence of those who lend money to the UK he means he shares their lack of confidence in his ability to grow the economy and therefore has to cut consumption instead. But let us not believe that cutting consumption is the only way forward. It is only so if you have no plan to increase production.





Why should anybody oppose public spending cuts, and how?

18 05 2010

Naturally, nobody welcomes having services they benefit from taken away. The bulk of public spending, about 63% of the total, goes on health, education, pensions and social security. Everybody at some time in their lives will benefit from these services. The problem is that the current  level of government spending can only be sustained either by borrowing more money or increasing taxation.

The government, and most economists, believe that borrowing more money would push the country even deeper in debt, which would worry  those who lend us the money so much that interest rates would soar. Eventually, according to this argument, the loans would dry up and we would be faced with default and have to be bailed out, like Greece, leading to even deeper cuts. While we await the specific details of the new government’s plans to tackle this problem it looks inevitable that it will involve a mixture of higher taxes and some cuts in public spending. (For a full treatment of the background to this approach see Sean Collins)

Given the way that financial markets work, looked at in this way it is quite a plausible scenario. So how should we think about what will be in effect an austerity budget that George Osborne , the Chancellor of the Exchequer, will be producing in  a few weeks time? We could all simply take the view that we do not want our public services to be reduced at all.  It would certainly be a good thing if there was a more general opposition to austerity measures,  to any attempt to take this country backwards in terms of the quality of life.

However, in the absence of an intellectual case against the cuts, any such anti-cuts campaign will almost inevitably take the form of special case arguments, as has happened many times in the past. This can take many forms. A popular one is that management should be cut, not ‘shop floor’ workers. Another is that this or that other part of the state, usually defence or the civil service, should take the brunt of the cuts, rather than health, education or welfare. This approach does not oppose public spending cuts per se, but tries to divert them elsewhere. However this pans out, the result is job losses somewhere along the line and a net increase in human misery.

So is it possible, or even desirable,in the light of the undoubted economic problems facing this country, to make a case against public spending cuts per se?  Before we begin to answer this it is important to grasp one vital truth about public spending. All of it is financed out of the proceeds from private business, whether  industry or services,  through corporate or individual taxation. If these parts of the economy are struggling, as they are today, then the proceeds from taxation will stagnate. The current severe deficit problem was created because tax revenues fell in the past few years, not because public spending rose. While increased borrowing can make up for this increased deficit for a while, eventually the borrowing becomes too much and we are back in the Greece scenario.

So the real question about defending public spending is how to regenerate and revitalise the productive parts of the economy to the point where increased revenue from taxation, and therefore more public spending money, becomes plausible. That is why the most effective way of opposing public spending cuts is to argue for policies which encourage faster economic growth. Here is where we begin to part company with the government concensus about austerity. A key element of pursuing faster economic growth is for the state to invest more public money in science and technology education, in the encouragement of research and innovation and  in new infrastructure. This approach would involve some reorganisation and reprioritisation of public spending, away from consumption and towards investment.

Most importantly, the government must generate enthusiasm for a more dynamic economy and society. This would mean challenging the risk averse, pessimistic and therapeutic aspects of British culture. It would mean rejecting the view that economic growth should be green and sustainable, all code words for slow. It would mean restoring the pursuit of excellence as a goal of society and it would aim to bring out the best in people.





And the election winner is…austerity politics!!

13 05 2010

So we now have a government that I am guessing virtually nobody in the UK who went into the polling booths actually voted for, a Con-Lib pact. To me it feels like a kind of coup d’etat, in a very polite English kind of way of course without the martial music.  This uncomfortable feeling is compounded by the announcement that a fixed term parliament of five years has been agreed. Not only did we not vote for this government but we are apparently stuck with it for five years.

Of course, there was so little between the parties in terms of policy that in practice any outcome, whether one party or a combination of the parties, would have made little difference to what is about to happen to us as a nation. As is becoming clear, all of the parties, and certainly this new government, are committed to a future of economic austerity.  Already there is talk of big tax rises, both direct through capital gains tax, and indirect, through VAT. While we are still waiting for detail on public spending , events elsewhere, such as in Ireland and Spain where wage cuts in the public sector are being implemented, are surely a harbinger of what is to come.

The almost unchallenged assumption throughout mainstream politics  is that austerity economics is the only way forward.  Much of the already pitifully small investment planned by Labour for upgrading the infrastructure of the UK has been scrapped or threatened with delays. The third runway at Heathrow will definitely not go ahead, the Crossrail project could be canned and the high-speed rail link  from London to Birmingham and beyond is in doubt.

What plans does this new government have to stimulate economic growth, which is the only alternative to austerity? There has been nothing in any of the pronouncements so far which has addressed this in any concrete sense. The focus is entirely on cutting the public spending deficit, mainly  to appease the financial markets, the same markets which were invoked as a reason why this coalition had to be put in place as quickly as it was.

Indeed the mood music is that the Liberal influence will make this government even more prone to sustainability and a green agenda than the last, another way of describing low growth expectations. Both Tories and Liberals are against state involvement in the fostering and development of new industries, something Labour’s Peter Mandelson was a late convert too.

The impression of a coup d’etat by a small, elite group of mainly upper middle class men will be reinforced once the cutting starts. One consolation is that this small group, cut off from any real social base or proper legitimacy,  may not even have the capacity to carry through a major attack on living standards.  But by the same token neither will it have the vision or decisiveness to take the steps necessary to modernise the UK economy. We are likely to be left with the worst of all worlds, an inward looking, pessimistic and unambitious elite which tries to micromanage the UK economy at time when boldness above all is required.

NB One of the main challenges for anybody who looks at the prospects ahead and recoils, is to develop an alternative approach to the economy. This means more than anything looking at why and how economic growth must be put at the centre of economic policy. Daniel Ben-Ami has put together a very helpful list of people who are trying to work in this direction. If you wish to become part of this, do get in touch with anybody on that list.