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.

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Why those working in the financial sector need to tell the truth about the crisis

1 11 2010

When Vince Cable recently attacked the ‘spivs and gamblers who did harm to the British economy while paying themselves outrageous bonuses’ he summed up what many think is the problem with the finance sector. Politicians like Cable have led the way in blaming the banks for taking too many risks out of greed and thereby causing the recession. We all love to find scapegoats for our problems and the banking industry has become the main scapegoat for our economic woes.

The reality is somewhat different from the story. The  banks’  massive extension of credit was in fact a government backed attempt to stimulate stagnating western economies artificially by pumping up consumption. The slicing and dicing of credit in the form of derivatives and other financial instruments prior to the recession was an attempt to spread the risk of this explosion of credit. The real problem is that investment in productive areas of the economy requires genuine risk and not enough of that kind of risk is being taken in western economies. Spending money on new research and technologies has no guaranteed pay off, it’s far easier to sink your cash into property and hope for a steady return.

Bankers operate within the parameters set by those whose money they manage. The supposed surprise that politicians now express at the way banks behaved is disingenuous. All the main parties were fully behind the credit boom. To express surprise and shock now as Cable and others have done is simply dishonest. Blaming greed is foolish and hypocritical. Indeed many of the same people who blame greedy bankers and consumers in the west for our problems are urging the Chinese and others to increase consumption so they will buy more of our exports.

The Hotwire survey reveals a great deal of defensiveness within the financial sector. While this may not be surprising it is unfortunate. The financial sector has attracted many of the brightest people in the UK. These people need to be more upfront about what really needs to be done to help our society move on. The Hotwire respondents felt for example that too much transparency may not be good for the industry; let us hear this argument being made more forcefully in the face of those who believe that more and more regulation is the answer.

Blamed for the crisis and also seen as responsible for the way out of it, some bankers hope that better corporate responsibility will restore trust. But in truth, the message that bankers need to get across is that economic stagnation cannot be solved by more regulation of banks but requires a much more fundamental reappraisal of how the west is run. Rather than spending their efforts on persuading us they are not greedy, those working in the financial sector would be better spelling out the real economic dangers we face. This would be taking real social responsibility.

*This is the preface I wrote for a report by Hotwire PR which was launched at this event, at which I was also speaking





Osborne’s cuts, neither unavoidable or achievable

23 06 2010

So George Osborne has sent his message to the world’s financial markets. His insistence that the cuts announced in yesterday’s budget were ‘unavoidable’ was based mainly on the need to reassure international investors that the UK is still a safe place to lend money to ie we are not another Greece. But is Osborne’s austerity drive really unavoidable, and secondly, is it achievable?

Most of what was announced yesterday was about trimming public spending, through the wage freeze for public sector employees and taxing consumption by an increase in VAT.  No doubt this will bring some pain to many people but the real impact on public services is yet to come. So far there has only been a statement of intent to cut all government departmental budgets by 25%, bar the NHS and international aid. The full extent of where the real cuts are meant to fall awaits the outcome of a public spending review in the autumn. We are now in the position of a patient who is told to cut back on fatty food while we wait for the diagnosis of how many vital organs are going to be extracted.

There is a great deal of uncertainty even within the elite as to whether austerity is the best policy to pursue. The Financial Times has been full of articles throwing doubt on the wisdom of cutting public spending too hard at this point. Some of this has come from the normal doctrinaire keynesian suspects such as Robert Skidelsky, who believe that state spending should be staying up at this stage of the recession to boost demand, not down. 

But there are others who recognise that much of  what Osborne, with his Liberal free market colleagues, is doing is based on a  belief in a small state rather than through any financial imperative. Matthew Parris, for example, writing in the Times urged Osborne to drop the ‘unavoidable’ tag and argues

The Chancellor should not be embarrassed to say that he wants to wield the knife regardless of the deficit’s size.

Martin Wolf’s main fear is that with all of the western world, bar the US, committed to austerity it is hard to see where the opportunities for growth can come from. This gets to the heart of the problem facing the Con-Lib coalition. Drastically cutting the deficit only makes sense as a prelude to growth in the economy. Yet nobody is clear as to where this growth is going to come from. There are no obvious sectors within the UK economy poised for massive expansion. Neither is there an obvious market for UK exports, when the euro zone, currently the UK’s biggest export market, is itself in austerity mode. So, putting it crudely, we do not have enough to sell, and nobody to sell it to even if we did.

The government’s focus on supply side economics, freeing up the labour market and reducing the tax burden on private business, only works if it leads to greater investment and higher production. There is no sign of either of those things happening in the UK.

Are the cuts achievable? Ultimately this is not an economic but a political issue. Public services are heavily dependent on people. If 25% is to be cut then this will inevitably mean around the same proportion of public sector jobs going. The CIPD economist John Philpott estimates this will lead to 725,000 jobs being lost in the public sector. Comparisons are often made with the wage cuts and job losses that the private sector has experienced over the past two years, with very little opposition.

However the difference between the private and public sectors is that, if an engineer in Sheffield loses his job, this is a tragedy for him and his family. But outside of that nobody is affected. Even if the engineer’s firm is closed down, anybody wanting to buy a widget could go elsewhere. If a doctor loses her job, the same impact is true for her family, but also anybody who depended on her services will be affected as well. The vast majority of people cannot go ‘elsewhere’ for their health provision. How the austerity programme plays out will depend on how we all respond to the drastic decline in public services the government has lined up for us.

As I have argued before, the state plays such a central role in British society because capitalism is both too anarchic and too feeble to provide the goods and services that people need without state intervention. Dismantling the state looks like a bridge too far for the new coalition.





What cowboy put this fiscal deficit in?

9 06 2010

That Cameron and Osborne should blame the previous administration for the mess they have inherited is hardly a surprise. It should also not be a shock that Cameron is painting the future as black. He then has the dual advantage that if things turn out badly he can say he told us so and if they do not he can claim the credit for turning the economy round.

What is more interesting is that beneath the rhetoric there does seem to be a genuine belief that the state in Britain should be smaller and have less role to play in all aspects of life. In this respect Cameron has been aided by the addition to his ranks of a section of the Liberal Democrats who believe in the free market. Clegg, Cable, Huhne and the (now departed) Laws were the four LibDems appointed as ministers in the cabinet. All of them contributed to the ‘Orange Book’ in 2004 which espoused the free market as a solution to the problems of the economy and which provoked controversy within the LibDems.

Having come late to the free market philosophy, and at a time when most other politicians and economists were moving away from it, they have some of the fervour of  the convert. Cable in particular, whose formative experiences were in the 1970s when the UK government failed abysmally to prop up failing businesses such as British Leyland, is possessed of a fierce belief that the state has only a limited role to play in the economy. He has promised to overturn Mandelson’s nascent attempts at reviving an industrial policy for the UK.

So now the government has both pragmatic and quasi-ideological reasons for cutting public spending and reducing the size of the state. Pragmatic in order to avoid a collapse of the confidence in those lending money to the UK and quasi-ideological through the concept of the ‘big society’ rather than the ‘big state’.

The problem with this approach is that it flies in the face of the history of capitalism over the past 100 years. The role of the state, in every developed and developing country in the world, has come to play a bigger and bigger role as time has gone by. Outside of the aftermath of wartime no state of any consequence has succeed in cutting public spending absolutely. Certainly no state has managed to do so after a recession. Even under Thatcher, in the supposed brutal period of the 80s, public spending overall continued to rise.

Why is this? Essentially because the free market has proved incapable of fulfilling many different and essential functions of society. No modern state for example has ever had an education system which is run as a private business. No modern state has had an entirely private health system. Even in the US, which is most committed to the free market, state funding of Medicaid is an essential part of health provision. In addition, individual national insurance schemes have never been able to pay entirely for payments to the unemployed.

Private businesses depend  on the state to provide cheap education, health care and unemployment benefits. To some extent the role of the class struggle in earlier periods was important in establishing the levels of provision of benefits from the state, but the elite as a whole understood that the state needed to subsidise welfare in order for the economy to function effectively. It was not the post war Labour government, for example, which architected the welfare state in the UK but the National Government under the Conservative Churchill which did so through the production of the Beveridge report in 1942.

The state has also had a key role in the building and maintenance of transport and other key infrastructural projects, which are too big for any individual private company to develop but which all businesses benefit from. Roads are one good example of this, but virtually all communication systems and infrastructure projects require massive state involvement and investment in their production or maintenance.

It is also the case that the state is now so large and so intertwined with private business that many companies depend on government contracts. The IT business in the UK, for example, has benefited over the past twenty years from many large projects in the NHS and in other government departments.

There are those who argue that it is the increasing role of the state which has stifled private enterprise, but the reality is that without ever-increasing state involvement modern economies could not survive. Capitalism is too feeble and unproductive in most modern economies to operate on its own two feet without massive state assistance.

 So what does this mean for the present UK government’s plans to cut spending? Firstly they will struggle to make any impact on the overall scale of public spending without doing huge damage to the way our society works. Secondly, whatever their pretensions to the opposite, the axe will fall hardest on those least able to defend themselves.

A version of this article appeared on Spiked





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.





Ten questions to ask your candidates about the UK economy

12 04 2010

According to the papers today, the election focus of the main parties this week will move away from the economy and on to domestic issues. Apparently last week’s spat over 1% increase in national insurance is what the parties think constitutes a debate on the economy. If you are thinking, given  the deep problems facing the UK economy, that this is a totally inadequate level of debate on the economy then you are right. And this is what you should do about it….

If any electioneers come to your door ask them as many of the questions below as you can get in. The links in each question refer to a discussion of the topic in other parts of this website.

1. The UK economy is slowly but surely slipping down the international rankings of economic size. Do you think it is possible to reverse the UK’s relative economic decline? If so how?

2. The recession appears to be over, do you believe we are inevitably now in for a long period of austerity?

3. The whole idea that economic growth is a good thing has come in for a lot of criticism, from Greens and others. Are you in favour of economic growth as an objective, or should we all permanently tighten our belts for the good of the planet?

4. For the past ten years the financial sector has been the motor of the UK economy. Do you see this continuing,if not what will take its place?

5. Is it necessary or indeed possible for the UK to revive its manufacturing industries, or should we focus on growing our services business, which already makes up 75% of the economy ? 

6.The UK manifestly needs a better transport and communications infrastructure in order to operate effectively. What should any government do to make sure that, for example, our railways, roads , energy or broadband provision, are world class? Or is this all just a job for the market?

7.  Most of the plans for job creation laid out by the main parties are based largely on supply side reforms, such as encouraging the sick to go back to work. Should government be doing more on the demand side as well, through, for example, creating favourable environments for successful forward looking industries such as bioscience,through support in taxation, policies, enterprise zones, science parks, the kind of educational and training policies we pursue etc.

8. There has been a very risk averse public response in this country to some cutting edge scientific developments, such as GM food, nuclear power and some pharmaceutical and medical breakthroughs. What would your approach to public fears around these types of issues be? Do you think government should be leading public opinion in these kind of issues or following it?

9. Should the UK be investing more in space travel?

10. What do you see as the cause of the economic crisis, greedy bankers, greedy people or the over reliance on the finance sector?





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.

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