On Davos and the crisis of global leadership

27 01 2010

Even if economic issues are more central to politics than ever before, argument today is less about the nature of economic systems than about the relative abilities of different politicians to administer a system on whose basic structure all are in agreement. In both Europe and the US, party identities are not now principally defined by economic differences but by questions that always crossed class lines and economic interests – nationalism and cultural identity, social liberalism versus social authoritarianism, and religious affiliation – a list to which we might now add environmental awareness. John Kay

As the international political and business elites gather in Davos for their annual away day, John Kay neatly sums up the state of modern politics.  While politicians focus on social, cultural and environmental issues, their discussion of the economy is restricted to the management of the latest crisis.

Yet at the same time there is a palpable sense that something important is missing. The FT’s Davos feature, the World in 2010,  is full of references to the failures and weaknesses of leadership at both a global and a local level. Nearly two years after the onset of the recession the world is still grappling unsuccessfully with the problems which created the financial crisis. Just to recap, here are three key issues I identified nearly a year ago in The Three Interlocking Crises of Global Capitalism.

Firstly;

The recession is severe, but what makes it worse is that it is happening when the coherence and the credibility of the political elites is at an historical low ebb.  The coexistence of a political with an economic crisis is what makes this recession so dangerous.

This has been born out completely. Remember a year ago Obama was in the first flush of his popularity and there was a sense in some quarters that new leadership had appeared to set the world on a different and better course. One year on and while the leadership of most western countries has struggled on in the same way, the big hope that Obama brought has been dimmed. Global leaders are still squabbling about the best way to constrain banking activity if at all, accompanied by a concerted campaign to ‘punish’ bankers for their supposed role in causing the crisis.

In the UK we are faced with an election choice between three parties which have little discernable differences. The main point of contention is over how far and how fast to cut public spending and introduce austerity measures. It is no wonder that a record number of people see voting as irrelevant.

Secondly;

The imbalance between productive economies like China and the less productive economies in the west lies at the heart of the recession…changing the way the world is run will be a tricky process as there will be losers as well as winners.

Events since then have reinforced this point. China in particular has come to the fore and its economy has proved much more resilient to the recession than any in the west. The stagnation of western economies and the growth of  China, India and others have added weight to the global political crisis, as agreement over issues such as rebalancing the world economy or tackling global warming have proved so far impossible.

The Chinese have continued to finance US consumption throughout the recession and western debt levels at a governmental and personal level have continued to grow. With all of the world’s major economies hoping for export led recoveries from the recession, as Martin Wolf has pointed out, there is much more scope for conflict over trade than has been the case before.

Thirdly;

The absence of opposition of any kind to capitalism today has contributed to a sense of drift and general loss of impetus in society in general and has also affected the political elites.

The absence of any alternative has been a mixed blessing for the economic system. There is no doubt that in the UK and elsewhere the absence of any kind of alternative vision has worked to the benefit of the status quo. It has been possible for employers to introduce wage freezes or cuts and short time working with little or no resistance. This  widespread acceptance of cuts in living standards has minimised social conflict and helped to stabilise society through a period of economic uncertainty.

But the problem remains that in the absence  of  any sense of a different way of organising society, the western world has become more and more conservative. This conservatism is increasingly taking the form of an anti -growth sentiment. It is important that we see this for what it is, at heart an abdication of the necessity for human development and the forward march of science and technology. People look at the failure of the market to be able to deliver consistent growth and improvement in living standards, and draw the conclusion that not only is it impossible to do so but it is probably the wrong objective anyway. In other words we are becoming resigned to a world of low growth and stagnation, causing negativity which then spreads out from the economic into the cultural and social spheres of life.

One commentator on the Davos meetings makes the point,

If the Davos crowd cannot identify a workable way to rebuild and reinvigorate the international system, it is hard to think where else the ideas will come from.

This is a question that all of us with pretensions to political change need to consider.

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The UK needs an industrial policy, and fast

21 01 2010

‘Industrial policy’ means in essence an activist approach by the state towards support for and development of the economy. In the UK, state activism in this area was discredited in the 1970s because extensive state financial support for the defunct UK car industry failed at huge expense. In France and elsewhere state support for industry has persisted and is seen as key to economic success.

The future of the UK economy is in a state of chronic uncertainty. Having depended for so long on the success primarily of the financial sector there is now grave doubt about where economic dynamism in the UK can spring from. There is also a growing sentiment that even were the financial sector to recover, over dependence on this one area is very dangerous. This has led to calls to ‘rebalance’ the economy.

Today’s Financial Times carries an analysis of why technology businesses in the UK are not able to offer the necessary dynamism. One key reason given is lack of the necessary support and investment to turn promising small companies into large successful ones. The article points out that Business Secretary Peter Mandelson is now keen on developing an industrial policy for the UK.

So what should an industrial policy look like were we to go down this road? Firstly, what it should not be. Propping up failing businesses in order to save jobs is a waste of money. For that reason the government ‘scrappage’ scheme to enable the buying of new cars was a mistake. Were it not for the fact that the UK no longer has an indigenous car industry no doubt the government would have done what the US did through the nationalisation of General Motors in 2008. Government money should not be used to keep failing industries going.

Nor should an industrial policy be about trying to preserve UK industry in the hands of UK owners as Mandelson has argued in relation to the proposed takeover of Cadbury by Kraft. Generally speaking any foreign buyer will want to keep good businesses going. If there are loss making parts of the business they would  be closed down eventually anyway. The key issue is what new businesses are emerging and growing and that is where the problems of the UK lie.

An industrial policy would first and foremost require a change in the nature of political leadership. The UK government has adopted a managerial approach to the economy for the past 13 years. This worked only because the technology and financial services bubbles kept the economy growing. Now that these bubbles have burst a different approach is required. We need a political leadership which is both entrepreneurial and strategic.

Government needs to be entrepreneurial initially by changing the nature of public debate away from risk avoidance and caution, at every level, towards one of measured risk taking. There is a growing unease  in the UK that we have become stifled by regulation, both state and self regulation, in every area of life. Politicians need to give a lead away from this towards a more self-reliant and entrepreneurial approach to life in general and to the economy in particular. This should then be backed up by specific tax breaks and other incentives to encourage new business and more research and development in older businesses.

Government needs to be more strategic by taking a longer term view of the infrastructural requirements of the UK and investing more where necessary. This is a huge discussion in itself and needs to be looked at in depth. Government should also be encouraging and incentivizing those sectors of the economy which are already successful to be more successful.

I wrote recently of the NASTI approach, No Alternative STagnation is Inevitable,  which dominates current thinking around the economy in this country. For this to be transformed requires a sea change in political leadership away from cautious managerialism  and towards dynamic entrepreneurialism. The upcoming general election campaign offers an opportunity to argue for this radically different way forward.





2010-the year of living uncertainly

12 01 2010

Welcome to 2010, a year which is pregnant with doubt and uncertainty. The western world has moved from the certainty of recession to a fear and acceptance of stagnation, the ‘flat is the new up’ mentality derided by Martin Sorrell. In the UK we have a general election contested by three parties which is shaping up like a contest between weak boxers. Every time they land a punch on each other they weaken their opponent without strengthening themselves.

There is a general mood of cynicism and disgust towards the political process which means that whichever party or parties win the election then nothing can really change. Mick Hume has accurately summed up the state of modern politics as dominated by;

..the politics of fear, with many apocalyptic warnings, but little analysis of the underlying causes; the politics of behaviour, with attempts to blame the crisis of the system on the greed of individuals; and the politics of low expectations, with efforts to persuade us that the most we can hope for in the future is no/low growth in a stable/stagnant capitalism on a life-support machine of state intervention.

We  have reached the end of a political cycle which began with the collapse of communism in 1989. Just to remind ourselves, the collapse of the Soviet Union created an initial surge of optimism that history had ended with the triumph of western liberal democracy.  In the East new democracies arose. In the west the third way concensus politics of Bill Clinton, adopted by Blair and others, replaced class based politics. It is very hard now to remember the enthusiasm which accompanied the election of Blair’ s New Labour in 1997. Many people welcomed what they saw as a decisive break with the past and the opening of a new chapter in history. We can now see that the idea of a new era of peaceful and stable capitalism which dominated the twenty years since the end of communism has come to a political dead end.

The upcoming defeat of Gordon Brown in the general election here will mark the final eclipse of New Labourism in the UK. What we are left with is a severely confused and disoriented western elite which is struggling to tackle the major changes taking place in the world. During the credit fuelled  boom years of the noughties the absence of any clear economic and political blueprint for the future did not matter so much as it does now. The best that any politician can do now is to try to navigate the future without a map. On the economic front there is just as much confusion. While there are some commentators who wish to paint a rosy picture the general view is one of foreboding. The underlying problems facing western capitalism, which have been extensively debated in this blog over the past year, have not even begun to be addressed. The lack of a plan means they will fall back on restraint and cutbacks in public spending rather than bold policies for economic growth.

Elsewhere the triumph of liberal democracy is looking very hollow. The most dynamic economies in the world now pay lip service to democracy in general if at all. The recession has played its part in deepening the crisis of western politics by accelerating  both a shift in global power eastwards and by undermining the western model of (supposedly) free markets plus democracy.

All of this means that the stakes are even higher for anybody who can come up with a better idea of how to run things. The depths of cynicism amongst the elite and the general populace will prove a huge barrier to any ideas of change, but there are always some people who will not want to give in to these  widespread negative sentiments. Uncertainty can be a good thing if it leads to broader questioning and wider debate. There are those, such as Martin Wolf, who accept that we have reached a ‘hinge in history’. Whether this leads to a turn for the better or the worse is up to us.





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.





We need real growth not sustainable growth

3 12 2009
It is not clear how the UK will earn its living in the years to come        Financial Times  3/12/2009
A new survey of the state of the UK’s economy has drawn a bleak, if not surprising , picture of the weaknesses of the UK economy as we begin to come out of the recession. The survey, carried by the FT today and over the next few days, reveals that despite all the claims of New Labour to have turned the UK economy into something more dynamic the truth is that the long-term trends of sluggish growth and the disappearance of manufacturing have if anything gone faster under New Labour than before:
  
  • Growth since 1997 has averaged just over 2%, slightly less than in the previous 20 years
  • Manufacturing has shrunk from 20% of the economy in 1997 to 12% now
  • The growth areas of the UK economy have been business and financial services, real estate and public services-all financed directly or indirectly from the proceeds of the financial bubble.
  • Around 2/3 of jobs created under New Labour have been in the public sector-which bodes badly for employment prospects if public spending is cut
To add to the ominous character of this survey a timely piece of new research by two academics at Kent University has looked at the experience of recessions around the world over the period 1960-2000 and concludes that deep recessions such as the one we are currently experiencing have profoundly negative impacts on productivity for years after the recessions are over. 

Our main findings show that, cumulatively, from the last year of the recession up to fours years after, recessions have significant negative productivity effects. These effects, however, arise as a combination of different mechanisms. Recessions tend to increase the level of frontier TFP (technology growth and efficiency) but decrease the rate of technical progress. The combination of these two effects is a fall in frontier productivity relative to the one that would have prevailed without a recession. Recessions also increase significantly technical inefficiency in the economy. Finally, deep and long-lasting recessions tend to have larger impacts on productivity, although the mechanisms differ from standard recessions.
  

 There are key debates to be had still about to what extent the UK needs to restore manufacturing as opposed to services, and also whether cuts in public spending are necessary and in what areas. However, one thing is crystal clear, that whatever route the UK has to take to recover a growth dynamic it is going to be very hard work. The dawning recognition that this is the case, and the absence of any coherent plan to achieve it,  must be one reason at least why those arguing for a more sustainable (ie environmentally focused ) economy are influential today. For a clear explanation of what the sustainable economists have in mind for us this new report spells it out. 
   The traditional function of investment, framed around increasing labour productivity, is likely to diminish in importance. Innovation will still be vital, but it will need to be targeted more carefully towards sustainability goals. Specifically, investments will need to focus on resource productivity, renewable energy, clean technology, green business, climate adaptation and ecosystem enhancement. These are precisely the kind of targets that emerge from the consensus around a global Green New Deal. Foregoing consumption growth seems inevitable if we are to sustain this enhanced need for ecological investment. 

 The necessity of ‘foregoing consumption growth’ in favour of saving the planet is, in this context, a convenient way of also avoiding the issue of tackling the stagnation of advanced economies such as the UK’s. The question of how to create a turn around in the UK economy should not get sidetracked by the sustainable growth lobby. The solution to all our problems, including environmental ones, involves greater control over our environment, through scientific and technological breakthroughs and through greater productivity of labour, which creates more human time to focus on new challenges rather than slogging away at the old ones. 





Can the UK economy become dynamic again and does it matter if it doesn’t?

10 11 2009

nukesThe Government has finally announced a nuclear power station building programme. Typical of Labour’s record on infrastructural projects it is far too late, too little, underfunded and came in the form of a statement in the House of Commons with no opportunity for a debate or a vote to give it democratic legitimacy, no doubt opening the way for endless legal challenges from the anti-nuclear and nimby lobbies.

It appears to be the very least that the government could do in the face of the expected power supply shortages in the future and the commitments it has made to cut carbon emissions. What it is not is part of any concerted plan to reinject dynamism into the UK economy. We are still lacking any overall vision for how the UK is going to become economically vibrant again. Of course there are  people, some of whom I debated at the Battle of Ideas Conference recently(see here for audio record), who argue that economic growth is a dangerous or futile objective.

In my previous blog I argued that economic growth is a good thing for social, cultural and philosophical reasons as well as the more obvious economic ones. I was struck at the Conference last weekend by two reactions against this point of view from people who did not fall easily into the categories of anti-growth viewpoints I was attacking.

First there were people who agreed in general that global economic growth was necessary, but that this should be mainly in the developing countries. Their argument is that we in the west have pretty much got what we need and we do not require faster growth rates. Secondly there were those, including Martin Wolf, who argued that even if we wanted to it is not possible to reverse the relative or perhaps even absolute economic decline of the UK and countries like it.

The two viewpoints are complimentary in arguing that faster growth, more economic dynamism, is either unnecessary or even if it is then it is not possible. If these views are not challenged and an alternative economic route mapped out, then the UK is condemned to stagnate with no prospect of changing itself in any fundamental way.

The recession has shocked many people in the west and shaken their confidence in the market system and added to a sense that economic growth is problematic. There is an increasing sense that we have reached a ‘new normal’, a position where slow or flat economic growth is likely and perhaps even desirable. There is a danger that this lack of confidence becomes a self-fulfilling prophecy. 

With a General Election in the next six months it is time to put on the table what we think should be on the economic agenda. If you have any views about what the economic policies of the next government should be then please feel free to respond. In future blogs I will examine why a fatalistic approach to growth and dynamism in the west is wrong and how we can begin to tackle it.





After the recession-the return of Keynes or the end of economics?

21 10 2009

images[1]Robert Lucas, the University of Chicago economist, joked last year that “everyone is a Keynesian in a foxhole’. At first glance it certainly seems that the idea of government intervention to maintain economies in trouble has made a comeback. In the past year various governments have nationalised banks, introduced major stimulus programmes, prevented industries from collapsing, subsidised employment and printed money in order to combat the financial crisis.

Yet as Sean Collins has argued in his excellent review of Keynes: The Return Of The Master by Robert Skidelsky, whom I shall be debating next week at  this event  , the ragbag of anti-crisis measures put together around the world was not the product of any widespread conversion to Keynesianism. It was instead an ad hoc programme of state measures aimed at one thing-staving off financial collapse and its perceived consequences.

The Keynes they like is not the proponent of permanent state intervention to guarantee full employment. He is instead the man who said ‘in the long run we are all dead’. In so far as Keynesianism means anything today it represents the short term managerial approach to running economies which characterises the UK and other developed countries. Why has there been so much state intervention from governments which have been arguing for ‘light touch’ regulation for the past ten years? Because there is no alternative on the horizon.

The recession has effectively destroyed, at least for the time being, the belief in free markets that has governed most of the developed world since the discrediting of Keynes in the 1970s. As Sean Collins argues however, we should not go along with the thesis that the past thirty years have been about actual free markets. During this period the state has continued to intervene in the economy, although in different ways.

Nevertheless we have reached a point where economics itself has been discredited. As Daniel Yergin argues there are so many explanations for the recession that no coherent narrative has emerged. This vacuum is being filled by another legacy from Keynes. His belief in both the power of psychology and the essential uncertainty of the capitalism economy have become more influential in response to the recession. Both of these points are highlighted by Skidelsky in his book.

The falling back on psychological explanations for the crisis amongst behavioural economists is a rejection of real economics. The crisis has in roots in economic stagnation in the west, the consequent financialisation of western economies and global imbalances created by the relative dynamism of the BRICs. To ignore these causes and point to crowd psychology reduces the problem to one susceptible by state manipulation of people’s activity. In this sense it fits with the short termism we spoke of above. It represents an inability to face reality and think through what it would mean to create more dynamic western economies.

The elevation of uncertainty as a major problem is also wrong. Keynes, writing in the 1930s was obsessed with the threat of capitalist collapse. Faced with the Depression and looming global conflict this was not an unreasonable fear. It is to Keynes’ credit, in contrast with many who followed after him, that he understood that economics is about politics. His argument for full employment was that it was necessary to stave off revolution.

In fact one thing the recession has shown us is that capitalism is in general very stable and quite predictable. We are in the midst of a major recession but as I have noted before there has been very little social response. This is because capitalism is at root a system of social relations. No matter how bad the economy may get, as long as there is no organised alternative it will bounce back.

Emphasising the uncertainty and risks involved in capitalism today can only have one effect, one which Skidelsky himself recognises,’uncertainty imposes a kind of permanent fearfulness about the future which puts a damper on economic progress’. Skidelsky also criticises some of the behaviouralist economists, like Shiller, for ‘panic’ in the face of apparently irrational human behaviour in the run up to the recession.

There may be opportunities, due to the crisis within economics, to debate what kind of economy we need. This would entail rejecting the panic and uncertainty brigade and arguing for a longer term more strategic approach to the economy, more planning, more debate about where we want to go and above all more leadership.