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.

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.

The market is not capable of being rational,but people are

28 10 2009

images[1]The news that George Soros is creating and financing a new economic thinktank  called the Institute of New Economic Thinking (INET) should not be a surprise given both the destitution of modern economics and Soros’ own conviction that traditional economics is ‘a dogma whose time has passed’. As I have argued before there is little doubt that rational or free market theories have been discredited by the reality of the financial crisis, although this does not mean that we have really been living through a period of free market economics.

However, while a reassessment of the way forward for economics is way overdue, it seems unlikely, given its brief ,that this new Institute will help very much. For a start, as Anatole Kaletsky makes clear in the Times today, it will be heavily influenced by the Behavioural Economics school of thought. This rightly rejects the spurious rationality of mainstream economics but replaces it with a view based on the belief that people are basically irrational and the future unpredictable.

To gain a genuine understanding of unpredictable reality, some unorthodox economists may employ new mathematical techniques of non-linear dynamics and chaos theory. Others may revive the literary and anecdotal traditions of the great economists of the past, building on the work of sociologists, psychiatrists, historians and political scientists disdained by the present orthodoxy. INET will try to support these new schools of thought.

As I said in my review of a book by influential behavioural economists, 

We can agree with the BEs that the market, or capitalism, is not rational in the way that rational market theorists claim. The most singularly irrational aspect of capitalism is that decisions to invest are made by individual or groups of capitalists rather than by or in the interests of the majority of people. If the prospects for profitable investment look poor, because the expected rate of profit is too low or too risky, then money flows elsewhere. In the past ten years money flowed instead into apparently safe areas such as financial derivatives based on assets like housing etc . This created an unsustainable asset bubble which inevitably crashed and burned. Phil Mullan calls this the over financialisation of the western economies, the tendency for money to try to beget more money without going through the process of productive investment in new businesses.

Crises in the financial sector are an inevitable outcome of the over financialisation of western economies. The exact day when they will happen cannot be predicted, but the continuous instability and the tendency towards crisis contained within it will always remain. But it is not inevitable that we have to have economies of this sort. The danger of Behavioural Economics is that it condemns us to a future where the vagaries of the market are a given and the only question is how to manipulate and control the activities of the irrational people engaged within it.

Once we accept that human behaviour is irrational and the future unplannable and unpredictable then we have taken out what is unique about humanity, its ability to consciously and collectively organise and influence the future. One bright spot about the current recession is that it has revealed the bankruptcy of the prevailing economic orthodoxy. It would be a great shame if the vacuum thus created were to be filled by those who have the most disdain for human rationality. This weekend I and many others will be debating the future of the economy with experts such as Lord Skidelsky, Martin Wolf and Paul Mason at this event. Come and join us.

Will this be a jobless recovery?

6 10 2009


AUAFSC9CA3B1FKFCA8XU5EPCA777ZTDCAR59Y2VCASIJMODCALGU5QUCAMXXSGBCAB6JSZRCA8KMPKXCARPYO9JCA653CVZCA0PX1P5CAW6HNUCCAVKPXI4CA0ILQW3CA370OV9CA9IHIE3CA7MSGYCCAVC85EWBetween 1999 and 2007 manufacturing jobs in the UK fell from 4.5m to 3.3m. In the same period jobs in the financial and business services sector grew from 5.3m to 6.5 m, and jobs in the public sector grew from 8.4m to 9.9 m. The Financial Times claims that around two thirds of jobs created since 1998 have been in the public sector. Most strikingly, within that figure, of the 1.07 m jobs created in the public sector,963,000 were taken by women in health, education, social care and social administration. There are at least 10 areas of the UK, all outside London, where 40% or more of those working are in the public sector. 1

There is good reason to fear that whatever the eventual shape of the UK recovery it will not bring with it many new jobs. As a result we may have to live with a much higher level of structural unemployment than has been the case for the past ten years. The two main areas of job growth in the UK in the past ten years were across the public sector, particularly in welfare and education, and in financial and business services. None of these sectors is likely to play the same role in the next ten years, if for different reasons.

The public sector now looks as if it will be, if not necessarily cut back as severely as the bloodthirsty rhetoric might suggest, then at least contained. Financial and business services may stabilise but are unlikely to regain the dynamic growth of the boom years.

Neither is the long term decline in manufacturing jobs likely to be reversed. The UK’s role in manufacturing is predominantly in areas of high productivity with high skill levels. Even with more investment and more support and encouragement from government, which would be very welcome,  manufacturing is unlikely to add a huge amount of new jobs.

Both the Tories and Labour are proposing ways of trying to reduce unemployment, but these are mainly on the supply side, through for example attempts to get people off of sickness benefit. Forcing people back to work only makes sense if jobs are available for them to do, and at decent wages. The main effect otherwise is the traditional role of the unemployed as the reserve army of labour which helps to force down the wages of those in work.

The proposed extension of the retirement age to 66, although welcome for other reasons, will also have the effect in the medium term of adding to the ranks of the unemployed, particularly the young.

Unemployment is now nearing 8% of the adult population of working age. It is estimated that it will reach at least 3 million by next year. With benefits also likely to be squeezed this means misery for millions. This is the reality of the austerity plans both parties have in store for us.  Far more discussion is needed  about what kind of economy the UK could have which could gainfully employ the unemployed.







1 https://postrecession.files.wordpress.com/2009/01/whitepaper6.pdf



After the recession-winners and losers

1 10 2009

ADR1SLKCAA3BDO3CAMR91MACAMICXACCAOCEYP1CAI1LJ91CA1T3JB8CACGBU4ECAW3UOYUCA4MN4QRCAFGIPYCCA5TT2W7CARIKEBXCABLGWTJCAR6GX1ICAU81D48CA175TUFCALF0KX9CAQRNIRKCAN99ILOEvery economic crisis creates its own winners and losers. At the level of any domestic economy a recession is often the last straw for an outmoded business, sometimes even whole industries can be swept away. This recession looks as if it might deal a grievous blow to the printed newspaper business as advertising revenue has dwindled. In the UK online advertising spend has overtaken tv advertising for the first time. The main benficiary in each of these cases case has been the digital industry and so the recession acts as a midwife to change. Such developments as these are seldom reversed.

It is important to remember that recessions only speed up developments which are already under way. We are only at the beginning of the process of change hastened by this recession. In fact, many of the actions taken by western governments have been attempts to prevent change, the propping up of the US car industry by the Obama regime being one example. It is also possible that western governments saving banks from bankruptcy may turn out to be a mistake in the longer term. As the IMF has pointed out, the empty hole at the centre of the financial system created by toxic debt has been painted over, not filled in. Trouble has been stored up for the future.

At a global level we can now also see how the recession has revealed a changing balance of power. The credit crunch has laid bare the dependence of the US economy on finance from China and other nations. It has also shown how undynamic most western economies currently are compared with these emerging nations. The emergence of the G20 as a body of international governance is an expression of these changes.

The UK is now in danger of being left behind. It appears increasingly marginalised from both its Atlantic and European allies. There is a measure of incompetence in the way foreign policy relations have been handled, for example over the Lockerbie affair which has annoyed the US. But the UK’s problems are based in the relative decline of its economy. It is  overdependent on the financial sector and an absence of any Plan B now that this source of growth has been threatened has created a biq question mark over its future. The movement of the headquarters of HSBC from London to Hong Kong may well be a straw in the wind, expressing both a shift  away from the UK as a leading financial centre and towards China and the east as its replacement.

The announcement of a new Franco German pact is a sign that the UK is seen as outside the mainstream of European developments. The UK faces a public spending deficit which threatens its  ability to stay at the top table internationally. Already Trident is being questioned and the UK’s willingness and ability to participate as a US ally in foreign wars is also being potentially undermined.

Does the UK’s relative decline matter? If other parts of the world are becoming more economically dynamic does it matter if this one part of it is in decline? Obviously it matters to us as citizens of this country if our living standards are to deteriorate. But I think there is also a greater issue at stake. Currently the most dynamic economies in the world are the least democratic. Perhaps this will change, perhaps it will not. Here in the UK we should recognise that the survival of democracy and its extension depend upon continued economic progress. A declining and stagnant economy tends to foster a declining and stagnant democracy.

The cuts ‘debate’, dumb, dumber and dumberer

22 09 2009

A4PFSW8CAUKKZTSCA6U26I5CAOIW9TQCA7JXEVACAUDPMGWCAZGBJLQCAF8443HCA2LH38PCASMAT7FCA6NTCQ9CAC0J7EACAFICEB6CA8BB0GACAZNP1EJCA25DXN8CA6PNK19CA06HHYVCA4H06MZCA09WITTOn October 31st I shall be debating with Lord Skidelsky and others on the subject of economic growth at this Conference. It will be a great relief to be having a discussion about the key question of the times with Keynes’s main biographer rather than listening to the so called ‘debate’ on cuts in public spending which is now dominating politics.

After a long period in which all parties were in a state of denial about the public spending deficit, each is now desperate to show they are more fiscally virtuous than the last. The ridiculous Nick Clegg has now called for ‘savage’ cuts and I am sure that the Tories are browsing the lexicon of violence to find a suitably bloodthirsty description for their own cutting plans. This bravura posturing on cuts is just as useless as the period of denial which preceded it. Neither addresses the real issues at the heart of the crisis of the UK economy.

As I and others have pointed out on this blog before, there are no doubt areas of the state we can do without-the latest being the Independent Safeguarding Authority which would vet all contact between adults and children not their own. In other words there are sometimes good political reasons why some public spending programmes should be cut.

On the other hand there are areas of the state which we need and which should be doing their job much better with the funding they have. Education and health are the two most obvious areas. These require more effective leadership and execution, not less spending, in order to make them more satisfactory.

The recession has created a massive public spending deficit, which is likely to get worse. Tax revenues are falling as unemployment rises and the unemployed become a burden on the state. This is an indictment of the market economy which renders many millions of people surplus to requirements at regular intervals. This is the real problem we face, how to create an economy which fully utilises the productive energies of its people.

There are many things that politicians could be doing to encourage future economic growth. But these would require a hard look at the nation we are and what we want to become. It would mean planning where we want to be in 25 or so years time and then making the necessary investments needed to get there. It would mean, amongst other things, challenging current anti-growth and anti-science sentiments to push through nuclear power station building programmes and road and rail building.

When ‘Dave’ Cameron talks about a broken Britain he believes he is talking about other people, the underclass in particular. But the part of Britain which is most broken is the political class and its ability to lead. For the past ten years it has been allowed to coast because of the financial bubble, all the hard choices could be put off. Now it is faced with a problem which will not go away, it owes money to people who will want it back. Nothing in the experience of modern day politicians has prepared them for this. One can even be sceptical about whether the rhetoric on cutting public spending could ever be turned into reality because of this weakness and lack of conviction.

All the bluster about ‘savage’ cuts does not remove the fact that the British elite has no real plan for the UK economy which goes beyond hoping the financial sector will revive. The debate which should be taking place is about how we can grow our economy out of recession. This is the one we will be having on October 31st.

What is ‘socially useful’ work?

10 09 2009

work[1]Lord Turner of Ecchinswell, an influential figure in the reform of banking rules in London and beyond, said that the City had grown “beyond a socially reasonable size”, accounting for too much of national output and sucking in too many of Britain’s brightest graduates.

“I think some of it is socially useless activity,” he said, adding that the financial sector had “swollen beyond its socially useful size” and seemed to make excessively large profits.

There are actually two distinct things going on in Adair Turner’s statement. Firstly he is saying that the UK financial sector is disproportionally too big for the UK economy, that it is ‘beyond a socially reasonable size’, an issue which we have debated on these pages before.

His second argument, that some aspects of financial services are not socially useful is slightly different. This plays to the idea that there are some kinds of jobs which are socially useful and others which are not. Michael Skapinker took up this aspect of the discussion in a column where he pointed out that

The division of work into “socially useful” and “socially useless” was a particular preoccupation of the post-Woodstock generation. Teaching, trade unions and public interest law were good. The oil industry and investment banking were not.

So should we oppose the financial sector on the basis that it is not socially useful? After all it is hard to see how arbitrage, the ability to shave earnings form tiny changes in exchange rates, for example, contributes much to the health, wealth or happiness of anybody other than the person doing it for a living.

The concept of ‘socially useful’ work is not itself very useful in understanding the nature of work in a capitalist economy. Businesses do not succeed or fail on the basis of whether or not they are ‘socially useful’. They prosper if they make profits and fail if they do not. The question of what specifically they produce is always secondary to the necessity of profit.

Having said that, it is also true that there needs to exist a demand for the products of any business. If there was no demand then the products of that business would be unsaleable. That is why even those  industries and professions which most people would not consider ‘socially useful’, such as the arms trade or estate agents, still do well, because their products are in demand.

Even the most arcane of financial products, such as the derivatives which lay at the heart of the financial crisis, existed because there was a demand from institutions which wanted to derisk their debt. The people who bought them did so because they thought it would make their investments safer. The fact that they failed to do this does not take away the rationality of the original impulse to buy.

Turner may have a point when he says that the UK economy has become too dependent on the financial services industry. As we have argued here before there is a danger that over reliance on financial services could backfire given the ease in which such an industry can be moved around the world. We may also chose as a nation to invest more in exciting new technologies because we think that they are more exciting and future oriented than financial services. But introducing the notion of ‘socially useful’ into the debate does not help to clarify what the real problems are.