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!!


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.


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.


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.


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.

How much is enough?

25 11 2009

Robert Skidelsky, with whom I debated on this issue a few weeks ago, has returned to the fray in the Guardian. In his new article he looks at Keynes’s prediction that by 2030 the world (or at least the developed part of it) will have raised living standards sufficiently to call a halt to growth and to reduce the working week to 15 hours. Skidelsky points out that we have already reached Keynes’s income target in the west, but instead of this leading to a shorter working week it has led to the tendency for people to work longer for higher pay. He explains this as due to  insatiable desires induced by the consumer society.

 Keynes …recognised that there are two kinds of needs, absolute and relative, and that the latter may be insatiable. But he underestimated the weight of relative needs, especially as societies got richer, and, of course, the power of advertising to create new wants, and thus induce people to work in order to earn the money to satisfy them. As long as consumption is conspicuous and competitive, there will continue to be fresh reasons to work.

As I pointed out in my debate with Skidelsky, the developing world is far from reaching even the basic levels of income required to combat poverty. This alone would demand that we continue to grow the world’s economy for many years to come. I also argued that even in the west there are many areas of life and many sections of society which are underfunded and  suffering deprivations of different types.

However let us accept for the time being that we stay in the developed countries and we equalise incomes to produce a tolerable subsistence level for all of society. Would this then justify an end to growth? It is a good question to ask. After all, it is true that often consumption for consumption’s sake can induce a feeling akin to nausea. It is something I experience every Xmas when confronted with the huge pile of presents which arrive for my children, most of which are consigned to the rubbish tip within days (sorry grandparents!). It is also true that we ‘need’ many of the things we buy only in the sense of satisfying a desire, rather than in order to keep alive and healthy.

So should we cut back on growth and train ourselves to not want things which we do not absolutely need? I think this is a dangerous path to pursue. Human beings have developed modern sophisticated societies on the back of scientific, medical, technological and engineering progress. Taking the long view, in the space of a few thousand years we have transformed ourselves from primitive beings at the mercy of the elements to masters of our own destiny. We have turned our planet from a hostile environment to one of relative safety for most. Accepting an end to growth in all of these areas would mean that we have effectively called a halt to our upward progress.

This would have profound effects on who we are. Humans have become something special through our conflict with the natural forces which threaten us. We have transformed ourselves into civilised people through this process. If we gave up on this struggle, stopped being inquisitive and experimental, we would be in danger of becoming the human equivalent of cows, well fed, safe and chewing the cud to pass the time.

Where Skidelsky has a point is in his recognition that we have paid a price for the way in which we organise production,

The accumulation of wealth, which should be a means to the “good life,” becomes an end in itself because it destroys many of the things that make life worth living. Beyond a certain point – which most of the world is still far from having reached – the accumulation of wealth offers only substitute pleasures for the real losses to human relations that it exacts.

Here Skidelsky touches on the alienating and destructive effect of modern capitalism on human relations,something Marx described brilliantly in his description of commodity fetishism. It is true that the capitalist mode of production isolates and alienates us from each other through the endless process of competition. But to use this as a reason to abandon economic growth is to confuse the current way we organise production (capitalism) with the purpose of production (raising living standards). We can find an alternative to the first eventually perhaps, but we should never give up on the struggle to develop ourselves through further control over the world around us.

Bankers’ bonuses-the great evasion

4 09 2009

images[9]The G20 meeting of finance ministers this weekend and the G20 itself two weeks later both look set to be dominated by the issue of bankers’ bonuses. Gordon Brown has joined with President Sarkozy and Chancellor Merkel in signing a ‘letter of intent’ to find a way of bringing banking remuneration under control.

Why are they focussing on this issue? Is it because the question of toxic finance, which triggered the recession, has gone away? Not at all, in fact banks around the world are still sitting on trillions of dollars worth of rubbish investments. The only reason they have not been written off as losses in their entirety is that such a move would render the banks bankrupt. Instead the bust banks continue to be propped up by government guarantees. The response of the banks has been to desperately save as much cash as possible to rebuild their balance sheets instead of lending it, which after all is their prime function as businesses, leading to a continued credit crisis, particularly in the UK and the US.

Is the focus on bankers’ bonuses  because the impact of the recession has gone away? Absolutely not. Unemployment is rising throughout the developed world and while there are some signs that the fall in production has stopped, there is little evidence that the world economy is back on a growth trajectory.

So, if there is still much to be done to get the world economy back into growth mode why the focus on bankers’ bonuses? Firstly, political leaders  are under pressure politically to find scapegoats for the crisis. The bonus issue has been the one thing that has stuck in the public mind as an ‘explanation’ for the crisis. The absence of any serious public debate about the recession and its causes has reduced the public discussion to a mere scapegoating exercise. Politicians posturing on the world stage about the need to contain bonuses is a cheap political gimmick aimed for domestic audiences. As there is almost no possible way in a market economy to restrict the pay of the rich, it is doomed to failure even were the political will really there to carry it through.

Secondly, a debate focussed around bankers’ pay  helps to distract attention from the fact that the world’s leaders have very little to say about the real long term problems facing the world economy. There is little evidence of a willingness, for example, to address the question of global trade imbalances which lie at the heart of the world recession. The G20 will discuss bankers’ pay because they have little else meaningful to discuss. The prevailing mood is to hope that we are out of the worst and that ‘business as usual’ can be resumed as soon as possible.

There are good reasons to oppose any restrictions on bonuses, but we should be clear that the fact that any debate about it at all is taking place is a clear sign of how empty the public discussion of the economy has become. It is a warning that there could be much worse to come down the line.

The uncertain state of the G8

10 07 2009

Obama G8 ItalyCompared with the drama of the G20 in April, the G8 meeting in Italy is a curiously muted affair. At the end of course there will be, as there always is, a joint statement from all involved saying something anodyne they can all agree with. But the overriding feeling coming out of the meeting is of drift.

The leaders gathered together on the site of an earthquake are themselves a curious bunch. For a start the G8 does not include China or India, the two most economically dynamic countries in the world, although the leaders of both countries were there to start with. It  includes countries whose presidents are both hugely popular at home, Obama being one and Berlusconi, for unfathomable Italian reasons, the other. Also present by contrast is Gordon Brown, currently on political death row. Whatever their individual current strengths or weaknesses  the problems they, and we , face were clearly contentious.

Firstly on the economy, there were no concrete proposals nor any clear agrement on what if any steps need to be taken to help the world out of recession. The G8 in this area resembles a group of generals who have sent their troops out to fight and are waiting for news from the front. There is an unmistakable feeling that everything that could be done has been done and now it is time to wait and hope for an upturn. Meanwhile the real underlying tensions between the debtor countries and those supplying the credit continue to simmer away.

Secondly, the debate over global warming is following a similar pattern. The main developing countries are objecting to pressure to cut emissions in a way that would hinder their economic growth. This issue is rapidly becoming a source of protectionist pressures in the US which reflects broader tensions between the US and China.

Altogether the world’s leaders look unsure and uncomfortable about how to deal with both the near term and longer term problems facing the world.

The Battle for the Economy is on

24 04 2009

Battle for the Economy, Institute of Ideas

Battle for the Economy
16 May 2009 (9.30 am-6.00 pm)
Googdenough College, London

On Wednesday we had a nothing budget from a politically exhausted and demoralised government.  There was a populist and financially meaningless tax rise for the rich but almost no recognition in any of the measures, or in the debate around the budget, of what we could be doing to tackle the deep seated problems of the UK economy.

This would not be so bad if there was an opposition with better ideas waiting in the wings. However the Tories have promised only one thing, to take a harder line on public spending than Labour has projected to do. In fact even this is not a real difference, for if Labour did win the next election against the odds it too would cut spending. The only reason Labour is not saying that now is to avoid alienating even further an already deeply discontented electorate.

Recently there have been efforts to suggest that the recession is coming to an end. It is certainly possible that the rate of decline is slowing . That does not mean that the recession is over, nor that there is any certainty of an early upturn. What is certain however is that the most important problems are still not being addressed. In the UK that includes the whole issue of excessive public spending.

In the coming year there will be a great deal of discussion about cutting  public sector spending. The public sector will account for around 48% of the UK economy by next year and there are no doubt parts of it which we could do without. The question of the role of the state in our society could do with a thorough examination, but it should not begin with what are the easiest parts to cut, but what kind of state we need and what role it should play.

It is issues like these which need to be subjected to the maximum public debate.  From the various discussions I have taken part in recently it is clear that many people have very strong views and opinions, some of them quite sensible, about what should be done. The dead nature of our political process means that there is very little opportunity for serious public discussion which can involve us all.

On May 16th (2009) The Battle for the Economy  conference, organised by the Institute of Ideas will begin to do just that. As you will see from both the speakers and the sessions, the Conference will directly address difficult issues led by speakers who are well informed about the background to the problems we face. I would urge you to buy your ticket now.

The three interlocking crises of global capitalism

1 04 2009

As the G20 leaders begin their deliberations today it is worth trying to assess the problems that face them, and us. Everybody has been competing to describe this recession as the worst since the 70s/30s/black death, yet the full scale of the crisis has yet to be properly discussed.  The world is facing three interlocking crises.


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.

The entwining of the political and the economic crises has meant that the world’s response to the recession has been slow and lacking coherence. For example,we are nearly two years into the toxic debt crisis and still the bank bailouts appear to be having very little impact. The weakness and isolation of the political elites has led them to scapegoat  bankers, and by extension the whole financial system of capitalism, as the cause of the problem. This has in turn undermined the bailouts of the banks as investors have become wary of being seen to be making money out of the crisis and governments have become constrained about what they can do for fear of upsetting their voters.

A key element of the crisis is the changing balance of world power. The imbalance between productive economies like China and the less productive economies in the west lies at the heart of the recession. China and others built up huge financial surpluses which were recycled into consumer debt in the west. Now China is demanding that it be recognised as a new global power and wants to see its economic clout recognised by changes in global institutuions like the International Monetary Fund. The very fact that it is now the G20, which includes China and other developing nations, that are meeting today is a recognition of the shift in the balance of power. But changing the way the world is run will be a tricky process as there will be losers as well as winners.

There is an absence of any alternative to the status quo. This may seem an odd thing to say. Why should an absence of any critique of capitalism be a problem for the system? The answer is that in the absence of contestation the global elites have lost their way. For most of the 20th century the west was driven on by its conflict with the Soviet Union. The technological and scientific breakthroughs that came with the space race, for example, came about because of the US’s determination not to let the Soviet Union put a man on the moon first.

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 global elites have themselves begun to lose faith in the market system, so much so that the G20 looks to be dominated by arguments about how much global regulation the system needs.

There are other social and natural problems facing the world of course. Huge numbers of people in the world still live close to the breadline. We need to develop new, cheaper and cleaner energy sources. But the three interlocking crises mean that developments in these areas will be held back until politics and politicians themselves are given a new lease of life.