Can the market (or the government) deliver fast economic recovery?

1 07 2010

For the past 30 years, the economy has been driven by public sector, finance and housing. So what will take their place? The strict answer is that nobody needs to identify where future growth will come from — that is the whole point of a market economy. Provided the cost of money is low enough to provide cheap capital and ample incentives for entrepreneurship, new industries will arise to replace declining sectors.   Anatole Kaletsky in the Times

Kaletsky was writing prior to a day of discussion involving the government and the heads of 100 or so top UK enterprises on what needs to be done to revive the UK economy.  It is quite unusual in the UK for pundits to openly state their belief  in the power of the market, unaided, to bring strong economic growth. Bear in mind that the main growth area of the UK economy in the past 10 years was the public sector, not the private sector, funded by a combination of taxation of the financial bubble and debt.

Why should the market succeed now, when it has failed in the past? The conclusions of the top CEOs at the Times conference were summed as follows, what the UK needs are:

International tax competitiveness

Financial stability

Investment in infrastructure

Education and training for the low carbon economy

Deregulation and labour market flexibility

It would be hard to find a group of businessmen anywhere at any time who did not produce exactly this list of priorities. Lower wages, lower taxes and less red tape figure high on any businessman’s wish list. Of course, this begs the question of how the infrastructure projects and better educational standards also requested would be paid for, as infrastructure and education are almost always executed by governments and paid for out of taxation. Financial stability, given the interlinked nature of the world’s financial system, is not really within any government’s gift, as we have had amply demonstrated over the past two years.

The problem with this list is that it does not address the specific problems of the UK, and other western, economies. The question of what is going to provide the motor for growth in the UK economy, for example, is a question well worth asking. If the only answer is that the market will provide then we have cause for concern. As I and others have argued before, in the UK  market capitalism has proved to be heavily dependent on the state for its survival. In fact, one of the most positive things to come out of the discussion was George Osborne’s recognition that the UK government should be positively assisting sectors of the economy which show potential. This is in contrast to Vincent Cable who is going out of his way to say there should be no return to the 70s policy of ‘picking winners’.

On the question of infrastructure, it was disheartening to hear that the government has decided to axe the Infrastructure Planning Commission which was set up last year in order to shorten the planning process for large infrastructural projects. It appears to have become the victim of nimbyism from Tory MPS who fear that their rural constituencies will have nuclear power stations and high speed railway lines imposed on them. The coalition remains lukewarm at best about major infrastructural projects such as new nuclear power stations and high speed railways.

The government now claims that its fiscal austerity package will lead to more jobs rather than fewer over the next five years. Public spending cuts will lead to hundreds and thousands of job losses and inevitably weaken the economy.  It is taking a huge gamble that the private sector can pick up the slack. There is no evidence of any upsurge of entrepreneurialism or appetite for investment in new industries in the UK. If the state is not even prepared to take the lead in pushing through modernisation of the UK infrastructure, something which nearly always requires state coordination, it does not bode well for leadership in other areas of the economy.

Over the past two years economic issues have dominated politics in a way not experienced since the 80s. The world’s financial system has been shaken and the weakness of many western economies exposed. Despite all of this, what little debate there is on the economy remains rooted in the past. The only area for discussion appears to be whether fiscal stimuli should be withdrawn now or later, a rerun of the debates during the recession of the thirties. Yet we all know that the thirties recession was only finally resolved through the massive destruction wrought during world war 11, not through any economic policies.

*** This blog will be taking a break from now until the end of the summer ***

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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 should anybody oppose public spending cuts, and how?

18 05 2010

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

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

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

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

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

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

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





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?





More effective leadership in politics would be a good thing, but leadership to what end? Shiller’s behavioural economics-wrong again

18 02 2010

..in the aftermath of the bursting of the largest bubble in history, in the property market as well as other markets, we see that a social-psychological phenomenon, over-confidence, was not managed by leaders, and its subsequent collapse represents the deepest cause of the financial crisis.

The essential banality of behavioural psychology when applied to politics or economics was revealed again today in Robert Shiller’s latest article on leadership in the United States. Shiller, the joint  author of Animal Spirits contrasts unfavourably  the leadership of Obama and Gordon Brown during the present recession with that of Franklin D Roosevelt during the Great Depression of the 1930s. His conclusion is

Leadership matters. But it can be effective only sometimes. And leadership in a crisis cannot undo all the damage of lack of leadership in the past.

so sometimes leadership works and sometimes it does not. Excellent work Sherlock! Shiller cannot even explain why on its own terms Roosevelt’s leadership was effective, merely pointing out that it appeared to help bring an end to the Depression. Such a narrow reading of the economics of the 1930s is itself absurd. The US economy was finally brought out of the Depression by World War Two and the tremendous boost to production and innovation that came with it.

There is now widespread acceptance that politics and the political process in the West are in acute crisis. (See this desperate analysis of UK politics for example). It is tempting at times like this to yearn for the smack of firm government. It is certainly true that seeing political leaders taking firm and decisive action evokes at least some respect, even if one disagrees with the particular approach, and is better than leaders who vacillate and seem constantly uncertain of even their short-term, let alone their long-term goals.

But Shiller and others over-emphasise the subjective element of leadership. It is interesting that the only other example he gives of effective leadership in a crisis is of Winston Churchill during World War Two. Churchill is significant because he combined strong personal leadership qualities with a well-defined cause, the survival of Britain in the face of a deadly enemy. Before the War  Churchill was a renegade who lacked significant influence. After the War he was a totem Prime Minister. It was the unique political environment of the War which gave content to his leadership skills. He engaged with the strong patriotic feelings still at that time present within large sections of the British people and inspired them to keep fighting.

President Obama is a man with obvious and admirable leadership qualities. His problem is that he is leading a nation which is in relative economic decline and he has no political framework available within which to address this problem. The story of the United States is of continuous progress and global domination. US politics is finding it impossible to deal with a world of relative decline. Shiller’s emphasis on confidence is very American. The story of the US is one in which confidence is the key to success.

There is something very attractive about this ‘can do’ approach to life and there is much about it which we who are immersed in the deep cynicism of British culture could emulate. British political leaders are dwarves compared with Obama, so the problem here is even more acute. However the mirror image of US style confidence is those other figures familiar from American fiction, the confidence trickster, the snake oil seller and the quack doctor. Confidence and optimism are all very well, but the main problem facing politics today is its emptiness and lack of vision. Shiller does us all no favours by focusing on the wrong problem and the wrong solution. The medicine of confidence he prescribes is the modern equivalent of snake oil.





UK politics is broken beyond repair-no coalition can fix that

12 02 2010

A recent opinion poll attracted a lot of attention because 70% of those polled agreed that Britain had a ‘broken society’. The striking figure which received less coverage was that even more, 73%, agreed that ‘politics is broken’. If you add that to the recent survey which showed only 56% of people in the UK thought it worth voting we can see what sorry depths politics has sunk to.

This nadir is also demonstrated by the fact that far from politics being at the centre of a discussion of the upcoming general election, the issue which now appears to be the main one facing the country is whether a coalition government would be a good or a bad thing. It is a remarkable demonstration of the weakness of the Conservative Party that it does not appear to be able to take advantage of the deep unpopularity of Gordon Brown’s Labour Government and win a clear majority.

Martin Wolf, writing today, makes the point that a coalition government would be a good thing because;

 ..the UK’s government has been the author of a flood of ill-considered, media-driven initiatives. Almost nothing is properly thought out. This is the result of the domination of a handful of people over the machinery of power, unchecked by party, parliament, bureaucracy or any other tier of government. Coalition government would make this change in desirable ways.

This is a case of right diagnosis, wrong medicine. Anatole Kaletsky made similiar points recently by implying that what we need is more concensus politics, like the Chinese, if we are to recover our social and economic dynamism. The cheap and shallow politics that Wolf refers to is a product of the end of big aspirational politics, which used to be ideologically framed, and its replacement by a short-term managerial approach. This short-termist approach dominates every party. Putting the parties together in to a coalition would not change this.  Politics is not petty because of the existence of different parties. It is petty because the parties have nothing else to offer except these ‘media driven’ idiocies. It is petty because of the absence in any of their programmes of any vision for a better society.

It seems we have reached the bottom or close to the bottom of a cycle of general cynicism towards politics and the political process. The question is are we condemned to bump along the bottom for a long time or will there be any reaction? There is certainly no sign of any recovery at the moment. There are some attempts to inject some politics into the general election campaign and these should be supported. It is difficult to encourage participation in a general election which is so devoid of policies which can make a difference, but the effort still has to be made. Without a democratic revival we are condemned to drift, frustration and cynicism.