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 kind of state do we have?

26 06 2009

As we are are trying to work out what our approach should be towards the state and public spending, I would heartily recommend James Heartfield’s new essay on the nature of the modern UK state. In it he examines the way in which the state has  weakened its control over key economic developments by contracting out key aspects of its economic decision-making and responsibilities to consultancies and private companies,often in dubious circumstances.

Yet while the state has contracted out these key public services it has also created a more intrusive system of regulation over society through intervention in public and family life. This is one of the key aspects of the state that many of you objected to in the discussion of public spending we can do without.

James Heartfield’s conclusion is, 

All the time the established boundary between ‘state’ and ‘civil society’, between ‘public goods and private benefits’, is being redrawn, or broken down altogether. What emerges is neither an enhanced private sector, nor coherent state provision, but rather a hybrid, dependent on public finances to survive, and increasingly operating according to a mixture of political, administrative and business models that makes little sense.

 In his essay he looks in detail at some of the ways that state intervention into the banks, the railways and the NHS amongst others has acted as an indirect subsidy to private industry. More analysis along these lines would help us to understand what it is about the modern state that we object to and what we can do without.

What the state is for

22 06 2009

News that the Tories are planning to scrap a new government body aimed at fast-tracking planning decisions, such as for airports or roads, should be met with qualified approval. The creation of this body, The Infrastructure Planning Commission, by Labour was an attempt to bypass the need to politically convince people that large infrastructure projects are necessary.

As Frank Furedi argues, the state in the UK is failing to fulfil many of its key functions, the creation of a modern infrastructure being one of them. There are many things that are socially and economically necessary which private capital cannot or will not do. The creation of large scale infrastructure projects involves levels of investment, planning  and coordination which necessitate the involvement of and leadership by the state.

The dependence of the UK economy over the past ten years on financial services , which require little more than offices and telephones in order to function,  has allowed growth to take place without  basic infrastructure upgrades. The probable decline of financial services as a driver for the UK economy makes the infrastructure issue even more vital.

New Labour, despite having increased public spending in almost every area of the economy, has conspicuously failed to modernise the basic infrastructure of the UK.  Dieter Helm recently listed the main areas which require attention,

Major upgrades are needed to the electricity and gas networks, smart meters, high-speed trains, upgrading the London Underground, Crossrail, new runways, new water resources and sewerage systems, and broadband roll-out, …new power stations, energy efficiency and renewables

Many of these projects are controversial and politically sensitive, nuclear power probably being top of the list.

Rather than confront directly those who cannot see the big picture requirement for investment in infrastructure New Labour has resorted to inquiries and bureaucratic means of pushing things through. It has often abdicated the need for government leadership by handing the decision making process over to third parties in an attempt to seem neutral and objective.

There are many aspects of life that the state should not involve itself in, (see the comments on this blog for some good examples), but it has a major responsibility for keeping the traffic running and the lights on.

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Does he take Sugar?

8 06 2009

Alan SugarNews that business owners are applying in large numbers to stand for parliament must be one aspect of the growing dissatisfaction with the existing political options. Conservative Central Office said it had received about 3,000 applications since David Cameron appealed for candidates from outside politics and about a third had come from business owners.

It is understandable that the kind of people who typically set up and run their own businesses would be feeling frustrated with politics today. Being an entrepreneur means trying to make things happen quickly. It means taking risks. It often also means working in new and untested areas of the economy. The UK, as I have argued here for some time, is not typified by any of these entrepreneurial traits.

An influx of people into government with experience of running  businesses, or for that matter schools, hospitals or any significant parts of our economy, would not be a bad thing in itself. For too long government has become the preserve of professional politicians. The front benches are full of people who went straight from student politics into mainstream politics with little experience of doing anything else, occasionally stopping off for a brief stint in PR, like Cameron himself, or in the media like James Purnell.

This deficit of real experience in running things has led to an increase in the number of unelected people being brought into government via peerages in an attempt to make up for it, hence Lord Drayson for example at the (now abolished) Department of Industry, Innovation and Skills. The terminally crippled Prime Minister has even turned to Sir Alan Sugar in a desperate attempt to marry a reputation for entrepreneurialism with celebrity and thus kill two birds with one stone.

More real life experience would no doubt be an asset in government. But, and it is a big but, this alone would not be enough to create a new start for British politics. We would still need to know what these people believed in and what policies they would wish to pursue. At the moment the Conservatives are no less empty of a real political vision than the discredited Brown government. New blood by all means, but new politics still seems a long way off.

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Barriers to innovation and change

22 05 2009

My closing speech at the Battle for the Economy conference

Taking risksWe have to frame this discussion within a cultural and a political context. Our society has become tremendously risk averse at every level. Common sense tells us it is unlikely that we can create a more dynamic and innovative economy when we are afraid to send our children to the park on their own, and how likely are these over protected children  to become confident risk takers as they grow up?

This may seem too much of a generalisation, but if you look at the specifics of what is happening in our economy you can see the links.

Take first of some of the better commodity producing  parts of our economy, the bits which actually make new things. Foremost in these are aerospace, pharmaceuticals, bioscience and energy. Each of these industries has been subjected to intense criticism for their supposed threats to us as consumers or to the environment. The aerospace industry is held responsible for global warming , as is the energy industry. The pharmaceutical industry is held in deep suspicion of selling us drugs which cause more harm than good. The biosciences have been held back by fears of Frankenstein food amongst other things. Many of these negative sentiments have been allowed to go unchallenged by our political leaders, sunk as they are in the mire of market research led policies.

How likely is it that these industries can attract the best and brightest young people to work in them or the support they need in universities or from investors when they are held in such low esteem?

Almost every time a crisis has arisen in public confidence the instinct of our political leaders has been to cut and run: Tony Blair over the MMR scare and nearly the whole political class over nuclear power and GM food. This has helped to create a lack of trust in science  and an irrational approach to what are the most exciting areas of development in medicine and other things.

The lack of leadership has encouraged this mood of anti-science and anti-progress, so much so that when swine flu broke out in a school down the road from me local opinion was divided between those who didn’t believe some scientists’ claims that  it  was a real threat, and those who took heed of this warning, but did not believe that Tamiflu was safe and not a dangerous kin to thalidomide, for example.

Secondly, also stemming from our over inflated sense of risk is the belief that economic growth in itself, whatever the source,  is problematic. There are even people who say that recessions are good for us and for the planet. These anti-growth sentiments fly in the face of reality, as all human progress is built on material prosperity. Yet they are very influential.

Thirdly, many of these anti-growth feelings are wrapped up in the idea of the Green New Deal, which seeks that progress and development be restricted to areas that can be proven to do no harm to the planet. This narrow criterion threatens to divert investment down narrow channels and hold up progress elsewhere.

Any threat to the environment or indeed any other challenge we face, is best dealt with by encouraging scientific and economic development on a broad front. Often scientists and technologists come up with solutions to problems they were not themselves originally looking for. To narrow down the areas of scientific endeavour too much risks those serendepitous discoveries.

Even on the terms of alternative energy itself, encouraging economic growth offers the best way forward. China creates 16% of its electricity through renewable sources, compared with 4% in the UK. This is  because China ‘s demand for energy to fuel its rapidly growing economy is such that it is prepared and able to experiment and innovate on a grander scale then we are here.

Finally, in the UK we have lower than OECD levels of both VC investment and R&D, but this is not because there is an absolute shortage of investment money available. Rather, risk aversion is what dominates large investors. The roots of the financial crisis lay in the fact that vast sums of money were recycled through financial instruments with a view to spreading and avoiding risk, incredible as it now seems.

There may be a case, as people like Lord Drayson are arguing, for diverting more of our State resources into encouraging innovation, but science and innovation need to be unwrapped from the risk aversion which surrounds and infuses them at the moment. Perhaps some of the money which is going into authoritarian measures such as ID cards, or the extension of CRB checks could be diverted into encouraging productive investment instead. In other words, this is a politicial and cultural problem about priorities, not an economic one, and so it needs to be tackled at that level.

It is clearer than ever before that there is a close connection between the failures of political leadership and the problems of our economic set up. You cannot tackle one without the other. The good news is that unlike, for example, a cure for cancer, the cure for our political problems lies in our own hands in the here and now.

Politicians pay the price for the recession

11 05 2009

Since the recession began, it has felt to me as if economics was coming into line with politics. What does this mean? Since the collapse of the left in the 80s the sphere of ideological disputation in political life has diminished consistently. Politics in the UK has come to be defined as a narrow contest between parties who disagree on very little and who conduct their politics via market research led focus groups. The idea of politics as a place where there is a battle of leadership to determine what direction the country should be going in has faded away. Instead, we have an increasingly personality led and cliquish political class which has shifted to the margins of what most people feel is important in their lives.

Over the past ten years, political leaders, Gordon Brown especially, made a virtue of their support for the expansion of financial services, the housing bubble and the vast increase of credit based consumption . The absence of any alternative to this approach did not matter as long as the bubbles kept inflating.  Brown was able to claim that he had brought an end to boom and bust, although unfortunately as we now know the boom was built on the expansion of credit, paid for by the Chinese and others.  Growth did not happen because the UK had developed a new productive economy, but because the Chinese and other productive developing countries could not find a domestic use for their profits.

The collapse of the financial bubble revealed that the UK economy had not been built on solid ground, rather, as Tony Blair has since admitted, Labour was lucky. Its rule coincided with the availability of cheap credit. The narrowness and introverted character of our political life combined with a blind faith in the market,  encouraged a lack of proper examination of what lay behind the financial and housing bubbles.

Politicians here and elsewhere reacted with shock and disbelief when the recession began.  For a long time they could not believe that their faith in the explosion of financial services could have been wrong. When they did begin to react they tried to avert attention from their own complicity in what had happened by trying to pin the blame on greedy bankers.  This should have been the time to launch into a proper debate about what went wrong and to try to work out a new approach to the economy. Instead, having blamed ‘greed’ for the recession they set themselves up perfectly for their current humiliations over their expenses.

Now we are in a very dire state. We have a political class which is lacking in ideas and credibility. We have an economy which has lost its driving force. What can we do about these problems? These and other issues will be at the core of the discussion at the Battle for The Economy next weekend.

After the recession, a New World Order?

27 04 2009
<I>Fixing Global Finance: How to Curb Financial Crises in the 21st Century </> by Martin Wolf

Fixing Global Finance: How to Curb Financial Crises in the 21st Century, by Martin Wolf

Fixing Global Finance: How to Curb Financial Crises in the 21st Century, by Martin Wolf (published by Yale University Press)

Following the ‘credit crunch’ and now the full-blown recession, the big story of the twenty-first century is likely to be the shift in the balance of power between the indebted West and the credited East.  There are some writers on the economy who seem to understand better than others that politics should be seen as concentrated economics. Martin Wolf, associate editor of the Financial Times, is one such writer.

His FT column is a must-read for anyone who wants to understand what is happening in the current economic crisis. His latest book is about the problems of the world financial system and the events that led up to the current debacle. In it, Wolf explains both the underlying causes of the recession while also exposing the complex and potentially dangerous political consequences that have arisen as a result.

The central point in the book is that China is now playing a role in the world economy that no country has ever done before. China is ‘both the largest exporter of capital (as the United Kingdom was in the late nineteenth century) and the fastest growing emerging giant (the role played by the United States at that time)’.

China, along with other dynamic exporting nations, such as Japan, built up massive external surpluses of money in the period after 1997. The surpluses were based on the export of manufactured goods to mainly Western countries. By 2006, says Wolf, ‘The total Asian surplus was $511billion ($239billion for China, $170billion for Japan, and $102billion for the rest of Asia). The surplus of the oil exporters was another $396billion… But the US deficit was $857billion.’

So the US deficit was the equivalent of the total surplus of Asia and the oil-exporting countries. As a result, ‘The United States has in turn, been absorbing about 70 per cent of the surplus savings in the rest of the world, with the difference accounted for, not by increased investments, but by higher consumption and a lower rate of savings.’

Wolf is highly critical of the US for consuming rather than investing the massive amounts of imported capital, which ended up inflating the housing bubble and presaged the credit crunch. He sees the problem as one of underconsumption within China and other developing countries. He attributes the running up of huge external surpluses by China and others as a policy response to the Asian crisis of 1997/1998 when currencies collapsed and there were devastating consequences for the economies of some East Asian countries. He argues that ‘The lesson learned by many emerging economies – both those directly affected by the crises and those who have been onlookers – is not to tolerate current account deficits’.

So he sees the growth of external surpluses as a policy decision by developing countries. Others have argued that it is not as straightforward as that (1). China in particular would struggle to reinvest its huge surpluses internally because of the general underdevelopment of huge parts of the country (although its huge internal fiscal stimulus this year is trying to address that problem).

Wolf discusses why China and others have put huge sums of money into the US when the rate of return is so low. Given the problems China has in developing its own economy, the question really should be: what was the alternative, other than keeping the money under the bed? The nightmare scenario now for the Chinese is that the US inflates its way out of its debt, thus reducing the value of Chinese capital in the US.

So while we can understand from the Chinese point of view how we have got to where we are, from the US point of view the problem is completely different. The US and other Western countries, like the UK, have run up massive debts because, as Wolf points out ‘The high income countries have become importers of savings since their savings rates have fallen below their investment rates’.

Quite simply, we in the US and the UK have taken the savings from developing countries and consumed them, leaving ourselves in massive debt. The key question that comes out of this is how this imbalance in the world economy can be righted. As Wolf says: ‘A large-scale flow of capital from poor countries to the world’s richest nations is perverse.’

One consequence of the recession is that the international flow of capital has collapsed. It seems unlikely that, once the recession is over, the flows of capital from East to West will return in the same way. A rebalancing of some sort will have to take place. The West is unlikely to be able to resume its consumption of the savings glut from the rest of the world, certainly to the extent that it has in recent years. Western countries will have to find other ways to finance growth and consumption while we can assume that developing countries will shift their surpluses more towards the development of internal markets.

The rebalancing of the world’s economies will also, of necessity, affect the way the world is managed politically. Currently all of the world’s financial and political global institutions reflect the relative economic weight of countries 40 or 50 years ago. This will have to change. This is where it becomes politically challenging. As Roger Alton has pointed out:

‘The financial and economic crash of 2008, the worst in over 75 years, is a major geopolitical setback for the United States and Europe. Over the medium term, Washington and European governments will have neither the resources nor the economic credibility to play the role in global affairs that they otherwise would have played. These weaknesses will eventually be repaired, but in the interim, they will accelerate trends that are shifting the world’s centre of gravity away from the United States.’ (2)

As a result, some countries will lose power and influence and others will gain. Whether and how this can be managed is going to be the story of the first part of the twenty-first. Managing this shift in the middle of a recession is a huge political task, to which Wolf offers no solution except to argue for a restructuring of the International Monetary Fund. Nevertheless, he has written a fine account of the economic issues underlying the political problems facing the world today.

This book review was published by www.spiked-online.com on 23 April 2009

(1) See Darling, it’s all about the global imbalances, by Stuart Simpson.

(2) The Great Crash, 2008: A Geopolitical Setback for the West, Foreign Affairs, January/February 2009