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Every cloud has a stormy lining

February 5, 2013 by
Filed under: Credit crunch, Politics 

Economics, to me, is like art; I can appreciate it, I can discuss it, even argue about it but I can’t really do it; as the following paragraphs will probably go to show.

I attended a conference at the end of last week which contained a number of presentations and conversations about the economy. It changed how I think about things quite substantially.

On the one hand, while we face huge fiscal challenges and the austerity programme is already causing pain, I concluded that the straight jacket we are in may not be at tight as is usually presented. For a start, the scale of the fiscal challenge depends a great deal on the estimate of how much of the deficit is structural – the more scope we judge there is for the economy to grow without inflation the less we should be worried about the medium term sustainability of public debt. A speaker at the conference said he had heard convincing estimates for the size of the output gap ranging from zero to six per cent of GDP.  Second, adding a year or two to the timeframe for cutting the deficit (as George Osborne has already done) can make quite a difference to the speed at which cuts need to be made. Third, as the muted market reaction to the decision of the heavily indebted Japanese Government to inject yet more cash into the economy suggests, international financial markets seem right now more concerned about growth – or the lack of it – than debt.

When economic debate isn’t focussed on the deficit it tends to focus on growth. The implication is that if only we could have a few years of two or three per cent growth – perhaps spurred by a temporary tax cut or some infrastructure spending – then we would be well on the way to recovery. But this belies the deeper nature of our economic problems.

For example, we continue to be the most privately indebted of the OECD countries, a debt concentrated disproportionately in the lowest income groups. There is simply no way for the poorest to get out of debt, because even if the economy did grow a rise in interest rates would plunge over the edge millions who are only just managing to meet interest charges. As ministers desperately scan the sky for rays of sunshine the clouds are continuing to gather over these families with welfare cuts and rising transport and utility charges (water becomes the latest today).

Back out in the economy at large, there is the huge decline in productivity which has occurred in the last few years, from the already modest base line at which we started when the credit crunch hit. This may in turn help to explain why after a twenty per cent devaluation in the pound in the last few years we are still experiencing a huge balance of payments deficit, one which would be substantially worse were it not for the contribution of the publicly-reviled financial services sector.

At this point we might add to the list the continuing hollowing out of the labour force leaving an ever bigger gulf separating the low productivity low pay service sector from the professional and managerial classes, and the latter from the global plutocracy who now use central London property as a massive piggy bank. And even at the scientific top end of the economy on which so many ministers seem to rest their hopes, there is both a decline in research and development investment by big firms and problems with translating Government intentions and funding for innovation into anything like the scale of new invention and enterprise needed.

There are three ways of looking at this (there always are). The basically complacent one I have described; with a bit of pushing and shoving growth will return. Then there is the gloomy one suggesting we have entered an era of low growth, stagnant living standards and a declining public sphere. The third is that in the face of all of this we need not only to think much more profoundly and talk much more openly about our economic challenges, but also to be willing to do some genuinely innovative things in relation to policy on tax (maybe a ‘use it or lose it’ tax on corporate balance sheets), spending (making tough decision on less productive public spending so more can go to those things which boost employment and skills), employment (an urgent national crusade to end long term youth unemployment), training (by 2020 every job should be a learning job), investing assets (using social housing receipts and public sector pension for productive investment) devolving to cities (implementing the Heseltine report and strengthening city regions).

To be honest, I don’t know all the pros and cons for these six ideas, and even if I did I might not understand them. But desperate times require desperate measures and, be in no doubt, for the UK economy these ARE desperate times.




  • Robert Burns


    I direct readers to the first five paragraphs of my comment on your recent posting “Wholly Moises”.

    The political and managerial class of the North Atlantic zone (and its satellites) have run the ship onto the rocks with their hubris.

    This ship is sinking and I should imagine that quite a few of them are surprised to learn that there is nowhere for them to go and almost no one left to sacrifice in their place.

    They will not be missed.

  • Margaret Bowker

    A very interesting point, Matthew, about having the same relationship to economics as you have to art. For me, sometimes, it seems as if economics is part of an unfolding narrative and therefore, comprehensible. Some commentators have been saying that it should be seen more in a socio/political context. I think Roger Bootle, (winner of the Wolfon Prize) had a article discussing it last year, arguing that pure economics should have a broader base in economic schools, so that real life forms a background to the modelling etc. Didn’t Davos call for a more comprehensive view of global rebalancing.

    But on to the discussion of austerity and growth. Your conference seemed to be debating the opportunity for easing in the reduction plan, considering output gap, timescale and growth stimulus. A number of countries are starting to say austerity is not enough. Japan, as you mentioned, is fully going for growth. Mario Monti has argued for it to be catered for in the long term EU budget. The IMF and Fitch would like to see a pro-active budget in the UK. Laura Tyson recently argued for growth to be protected in the upcoming US budget negotiations.

    Balanced against this is the necessity to reduce debt and countries like the UK and the US are having to face the issue of entitlements or benefits. You made very good points about the effect of debt on the less well-off and those receiving benefits. But I would expect growth to be sustainable and significant before raising UK rates was even considered. as with the US. For many, as you say, low mortgage repayments make a tight budget just about possible, as charges rise.

    Your point about the substantial contribution of the financial services sector was well-made, although the idea of fining the corporations if they don’t invest, went a bit too far for me. Shout at them, yes, encourage them tax-wise, yes, but punishing might be counter-productive.However, Vince Cable’s suggestion of publishing highly detailed bank branch lending figures caught the attention this morning.

    Very thought-provoking and enjoyable article.

  • Robert Burns


    don’t take too much comfort from what Margaret has written.

    Instead of talking about the few hundreds, or thousands, of pounds in consumer debt that ‘less well off households’ have outstanding, let’s talk about the hundreds OF thousands that ‘better off households’ have outstanding in mortgage debt.

    A good deal more destructive debt is held in mortgage borrowing than consumer debt.

    If property prices were allowed to function under free market conditions we would not have a situation where domestic property valuations represent multiples of 5, 10, 15 and higher of real ‘average incomes’.

    The cost of business premises would also be more realistic.

    The ‘less well off’ did not create the present mess.

    Let’s be clear here.

    The ‘financial sector’ created this mess by providing the credit to drive an inflationary spiral in property prices without any reference to what was happening in the wider economy – particularly pay.

    In the free market that they seem to think is such a wonderful thing much of that mortgage debt would have been allowed to go bad and property prices would be aligned with incomes.

    Denying its influence (by excluding it) in official cost of living inflation calculations is one of the open lies that is bleeding us all to financial death.

    The other open lie in this context is that property price ‘growth’ is good for the economy as a whole.

    That’s like equating cancerous tumors with healthy tissue or a heroin jolt with natural pleasure.

    Property price ‘growth’ shrinks personal disposable incomes for the majority of the population and drives businesses to destruction or out of the country.

    The ‘financial sector’ did these things because they pay themselves too much in salaries, bonuses and commissions for (at best) meager returns to the people whose money they held in trust and ultimately lost.

    Anyone who holds up the ‘financial sector’ as making a significant contribution to easing our national economic troubles is just embarrassing themselves.

    As for general economic growth zero or negative figures are the order of the day for the foreseeable future as long as:

    (a) employment continues to be expatriated – thereby reducing any opportunity of correct the balance of payments other than by selling financial jiggery-pokery ‘services';

    (b) foreign unemployment continues to be imported

    Don’t blame the ‘poor’, blame the all those ‘Strivers’ who made all the decisions that led to this mess.

  • Zio Bastone

    @ Margaret Bowker

    Be careful with your affections.

    According to the DTI in 2010  the ‘substantial contribution’ made by financial services (3% of UK GDP) was the same as that made by ‘Ndrangheta to Italian GDP.

    As we say so often down at Pizza Express, ‘Italy’s position would be substantially worse were it not for the contribution of these publicly reviled webs of organized crime.’

    Defend the banks if you will, but not please on the basis of ‘contribution’. We nearly lost our domestic financial system partly thanks to RBS, a grotesquely large and underregulated bank, playing My Acquisition is Bigger than Your Acquisition with its friends; Greece was brought to its knees partly through the actions of Goldman Sachs; Monte di Paschi, the world’s oldest bank and Italy’s third largest, has suffered catastrophic losses through what were probably fraudulent trades entered into when Mario Monti was the regulator; we know, of course, about the subprime and CDS crisis which started in the States. And I have mentioned before the malign influence of banks, and German banks in particular, upon shipping. Which is one reason why Greek players (bankrolled by the Chinese, who now own half of Piraeus) are buying up very cheap ships.

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