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.
My working week started early with an interview last night on The Westminster Hour. The discussion topic was the impact on public services of the sharp deceleration in spending planned to start in 2010.
As I argued a couple of weeks ago in this blog, it is important for public services managers to use the coming months to prepare for the long period of tightening budgets ahead. The reductions in spending – against a backdrop of increasing demands particularly in key areas such as social care – will not be achieved through painless ‘efficiency savings’.
As an example of a more radical approach to improving public service productivity, I suggested that year 10 and 11 pupils in secondary schools might only be expected to attend lessons for four days a week. The students would spend the other day at home or in the school library using on-line materials to structure their learning. This could free up teachers’ time and mean that class sizes could be maintained even with a rising pupil teacher ratio.
So I was fascinated to read this morning in The Independent about the Kunskapsskolan schools in Sweden. Among their many innovations is a system in which older students work much more independently under the supervision of personal tutors.
My prediction is that by 2020 whole class teaching will have been largely abandoned for the upper years of secondary school (KS4 and 5). So this is a good example of how a public service can be innovative, improve its service and improve productivity. But this kind of change needs to be explored now not in 18 months, by which time every change will be portrayed as driven simply by the need for ‘cuts’.
Here’s another contribution to this debate – albeit from a privileged perspective…
One of our annual highlights yesterday was the Royal Designers for Industry dinner. The winner of our Bicentenary Medal and keynote speaker was Tom Bloxham of Urban Splash. When we told Tom he had been given the award we asked him to speak on how urban regeneration might be affected by the economic downturn. That was last July when things seemed difficult but not nearly as bad as they look now.
Tom didn’t hide how tough things are now in the property sector. But he expressed the hope that in times of austerity good design would be seen as an even more important virtue.
Let’s hope he‘s right but, in fact, as I intimated in my earlier blog on Virgin Trains, the recession could drive producers and consumers in two directions. On the low road, sellers will try to screw every penny out of us as they seek to keep their head above water, while consumers will go for the cheapest option. On the high road, sellers will do everything they can to retain the loyalty of customers while buyers will be much more discerning, making sure that they spend their limited money on quality products made to last. The outcomes will in large part reflect the nature of different markets and sets of consumers. Those with a monopoly will try to screw people (as in Virgin Trains), poorer customers will have little choice but to go downmarket.
Our actions as individual consumers will have unwanted collective outcomes. As Anne Ashworth comments in the Times today, we may not think now we will bemoan the loss of Woolworths but we will feel differently when our run down high streets are full of boarded-up shops. In some villages – for example Blockley in Gloucestershire – the combination of an imaginative business strategy and a commitment by residents has seen the local shop not just saved but turned into a thriving social business.
Tom says that fewer people can buy his flats but more people want to rent them. In this way he can continue to design and build great homes. Many businesses will need to look to fundamental changes in their business model to survive. In doing this, there is a case for producers and consumers to work together to get through the bad times. We need to create the spaces for communities to talk over the tough choices we face over the next few years.
Notwithstanding my Kerry Katona like mood swings, I find myself increasingly convinced that the economic downturn is going to be very, very bad; so much so that our lives and our country will never be the same again. Even if we have seen the beginning of the end of the problems in the financial sector (and there is still a huge amount of leveraging to unwind), and even if the economy starts to pick up slowly towards the end of next year, we then face severe cuts in public investment. On the one hand, this could kill off any recovery (as we now know, much of the job creation of the last decade has been in the publicly funded sector) while on the other, we will all suffer diminished public provision and many will face real hardship.
As the Conservatives inadvertently underline every day, there is no alternative; things are going to be grim. What we must do – the ‘we’ in this case being society in general and organisations like the RSA – is make better use of the under-used capacity which exists in society.
Innovation is very often precisely about this mobilisation of capacity. So, as I was saying to Leonard Cheshire Disability this morning, individual budgets for social care work in part because they tap into the previously unseen and unused capacity to manage their own lives and services which exists among social care clients and carers. Another example, which I heard in Leicester from a Fellow called Nigel Lothrop, is a successful scheme in which young people who have been in trouble or have dropped out of school clear and maintain the gardens of people unable, for one reason or another, to do it themselves. Using a time bank mechanism the young people then trade the hours donated to the gardens for time getting one-to-one tuition in the basic skills they often failed to pick up in formal education. Apparently, the scheme is proving too successful in that the barrier to it now is not the need for or supply of volunteers but the capacity of the local authority and third sector to manage the scheme.
If we are to improve the quality of our lives, protect the most vulnerable and strengthen communities we need these kinds of experiments to be taking place everywhere. However much capacity we are going to lose in the private and public sector, it is dwarfed by the unexploited potential of civil society. Mobilising this capacity should be a priority for policy makers and a new raison d’etre for the RSA Fellowship.