If our economy is in deep trouble, what’s next?


9:15 am - May 22nd 2011

by Adam Ramsay    


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Vince Cable has finally admitted the extent to which the UK economy is screwed. In an interview with the Guardian yesterday, he said we depended far too much on financial services, the scale of global inflation, and the rapidly increasing role of China in setting prices and outcompeting us.

Politicians have failed, he says, to prepare us for the rocky ride ahead. Well, I can go half way there with him.

Our economy is in serious trouble, and all of the reasons he outlines are contributing factors. But, here’s my question: What’s his plan. Other than running around the country shouting ‘WE’RE ALL DOOMED&#8217

As I’ve written before, the government’s economic plan seems to have 3 strands – export led growth, privitisation and de-regulation, and re-inflating the financial bubble.

Essentially, Cable today seems to be saying that these won’t work. I agree. They won’t. To whom, precicely, are we supposed to export? As Vince Cable outlines, this strategy is clearly going to fail as the seas of the global economy fail to calm.

Privatisation doesn’t deliver real wealth, only the pyhrric joy of a stock market high. There is little evidence that de-regulaiton helps at all – we had much faster growth rates both in the UK and around the world in the era when things were much more regulated. Re-inflating the financial bubble will end with another pop.

But being able to see a long way is not the same as having vision. And it is this vision that Cable lacks.

This decline in quality of life is not intrinsic to our situation. We are one of the richest countries on earth. We have remaining a fantastic education system, and the resources with which people can build a better economy.

But that will require a government willing to invest. That will need a government willing to take risks.

What Cable expressed today is the sentiment of the whole of Europe’s failed liberal centrists – politicians left floundering in the wake of an economic storm they didn’t understand and in which they have failed to get a grip.

Because the truth is that Cable is right. As Peter McColl has put it, the credit crunch removed the velvet glove from the iron fist of neo-liberal capitalism that has been asset stripping and gutting our economy for the last 30 years.

The strategy of the centrist liberals – try to collect the wealth of neo-liberalism and redistribute it through the welfare state – this strategy has failed. Cutting back public sercies is simply an attempt to dig our way out of this hole.

Cable complains of the volatility of oil markets. Where is his mass investment in renewables? He complains of over-financialisation. Where is his industrial plan? He complains about inflation. Where is his global treaty to control speculation?

We are 3 years now from the credit crunch. The time for moaning has passed. Now is the time to build something new. The crisis in finance has been mirrored by a crisis in imagination. Now is the time to imagine tomorrow.


A longer version is at Bright Green Scotland

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About the author
Adam is a regular contributor. He also writes more frequently at: Bright Green Scotland.
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Reader comments


It is the world economy which is doomed while we continue to consume more than Earth’s resources an sustain, condemn future generations and advance climate change. Until we fully understand this – Ed does but has not yet managed to shape a coherent and palatable political message – all our short-term ‘fixes,’ like Adam’s, are irrelevant. It’s time the Earth Charter’s framework http://www.earthcharter.org was taken seriously since it provides a global context to help us think.

I wouldn’t say we had a fantastic education system. It’s mediocre at best. A fantastic education system would be teaching our children a better moral understanding of how distructive greed can be. It would be teaching them why everyone should take an interest in politics and why they should always exercise their right to vote. Secondary education needs a shift as well. Kids from the age of 12 should be taught that borrowing money from banks is not the quick fix to attain all the nice things they’d like to possess such as cars, big TV’s, mobile phones etc, as you end up enslaved to the lenders for decades. Maybe if we were drumming these fundementals into our kids from an early age, they wouldn’t be growing up believing that the pursuit of wealth and power will never deliver happiness. Only the illusion of happiness.

If we began by making this shift in our education system, while at the same time imposing tough regulation on shadow banking, Hedge Funds (who also make a massive contribution to inflation) and tax avoidance, it would only be about 10-20yrs before we would start to see a massive shift in the overall economics in the world. There’s not going to be a quick fix to the financial crisis we are all suffering. It took 40yrs and a World War before we started to climb out of the Great Depression. If we start now, it could be half that this time round.

Dammit! I ended up putting in a double negative then.

It should read “Maybe if we were drumming these fundementals into our kids from an early age, they wouldn’t be growing up believing that the pursuit of wealth and power will EVER deliver happiness. Only the illusion of happiness.”

4. Mike Killingworth

Perhaps the reason Vince Cable doesn’t offer a solution is because there isn’t one. Even though, contrary to what Adam Ramsay appears to think, this government is taking risks, not least with its own popularity.

I have a presentiment that I shall be repeating this statistic on thread after thread here until I get through: Boris Johnson thinks that a living wage for a Londoner is £8.30/hour. (Many would put it higher.) But Londoners – and other Brits – are in a global labour market, where the average wage for semi-skilled manual work is about a tenth of that and for semi-routine white collar work a fifth.

The Chinese have neither a nationalised health service nor a market-based insurance system. And they cope. They save up their pennies and they pay for their health care when they need it. Or they go without. In many parts of the world workers experience conditions little better than slavery, especially women, because that’s actually better than starving to death in rural squalor. And I have little doubt that, shortly, if they’re allowed to, Indian universities will be promoting themselves to British teenagers with academic standards as good as an average British redbrick (better in a few cases) and fees and living costs a fraction of those at home.

From the 1970s to the end of the century, the British working class saw their jobs in mines and factories destroyed. Now it is the turn of the salariat.

5. Luis Enrique

To whom, precicely, are we supposed to export?

ooh ooh I know this one: foreigners.

Does this mean that Thatcherism is seeing it’s last days, although it seems there isn’t an idea to replace it?

“To whom, precicely, are we supposed to export?”

Those who wish to buy what we make perhaps? Given that the global economy is growing by 4-5% a year, should be someone out there. Why, we might even build on our most successful export sector, international finance. There is a reason why Swiss companies like Glencore pay hundreds of millions to British finance houses to have their shares listed in London. Because we’re better at it than anyone else.

And yes, this is an export: it’s money coming in, d’ye see?

“Privatisation doesn’t deliver real wealth”

Sez who? We had a nice little experiment with the water companies. England got regulated for profit companies, Wales a mutual, Scotland a govt owned company and NI direct council provision. Which system performed best in terms of cleaner water, lower costs, less wastage, lower environmental costs?

England. So, privatisation provided larger outputs of the things we want at the cost of lower inputs into the system. This is the very definition of wealth creation, higher outputs for lower inputs.

“There is little evidence that de-regulaiton helps at all”

Well, only if you’re willing to ignore the entire economic canon on regulation of course.

Some regulation undoubtedly boosts growth. Some undoubtedly doesn’t. Just depends on which regulation and when. And it would be a very brave man indeed who tried to argue that every regulation that we currently have is only of the growth boosting, rather than growth reducing kind. So brave as to be foolhardy in fact.

“A fantastic education system would be teaching our children a better moral understanding of how distructive greed can be. It would be teaching them why everyone should take an interest in politics and why they should always exercise their right to vote.”

Let’s try for one that teaches everyone to read and write first, shall we?

“Hedge Funds (who also make a massive contribution to inflation)”

Rilly? Care to explain that one to us all? By what mechanism does this happen?

“It took 40yrs and a World War before we started to climb out of the Great Depression.”

Here in the UK, about 18 months actually. After we came off the gold standard in summer 1931, output was back above 1929 levels by 1934.

“But Londoners – and other Brits – are in a global labour market, where the average wage for semi-skilled manual work is about a tenth of that and for semi-routine white collar work a fifth. ”

You’re missing the important point. Average wages in an economy are determined by average productivity in that economy. The average level of Chinese productivity is vastly lower than the average level of UK labour productivity. Therefore their wages are vastly lower. As and when Chinese average productivity is the same as the UK’s then sure, average wages will be the same. Chinese wages will rise to meet UK.

Don’t just take it from me, get it from a Nobel Laureate:

http://web.mit.edu/krugman/www/ricardo.htm

8. Charles Wheeler

“The strategy of the centrist liberals – try to collect the wealth of neo-liberalism and redistribute it through the welfare state – this strategy has failed.”

Well they didn’t try very hard. With the huge increases in income for those at the top, combined with lower taxes and privatisation we’ve effectively had a de-distribution of income and wealth from low and middle income earners to top earners – with the result that, the flow of taxes from richer to poorer has been replaced by a flow of credit/debt – with interest payments moving in the opposite direction. In the end the arithmetic doesn’t add up. It’s just not possible to sustain a cohesive society over the long-term with the levels of inequality we are experiencing. The next generation will not be able to afford higher education as the (progressive) subsidies from taxpayers are replaced by loans, they won’t be able to finance their own healthcare as the NHS is privatised, and the so-called ‘dependency culture’ will be replaced by a desperate scramble for survival – with rising crime rates, US levels of incarceration and increases in mental illness. It’s not like we haven’t been here before. But at the end of the 19th C., as laissez-faire promised to take capitalism over the abyss progressive thinkers like Hobhouse had the courage to map out a new route for capitalism.

Neoliberals like to foster a belief that there is a dichotomy between capitalism and socialism – but, a Hobhouse argued, it’s quite possible to harness the undoubted power of capitalism to improve the lives of the majority. Paradoxically, the welfare state was a victim of its own success – improving the lives of working people by guaranteeing a decent level of healthcare, education, pensions and out of work benefits to the extent that many started to believe the myth that these benefits could have b en achieved through the market alone. But poorly regulated capitalist markets will always collapse under the weight of their contradictions – and the state will always be left to pick up the pieces.

All Cable seems to be offering is a message of despair – and a continuation of business as usual as public services and benefits are cut to appease the markets and ensure inequality continues to accelerate – making the problem worse.

Where is the Hobhouse de nos jours?

This piece by Stiglitz argues the case: http://goo.gl/Vs1GA

@7 Tim Worstall

I thought we covered the water companies in a previous thread. You argued that they were privatised because as public utilities they were failing, then later you were forced to agree that they are still failing in exactly the same way. Of course, some people have made lots of money out of them in the mean time and the public no longer has an important asset, so it’s probably alright in Worstall world.

I suspect the future lies somewhere between the doom’n’gloom of the OP and your Panglossian view. If we can produce stuff that people want and sell enough of it then well and good, but the OP is right to suggest that we will face increasing competition and with greater overhead costs.

10. Mike Killingworth

[7] Tim, you know very well what I think about economic models and nothing Krugman says gives me grounds to review my position. Ricardian theory would work just fine and dandy if every country in the world operated completely free (i.e. theory-conformable) markets in all goods and services within their borders, but they don’t. And they never will for reasons you know as well as I.

Financial services cannot, surely, ever employ more than a small proportion of the UK workforce. And if you pay attention to my comments here (I know you do) you will also know that I expect the sector to decamp to the Cape of Good Hope once the local politics are sorted and a sufficiently fat fibre-optic laid to connect it to the rest of the world. Ten years? fifteen? twenty? What do we do then?

4
I’m afraid the genie is out of the bottle, the NHS is one of the largest employers in the world, do you realize how much unemployment it would cause, not to mention the administration of welfare and benefits.And it’s those employees (all employees) who pay for those services via taxes. We could lower wages by the equivalent of the taxes paid for that service but it would still cause mass unemployment like we have never seen. And we are a much smaller land mass than China, disease through lack of healthcare would have a much more devistating affect.

“To whom, precicely, are we supposed to export?”

Well Germany appears to be experiencing an export-led recovery/ boom…

“It’s just not possible to sustain a cohesive society over the long-term with the levels of inequality we are experiencing.”

Well, that depends on your definition of cohesion. We’ve a long way to go before we reach US, Chinese, or African levels of inequality, and yet there is surprisingly little disorder on the streets… That’s not to say these are desirable, but the sad fact is that rotten social models are sustainable.

These kind of debates may be pointing in the wrong direction. We seek answers but without psychological insight they are meaningless. The Germans do what they do well because they are German. The English managed to make much of the world in their image (language/ business-wise) because it is essentially a nation of individualistic traders. Even when there were large factories and organised labour, we rarely made things as well as the Germans and our unions still seem incapable of looking beyond their own interests. We love the NHS because we can see what we get out of it, not due to any self-less impulse.

Without understanding these things about the UK, we can’t develop a national model that will work in our best interests.

7
With respect Tim, regulation of water companies has, arguably, intensified since privatization.
And we now have the debacle of Railtrack/Network Rail having to pay a £3million fine, one of the worst examples of capitalizing profits and socializing costs.

I’m not sure of the statistics on how many kids leave school unable to read and write, but I do know that most kids leave school thinking that text speak is the only way people read and write. It’s wrong yes, but if they won’t correct them, then they’ll keep on doing it. But as I explained, or thought I’d explained, we need a massive reform of the education system. I’m well aware that we have Labour to thank for it, as they were the ones that allowed the likes of AQA to mark exam papers. And the instruction to AQA was to pass as many as possible just so Labour could say “We’ve made education better!” But I do notice you haven’t disagreed with what we should be teaching our kids.

And you must be really niave if you don’t know how Hedge Funds ramp up inflation. It’s well documented but not often spoken of, that Hedge Funds are allowed to buy up stocks of commodities that they’ll never need in order to drive up their price, not their value, but their price. In 2007 Hedge Funds ganged together and bought up huge stocks of cocoa to drive up the cost of chocolate, and made a massive profit from it. This happens with all commodities. In january of this year as soon as Egypt began their protests for freedom, Hedge Funds started buying up massive stocks of oil. The price was going to rise anyway thanks to skittish markets, but with the additional purchases from Hedge Funds the price was driven higher faster. It’s not rocket science to understand how they help drive up inflation. If there’s a profit to be made they’ll have at it.

And as for the 18month recovery. Pft! Maybe for London and the Home Counties. But for the rest of the country the depression lasted long into the mid 1930’s. And overall unemployment didn’t start to fall until the UK realised Nazi Germany was going to be a big problem, and the Government started re-arming ready for what became WWII. But it wasn’t the private sector that got us out of the financial downturn. It was the Government borrowing money to put the country to work. Just as it was in the US.

The financial sector will not get us out of the troubles we are in, troubles that the financial sector caused. Allowing them to try and create more wealth will just create more bubbles. And bubbles eventually will burst, leaving even more people out of pocket. All except the loons at the top that will walk away with their fat pay packets and massive bonuses intact.

15. Mike Killingworth

[10] Just to expand a little on one point. It is not atypical of the way economists carry on that Krugman thinks that some people who doubt the applicability of Ricardian economics to the real world are “afraid of systems”. We are not. We are protesting the appalling consequences of mapping simple systems onto complex realities. Economics is not, never has been and never will be a science. Not even Ricardo thought it could be.

Oh yeah. And you are SOOO wrong thinking that the English water companies are the best. In Scotland we don’t have to worry about prices rising when a company isn’t turning enough of a profit to keep share prices high. Our water rates are included in our council tax, and since our council tax is a lot less than it is in England we pay far less overall for both. England has wastage on a massive scale with pipes burst all over the place, hosepipe bans because your supplies are running out, and our water is a hell of a lot cleaner. I’ve lived in England for many years and I was always having to descale my kettle. Usually once a month from the huge build up of limescale. Don’t get any of that in Scotland. And we’ve normally got that much water we end up exporting the stuff.

So who does better in terms of cost, wastage, enviromental issues and cleanliness?

@7: Let’s try for one that teaches everyone to read and write first, shall we?

What an excellent suggestion.

“Up to 12 million working UK adults have the literacy skills expected of a primary school child, the Public Accounts Committee says. . . The report says there are up 12 million people holding down jobs with literacy skills and up to 16 million with numeracy skills at the level expected of children leaving primary school.”
http://news.bbc.co.uk/1/hi/education/4642396.stm

Record number of young people not in education, work or training. Figures show 15.6% of 16-24 year-olds were ‘neets’ at end of last year, as thinktank warns young people’s unemployment likely to rise to 1.2m in next five years
http://www.guardian.co.uk/education/2011/feb/24/young-people-neets-record-high

This year [2010], 53% of pupils attained the benchmark level – between A* and C – compared with 49.7% last year. The schools minister warned that nearly a quarter of a million pupils left school without a range of good GCSEs.
http://www.bbc.co.uk/news/education-11597488

“Just one in six pupils in England has achieved the new English Baccalaureate introduced by the government, England’s league tables show.”
http://www.bbc.co.uk/news/education-12163929

I despair when politicians – especially knowledgeable ones like Mr Cable – run around screaming that the sky is about to fall in yet foster an atmosphere of despair and impotence.

The idea we can do nothing through government about our predicament is the most dangerous fantasy dreamt up by the deranged neo-liberals.

Government is the single most powerful economic tool available to us, everyone has a stake in it, so why not get it to work in our interests? Right now – today that is – we could take the collective decision to ramp up investment in schools, hospitals, policing and all the other things that actually – yeah – we all want. We could tackle Global Warming face on.

All these things are within our remit to do. If only we had the politicians around who’d shake off self-defeating neo-liberal fatalism and roll their sleeves up to get stuck in instead.

And a nice big “up yours!” to the non existent bond vigilantes would go down a treat too. It would shoot the neo-liberal fox once and for all and we could get this show – the one that increased wealth for everyone through the post war consensus – back on the road after a madcap 30 year hiatus.

@16

You need to go back to primary school and learn about hard and soft water before expressing any opinion you want taken seriously.

That was my point though Cherub. Calling the water soft and hard is an easy way to deflect from clean and not so clean. If you go to the likes of Gran Canaria, they’ll tell you it’s best to drink bottled water. The tap water over there is actually very safe. It just tastes funny. I’ll happily drink water straight from a tap in Scotland, but the extra minerals in English water makes it taste nasty. It’s not harmful, but I’ve noticed my health has improved a great deal since I moved back to Scotland.

And it also doesn’t change the fact that the Scottish water board does a far better job than the English Privatised companies who only care for profit.

“It’s well documented but not often spoken of, that Hedge Funds are allowed to buy up stocks of commodities that they’ll never need in order to drive up their price, not their value, but their price. In 2007 Hedge Funds ganged together and bought up huge stocks of cocoa to drive up the cost of chocolate, and made a massive profit from it. ”

That was Cocoafinger. In one hedge fund. And he lost a fortune on it. For after his purchase the price *went down*. At least, that’s what happened last year when he tried the trick again.

This is the thing you see: speculation doesn’t always work.

“In january of this year as soon as Egypt began their protests for freedom, Hedge Funds started buying up massive stocks of oil. The price was going to rise anyway thanks to skittish markets, but with the additional purchases from Hedge Funds the price was driven higher faster.”

Umm, no, they didn’t. For a hedge fund (or anyone else) to drive up physical prices they must be buying and hoarding physical stocks (as with the cocoa). Physical stocks of oil did not rise: thus purchases and hoarding of oil could not be the cause of the price rises.

The buying of futures will push up futures prices, yes, but that’s a very different thing indeed.

“And as for the 18month recovery. Pft! Maybe for London and the Home Counties. But for the rest of the country the depression lasted long into the mid 1930?s.”

Depends what you want to call the DEpression. When GDP is higher than it was before it, I’d say it was over. So 1934 then.

“But it wasn’t the private sector that got us out of the financial downturn. It was the Government borrowing money to put the country to work.”

Buet, erm, the UK Govt didn’t borrow lots of money in the 1930s. Outstanding debt in 1930 was 7.46 billion, in 1940, 7.90 billion.

23. Chaise Guevara

@ 20 McDave

“That was my point though Cherub. Calling the water soft and hard is an easy way to deflect from clean and not so clean”

The point remains that the Scots have a situational advantage when it comes to water supply. You’ve got lots of it, and a lot of it is in areas that haven’t been damaged by industrial processes – we can’t just erase the pollution of the past.

Where were you when you were drinking English water? My limited experience of Scottish water is that it’s awesome, but the quality of English water varies hugely by location, the main factor being whether you’re in the countryside or a city. Water in Surrey is delicious. Water in London takes some getting used to.

One other point: you don’t actually need to descale your kettle. Limescale won’t hurt you, it’s just that advertisers try to make it sound bad so you’ll buy their water purifiers (which actually remove healthy minerals from tap water).

It’s not different at all Tim. It still fuels inflation. Do prices come down after the market price collapses? Does it heck as like. It’s seen all over in petrol stations. The price plummetted $30 a barrel before rallying again but was still down $10. Has that been passed on to the price at the pumps?

“Do prices come down after the market price collapses? Does it heck as like.”

Start on page 48 here.

http://www.decc.gov.uk/assets/decc/statistics/publications/prices/1_20100621134719_e_@@_qepjun10.pdf

Changes in retail petrol prices as compared to global crude oil prices.

“Due to high prices in the first
half of the year, annual 2008
prices were 43.2 per cent above
2007. Annual 2009 prices were
24.8 per cent below 2008.”

Yes, they do fall again.

Your next whine is?

@7 Tim Worstall

Sez who? We had a nice little experiment with the water companies. England got regulated for profit companies, Wales a mutual, Scotland a govt owned company and NI direct council provision. Which system performed best in terms of cleaner water, lower costs, less wastage, lower environmental costs?

England. So, privatisation provided larger outputs of the things we want at the cost of lower inputs into the system. This is the very definition of wealth creation, higher outputs for lower inputs.

We’ve also had a less than nice experiment with rail privatisation. Which has seen the cost to the taxpayer and passengers of running the railways quadruple since it was run by BR. Despite there only being a 10% increase in services since privatisation. http://www.christianwolmar.co.uk/2010/11/rail-657-an-open-letter-to-sir-roy-mcnulty/

As private train companies take their cut of profit out of public subsidy at every turn. So clearly rail privatisation has been a huge benefit to the private shareholders. But little benefit to anyone else. The same could be said of many other “privatisations” carried out by the Tories and New Labour which merely ammount to private corporations turning public subsidy into a feeding trough, at no benefit to the public.

And what about energy? Since privatisation, bills have been reduced. But only because vital spare capacity has been removed because it was deemed an ‘unnecesary cost’ by the profit seeking private companies, and we have shifted much of our generating capacity to cheaper gas. making us dangerously over-reliant upon imported Russian gas. Since short term profit trumps any kind of strategic planning in the national interest under a privatised industry. None of this should really be a surprise.

“We’ve also had a less than nice experiment with rail privatisation. Which has seen the cost to the taxpayer and passengers of running the railways quadruple since it was run by BR.”

Nicholas Ridley, a minister for transport in a Thatcher government, came to the conclusion that the railways should stay in public ownership – and Mrs T acknowledged that he was her mentor on privatisation. It was John Major, as PM, who pushed through the privatisation of the railways in the year that Ridley died.

28. Mr Grunt

Maybe Vince Cable and George Osborne should dip into one of those reserve funds that they are using to finance the 3 million pound a day confict in libya.

Notice they have not dipped into one of their secret reserve funds to help to pay off or lower the British deficit even though David Cameron claimed that paying off or lowering the deficit was his number one priority over everything else.

Money for war but not to help our financially incapacitated economy.

By the way because David Cameron and this evil coalition wanted a conflict with Libya for hypothetical reasons (Gaddafi’s Threats) the cost of oil worldwide has gone up which means knock-on effects that will be higher prices for fuel and everything we buy which means we silently have a bigger Tax burden because everything we buy has Value Added Tax which means if something becomes more expensive the more tax you have to pay on it. We pay Value Added Tax on everything we buy or pay for. We have been hit with David Camerons silent tax. So tax has gone up more than you realise, a lot more.

Under David Cameron and this Coalition we have been taxed again and again and again and again. People are going to have less money which of course is going to make the economy even worse and the deficit is going to increase.

There was me thinking that David Cameron and George Osborne the economically illiterate thought that they had it all worked out with plan to bring about almost instant financial recovery. What a Diabolical Disgrace.

I reckoned that I was forced by events to conclude a long while back that most British politicians were a useless lot of twits, which is how I became a floating voter. IMO it’s no accident that turnout at the last three general elections has been low by historic standards so I doubt that my view is altogether unusual:

http://www.ukpolitical.info/Turnout45.htm

Take Ted Honderich on Blair:

Honderich is also a consequentialist, which partly explains his hatred towards Tony Blair. “He is always asking to be judged by the morality of his intentions,” he spits. “He doesn’t understand that no one cares about his fucking morality. We judge him by the consequences of his actions. In any case, his morality is so muddy and ill-considered. I’m increasingly coming to the opinion that Blair’s main problem is that he’s not very bright.”
http://www.guardian.co.uk/education/2005/mar/22/academicexperts.highereducationprofile

Until he retired, Ted Honderich was for many years Grote Professor of Mind and Logic at UCL.

@29 BobB

You’re starting to cut and paste yourself! You’ve quoted that before in your usual terms of finding a reference by Google and suggesting it has somne universal meaning. I normally skip your postings and you’ve just reminded me why.

@30: “I normally skip your postings and you’ve just reminded me why.”

Fine – you’re in denial. Anything to avoid facing the issues of how useless our political leaders are and why turnout at elections has dropped to historic lows.

Between the general elections of 1997 and 2005, Blair lost 4 million votes and half the membership of the Labour Party. Ted Honderich offers an insight into why that was.

32. Chaise Guevara

@ 31 Bob B

“Fine – you’re in denial. Anything to avoid facing the issues of how useless our political leaders are and why turnout at elections has dropped to historic lows. ”

I agree that turnout is a problem, but saying it’s because our leaders are stupid seems to be a bit of a convenient way to simplify the solution, especially as it’s clearly not actually true.

“Between the general elections of 1997 and 2005, Blair lost 4 million votes and half the membership of the Labour Party. Ted Honderich offers an insight into why that was.”

Ted Honderich shows that’s he’s an odd person who thinks we should judge people by the outcome, not intentions, of their actions. And then he goes right ahead and judges Blair by his outcomes anyway, at the same time. He’s probably right about the electorate judging people by outcomes though.

I suspect a lot of Blair’s loss of support was due to dying euphoria. People felt GOOD about Blair when he got into power, they were more willing to overlook his failings at first than they were several years later.

@32: “Ted Honderich shows that’s he’s an odd person who thinks we should judge people by the outcome, not intentions, of their actions. And then he goes right ahead and judges Blair by his outcomes anyway, at the same time. He’s probably right about the electorate judging people by outcomes though.”

Ted Honderich was being consistent. There’s that old saying: The path to hell is paved with good intentions. Of course, Honderich wasn’t the only one to regard Blair as rather dim. Roy Jenkins came to a similar conclusion, as I recall.

“I suspect a lot of Blair’s loss of support was due to dying euphoria. ”

C’mon. In a speech early in 1997, Blair famously responded to a question about his policy priorities by saying his priorities were: Education, education, education. The outcome of those good intentions is shown in the miserable condition of schooling standards shown in the news reports linked @17 here.

Mind you, I suppose Blair got distracted by running all those exciting wars Britain became engaged in. Gordon Brown gave us some figures a couple of years back: £8bn for Iraq and £10bn for Afghanistan.

FWIW I agree with most of Cable’s diagnosis – my point of departure is that I think paying down the legacy budget deficit within the lifetime of the present Parliament will prove too punishing and will impose too much stagnation on the economy. Cable makes the valuable contribution of reminding us how much the bankers are to blame for our present predicament. By implication, that also reminds us of the regulatory failings of the Financial Services Authority – and the Treasury.

The electorate is going to need a lot of reassurance that the next Labour government is going to be a great deal more competent than the last one.

@6: On the contrary, the whole argument at the core of Thatcherism, as expressed by Sir Keith Joseph and others, was that the UK’s key industries were, because of unionisation, economically unsustainable, paying people more than their foreign competitors. And that could best be dealt with by simply destroying the industries those practises had taken root in. Creative destruction would make room for new, vibrant and profitable replacements, and pain caused by the process was a necessary part of it.

This argument won 2 or 3 elections[1], having just enough of an element of truth to pass muster, while being pessimistic enough to find favour with the naturally gloomy English.

Nevertheless, it was, as can be seen by looking at other European countries like Germany, more a self-sustaining pathology than an acknowledgement of external reality. Make people unemployed, and they won’t be buying much. Marginal enterprises will go under, and good ones will stop investing and so over time become marginal. And what you predicted will become true.

I would say that both Cable’s interview, and probably even more so, this ‘Liberal Conspiracy’ article are very much close to the heart of Thatcherism. Just change the names of the industries to be pruned for the health of the tree.

Political positions are not divided up so much by what people would express as a belief, let alone whether they prefer to think of themselves as nice or tough,

The real differences are in the things we think to be true, but which we merely believe.

[1] depending on how many you think Labour lost without help.

@34

The New Labour government didn’t have a coherent industrial policy of any kind – the contribution of manufacturing to Britain’;s GDP sank to 12% . BAE Systems, the armament manufacturers, are now Britain’s largest manufacturing company:

LONDON (AP) — Defense contractor BAE Systems PLC said Tuesday it has agreed to pay a fine of up to $79 million to settle an arms export controls case with the U.S. Department of State, the largest civil fine ever levied by the department.
http://www.google.com/hostednews/ap/article/ALeqM5jJRJoA_mKGOc-Fb_OcQEU4foUdRw?docId=475b1b0dfe4847f99bb5925ce71a07e3

By the time the Thatcher government sold off the Rover Group – previously part of British Leyland – to British Aerospace in 1988, £3.4 billion of taxpayers’ money had been sunk into the business.

Remember what happened to Marconi with a new Labour government?
http://news.bbc.co.uk/1/hi/in_depth/uk/2000/newsmakers/1527551.stm

The fact is that the industrial policies of the Thatcher governments during the 1980s were far more “wet” than the industrial policy of New Labour governments. Another fact is that Britain’s economy performance during the 1980s improved relative to European peer-group countries whereas it had lagged in previous decades.

For a dispassionate assessment of the performance of Britain’s economy during the 1980s, try: Charles Bean and Nicholas Crafts: British economic growth since 1945 – relative economic decline . . and renaissance? in Crafts and Toniolo (eds) Economic Growth in Europe Since 1945, chp.6:
http://books.google.co.uk/books?id=wiTtnUn5qGsC&pg=PA131&lpg=PA131&dq=British+economic+growth+since+1945+%E2%80%93+relative+economic+decline&source=bl&ots=s96QcOn1h4&sig=l0pmjih5HXx7qf4onzLouUHByrw&hl=en&ei=i2XZTY2ONpO48gOnovGDBQ&sa=X&oi=book_result&ct=result&resnum=6&sqi=2&ved=0CEoQ6AEwBQ#v=onepage&q=British%20economic%20growth%20since%201945%20%E2%80%93%20relative%20economic%20decline&f=false

36. Richard W

It is tedious the way that the neo-liberal bugbear is thrown around without any specific definition of what is meant by neo-liberalism. Usually the writer just means anything I do not like will be lumped in as neo-liberal. We get nowhere because we never find out what neo-illiberalists are against.

Comparing the growth achieved in post-WW2 advanced industrial economies to the growth achieved in the post mid 1970s period is not very illuminating. They all slowed down after around 1973, and the ones who slowed down the least are those who had ‘neo-liberal’ reforms. Moreover, British post-WW2 industrial policy was an abject failure under every government. There was no golden period. No matter how well the British economy was performing in this period everyone else was performing better. It was quite an achievement of all British governments to take the highest paid workers in Western Europe in 1950 and by the 1970s make them the worst paid. What a legacy for a golden period of industrial policy. The last time I looked British average wages were the 2nd highest in the EU, so much for neo-liberalism making us poorer. Which income quintile has a lower real income than the same quintile from the 1950/60 period? If none, what does that say about the golden age compared to the ‘neo-liberal era?

Let’s look at the industries that the British government was most heavily involved after WW2.

Coal industry- oh dear

Car industry- oh dear

Steel industry- oh dear

Shipbuilding industry- oh dear

Railways- oh dear

Spot a pattern? When the state gets involved the industry ends up a mess or becomes an ex-industry. British state involvement and industry is not a match made in heaven unless one wants to end that industry.

Hedge funds cause inflation is a new one on me. There is a reason why volatile food and energy prices are disregarded from what is considered inflation. They are by definition volatile and their movements are not inflation.

” To whom, precicely, are we supposed to export? ”

Hmm, well you did mention the rise of China. Maybe we could do something really crazy like export to China.

@36

Let’s look at the industries that the British government was most heavily involved after WW2.

Coal industry- oh dear

Car industry- oh dear

Steel industry- oh dear

Shipbuilding industry- oh dear

Railways- oh dear

Spot a pattern? When the state gets involved the industry ends up a mess or becomes an ex-industry. British state involvement and industry is not a match made in heaven unless one wants to end that industry.

Actually I hate to take issue with you, but the government only got involved with those industries because they were failing in private ownership. They were to the most part already in a terrible state before the state got involved with them. When the coal industry was nationalised in the 40s it was one of the most backward in europe with many collieries using operating practices little changed since Victorian times. After nationalisation the industry saw massive modernisation and improvements in productivity and working conditions.

The government only became involved with the car industry in the 70s when in was already in a pretty dire state. It can hardy be said that nationalisation was the cause of that industy’s failiure. Actually you are party wrong in the early 70s Edward Heath’s government nationalised Rolls Royce because it was in danger of going bankrupt. It is now one of the UK’s most successful engineering companies (although it has been re-privatised since). British Leyland however was probably beyond salvation. The same applies to the shipbuilding industry.

The railways were essentially bankrupt when they were nationalised in the 40s. And they then suffered from competition from road transport. They would not have fared any better under private ownership. Look at the poor state of the rail network in the USA where nearly all passenger trains were discontinued in the 1960s by private operators, and now only a skeleton passenger rail network now exists, operated by the government owned Amtrak.

And to further add. Your example of the railways is a poor one. British Rail was one of Europe’s most cost efficient rail operators. With one of the lowest levels of public subsidy per passenger. Since privatisation, the UK’s railways have become the most expensive to run in Europe.

@36: “Let’s look at the industries that the British government was most heavily involved after WW2.”

You overlooked Britain’s pioneering role in building nuclear power stations and supporting ICL, which was going to be Britain’s answer to IBM. Whatever happened to Alfred Herbert machine tools?

The sad reality is that British governments over the post-war period have an abysmal record in industrial policy. Arguably, the French and West German governments were far more successful. Consider the flourishing indigenous automotive companies of France and Germany: Renault and Peugeot in France, and VolksWagen, Mercedes and BMW in Germany. Where are the British equivalents of Siemens, Braun and Bosch?

Part of the explanation IMO is that Britain has been especially bad at providing for education and training in industrial vocational skills, unlike Germany and France.

The Japanese car manufacturers can manage on greenfield sites here, well away from the traditional locations of Britain’s motor industry and, crucially, because on recruiting workforces, they were inundated with applications so they could pick and choose the best among the applications. And the companies famously negotiated rather special industrial relations agreements with just one trade union.

Does anyone reflect on why would a multinational company choose to locate a new manufacturing plant in Britain to serve European markets – when they can establish a plant in eastern Europe where it will be much easier to recruit the skills they need and where the pay rates will be lower?

The reason banks and financial services businesses flock to London is because of a resident skills pool that only New York can rival and because London, with its many amenities, is an attractive place to live.

Bandying around terms like “neo-liberalism” goes nowhere near answering the challenging questions.

@38

Nicholas Ridley – who was nobody’s fool – looked into privatising the railways for Mrs T and concluded that the railways would always need public subsidies to keep them going so it was better to keep the railways in the public sector to maintain financial discipline and accounatability to Parliament. As a consequence, Mrs Thatcher didn’t privatise the railways. Major as PM pushed through privatisation of the railways in the year Ridley died, basically because Major really didn’t understand the issues.

As I’ve written before, the government’s economic plan seems to have 3 strands – export led growth, privitisation and de-regulation, and re-inflating the financial bubble.

So in other words, we have a government who believe that the mess caused by failed neo-liberalism can be solved by an even bigger dose of the same neo-liberalism.

I think it was Albert Einstein who said that insanity was doing the same thing over and over again and expecting different results.

I actually think the political class (and the right in particular) is in a state of complete denial over what has happened since 2008. Essentially we saw the demolition of a major chunk of the Thacherite dogma which has dominated British politics for the last 30 years,

The fact that the Tories were so eager to blame the crisis totally implausibly on “Labour overspending” rather than the dogma of deregulation which they so vigorously promoted suggests that they are still deeply wedded to Thacherism, and in a state of total denial.

@41:

I regard that as mostly an incoherent rant without substantive content.

New Labour relied on the booming financial services industry to generate the tax revenues which it spent on public services – spending on healthcare tripled between 1997 and 2010.

The constraining reality facing any government on promoting alternatives to financial services is Britain’s poor endowment of vocational skills and the poor legacy schooling standards as reported @17. Britain’s largest manufacturing company produces armaments.

Exactly what policies is some supposedly “enlightened” leftist government to apply to rebalance the economy and appropriately regulate financial services? Crucially, would some incoming leftist government reimpose exchange controls to regulate capital movements and what actions would it take, if any, to encourage inward investment? I think we should know.

Without illumination, “neo-liberalism” is a vacuous expression.

Without illumination, “neo-liberalism” is a vacuous expression

I refer mainly to the dogma that deregulation and minimal government intervention in the economy produces the best results. And that everybody acting in their own self interest is necesarilly beneficial to the common good. We have seen the results of allowing bankers greed free reign. And oddly enough it hasn’t exactly proved beneficial to the common good.

Of course, this was entirely predictable. The last time this phillosophy was popular in the 1920s it resulted in another similar financial disaster. Leading to the discreditment of laisses faire philosophy for nearly two generations. Until it was revived by Thatcher and Reagan in the 80s.

The constraining reality facing any government on promoting alternatives to financial services is Britain’s poor endowment of vocational skills and the poor legacy schooling standards as reported @17. Britain’s largest manufacturing company produces armaments.

To the most part I quite agree. And any serious plan to rebalance our economy should probably start there. Although I think that I argued in another thread that the dominance of the city was actively harmful to other sectors of the UK economy. As a career in the city pays more highly than say engineering or science and so tends to suck up the best talent.

I think another thing that should be addressed, is the risk averse, short termist and profit maximisation mindset of much of the UK investment culture compared to other countries such as Germany. I believe that Will Hutton has argued along the lines that this is damaging to innovation which can often require years of support and investment before seeing any return. In countries such as Germany, they do not have the culture of greed and a fast buck so prevailent in Anglo Saxon countries. Aloowing them to take a more balanced long term approach which helps innovation.

http://www.thirdworldtraveler.com/Economics/AmericanProsperityMyth.html

“I refer mainly to the dogma that deregulation and minimal government intervention in the economy produces the best results.”

– A recent thread here dealt with the extensive existing economics literature on market failure:
http://liberalconspiracy.org/2011/05/21/why-inequality-and-power-imbalances-still-matter/

– Many commentators on the recent financial crisis – in which banks with head offices in Scotland featured so prominently – attribute responsibility to regulatory failings by the Financial Services Authorities – as well as to HM Treasury. Regulatory failings by the FSA were analysed in depth in the Turner Review:
http://www.fsa.gov.uk/pubs/other/turner_review.pdf

One important implication is that we need to focus on government and regulatory failures as well as market failures.

Nobody here has responded to my comment @39 about the greater evident success of the industrial policies of governments in France and West Germany.

We’ve still not been told what these promising non-neo-liberal policies of the next leftist government in Britain are to be.

On the potential for regulatory failings, check out this in Monday’s FT:

Fears rise over BoE governance
http://www.ft.com/cms/s/0/64f1b630-84bb-11e0-afcb-00144feabdc0.html?ftcamp=rss&ftcamp=crm/email/2011523/nbe/UKMorningHeadlines/product#axzz1N9xEGsIR

46. Richard W

@ 37. Graham

Yes, many of those heavy industries were failing in private hands. However, they still failed in public hands. However, they consumed vast amounts of subsidies that may have been deployed better. Propping up failing industries quite often buys a government short-term popularity. However, it rarely works out well in the end. Rolls Royce was a rare shining success story. I agree with you that part of the problem in the UK was short-termism and that led to a lack of investment. Moreover, the management of much of British industry after WW2 was totally inept. Most of the so-called union militancy was caused by useless management. Boards were full of descendants of Victorian founders who were only there because of their name and they hardly owned any significant part of the modern firm.

What I am against is the idea that we can go back to the state owning large parts of the UK economy. I can understand lefties arguing in favour of natural monopolies like utilities being publicly owned. However, we used to have the state owning a travel agency and we still own a bookmaker. Those type of things should be left to the private sector to provide and the state should have no role beyond a framework of rules.

We in the UK are just not very good at bureaucrats trying to pick winners. The problem in the UK when the government speaks about working in partnership with industry it is nearly always large firms that they work with and provide subsidies. Large firms will take anything that they can get from government. However, large firms invariably want to become more productive by reducing the size of their workforce. Therefore, it is the SME that government should be interested in as those firms have the potential and desire to grow. Financing of those types of firms is where we have always fallen down. For example, Germany have traditionally done very well in financing those type of firms through the publicly owned Landesbanks. Although, the Landesbanks have not be immune in recent years to buying lots of iffy debt.

There is a role where the government can be more activist without bureaucrats trying to pick winners. Many new start firms can’t get finance because the founders do not have the required capital and no matter how much politicians castigate banks for not funding them, they are just not bankable. The high growth bio-tech, alternative energy, IT type of firms have a failure rate of 70-80% so the banks will rightly not give them the finance without any assets for collateral. Co-investment where public money invests in ideas only if the private sector are first going to invest is a way around the picking winners problem. Through co-investment the state can play a major role in rebalancing and supporting the economy.

47. Mike Killingworth

[46]

We in the UK are just not very good at bureaucrats trying to pick winners.

There are, I think, two interesting points that follow from this sentence.

First, capitalists aren’t that good at picking winners, either. Look how many bankruptcies there are each year – yet we see that as evidence of the system working well. When a public servant messes up, that’s stupidity and wickedness of course, and must be punished. Double standards are hard-wired into “free” societies.

Second, there is an implication that bureaucrats elsewhere are better at picking winners than ours. I’m not sure which countries Richard has in mind, I suppose France and Japan are two possibilities. If so, I wonder why we have never been able to learn from them?

“First, capitalists aren’t that good at picking winners, either. Look how many bankruptcies there are each year – yet we see that as evidence of the system working well. When a public servant messes up, that’s stupidity and wickedness of course, and must be punished. Double standards are hard-wired into “free” societies.”

That’s not actually the point of it all.

Picking winners is very difficult, whoever does it. What we actually need is a system that allows lots of people to try and pick winners. And then the second part of the system: shutting down those wrong picks quickly and cleanly with the minimum of pain.

It’s that latter part that government and bureaucratic systems are seriously terrible at and market based systems pretty good at. Getting rid of the bad ideas.

A market based system without bankruptcies would be terrible: and government planned systems are nearly as bad because the politicians and the bureaucrats are loathe to admit to error which should lead to the abandonment of a scheme or a plan.

An analogy is to evolution. In each generation there are mutations and also new combinations of genes (for sexually reproducing species at least). Some of these are not viable and fail at the first fence, in the pregnancy. Some allow viability but not reproductive success and thus vanish. Many make little difference one way or another. And a few, a very few indeed, provide such huge gains that they lead, in time, to new species.

But the really important part of evolution isn’t the mutation or the gene combinations: it’s the selection afterwards.

And yes, you can plan such gene combinations and you can deliberately increase the mutation rate (much plant breeding is done this way). But it is still the selection afterwards which is the most important part of the system.

And to close our analogy, nature is a ruthless selector, whereas in the economy government/buraucracy isn’t ruthless enough, while the market is, if not perfectly ruthless, at least more so that government.

49. Mike Killingworth

[48] So you admire ruthlessness, eh, Worstall?

“So you admire ruthlessness, eh, Worstall?”

Of course: why, in my Portuguese mountain hideaway I even have *two* white cats that I can stroke while plotting my ruthless deeds!

Now stop being silly and think about it for a minute. If you’ve any care at all for economic efficiency (and you ought to of course) then you’ve got to pay attention to how quickly the system kills off bad ideas.

For there always will be bad as well as good ideas, whatever system we use to come up with ideas.

On ‘picking winners’, for whatever reason and however they managed to achieve it, on their respective records the public sectors in France and Germany have proved to be far more adept at selecting or promoting successful manufacturing enterprises, albeit seemingly in different ways.

As mentioned, IMO having better national infrastructures for bringing on industrial vocational skills is part of the explanation. And I agree with the diagnosis that the quality of management in traditional British companies was poor relative to that in equivalent companies in European peers. Better industrial relations in European peers is another part of the explanation.

Harold Macmillan, as PM, announced the launching of the National Economic Development Office with the Council in 1961 in the belief he was capturing the essential ingredients of France’s apparently successful planning system and the main reasons for France’s better performance since WW2. Harold Wilson’s Labour governments 1964-70 wheeled out a National Plan. In retrospect, none of that seems to have achieved much – the relative preformance of Britain’s economy still lagged that of its European peers until – on the evidence – theThatcher government came along. I think we really do need to look at that analytically and less emotively.

Btw anyone still thinking that the private sector is going to fill in for the Coalition’s public spending cuts is advised to look at this in Tuesday’s FT:

UK builders see value of orders collapse
http://www.ft.com/cms/s/0/c51d4426-8573-11e0-ae32-00144feabdc0.html?ftcamp=rss&ftcamp=crm/email/2011523/nbe/InTodaysFT/product#axzz1NGDIfGc3

52. Mike Killingworth

[49] Anyone who admires Social Darwinism has got serious “stuff”. And your attitude to economic efficiency betrays a deep-seated means-end confusion.

“Anyone who admires Social Darwinism has got serious “stuff”.”

Mike, seriously, you’re embarrassing yourself. Making an analogy between discovery in an economy and evolution is just that, making an analogy. Social Darwinism is the full throated roar that we should run the economy exactly as evolution works: the weak dying or being eaten as it is righteous and just that they should.

Someone like me who supports a welfare safety net, government funding of many public goods, even government funding of many public services, simply isn’t a Social Darwinist.

From a perspective of the late 1960s, a visiting team of American academics from the Brookings Institution analysed the problems and issues of Britain’s economy almost exhaustively:

R Caves (ed): Britain’s Economic Prospects (Brookings Institution, 1968)
http://www.amazon.co.uk/Britains-Economic-Prospects-Richard-Caves/dp/0815713223

For a synoptic review of umpteen research studies covering most of the post-war period, try Nicholas Woodward: The Management of the British Economy 1945-2001 (Manchester UP 2005)
http://eh.net/book_reviews/management-british-economy-1945-2001

Nicholas Woodward on: Britain’s Post-War Economic Decline (1995)
http://www.users.globalnet.co.uk/~semp/bdecline.htm

It should probably be noted that othe countries in Europe have had a far more successful record of state intervention in the economy than in Britain. In Italy for example the “Istituto-per-la-Ricostruzione-Industriale” was a state owned company which was originally set up by Mussolini in the 1930s. However it sucessfully redeveloped the Itallian economy in the 1950s and 60s by investing and taking a stake in strategic sectors of the economy. At one point it owned a significant proportion of the itallian economy. Although it rarely fully nationalised any companies.

http://www.fundinguniverse.com/company-histories/Istituto-per-la-Ricostruzione-Industriale-SpA-Company-History.html

This kind of approach was replicated with some success by other European countries in the postwar years. In Britain an attempt was made to do something similar to the IRI by the Labour government in the 1970s in the form of the “National Enterprise Board” although Harold Wilson heavilly watered down the powers of the NEB under pressure from industrialists.

http://www.nationalarchives.gov.uk/cabinetpapers/themes/national-enterprise-board-neb.htm

In practice the NEB never had enough resources or clout to make much difference, and never came close to replicating the success of the IRI. And it’s main function became attempting to rescue lame duck companies like British Leyland and shipbuilding.

Needless to say that the NEB fell foul of Thacherism and waqs quickly wound up.

The fundamental problem is that to all intents and purposes the global economy more broadly and the UK economy as reached debt saturation. The first signs of this was in 2007 when the interbank markets froze.
Yes we have run higher debts before but this was at times when we had an Empire and a closed market with structured and captured markets, so we could carry more debt sustainably or export ourselves out of it.
In this globalised world to which we have signed up to we have no power to influence the markets. There will be no growth to get us out of trouble the world will not buy what we can produce if we had any industry as it is in trouble as well.
Spend more now – or entrench with austerity the outcome will be the same.


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