There is no doubt that the country was badly placed to withstand the immense damage caused by the financial sector when it first hit the economy and it is not in a lot better shape today. Badly placed indeed, due an unbalanced economy that had become far too reliant on casino capitalism rather than the productive sectors and of course, on an epic scale, due to the abandonment of prudence, wisdom, decency, diligence, respect and even plain common sense in the banking and financial sector and the absence of effective financial regulation.
Added to this has been the destruction of social and industrial foundations caused by globalisation on manufacturing and engineering in particular, with much production closed down by disloyal and herd-driven management and greedy ‘stakeholders’ and many jobs already exported.
The evisceration of our industries of substance has left the country less able to benefit from the lower value of the pound by producing for export - where external demand has not been destroyed by external banks and ill-advised economic policies particularly in Europe. The commercial banks added to the damage caused by their own greed and incompetence by effectively forcing viable producers out of business with severely tightened conditions or recalled loans. I sometimes think that banks, in their behaviour towards industry and individuals alike, are little better than a fifth column. As a result of this and government policies of austerity there is little prospect of anything much better than the economy continuing to bump along the bottom and there is still a real and present danger of approaching a 1930s situation.
How is this dire predicament to be remedied? Certainly not without a cost - folly always has a steep price. But how do we ensure that such a deep recession, where productive output recedes and where spending and incomes are well below normal, does not worsen further into sustained depression where there are further falls and the loss of GDP approaches double digits? And how do we ensure that a sustainable economic recovery begins as soon as possible?
Those in power, or aspiring to power, must develop effective recovery strategies. It is clear that these do not exist in Government and the opposition continues to be excessively timid and fearful of offering a constructive alternative to the depressing consequences of continuing and deepening austerity. If output, income and employment are to sustain an upward trend, then there must be extra spending, preferably in the form of investment in public utilities and infrastructure. In this connection parts of Michael Heseltine’s recent recommendations are welcome and long overdue although few will find their way into government policy. The rational debate - and there is plenty of scope for discussion of which measures will prove to be most effective - is about how a Keynesian solution is to be implemented, and which quarters can be persuaded and enabled to spend more.
Entirely predictably, precious little benefit has come from exports due to the demand suppressing austerity obsessed policies of European governments promoted and pushed by Germany. If the death grip of the banks can be loosened, and companies can be encouraged to increase their investment spending, then that would be of great benefit. But, to justify such investment, companies need to see demand for their products, which of course is precisely what isn’t there. To add to this situation by further cutting makes no sense at all.
In terms of expanding aggregate demand, you could try to create that extra consumption with tax cuts. But cutting taxes for the rich is precisely not the way to do it – as all concerned know. It is true that continuance with low interest rates cause borrowers to have more at their disposal. But interest rates are a double-edged sword whereby those who rely on savings for income are made worse off and so spend less. We know only too well that, courtesy of the banks, savers are hit early and in full and borrowers benefit later and less. Additionally, experience in Japan in the 1990s found that in the face of interest rate cuts some people may save harder to preserve their future security and incomes.
Important though they are, there has been too much concentration on interest rates and taxation (though not enough about helping those who save) and the related adoption of risky monetary policies such as quantitative easing. Though these policies have a role to some extent, there has been not nearly enough focus on public works projects, support for manufacturing industry and pressing companies to repatriate production in the national interest - and indeed their own.
With infrastructure work - and goodness knows that after decades of under-investment we need it in energy, transport, public and heritage buildings and right across the board - we generate business to firms and encourage them to invest, create or save jobs, keep more of the money at home and provide a better quality infrastructure and the much needed energy security along with stable prices in the future if cartel behaviour can be regulated or re-nationalised away. To my mind that’s a whole lot better and wiser than, in effect, saying: ‘Here’s £100, dash down the shopping centre and spend it on imports’.
What about Government waste? All too much of this is gone for good, but no-one in their senses would object to cutting current waste and improving efficiency - it’s important to do this. But it is also important to divert the bulk of such savings to public works projects - and then to add to this total. It is imperative that the total be increased. Also, if too much of the savings from waste reduction are passed on in the form of tax cuts then, entirely rationally in individual terms, people will use much of it to repair their domestic balance sheets - rather like the banks and with the same lack of benefit to the economy as a whole.
Economic recessions are about a serious and sustained shortage of aggregate demand - and it matters what makes up that demand. The less expenditure that is frittered away on fashionable gadgets and bric-a-brac and which leaks out on imports, and the more of it that is invested in improvements in the nation’s infrastructure and the environment, securing productive jobs and supporting manufacturing, the better. And in the longer term, a restored and re-balanced economy, achieved by these Keynesian means described, will provide the firmest foundation for the restoration of future public finances and the resumption of prudent and sustainable ways of living.
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