Short term pain or long term strategy?
I’ve been blogging about the economy, on and off, since early 2009. In that time much of what I’ve written about has been bad news – recessions, squeezed incomes and financial crisis.
This week there is once again much to worry about – the continuing austerity programme, an oncoming fall in living standards and the apparent abandoning of serious attempts at rebalancing have all featured this week. Abroad the news has been dominated by the Eurocrisis and the US fiscal cliff.
It is very easy to look at the current economic outlook of weak growth, high unemployment, falling incomes and poor public finances and conclude that the future will be equally grim.
Yesterday Hopi Sen blogged on public spending choices for the next spending review, where poor growth has made dealing with the deficit even harder and as a result, under the current fiscal framework, the squeeze on unprotected departments is set to deepen.
Against a poor economic backdrop Hopi recently set out 4 ways in which politicians can respond, of which his preferred method (I think!) was:
The Johnny Cash plan “Focus on the pain, it’s the only thing that’s real”. If some people are seeking the fantasy of populism because you’re not saying anything meaningful to them, then you need to start standing up for reality, even if that means not promising voters ponies and butterflies.
Leaving aside for a moment that this should clearly be called the ‘Trent Reznor plan’, I think there is something in the counter-argument made by Dan Corry back in October:
The search for realism and credibility can easily tip into fatalism. Over time the deficit needs to come down but we have some time to play with.
As I’ve argued before I think an excessive focus on the structural deficit is, to put it mildly, unhelpful. I don’t even think it is the right measure for a set of fiscal rules given the huge uncertainty around its size. And even if the structural deficit were the correct target there is no reason, economically speaking, why it has to be eliminated in 5 years.*
I worry that much of the UK economic debate has tipped over into ‘fatalism’ and is too focussed on the relatively narrow question of ‘fixing the public finances’ over much too short a timetable.
Of course it’s easy to embrace fatalism if all the news you hear is bad. But not all the news on the economy is ‘bad’.
The chart below shows global GDP growth from 1980 to 2017 (2012 to 2017 are the IMF forecasts).
What really stands out is that global growth is set to increase at decent rate in 2013-2017. (I’ve included a rolling 5 years average to smooth out the 2008/09 crisis and bounce back).
Of course this headline figure masks the composition of that growth, the chart below (this time using just 5 year moving averages) breaks this down between advanced and emerging economies.
As can be seen whilst growth in the advanced economies is set to remain low (by recent historical standards) growth in the emerging world has recovered and is set to be 5.5-6.0% annually between 2013 and 2017.
These forecast only go up to 2017, to look further ahead there are the recent OECD long-term forecasts.
According to the OECD the size of the world economy is set to double by 2030 and to quadruple by 2060. This expansion is being accompanied by a structural shift in the global economy, away from the OECD and towards rising economies.
Politicians are quick to blame corporate Britain for excessive short-termism and under-investment and whilst these are valid charges, the same one can be levied against policy-makers. The world’s output is set to double in size in less than twenty years and yet rather than debating how Britain can position itself to benefit from this huge structural shift in the global economy, most choose instead to focus on the state of the public state finances over the next half decade.
It is very interesting that the UK economic commentator that talks about this the most is Boris Johnson’s economic advisor Gerard Lyons. As he wrote last month:
the UK needs three things – to spend, lend and change. The economy is suffering from a lack of demand. There needs to be more spending by the Government on both infrastructure and construction and people and firms with the ability to spend need to be given the confidence to do so. There has to be more lending by the banks. And the supply side of the economy needs a helping hand and thus there has to be change – which is all part of repositioning the UK in the changing global economy.
I doubt that myself and Mr Lyons agree on all policy areas (we don’t exactly see eye to eye on higher rate taxation and financial regulation for example), but there is much to work with here.
Boosting infrastructure, reforming banks to get them supporting growing firms, increasing skills, encouraging a long-term approach from corporations, a modern industrial policy – these are the kind of supply-side policies that Britain really needs. These sorts of ideas can be found in the Heseltine Report, in the LSE Growth Commission findings and in the TUC’s own budget submission.
Get these policies right and Britain can be positioned to take advantage of the good news globally. Focus instead on the short-term pain in the public finances and we risk getting this wrong.
I think at this point it is instructive to look back into history. Back in 1949, the German government decided to use the counterpart funds raised through Marshall Aid to capitalise a development bank – KfW. In the decades that followed KfW played a vital role in the development of the economy and it has now become a point of near-consensus in the UK (stretching from the TUC to the BCC and from the Labour Party to Vince Cable and even George Osborne) that the UK need something similar. Between 1948 and 1952 the UK actually had access to 80% more in the way of counterpart funds than West Germany. 97% of them were used to pay down debt.
Focusing on the long-term and investing in the future can often lead to much better results than a short-term approach than concentrates on ‘dealing with the debts’. This is something policy-makers would do well to bear in mind.
*As an aside, I think there is much merit in consideration of Nick Pearce’s idea in this week’s FT. He suggested targeting reducing debt to GDP to 65% by 2025 – which has the advantages of a realistic timetable, taking account of growth and a target that can actually be measured rather than estimated.