Rejecting Economic Fatalism
Yesterday I blogged about my frustration with ‘economic fatalism’ and argued that with better policies – not just a boost to demand but also wide spread reform of how our economy works – we could achieve better outcomes.
Today the Guardian has published a classic example of the ‘economic fatalism’ genre from HSBC’s Stephen King.
King argues that he is offering an “alternative explanation, neither Keynesian nor austerian” for our current economic woes. That said in practice he endorses fiscal austerity, he just doesn’t think it will boost growth. Instead he argues that:
The new reality is, I’m afraid, a world of significantly lower growth, where the gap between our expectations and actual income is getting bigger day by day. Neither Keynesians nor austerians have an answer to this sober outlook because both sides claim their own policies will ultimately take us back to a world of rapidly advancing living standards.
Praying for a strong recovery is not, however, the answer to our problems. By doing so, we’ll only end up imposing a bigger and bigger cost on our children. Living within our means is hardly easy but the alternative is worse: false hope leads ultimately to financial crisis, political upheaval and social turmoil.
In short – things are really bad, they are going to stay pretty bad and we should get used to weaker growth in living standards.
This is exactly the kind of fatalism I find depressing.
Whilst King is no doubt correct that “praying for a strong recovery” is not the answer to our problems, I am not aware of anyone suggesting that it is.
We don’t need prayers, instead we need actions. The single most pressing problem facing the British economy today is a lack of demand – government action could help to reverse this.
But we also face wider problems – an unbalanced economy, rewards from growth that flow to those at the top – and these require supple side solutions (banking reform, corporate governance reform, economic democracy, supporting skills, a modern industrial policy, to name just a few).
Because for all the gloom facing the UK today we are not in a world of “significantly lower growth”. As I wrote earlier this month:
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…
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.
Instead of acting to take advantage of these changes in the world economy, too much of the government’s efforts are going into a meeting a fiscal framework which targets the wrong measure, is too short term and isn’t working.
If we accept that growth is set to be low we will get the growth we deserve. The economy will go further down the ‘low wage, low productivity’ road. Growth will be weaker and living standards lower. If we instead focus on getting long-term policy right then we can take a ‘higher productivity, higher wage’ path. By focusing on meeting a short-term fiscal target means policymakers are currently pushing us down the low productivity course.
As I’ve noted before:
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.