Monday, February 08, 2010
Obsession with China masks West’s inertia
This is my comment from this week’s Fund Strategy.
It is easy to become so focused on someone else’s problems that you fail to grapple with your own. That is a lesson that the West’s leaders, fixated with China, would do well to learn.
No doubt China has its faults. It is arguably keeping its currency artificially low to help bolster its exports. But western leaders are too eager to scapegoat China for their own failings. America and Britain would have a weak export sector even if their trade with China was in balance. Both Anglo-Saxon economies have suffered a long period of deindustrialisation. Nor are the spats restricted to economics. America has got into rows with China recently over the Copenhagen climate summit, the Dalai Lama, Google, Iran and Taiwan arms sales. These disputes are happening against a backdrop of a western debate over how best to respond China’s rise. It is the cover story of this week’s Economist and the theme of a new book by Anatole Kaletsky, an economics commentator on The Times (London).
There are two key reasons why this obsession with China is unhealthy. First, there is a danger that the conflict between the West and China will spill out of control. Given the importance of China in the world economy this risk is particularly worrying. China is already retaliating against punitive measures by the West. Last week it announced anti-dumping duties on American chicken imports in a response to American tariffs on Chinese steel. But, even more important, the verbal assault on China is a distraction from the West sorting out its domestic economic problems. If the western economies are restructured the main motivation should not be to compete more effectively against China. More likely, though, the West will do little restructuring at all rather than tackle the formidable challenge of its domestic weaknesses.
Western economic debate focuses on the relatively easy questions rather than the hard ones. It is obsessed with the correct monetary and fiscal policy to help offset the immediate impact of the economic downturn. But long-term structural weaknesses get scant attention.
Last week’s Green Budget from the Institute for Fiscal Studies and Barclays Wealth gave some idea of the scale of the problem. It estimated that Britain’s trend rate of growth was only 1.75% rather than the 2.75% the Treasury assumes. Although one percentage point might not sound a lot it makes a huge difference when compounded over several years.
Western leaders should stop fretting over China and tackle their domestic weaknesses.
It is easy to become so focused on someone else’s problems that you fail to grapple with your own. That is a lesson that the West’s leaders, fixated with China, would do well to learn.
No doubt China has its faults. It is arguably keeping its currency artificially low to help bolster its exports. But western leaders are too eager to scapegoat China for their own failings. America and Britain would have a weak export sector even if their trade with China was in balance. Both Anglo-Saxon economies have suffered a long period of deindustrialisation. Nor are the spats restricted to economics. America has got into rows with China recently over the Copenhagen climate summit, the Dalai Lama, Google, Iran and Taiwan arms sales. These disputes are happening against a backdrop of a western debate over how best to respond China’s rise. It is the cover story of this week’s Economist and the theme of a new book by Anatole Kaletsky, an economics commentator on The Times (London).
There are two key reasons why this obsession with China is unhealthy. First, there is a danger that the conflict between the West and China will spill out of control. Given the importance of China in the world economy this risk is particularly worrying. China is already retaliating against punitive measures by the West. Last week it announced anti-dumping duties on American chicken imports in a response to American tariffs on Chinese steel. But, even more important, the verbal assault on China is a distraction from the West sorting out its domestic economic problems. If the western economies are restructured the main motivation should not be to compete more effectively against China. More likely, though, the West will do little restructuring at all rather than tackle the formidable challenge of its domestic weaknesses.
Western economic debate focuses on the relatively easy questions rather than the hard ones. It is obsessed with the correct monetary and fiscal policy to help offset the immediate impact of the economic downturn. But long-term structural weaknesses get scant attention.
Last week’s Green Budget from the Institute for Fiscal Studies and Barclays Wealth gave some idea of the scale of the problem. It estimated that Britain’s trend rate of growth was only 1.75% rather than the 2.75% the Treasury assumes. Although one percentage point might not sound a lot it makes a huge difference when compounded over several years.
Western leaders should stop fretting over China and tackle their domestic weaknesses.
Labels: America, china, economics, Fund Strategy, trade
Saturday, February 06, 2010
Global success in information technology
The global statistics on information and communication technology give some of the clearest indications of the benefits of economic growth for the mass of humanity. According to a flyer on The World in 2009 (PDF) from the International Telecommunications Union some 4.6 billion people, two-thirds of the world’s population, had a mobile phone by the end of the year. This compares with about 10% in 2000. Also last year: more than a quarter of the world’s population were using the internet, more than a quarter of the world’s population had access to a computer at home and three quarters of households had a television. Of course it would be even better if access to such technologies was universal but the trend is clearly in the right direction.
Labels: consumption, development, technology
Wednesday, February 03, 2010
For sprawling cities
James Heartfield has an article on the newgeography website celebrating what he calls dispersed settlements and others deride as urban sprawl. He concludes that:
“Far from being necessarily de-humanising, dispersed settlements are an opportunity for an enlargement of the human spirit. To imagine that there is anything in physical proximity that is essential to community is to confuse animal warmth with civilisation, and an unfortunately deterministic view of architecture’s relationship to society. But worst of all it misses out the great alternatives that are waiting to be made in new communities across the country.”
This is a welcome contrast to the romanticised vision of slums contained in a recent article (truncated) on “how slums can save the planet” by Stewart Brand in Prospect. Brand’s argument was in turn similar to Kevin McCloud’s recent documentary on Mumbai which I suggested might be the dumbest programme ever (see 15 January 2010 post).
“Far from being necessarily de-humanising, dispersed settlements are an opportunity for an enlargement of the human spirit. To imagine that there is anything in physical proximity that is essential to community is to confuse animal warmth with civilisation, and an unfortunately deterministic view of architecture’s relationship to society. But worst of all it misses out the great alternatives that are waiting to be made in new communities across the country.”
This is a welcome contrast to the romanticised vision of slums contained in a recent article (truncated) on “how slums can save the planet” by Stewart Brand in Prospect. Brand’s argument was in turn similar to Kevin McCloud’s recent documentary on Mumbai which I suggested might be the dumbest programme ever (see 15 January 2010 post).
Labels: cities, development, footprint, television
Monday, February 01, 2010
Cultural aversion to wealth stifles growth
My news analysis from this week’s Fund Strategy attempts to grapple with the debate on economic policy in the run-up to Britain’s general election.
It is rare for so much fuss to be made over anything so small. Yet the announcement of a 0.1% rise in Britain’s GDP in the final quarter of 2009 got economic pundits highly excited last week.
Up to a point, the hype can be explained by the figure’s symbolic value. After six consecutive quarters of falling output the economy had finally returned to growth. For production industries, where the fall was steeper still, the relief was even greater.
But one quarter’s figures mean little. Even if the preliminary estimate is revised upwards, which many argue is likely, it says nothing about the long-term trend.
The most important economic challenge facing the next government, whichever party wins the election, is how to generate the best possible growth.
More rapid GDP growth means increasing prosperity as well as enhancing Britain’s ability to repay its burgeoning debt.
Despite the bickering there is little difference between the main parties on macroeconomic policy.
There is a broad consensus that the next government will need to make substantial spending cuts and that growth is likely to be slow over the next few years.
As Jonathan Loynes, the chief European economist at Capital Economics, concluded in a recent paper on the subject: “On fiscal policy, the gap between the two main parties is perhaps not as big as the rhetoric suggests, but an earlier and rather bigger tightening is probably still likely under the Conservatives.
“Whoever is in power, though, the next parliament will be characterised by a long and painful fiscal squeeze, accompanied by ultra-loose monetary policy.”
This narrow consensus begs the question of why there is not a bigger debate on economic policy.
In broad terms there are two ways to deal with the debt problem. The one emphasised by the main political parties is to restrict consumption so that Britain can slowly reduce its fiscal deficit. The alternative approach, to strengthen the productive side of the economy to generate more growth, receives relatively little consideration.
Some might argue that the size of Britain’s debt burden means that ¬savage spending cuts are necessary. According to a recent study by the McKinsey Global Institute, Britain’s debt-to-GDP ratio is the highest of any major economy except Japan’s - and this is even adjusting for London’s role as a global financial centre.
But the size of the debt burden alone does not explain the widespread anxiety about growth among Britain’s political elite. If anything, more rapid growth would enhance the country’s ability to rapidly reduce its debt.
In broad terms, it is possible to identify three related ways in which the nervousness about growth is expressed:
Bubblephobia
Politicians seem incredibly worried that any surge in growth will be followed by a bubble and inevitable bust. The experience of the past two years is enough to warn them of the ¬turmoil that such a course of action could bring.
That is one reason why all the main parties are concerned to restore stability to public finances and maintain the independence of the Bank of England. However, it does not follow that any rapid growth will automatically turn into a bubble.
The challenge is to promote growth which is strong and consistent rather than an artificial boom based on credit expansion.
Sense of limits
Since the 1970s a pervasive sense of limits - environmental, moral and social - has enveloped the British political establishment. It has become widely accepted that there could be damaging consequences if growth is not restrained.
So, for example, in a speech given last week, Vince Cable, the Liberal Democrats’ shadow chancellor, warned the government against being “too absorbed by growth for its own sake rather than protecting the environment and maintaining a sense of fairness and community”.
Cable’s statement was particularly peculiar in that context. It is hard to imagine many people favouring growth “for its own sake”. The benefits of growth include greater prosperity and the ability to repay debt more rapidly.
In addition, the idea of limits to growth is open to question, but an investigation of this subject is beyond the scope of this article.
Blindness to production
It is striking how little of Britain’s economic debate is about restructuring and bolstering the productive side of the economy.
Although there is some talk of entrepreneurship, innovation and even industrial policy the character and scale of what is being proposed
is limited.
Britain is suffering from a strong cultural aversion to economic growth and prosperity. Unless this is tackled it is likely that Britain’s growth record will remain muted in the years to come.
It is rare for so much fuss to be made over anything so small. Yet the announcement of a 0.1% rise in Britain’s GDP in the final quarter of 2009 got economic pundits highly excited last week.
Up to a point, the hype can be explained by the figure’s symbolic value. After six consecutive quarters of falling output the economy had finally returned to growth. For production industries, where the fall was steeper still, the relief was even greater.
But one quarter’s figures mean little. Even if the preliminary estimate is revised upwards, which many argue is likely, it says nothing about the long-term trend.
The most important economic challenge facing the next government, whichever party wins the election, is how to generate the best possible growth.
More rapid GDP growth means increasing prosperity as well as enhancing Britain’s ability to repay its burgeoning debt.
Despite the bickering there is little difference between the main parties on macroeconomic policy.
There is a broad consensus that the next government will need to make substantial spending cuts and that growth is likely to be slow over the next few years.
As Jonathan Loynes, the chief European economist at Capital Economics, concluded in a recent paper on the subject: “On fiscal policy, the gap between the two main parties is perhaps not as big as the rhetoric suggests, but an earlier and rather bigger tightening is probably still likely under the Conservatives.
“Whoever is in power, though, the next parliament will be characterised by a long and painful fiscal squeeze, accompanied by ultra-loose monetary policy.”
This narrow consensus begs the question of why there is not a bigger debate on economic policy.
In broad terms there are two ways to deal with the debt problem. The one emphasised by the main political parties is to restrict consumption so that Britain can slowly reduce its fiscal deficit. The alternative approach, to strengthen the productive side of the economy to generate more growth, receives relatively little consideration.
Some might argue that the size of Britain’s debt burden means that ¬savage spending cuts are necessary. According to a recent study by the McKinsey Global Institute, Britain’s debt-to-GDP ratio is the highest of any major economy except Japan’s - and this is even adjusting for London’s role as a global financial centre.
But the size of the debt burden alone does not explain the widespread anxiety about growth among Britain’s political elite. If anything, more rapid growth would enhance the country’s ability to rapidly reduce its debt.
In broad terms, it is possible to identify three related ways in which the nervousness about growth is expressed:
Bubblephobia
Politicians seem incredibly worried that any surge in growth will be followed by a bubble and inevitable bust. The experience of the past two years is enough to warn them of the ¬turmoil that such a course of action could bring.
That is one reason why all the main parties are concerned to restore stability to public finances and maintain the independence of the Bank of England. However, it does not follow that any rapid growth will automatically turn into a bubble.
The challenge is to promote growth which is strong and consistent rather than an artificial boom based on credit expansion.
Sense of limits
Since the 1970s a pervasive sense of limits - environmental, moral and social - has enveloped the British political establishment. It has become widely accepted that there could be damaging consequences if growth is not restrained.
So, for example, in a speech given last week, Vince Cable, the Liberal Democrats’ shadow chancellor, warned the government against being “too absorbed by growth for its own sake rather than protecting the environment and maintaining a sense of fairness and community”.
Cable’s statement was particularly peculiar in that context. It is hard to imagine many people favouring growth “for its own sake”. The benefits of growth include greater prosperity and the ability to repay debt more rapidly.
In addition, the idea of limits to growth is open to question, but an investigation of this subject is beyond the scope of this article.
Blindness to production
It is striking how little of Britain’s economic debate is about restructuring and bolstering the productive side of the economy.
Although there is some talk of entrepreneurship, innovation and even industrial policy the character and scale of what is being proposed
is limited.
Britain is suffering from a strong cultural aversion to economic growth and prosperity. Unless this is tackled it is likely that Britain’s growth record will remain muted in the years to come.
Labels: debt, economics, finance, Fund Strategy, growth
Rules will not quell economic troubles
This is my comment from this week’s Fund Strategy.
A lesson that should have been learned from the economic crisis is that there are severe limits to the efficacy of rules and regulations.
Although rules have their place they cannot quell problems if the underlying troubles are sufficiently bad. Indeed over-regulation can make matters worse.
Barack Obama’s plan to add additional restrictions to the size and activities of banks shows he is either unaware of the limitations of rules or choosing to ignore them. It is hard to see how his proposed regulations could quell any financial crisis. For example, they do not cover “non-bank” financial institutions–a category which included AIG, Bear Stearns, Lehman Brothers and Merrill Lynch. Nor do they have any impact on the likelihood of bail-outs.
Fixation with regulation is not unique to America. It is easy to forget that until a couple of years ago New Labour was boasting about its two fiscal rules. These were meant to a way of stifling any return to the bad old days of boom and bust.
In the event both rules were busted. The Sustainable Investment Rule stipulated government debt should be set at a “prudent level”. This was taken to mean below 40% of GDP. Yet according to the latest pre-budget report the net debt of the public sector will be 55.6% this year and will exceed 75% for several years in a row.
No doubt the government would claim the rules needed to be breached because of the global recession, just as it explains away the return to bust. But it was the government’s fault that the economy remained so heavily dependent on financial services rather than becoming more diversified. In any case Britain’s performance in the downturn is among the worst of the developed countries.
What the breaking of the rules really shows is that Britain’s fiscal framework, supposedly so clever, had little effect. When economic troubles emerged the rules were swept aside.
A similar failure is apparent in the European Union’s stability and growth pact. Under these rules annual budget deficits were supposed to be no higher than 3% of GDP and national debt was meant to be lower than 60% of GDP. Yet many governments have breached these levels.
Rather than obsess over devising more rules and regulations it is time for governments to pursue a different approach. The sooner they start promoting economic dynamism the better able they will be to cope with any challenges ahead.
A lesson that should have been learned from the economic crisis is that there are severe limits to the efficacy of rules and regulations.
Although rules have their place they cannot quell problems if the underlying troubles are sufficiently bad. Indeed over-regulation can make matters worse.
Barack Obama’s plan to add additional restrictions to the size and activities of banks shows he is either unaware of the limitations of rules or choosing to ignore them. It is hard to see how his proposed regulations could quell any financial crisis. For example, they do not cover “non-bank” financial institutions–a category which included AIG, Bear Stearns, Lehman Brothers and Merrill Lynch. Nor do they have any impact on the likelihood of bail-outs.
Fixation with regulation is not unique to America. It is easy to forget that until a couple of years ago New Labour was boasting about its two fiscal rules. These were meant to a way of stifling any return to the bad old days of boom and bust.
In the event both rules were busted. The Sustainable Investment Rule stipulated government debt should be set at a “prudent level”. This was taken to mean below 40% of GDP. Yet according to the latest pre-budget report the net debt of the public sector will be 55.6% this year and will exceed 75% for several years in a row.
No doubt the government would claim the rules needed to be breached because of the global recession, just as it explains away the return to bust. But it was the government’s fault that the economy remained so heavily dependent on financial services rather than becoming more diversified. In any case Britain’s performance in the downturn is among the worst of the developed countries.
What the breaking of the rules really shows is that Britain’s fiscal framework, supposedly so clever, had little effect. When economic troubles emerged the rules were swept aside.
A similar failure is apparent in the European Union’s stability and growth pact. Under these rules annual budget deficits were supposed to be no higher than 3% of GDP and national debt was meant to be lower than 60% of GDP. Yet many governments have breached these levels.
Rather than obsess over devising more rules and regulations it is time for governments to pursue a different approach. The sooner they start promoting economic dynamism the better able they will be to cope with any challenges ahead.
Labels: America, economics, Europe, finance, Fund Strategy
Sunday, January 31, 2010
The anxious elite
Anyone who still believes the global elite consists of fire-breathing market fundamentalists should look at the programme for this year’s World Economic Forum in Davos. One of the main themes of this year’s event at the exclusive Swiss ski resort was sustainability with other sessions on business ethics, the economics of happiness, rethinking values and the Millennium Development Goals. Among the speakers were staunch critics of growth, including Jim Wallis and the Archbishop of Canterbury, while Stewart Wallis, the executive director of the New Economics Foundation, chaired a session on rethinking economics.
An account of the event by Jeremy Warner of the Daily Telegraph can be found here.
An account of the event by Jeremy Warner of the Daily Telegraph can be found here.
Labels: development, ethics, happiness, sustainability
Saturday, January 30, 2010
The new intolerance
Janice Turner, a Times (London) columnist, does a good job of showing how British society has become less tolerant towards obesity at the same time as it has become more tolerant towards gays. The welcome news that homosexuality is more widely accepted was contained in the annual British Social Attitudes survey. But, as Turner astutely points out, it does not necessary follow that society has become more tolerant in other respects:
“Sometimes it feels as if the anger and intolerance upon our angry, always up-for-a-fight island, is just being funnelled to other targets: the fat, the poor, the white trash, the chavs and pikeys, the underclass on the fringes of society who we loathe almost as much as we fear.”
In my view the new intolerance is closely related to the elitist disdain for consumption that is pervasive in growth scepticism. It is seen as OK for the relatively wealthy to consume – as long as they do so in what is deemed an “ethically correct” way – but popular consumption is seen as truly disgusting.
“Sometimes it feels as if the anger and intolerance upon our angry, always up-for-a-fight island, is just being funnelled to other targets: the fat, the poor, the white trash, the chavs and pikeys, the underclass on the fringes of society who we loathe almost as much as we fear.”
In my view the new intolerance is closely related to the elitist disdain for consumption that is pervasive in growth scepticism. It is seen as OK for the relatively wealthy to consume – as long as they do so in what is deemed an “ethically correct” way – but popular consumption is seen as truly disgusting.
Labels: consumption, inequality
Friday, January 29, 2010
Growth is essential
Spiked has published a review by me looking at three American growth sceptic books. It is essentially an introduction to some of the key themes of my new book.
Labels: book, growth, media appearances, review, spiked
