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
Thursday, August 20, 2009
Backlash against microfinance
I welcome the news, courtesy of Duncan Green’s Oxfam blog, that there is a backlash against microfinance. He cites several papers, written from various perspectives, arguing that microfinance does not work. Among the criticisms: it has failed to reduce poverty, it has never been included in a successful national development strategy, it ignores the role of scale in economics and it has driven up interest rates.
Whatever the attractions of microfinance to individual borrowers it does not constitute a strategy for development. Indeed it is often posed as an alternative to economic growth.
Whatever the attractions of microfinance to individual borrowers it does not constitute a strategy for development. Indeed it is often posed as an alternative to economic growth.
Labels: debt, development, finance
Monday, July 06, 2009
Better to take a short term hit
The following comment by me appeared in the latest Fund Strategy (6 July).
Last week saw the publication of some of the scariest numbers so far in this recession. Britain suffered its worst quarterly fall in GDP since 1958: a year when Harold Macmillan was prime minister and the Soviet Union was launching Sputnik satellites into space. The 2.4% fall in the first quarter of 2009 was equivalent to about 10% at an annual rate.
In America the unemployment rate hit its highest level since 1983: when the American embassy in Beirut was bombed and Michael Jackson first performed the “Moonwalk”. Paul Krugman, a Nobel prize-winning economist, has estimated America has lost 6.5m jobs since the start of this recession.
To make matters worse Arnold Schwarzenegger, the governor of the state of California, declared a state of fiscal emergency in his state. The fiscal plight of the American states adds to the ballooning of federal debt discussed in this week’s cover story.
Under such circumstances it is not surprising that Stuart Thomson, the economist at Ignis, talks of a “WWW recovery”. He is not referring to the internet but to the pattern of apparent recovery followed by a decline back into the mire.
After nine months of severe pain it should be apparent to all that the recovery, when it comes, will not be easy. The economies of the developed world are in a dire state.
With the benefit of hindsight it would have been better to take some pain in the short term, rather than the sustained torture by a thousand cuts. For example, letting some large banks and auto makers go under would no doubt have been unpleasant. But if the destruction of old business helped pave the way for the generation of new ones, the longer-term effect could be beneficial.
Of course, it makes sense to minimise the extent of human suffering. Those who lose their jobs should, as far as possible, get help in finding work in new or expanding economic sectors.
In any case, the current recession is hardly painless. As Greg Mankiw, a professor of economics at Harvard, points out in his blog the level of American unemployment now is much higher than the Obama administration forecasted in January. This is despite its huge stimulus plan. Better to take misery in the short run than face a protracted period of unpleasantness.
Last week saw the publication of some of the scariest numbers so far in this recession. Britain suffered its worst quarterly fall in GDP since 1958: a year when Harold Macmillan was prime minister and the Soviet Union was launching Sputnik satellites into space. The 2.4% fall in the first quarter of 2009 was equivalent to about 10% at an annual rate.
In America the unemployment rate hit its highest level since 1983: when the American embassy in Beirut was bombed and Michael Jackson first performed the “Moonwalk”. Paul Krugman, a Nobel prize-winning economist, has estimated America has lost 6.5m jobs since the start of this recession.
To make matters worse Arnold Schwarzenegger, the governor of the state of California, declared a state of fiscal emergency in his state. The fiscal plight of the American states adds to the ballooning of federal debt discussed in this week’s cover story.
Under such circumstances it is not surprising that Stuart Thomson, the economist at Ignis, talks of a “WWW recovery”. He is not referring to the internet but to the pattern of apparent recovery followed by a decline back into the mire.
After nine months of severe pain it should be apparent to all that the recovery, when it comes, will not be easy. The economies of the developed world are in a dire state.
With the benefit of hindsight it would have been better to take some pain in the short term, rather than the sustained torture by a thousand cuts. For example, letting some large banks and auto makers go under would no doubt have been unpleasant. But if the destruction of old business helped pave the way for the generation of new ones, the longer-term effect could be beneficial.
Of course, it makes sense to minimise the extent of human suffering. Those who lose their jobs should, as far as possible, get help in finding work in new or expanding economic sectors.
In any case, the current recession is hardly painless. As Greg Mankiw, a professor of economics at Harvard, points out in his blog the level of American unemployment now is much higher than the Obama administration forecasted in January. This is despite its huge stimulus plan. Better to take misery in the short run than face a protracted period of unpleasantness.
Labels: debt, economics, finance, Fund Strategy
Monday, February 23, 2009
‘Expert’ views that spark bad solutions
The following review by me appeared in the latest Fund Strategy (23 February).
Attacks on greedy financiers are becoming so shrill it is worth revisiting some financial basics. Sadly, most financial “experts” are guilty of what could be called “one-dimensional thinking”.
Take two key propositions that superficially seem true but on closer inspection are gross oversimplifications. First, that greedy financiers, through their enormous risk taking, are largely to blame for the crisis. Second, that the main problem was the massive extension of credit.
In relation to the first, it seems to have been forgotten that the financial instruments that have caused so much trouble were designed to help avoid risk. Both mortgage-backed securities and credit derivatives, for example, were essentially risk management tools.
Of course, things did not work out as their designers or users intended. Instead of removing risk they simply transferred it from one party to another. Indeed, they were the basis for “contagion” to create “toxic assets”. But the fact remains that the intention was to manage risk rather than to increase it.
In relation to the credit boom, it is clear that once the bubble burst it had a damaging impact on economic activity. But to stop at this observation is to miss the point that credit kept the global economy growing far faster than it would have done otherwise.
Although credit expansion eventually became a problem, it was for a long time encouraged by the monetary and fiscal authorities in the West, who were motivated by a desire to offset the sluggishness of western economies rather than by simple foolishness.
America was the prime example of this trend. It managed reasonable growth on the basis of huge capital flows from Asia and the Middle East. In effect many of the world’s relatively poor countries were subsidising American consumption.
Contemporary economic thinking, particularly that of the more popular pundits, plays down the importance of such complexities. Instead it starts with superficial observations before quickly descending into morality tales about greedy financiers.
It would be far better if more effort was made to go beyond one-dimensional thinking. Rather than present fables about the dangers of greed, an attempt to grapple with real economic trends would be a huge advance. Crass thinking tends to lead to a crass discussion which results in crass solutions.
Attacks on greedy financiers are becoming so shrill it is worth revisiting some financial basics. Sadly, most financial “experts” are guilty of what could be called “one-dimensional thinking”.
Take two key propositions that superficially seem true but on closer inspection are gross oversimplifications. First, that greedy financiers, through their enormous risk taking, are largely to blame for the crisis. Second, that the main problem was the massive extension of credit.
In relation to the first, it seems to have been forgotten that the financial instruments that have caused so much trouble were designed to help avoid risk. Both mortgage-backed securities and credit derivatives, for example, were essentially risk management tools.
Of course, things did not work out as their designers or users intended. Instead of removing risk they simply transferred it from one party to another. Indeed, they were the basis for “contagion” to create “toxic assets”. But the fact remains that the intention was to manage risk rather than to increase it.
In relation to the credit boom, it is clear that once the bubble burst it had a damaging impact on economic activity. But to stop at this observation is to miss the point that credit kept the global economy growing far faster than it would have done otherwise.
Although credit expansion eventually became a problem, it was for a long time encouraged by the monetary and fiscal authorities in the West, who were motivated by a desire to offset the sluggishness of western economies rather than by simple foolishness.
America was the prime example of this trend. It managed reasonable growth on the basis of huge capital flows from Asia and the Middle East. In effect many of the world’s relatively poor countries were subsidising American consumption.
Contemporary economic thinking, particularly that of the more popular pundits, plays down the importance of such complexities. Instead it starts with superficial observations before quickly descending into morality tales about greedy financiers.
It would be far better if more effort was made to go beyond one-dimensional thinking. Rather than present fables about the dangers of greed, an attempt to grapple with real economic trends would be a huge advance. Crass thinking tends to lead to a crass discussion which results in crass solutions.
Labels: debt, finance, Fund Strategy
Wednesday, February 18, 2009
US living standards forecasted to plummet
Howard Davidowitz, a retail analyst, predicts a long term decline in living standards for the average American consumer. He says ‘the worst is yet to come” as a result of several factors. According to a report on Business Insider they include:
* An $8 trillion negative wealth effect from declining home values.
* A $10 trillion negative wealth effect from weakened capital markets.
* A $14 trillion consumer debt load amid "exploding unemployment" leading to "exploding bankruptcies."
"The average American used to be able to borrow to buy a home, send their kids to a good school [and] buy a car," he says. "A lot of that is gone."
It is a grim prospect.
* An $8 trillion negative wealth effect from declining home values.
* A $10 trillion negative wealth effect from weakened capital markets.
* A $14 trillion consumer debt load amid "exploding unemployment" leading to "exploding bankruptcies."
"The average American used to be able to borrow to buy a home, send their kids to a good school [and] buy a car," he says. "A lot of that is gone."
It is a grim prospect.
Labels: America, Austerity Watch, consumption, debt
Tuesday, October 28, 2008
Atwood book on debt
Margaret Atwood, a Canadian writer and activist, has had a non-fiction book published on debt. Payback: Debt and the Shadow Side of Wealth is a collection of essays based on the annual Massey lectures she gave this year. From what I can gather it is against “greed” and pro-environmentalist. For an extract click here.
Labels: book, debt, environment, finance
Monday, September 10, 2007
Fantasists spawn nightmare vision
There follows my review of Fantasy Island by Larry Elliott and Dan Atkinson (Constable & Robinson 2007) in the 10 September issue of Fund Strategy.
Larry Elliott and Dan Atkinson see Tony Blair as having turned Britain into a "fantasy island" during his decade in office. The two economics editors, Elliott at the Guardian and Atkinson at the Mail on Sunday, argue that Britain's apparent economic and social health is largely illusory. New Labour has, in their view, simply disguised problems and stored them up for the future.
Fantasy Island sees New Labour as responsible for five minor fantasies and two master fantasies. The minor fantasies relate to inflation, the knowledge economy, the public sector, work and defence. The master fantasies relate to debt and the environment. Behind all these fantasies is a common theme of excess. As Elliott and Atkinson argue: "There is a surfeit of consumption, a surfeit of speculation and a surfeit of deceit".
Before examining these fantasies in more detail it is important to note that this is a broadly sympathetic critique of New Labour. The two authors, who are not members of any political party, praise the organisation for its record on civil partnerships and the minimum wage. They also endorse its overseas record in relation to the Good Friday agreement, Kosovo, Sierra Leone and African development.
What they object to is Labour's habit of pretending two opposites are not opposite. For example, on the one hand New Labour preaches the virtue of people living within their means. On the other hand, it has presided over a huge build-up of household debt. Yet New Labour denies there is any contradiction between the two.
It is certainly possible to sympathise with Elliott and Atkinson's charge of self-delusion against New Labour. Its pronouncements are riddled with inconsistencies. Fantasy Island's strength is that it outlines many of these contradictions well. For instance, New Labour says it is against privatisation but, in its own covert way, has played a big role in privatising welfare services. The Private Finance Initiative has involved private companies in welfare provision at the cost of saddling the public sector with a heavy debt burden.
But the characterisation of New Labour's outlook as "fantasy island" in a way misses the point. If anything defines the party it is a lack of a broader vision of how to run society. It is the Ideas Lite party. To the extent it believes in anything it is regulating individual behaviour and imposing restraint on society. Labour has given up on taking control of the "commanding heights" of the economy and instead wants to tell people how to recycle their rubbish or what food to eat.
It is New Labour's lack of any principles that helps explain why it can take up apparently contradictory positions with such ease. Beyond its avid belief in social regulation it is highly pragmatic. All its leaders care about are the perpetuation of their own cliques and the survival of the party's electoral machine.
What Elliott and Atkinson are really saying is that Labour should be more consistent in its campaign against excess. Their starting point is the old environmentalist canard of limited resources: "living within our means has to start with acknowledging what the planet can and cannot bear." From this premise they go on to argue that it is necessary to start planning for a more frugal future.
Yet this underlying assumption is false. There is no finite amount of resources on the planet or limit to the extent to which humanity can exploit the Earth. The richer and more advanced we are the better able we are to utilise the planet to our advantage.
The pattern is clear in relation to energy but it could equally apply to other natural resources. Pundits have for decades predicted the exhaustion of oil supplies yet new sources of crude keep on being discovered. New fields are found, extraction technology improves and new sources, such as tar sands, are utilised. When oil does eventually run out there is no reason why it cannot be replaced with other sources of energy such as nuclear power or hydroelectric power. There is no fixed amount of energy in the world.
The same approach can be applied to climate change. For Elliott and Atkinson, as with so many others, this is seen as the ultimate factor limiting consumption. But much of the technology needed to tackle the problem already exists. There are already many sources of energy that do not emit greenhouse gases. There are also other technologies, such as modern flood defences, that can protect humanity against the impact of rising sea levels. What is missing is the resources for this technology to become widely used. More economic growth and prosperity should provide us with such resources.
No doubt technology will improve further still as long as science and experimentation are encouraged. One way to see the history of humanity is of ingenuity enabling it to overcome what were previously seen as insurmountable problems. In the longer term it may even be possible to use advanced technologies to control the climate.
Yet Elliott and Atkinson's starting point is the mistaken idea of natural limits rather than having a positive vision of creating a better society. Although they are reluctant to spell out the consequences of this world view it presumably means more austerity and restraint. It means curbing the growth in living standards and perhaps even cutting them in absolute terms.
From this perspective it is possible to see the true content of the authors' critique of New Labour. For them its problem is that it is not New Labour enough. It should not just preach austerity but follow it through in practice. Gordon Brown, until recently known at the "Iron Chancellor", does not have enough mettle.
What Elliott and Atkinson propose in place of Fantasy Island could be called Nightmare on Fleet Street. Their vision is even more bleak and limited than that of New Labour. In that sense Fantasy Island is a remarkable achievement.
Larry Elliott and Dan Atkinson see Tony Blair as having turned Britain into a "fantasy island" during his decade in office. The two economics editors, Elliott at the Guardian and Atkinson at the Mail on Sunday, argue that Britain's apparent economic and social health is largely illusory. New Labour has, in their view, simply disguised problems and stored them up for the future.
Fantasy Island sees New Labour as responsible for five minor fantasies and two master fantasies. The minor fantasies relate to inflation, the knowledge economy, the public sector, work and defence. The master fantasies relate to debt and the environment. Behind all these fantasies is a common theme of excess. As Elliott and Atkinson argue: "There is a surfeit of consumption, a surfeit of speculation and a surfeit of deceit".
Before examining these fantasies in more detail it is important to note that this is a broadly sympathetic critique of New Labour. The two authors, who are not members of any political party, praise the organisation for its record on civil partnerships and the minimum wage. They also endorse its overseas record in relation to the Good Friday agreement, Kosovo, Sierra Leone and African development.
What they object to is Labour's habit of pretending two opposites are not opposite. For example, on the one hand New Labour preaches the virtue of people living within their means. On the other hand, it has presided over a huge build-up of household debt. Yet New Labour denies there is any contradiction between the two.
It is certainly possible to sympathise with Elliott and Atkinson's charge of self-delusion against New Labour. Its pronouncements are riddled with inconsistencies. Fantasy Island's strength is that it outlines many of these contradictions well. For instance, New Labour says it is against privatisation but, in its own covert way, has played a big role in privatising welfare services. The Private Finance Initiative has involved private companies in welfare provision at the cost of saddling the public sector with a heavy debt burden.
But the characterisation of New Labour's outlook as "fantasy island" in a way misses the point. If anything defines the party it is a lack of a broader vision of how to run society. It is the Ideas Lite party. To the extent it believes in anything it is regulating individual behaviour and imposing restraint on society. Labour has given up on taking control of the "commanding heights" of the economy and instead wants to tell people how to recycle their rubbish or what food to eat.
It is New Labour's lack of any principles that helps explain why it can take up apparently contradictory positions with such ease. Beyond its avid belief in social regulation it is highly pragmatic. All its leaders care about are the perpetuation of their own cliques and the survival of the party's electoral machine.
What Elliott and Atkinson are really saying is that Labour should be more consistent in its campaign against excess. Their starting point is the old environmentalist canard of limited resources: "living within our means has to start with acknowledging what the planet can and cannot bear." From this premise they go on to argue that it is necessary to start planning for a more frugal future.
Yet this underlying assumption is false. There is no finite amount of resources on the planet or limit to the extent to which humanity can exploit the Earth. The richer and more advanced we are the better able we are to utilise the planet to our advantage.
The pattern is clear in relation to energy but it could equally apply to other natural resources. Pundits have for decades predicted the exhaustion of oil supplies yet new sources of crude keep on being discovered. New fields are found, extraction technology improves and new sources, such as tar sands, are utilised. When oil does eventually run out there is no reason why it cannot be replaced with other sources of energy such as nuclear power or hydroelectric power. There is no fixed amount of energy in the world.
The same approach can be applied to climate change. For Elliott and Atkinson, as with so many others, this is seen as the ultimate factor limiting consumption. But much of the technology needed to tackle the problem already exists. There are already many sources of energy that do not emit greenhouse gases. There are also other technologies, such as modern flood defences, that can protect humanity against the impact of rising sea levels. What is missing is the resources for this technology to become widely used. More economic growth and prosperity should provide us with such resources.
No doubt technology will improve further still as long as science and experimentation are encouraged. One way to see the history of humanity is of ingenuity enabling it to overcome what were previously seen as insurmountable problems. In the longer term it may even be possible to use advanced technologies to control the climate.
Yet Elliott and Atkinson's starting point is the mistaken idea of natural limits rather than having a positive vision of creating a better society. Although they are reluctant to spell out the consequences of this world view it presumably means more austerity and restraint. It means curbing the growth in living standards and perhaps even cutting them in absolute terms.
From this perspective it is possible to see the true content of the authors' critique of New Labour. For them its problem is that it is not New Labour enough. It should not just preach austerity but follow it through in practice. Gordon Brown, until recently known at the "Iron Chancellor", does not have enough mettle.
What Elliott and Atkinson propose in place of Fantasy Island could be called Nightmare on Fleet Street. Their vision is even more bleak and limited than that of New Labour. In that sense Fantasy Island is a remarkable achievement.
Labels: Austerity Watch, book, debt, economics, Fund Strategy, review
Sunday, April 01, 2007
Microfinance – a crack in the consensus
It seems there is a crack in the near universal consensus in favour of microcredit (extending tiny loans to third world entrepreneurs). Newsweek reports that a backlash is growing:
“Critics on the left charge that micro-finance privatizes social safety networks, while conservatives dismiss it as charity disguised as enterprise. Wonks weigh in with studies like "The Myths and Magic of Microcredit" and "Money Is Not Enough." Insiders turn on the industry. Loïc Sadou-let, a former World Bank economist who worked in microfinance in Guatemala, estimates that only about 300 of nearly 25,000 microlenders have reached financial "sustainability," meaning they are able to cover all costs.”
A critical essay by Thomas Dichter, an international aid expert, is also available on the Cato Institute website. In his view most such credit is likely to be use to fund consumption rather than investment.
“Critics on the left charge that micro-finance privatizes social safety networks, while conservatives dismiss it as charity disguised as enterprise. Wonks weigh in with studies like "The Myths and Magic of Microcredit" and "Money Is Not Enough." Insiders turn on the industry. Loïc Sadou-let, a former World Bank economist who worked in microfinance in Guatemala, estimates that only about 300 of nearly 25,000 microlenders have reached financial "sustainability," meaning they are able to cover all costs.”
A critical essay by Thomas Dichter, an international aid expert, is also available on the Cato Institute website. In his view most such credit is likely to be use to fund consumption rather than investment.
Labels: consumption, debt, development, finance
Tuesday, March 27, 2007
Microfinance and miniscule ambitions
Nicholas Kristof, a New York Times columnist, demonstrates tragically low horizons in relation to fighting poverty. He advocates using websites such as kiva.org and globalgiving.com which allow Westerners to lend small amounts of money to third world entrepreneurs:
“From my laptop in New York, I lent $25 each to the owner of a TV repair shop in Afghanistan, a baker in Afghanistan, and a single mother running a clothing shop in the Dominican Republic. I did this through www.kiva.org, a website that provides information about entrepreneurs in poor countries - their photos, loan proposals and credit history - and allows people to make direct loans to them.”
A PDF version of his article, from the kiva.org website, can be read here.
“From my laptop in New York, I lent $25 each to the owner of a TV repair shop in Afghanistan, a baker in Afghanistan, and a single mother running a clothing shop in the Dominican Republic. I did this through www.kiva.org, a website that provides information about entrepreneurs in poor countries - their photos, loan proposals and credit history - and allows people to make direct loans to them.”
A PDF version of his article, from the kiva.org website, can be read here.
Labels: debt, development, finance
Wednesday, December 13, 2006
Me on spiked on household debt
Yesterday spiked published an article by me about the panic on household debt levels in Britain. To read the piece click here.
Monday, December 04, 2006
Put alarmist debate on debt into context
There follows a comment by me on household debt from the 4 December issue of Fund Strategy.
Tucked away in the latest issue of a dusty journal lies a healthy corrective to the often hysterical discussion of household debt. An article in the Organisation for Economic Cooperation and Development's Economic Outlook shows the debt situation is not nearly as serious as is often assumed.* To the extent it could become a problem, it is likely to be because of broader economic factors rather than the debt situation in itself.
Most sensationalist coverage of household debt follows a similar pattern. It starts with sensational-sounding figures on the size of the debt burden. Often it claims that debt levels are at an all-time high. Rarely is the discussion of debt put into its proper context.
For example, the fact that debt is at record levels reveals less than it seems. As the economy grows it is unusual for many indicators not to be at record levels. Economic output is usually at its highest level ever, corporate profits are generally at record highs and the economy is often more productive than ever.
Nor are figures on their own particularly revealing. The claim that personal debt in Britain is growing by £1m every four minutes sounds impressive but says little. How many people is this debt burden spread across? How high are their incomes? What assets do they have?
As with most statistics, skill is needed to ensure that comparisons are meaningful. For instance, looking at debt levels relative to GDP in an international or historical context makes more sense. It is also instructive to compare debt levels to levels of household assets. That way the overall health of household balance sheets can be properly examined.
The OECD makes several useful points to put the debt discussion into context:
* Favourable financial conditions and buoyant housing markets have bolstered household debt. In addition, financial liberalisation has meant that credit has become more widely available.
* Household wealth has risen sharply as a result of higher property values and a stockmarket recovery. In addition, home ownership rates have increased, so debt is spread across a larger number of people.
* Although debt service levels have risen, mortgage delinquency rates have trended downwards over the past decade.
* Surveys show that most debt is held by households better able to manage it.
None of this means that debt could not become a problem but if it does so it is likely to be because of broader economic factors.
Higher interest rates, falling house prices and drops in income could all turn debt into a serious economic problem. But at present, for the economy as a whole, the burden looks manageable.
* Available at www.oecd.org
Tucked away in the latest issue of a dusty journal lies a healthy corrective to the often hysterical discussion of household debt. An article in the Organisation for Economic Cooperation and Development's Economic Outlook shows the debt situation is not nearly as serious as is often assumed.* To the extent it could become a problem, it is likely to be because of broader economic factors rather than the debt situation in itself.
Most sensationalist coverage of household debt follows a similar pattern. It starts with sensational-sounding figures on the size of the debt burden. Often it claims that debt levels are at an all-time high. Rarely is the discussion of debt put into its proper context.
For example, the fact that debt is at record levels reveals less than it seems. As the economy grows it is unusual for many indicators not to be at record levels. Economic output is usually at its highest level ever, corporate profits are generally at record highs and the economy is often more productive than ever.
Nor are figures on their own particularly revealing. The claim that personal debt in Britain is growing by £1m every four minutes sounds impressive but says little. How many people is this debt burden spread across? How high are their incomes? What assets do they have?
As with most statistics, skill is needed to ensure that comparisons are meaningful. For instance, looking at debt levels relative to GDP in an international or historical context makes more sense. It is also instructive to compare debt levels to levels of household assets. That way the overall health of household balance sheets can be properly examined.
The OECD makes several useful points to put the debt discussion into context:
* Favourable financial conditions and buoyant housing markets have bolstered household debt. In addition, financial liberalisation has meant that credit has become more widely available.
* Household wealth has risen sharply as a result of higher property values and a stockmarket recovery. In addition, home ownership rates have increased, so debt is spread across a larger number of people.
* Although debt service levels have risen, mortgage delinquency rates have trended downwards over the past decade.
* Surveys show that most debt is held by households better able to manage it.
None of this means that debt could not become a problem but if it does so it is likely to be because of broader economic factors.
Higher interest rates, falling house prices and drops in income could all turn debt into a serious economic problem. But at present, for the economy as a whole, the burden looks manageable.
* Available at www.oecd.org
Labels: debt, Fund Strategy
Monday, November 27, 2006
On Chindia and Brics
There follows a comment by me on the third world development from the 27 November issue of Fund Strategy.
First we had Brics, now we have Chindia. The first term, coined by Jim O'Neill of Goldman Sachs in 2001, has become widely accepted as an acronym to cover Brazil, Russia, India and China. Chindia was coined by Jairam Ramesh, an Indian politician and economist, and now is the basis for several funds.
As a shorthand way of indicating the countries included have huge populations while remaining relatively poor, such terms are fine. But there are many important differences between them. Brazil, unlike the others, is not growing particularly fast. Russia, unlike the others, is heavily dependent on one commodity - oil - and related products. India, despite its rapid growth, has appalling infrastructure and a weak industrial base. China stands out as by far the largest and most rapidly growing economy.
In other ways, too, the discussion of these countries is often distorted. A typical fund manager presentation on any of these countries starts by noting their huge populations. It then raises the spectre of such relatively poor countries moving towards Western levels of consumption. "Just imagine if every family in China buys a food processor," runs the argument. "The share price of the Shanghai Acme Food Processor Company is bound to rocket."
Such discussions are back-to-front. The primary determinant of consumption is production. In other words, it is necessary to work out how the barriers to raising production can be overcome before considering how much consumption can rise. The only reason China can consume so much more than in the past is because its output has risen rapidly.
Admittedly the level of production does not put an absolute limit on consumption in the short term. Up to a point it is possible for countries to borrow overseas to help subsidise their current consumption. It is also possible, as in China today, for individuals to save heavily rather than go all out to consume.
Despite these modifications, the fundamental point remains that production determines the level of consumption over the long term. Therefore, a consideration of such factors as the level of investment and the ambition of the governing class are crucial in assessing development prospects. If the level of production rises, consumption levels are likely to follow. Stagnant output, in contrast, means that the consumption story will fail. The simplistic story of the Brics and Chindia told by many financial institutions misses out the key elements in the development process.
First we had Brics, now we have Chindia. The first term, coined by Jim O'Neill of Goldman Sachs in 2001, has become widely accepted as an acronym to cover Brazil, Russia, India and China. Chindia was coined by Jairam Ramesh, an Indian politician and economist, and now is the basis for several funds.
As a shorthand way of indicating the countries included have huge populations while remaining relatively poor, such terms are fine. But there are many important differences between them. Brazil, unlike the others, is not growing particularly fast. Russia, unlike the others, is heavily dependent on one commodity - oil - and related products. India, despite its rapid growth, has appalling infrastructure and a weak industrial base. China stands out as by far the largest and most rapidly growing economy.
In other ways, too, the discussion of these countries is often distorted. A typical fund manager presentation on any of these countries starts by noting their huge populations. It then raises the spectre of such relatively poor countries moving towards Western levels of consumption. "Just imagine if every family in China buys a food processor," runs the argument. "The share price of the Shanghai Acme Food Processor Company is bound to rocket."
Such discussions are back-to-front. The primary determinant of consumption is production. In other words, it is necessary to work out how the barriers to raising production can be overcome before considering how much consumption can rise. The only reason China can consume so much more than in the past is because its output has risen rapidly.
Admittedly the level of production does not put an absolute limit on consumption in the short term. Up to a point it is possible for countries to borrow overseas to help subsidise their current consumption. It is also possible, as in China today, for individuals to save heavily rather than go all out to consume.
Despite these modifications, the fundamental point remains that production determines the level of consumption over the long term. Therefore, a consideration of such factors as the level of investment and the ambition of the governing class are crucial in assessing development prospects. If the level of production rises, consumption levels are likely to follow. Stagnant output, in contrast, means that the consumption story will fail. The simplistic story of the Brics and Chindia told by many financial institutions misses out the key elements in the development process.
Labels: china, debt, Fund Strategy, india
Friday, November 24, 2006
Tory tossers
The Conservative party has launched a “tossers” website to help people avoid getting into debt over Xmas. It is designed to dissuade us from “overspending” by curbing our “inner tosser”.
This initiative could, with some justification, be dismissed as a stupid stunt by an organisation which has lost any sense of political direction. But it does have a horrible logic to it. Curbing what is seen as “overconsumption” is a favourite theme of today’s politicians.
This initiative could, with some justification, be dismissed as a stupid stunt by an organisation which has lost any sense of political direction. But it does have a horrible logic to it. Curbing what is seen as “overconsumption” is a favourite theme of today’s politicians.
Labels: consumption, debt
Wednesday, September 27, 2006
Debating debt
Today I debated consumer debt on the Jeremy Vine show on BBC Radio 2. The peg for the debate was a report from Datamonitor, a business research group, which estimated that the average British resident has £3,175 of unsecured borrowing. That is about twice the average in continental Europe.
I argued that debt was not a problem for most people as long as the economy was growing strongly and unemployment was low. In addition, much of the anti-debt campaign has a puritanical edge to it: a dislike for ordinary people buying luxury goods. However, this does not preclude a small minority having debt problems. Usually these are a result of changes in life circumstances such as divorce or unemployment.
My opponent was David Nellist, a former Labour MP. He presented debt as a huge problem for ordinary people; seduced by advertising and enticed by junk mail.
I argued that debt was not a problem for most people as long as the economy was growing strongly and unemployment was low. In addition, much of the anti-debt campaign has a puritanical edge to it: a dislike for ordinary people buying luxury goods. However, this does not preclude a small minority having debt problems. Usually these are a result of changes in life circumstances such as divorce or unemployment.
My opponent was David Nellist, a former Labour MP. He presented debt as a huge problem for ordinary people; seduced by advertising and enticed by junk mail.
Labels: debt, media appearances, radio
Sunday, September 24, 2006
The new philanthropy: a dirty deal
Philanthropy seems to be in fashion. Bill and Melinda Gates have donated huge amounts to ending global poverty. Warren Buffett has followed their lead. Bono and Bobby Shriver seem to be trying to popularise the movement further with their Product Red campaign.
The latest high profile event in London is Tuesday’s Fortune Forum dinner at Billingsgate including Bill Clinton, Michael Douglas, Deepak Chopra (spiritual guru), Zac Goldsmith (eco-toff and editor of the Ecologist), and a comeback performance by Yusuf Islam (formerly Cat Stevens). For those who are interested prices start at only £1,000 a plate.
On the face of it what could be wrong here? The wealthy are giving substantial amounts of money to worthwhile causes such as curing AIDS and malaria, tackling climate change and reducing global inequality. But closer examination shows that a dirty deal is implicit in this arrangement: the rich will give a little money to the poorest of the poor in return for the mass of the population giving up the ambition of broader development. Unpicking this arrangement will be one of my tasks over the coming months.
The latest high profile event in London is Tuesday’s Fortune Forum dinner at Billingsgate including Bill Clinton, Michael Douglas, Deepak Chopra (spiritual guru), Zac Goldsmith (eco-toff and editor of the Ecologist), and a comeback performance by Yusuf Islam (formerly Cat Stevens). For those who are interested prices start at only £1,000 a plate.
On the face of it what could be wrong here? The wealthy are giving substantial amounts of money to worthwhile causes such as curing AIDS and malaria, tackling climate change and reducing global inequality. But closer examination shows that a dirty deal is implicit in this arrangement: the rich will give a little money to the poorest of the poor in return for the mass of the population giving up the ambition of broader development. Unpicking this arrangement will be one of my tasks over the coming months.
Labels: debt, development, ethics, health, inequality
