Ferraris for all

Most people find watching themselves on video odd but this item from BBC World television (only broadcast outside Britain) is truly weird. It holds me up as a critic of the “green economy” (which is fine) only to have me knocked down by a top panel at a United Nations conference in Indonesia including a Nobel peace prize winner, the head of the United Nations Environment Programme, the Indonesian trade minister and the Norwegian environment minister. Sadly I was filmed in London rather than Bali and I had no chance to reply to the critics.

Labels: development, economics, environment

The second part of Matthew Lockwood’s scathing critique of the New Economic Foundation’s Growth Isn’t Possible (see 27 February post).

Labels: economics, environment

This is my comment from this week’s Fund Strategy. The issue also includes a cover story by me on the British debate about economic policy in the run-up to the next election

The slight upward revision in the figures for Britain’s GDP growth in the final quarter of 2009 is little cause for cheer. While economic growth is always welcome, a closer look at the figures reveals no signs of a strong recovery.

Of course the usual caveat applies: short-term figures should not be taken too seriously. But the breakdown of the figures gives some indication at least of where the economy appears to be heading for now.

Although the overall growth figure was revised upwards from 0.1% to 0.3%, there are several reasons to question claims that this indicates a robust recovery. The impending rise in VAT probably encouraged consumers to make discretionary purchases earlier than they otherwise would have done. Perhaps they bought a new television in December rather than waiting until 2010. But this is no sign of a real recovery.

In addition, while the contribution from exports rose, that from imports increased even further. This is the wrong direction for those hoping that net exports will power Britain’s recovery.

More fundamentally, gross fixed-capital formation fell by 3.1% and is now 14.2% lower than in the final quarter of 2008. Yet such investment is a fundamental driver of economic growth in the future.

Britain’s problem of low growth is discussed in more detail in my cover story this week. Over the past decade, Britain grew at its slowest rate since the second world war. This was in turn part of a longer-term trend, with relatively low growth rates from the 1970s onwards.

Yet despite the scale of the problem, it receives relatively little attention. Politicians evidently prefer to obsess over the fiscal deficit and lambast bankers for their high bonuses. These are likely to dominate the economic debate in the run-up to the election, rather than the problem of low growth.

Overcoming this blinkered attitude demands a fundamental cultural shift. Promoting strong and consistent long-term growth should be the key priority of any political programme. The ideas used to question the feasibility of growth, including the flawed notions of environmental and moral limits, also need to be challenged.

Labels: economics, finance, Fund Strategy, growth

Part one of an interesting critique of the New Economics Foundation’s Growth Isn’t Possible by Matthew Lockwood of the Institute for Public Policy Research, an influential British think thank. I look forward to seeing part two.

Back on 6 April 2007 I wrote a short critical blog post on Lockwood’s apparently radical views on Africa.

Labels: Africa, economics, growth

America’s EF Schumacher Society is transforming itself into the New Economics Institute. The name change seems to at least partly reflect a closer link with Britain’s New Economics Foundation (NEF). Stewart Wallis, the executive director of the NEF, is on the board of the new organisation. Among those involved in the new organisation are Gar Alperovitz (professor at University of Maryland), Bill McKibben (veteran environmental campaigner) and Gus Speth (professor at Yale).

Speth recently gave a lecture in Washington DC on “a new American environmentalism and the new economy”. The main thrust of his argument is that: “we see that the new economy – the prime objective of the new environmentalism – must be about more than green. We need a broader, more inclusive framing of our goal. We need to answer the probing question posed by John de Graaf in his new film: What’s the economy for anyhow? The answer, I believe, is that we should be building what I would call a “sustaining economy” – one that gives top, over-riding priority to sustaining both human and natural communities. It must be an economy where the purpose is to sustain people and the planet, where social justice and cohesion are prized, and where human communities, nature, and democracy all flourish. Its watchword is caring – caring for each other, for the natural world, and for the future. Promoting the transition to such an economy is in fact the mission of the New Economy Network, which I’m now working with many others to build. It will be a broad, welcoming space for all those pursuing diverse paths to these goals.”

Essentially he is giving what I call growth scepticism - with its emphasis on environmental, moral and social limits - a positive spin.

Labels: America, economics, environment

This is my comment from this week’s Fund Strategy.

The main focus of the debate on economic policy in the run-up to the election is becoming increasingly clear. More importantly it is apparent what will be virtually ignored.

Fiscal policy will be the overwhelming centre of attention in the election debate. More precisely it will be on exactly when cuts should be made, exactly where they should fall and exactly how large they should be. There is not even a debate about whether tax rises would provide a better way of tackling the deficit or, more importantly, whether there is an alternative to austerity.


For all the personal bile in the rows between the parties there is little difference of substance. Mostly the spats are a form of bluster. To the extent there are disagreements they are about the precise details of managing Britain’s deteriorating fiscal position.

Economists have only added to this narrow fiscal obsession. Three factions of economists have written open letters expressing their view on the precise form that the end to the fiscal stimulus should take. Politicians have been quick to latch on to whichever group of economists has supported their position.



What all this leaves out is any substantial discussion of how Britain can rejuvenate its economy. Of how it can generate consistent and rapid economic growth. For such growth is key to minimising the pain involved in tackling the fiscal deficit and providing the basis for a prosperous long-term future.

For example, Gordon Brown’s emphasis is on securing the recovery. For an election with a five-year time horizon this reveals abysmally low ambitions. Securing the recovery–ensuring Britain does not plunge back into recession–essentially means leaving the economy more-or-less where it is.

It is true that Brown sometimes talks about going for growth. But usually what he means by the phrase is starting to make cuts a bit later rather than a bit earlier. His is not a perspective for long-term growth.

If Labour does win the election no doubt Brown will suddenly see the need for cuts as more pressing. In the next few months, with an election looming, he does not want to start imposing austerity.

But it would be wrong to single out Brown for being uniquely bad. None of the main parties are seriously discussing how to promote innovation or encourage higher productivity.

If there is to be serious debate about economic policy in the run-up to the election it is not going to happen among the main political parties.

Labels: economics, Fund Strategy

This is my comment from this week’s Fund Strategy.

The most amusing event of last week had to be Gordon Brown’s brief appearance on the BBC Newsnight programme. In the space of 30 seconds he found seven different ways of saying that helping to tackle the Greek crisis was not Britain’s responsibility.

Given that Brown constantly evades responsibility for his actions at home it is hardly surprising he wants to distance himself from the Greek crisis. As it happens the financial turmoil in Greece has considerable consequences for Britain whether Brown likes it or not.

It is true that in the most narrow technical sense Britain is not responsible. Since it is not a member of the eurozone it was not party to last week’s negotiations on supporting Greece.

But that is far from the end of the story. For a start there is the so-called contagion effect of Greece on the debt markets. If the markets are really spooked by events in Greece then it is likely to become more expensive for Britain to raise credit too.

This contagion effect itself reflects the fact that Britain’s debt position is not that different from Greece. Although its key debt ratios are not as bad, and its debt has a longer maturity, Britain’s fiscal position is deteriorating fast.

Fundamentally what this reflects is that the economic crisis that hit the world in 2008 was never really resolved. Although the global economy was stabilised its structural problems were not addressed.

Essentially what happened was that the troubled debt of financial institutions was in effect nationalised. Its ownership was simply transferred to the state.

Although this transfer quelled the immediate financial panic it did not resolve the underlying problem of a weak economy. It simply moved the infection somewhere else–to the state sector–and stored up further trouble for the future.

Indeed the financial history of the past two decades can be seen as bubbles inflating as a result of western governments failing to grapple with economic weakness. In the run-up to the Asian crisis of 1997-8 there was a surge to emerging markets. This was followed by the tech bubble which burst in 2000. Then there was the housing bubble for much of this decade followed by the financial crisis of 2008. In each case speculative capital flowed from one area to another rather than being invested in the sluggish real economy.

It is time western governments stopped evading responsibility and started tackling their economic weaknesses at home.

Labels: economics, Europe, finance, Fund Strategy

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.

Labels: America, china, economics, Fund Strategy, trade

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.

Labels: debt, economics, finance, Fund Strategy, growth

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.

Labels: America, economics, Europe, finance, Fund Strategy

There is little new in yesterday’s New Economics Foundation (NEF) report arguing growth isn’t possible apart from its vivid metaphor about giant hamsters. The report draws an analogy between a hamster rapidly gaining in weight and the dangers of economic growth:

“From birth to puberty a hamster doubles its weight each week. If, then, instead of levelling-off in maturity as animals do, the hamster continued to double its weight each week, on its first birthday we would be facing a nine billion tonne hamster. If it kept eating at the same ratio of food to body weight, by then its daily intake would be greater than the total, annual amount of maize produced worldwide. There is a reason that in nature things do not grow indefinitely.”

Although Malthus did not use the hamster metaphor this is essentially his argument in a different guise. Malthus famously argued that population growth would outstrip the supply of food and mass starvation would result. If he had thought of the hamster metaphor he could have used it back in 1798 when he first issued his warning about overpopulation.

The NEF takes rising consumption resulting from economic growth (rather than population growth) and represents it by the hamster. What it forgets is that human ingenuity can increase the supply of resources more rapidly than demand.

As a result humanity can get richer and consume more resources at the same time. Failure to recognise this elementary fact has meant that - fortunately - gloomy Malthusian predictions have proved appallingly innaccurate.

All the NEF report proves it that its authors have a vivid imagination and a gift for public relations.

Labels: consumption, economics, environment, growth, Malthus

This is my comment from this week’s Fund Strategy.

Last week saw the most decisive intervention so far in the economic debate leading up to the election but it did not come from a politician.

Instead Mervyn King, the governor of the Bank of England, endorsed the need for austerity as pivotal to dealing with Britain’s plight.

Being a central banker he did not come straight to the point. By the time he had finished talking about global rebalancing and moved on to Britain his audience was probably on to after dinner drinks.



Even then he initially talked about cutting public spending as a key way of encouraging savings. It was only when he was coming to the end that his message was made clear:

“The patience of UK households is likely to be sorely tried over the next couple of years. There is little scope for growth in real take-home pay, which may remain weak even as output recovers.”

This remark was barely commented on by the main political parties—presumably because they agree with it.
In any case it seems unlikely that anyone will challenge King’s argument. Times are hard and austerity is viewed as the only solution.

Such a point is easy for King to make. As a non-elected official he is not threatened with losing his seat if his words displease the public. In that respect he can afford to be more blunt than politicians.

Sadly today’s generation of politicians are not much better than King. Although they are answerable to their electorates they lack the imagination to envisage an alternative response to the crisis.

Industrial policy—in which the state gives direction to the promotion of industrial enterprises—is out of fashion. The government has abdicated responsibility in that area as it has for many others.

Despite the talk about infrastructure relatively little is being built. Projects such as airports, roads and power stations are seen as morally suspect rather than as necessary to a country’s economic health.

Politicians have become as dull and grey as central bankers. They may bicker like children but their arguments do not extend to promoting different visions of social organisation.

What is needed is an injection of politics. Genuine debate demands a recognition that there is more than one view of how best to do things. There are other shades of colour besides grey.

Labels: economics, finance, Fund Strategy, growth

Duncan Green of Oxfam describes in his blog a meeting in London organised by CEECEC and the New Economics Foundation to discuss “degrowth”. The idea was inspired by Serge Latouche in France, where it is known as décroissance, and it also has followers in Italy (where it is called decrescità ) and Spain. Green criticises the movement on the grounds that he is against shrinking the global economy but he does argue the orthodox case that there are limits to economic growth (see 30 September 2009 post).

Labels: economics, Europe, growth

This is my comment from this week’s Fund Strategy.

Barring an apocalypse it looks certain there will be a general election in Britain over the next few months.

Yet none of the main parties has convincing policies for the restoration of economic growth. Indeed, they all embrace policies that are likely to damage Britain’s growth prospects.



Although the parties have yet to publish their manifestos they all have statements of economic policy on their websites. It is also possible to discern a party’s trajectory by scrutinising statements by its leaders.


Strangely they all seem to follow a similar pattern. They start with pledges of measures to support particular groups. Whatever the merits of the supposed beneficiaries it is hard to see what bearing they have on reviving the economy. And if the economy cannot be rejuvenated then many of these promises will not be kept.

Then there are the buzzwords which indicate that the party concerned is intent on limiting its aspirations. These include such terms as green, responsible, sustainable and low carbon.



Although these might appear common sense they are essentially a way of indicating support for restraint. For example, why would anyone want economic performance to be sustainable when it would be far better to have a transformation to something better? The notion of sustainability embodies a deeply conservative outlook. It is an updated version of the idea that aristocrats should exercise stewardship of the environment for the sake of other generations.



A similar point could be made about responsible policy. It means keeping demands strictly limited rather than engaging in any bold ambition.



To be sure, all the parties make some of the right noises such as acknowledging the need to invest in infrastructure. Yet they are vague about how it can be achieved.

Typically they make at least two fundamental errors. First, they do not recognise that to build a vibrant new economy they need to let go of the old. Some old companies and sectors should be closed down while new ones should be encouraged to take their place. If this is done in a co-ordinated way it should be possible to minimise any social dislocation that results.

Second, they pay far too little attention to the productive side of the economy. The overwhelming emphasis is on such matters as bolstering the consumer, financial regulation and skills training. However worthy any of these causes they fail to get to the nub of addressing Britain’s economic weakness.

As Britain enters a new year it should be willing to embrace change. Not as a platitude but as a process of genuine economic and social transformation.

Labels: economics, Europe, growth

Listening to More Or Less or BBC Radio 4 I came across the Malthusian mathematics of Albert Bartlett. The emeritus professor of physics at the University of Colorado at Boulder argues (video) that: “The greatest shortcoming of the human race is our inability to understand the exponential function". This function describes anything that is growing steadily – for example at 5% a year.

Bartlett’s point is that most people how rapidly something will grow if it is increasing at an exponential rate. For example, at a growth rate of 5% a year a population will double every 14 years. He uses this simple mathematics to show that Malthus was essentially right: our population and use of natural resources is bound to hit natural limits sooner or later.

In reality it is not the critics of Malthus who fail to understand the exponential function. It is the Malthusians who fail to understand humanity. For example, it is true that if the demand for natural resources grows exponentially it will increase fast. But human ingenuity can also lead the creation and production of resources to also increase exponentially. Indeed the production of resources can increase faster than demand. As a result overall human wealth can increase rapidly over time without depleting resources.

Labels: consumption, economics, environment, Malthus

I have discovered that the European Union is backing research in ecological economics as well as related campaigns by non-governmental organisations (NGOs). The Civil Society Engagement with ECological Economics (CEECEC) is coordinated by the Universitat Autònoma de Barcelona (UAB) and involves organisations in Europe and beyond.

CEECEC is clearly intent on promoting green thinking rather than engaging in impartial research. However, its website is a useful resource for anyone wanting to study ecological economics.

For background on the subject a link to my essay on “the dismal quackery of eco-economics” is available in the “my essays” section on the left hand side of the homepage.

Labels: economics, environment, Europe

The Economist has an article on poverty reduction which suggests there is no correlation between economic growth rates and eradicating hunger. It is based on studies by ActionAid and by Martin Ravallion of the World Bank.

Such studies can lead to naïve conclusions. No doubt there is no simple correlation between economic growth and poverty reduction in individual countries. Many factors can influence the precise outcomes in each nation. But the long-term historical trend is for economic growth to drive economic development.

For anyone who has the perspective of development as transformation – poor countries becoming rich ones – economic growth has a central role. In contrast, those who want to tinker with the figures for individuals slightly above or below the poverty line will be content for things to stay more-or-less as they are.

Labels: development, economics, inequality

Anyone who wants to hear leading exponents of mainstream views on economic and social issues could benefit from listening to some of the public lectures at the London School of Economics. British speakers such as Nicholas Stern on climate change and Paul Collier on Africa regularly feature as do international speakers such as Paul Krugman and Jeffrey Sachs. It is no longer necessary to live in London to hear such speakers as the key lectures are available to watch as podcasts.

Anyone looking for original or radical ideas should look elsewhere.

Labels: Africa, climate, economics

An interesting aside by Frank Furedi, professor of sociology at the University of Kent, at the Battle of Ideas session on post-recession ideologies. He argued that the physiocrats provide the closest historical precedent to the 21st century idea of limits.

For those not familiar with the finer points of the history of economic thought the physiocrats were an eighteenth century school of French political economy. Their core belief was that only agriculture yielded a surplus. Manufacturing, they argued, created no net product.

According to Furedi the contemporary left is particularly into such ideas. That they should take up such a backward set of concepts is a symptom of a deep intellectual malaise.

Labels: economics

This is my comment from this week’s Fund Strategy.

The debate on public spending is proving to be one of the most degraded in economics. Each round of discussion is even worse than the previous one.

First there was denial. The main political parties even refused to discuss the possibility or desirability of making cuts. This was despite the obvious deterioration in the public finances.

Labour maintained this position longer than any of the others. It scoffed at “Tory cuts” as opposed to what it characterised as Labour investment.

After it while it became clear that Labour could no longer maintain such a ludicrous position. Then all of the parties starting to compete in a virility competition about who could talk tougher on cuts. Although they were all short on detail, they all agreed that Something Must Be Done regarding public finances. Tough choices needed to be made in a world of scarce resources.

All of this betrays a one-dimensional understanding of economics. Policy is not simply a question of whether to cut or not. Nor can it be reduced to, in effect, nice cuts versus nasty cuts.

Even in the most general terms there are more choices ahead than simply whether or not to cut.

Logically it is possible to identify at least three ways to rebuild the public finances: to make cuts, to raise taxation or to bolster economic growth.

What is most striking about the debate is how little attention is being given to strengthen economic growth. Yet if growth was stronger it would be possible to increase public spending where necessary, increase tax revenue yet not raise tax rates. If the pie was bigger there would be more to go round for everyone.

Yet instead of having an urgent public debate about how to raise economic growth the opposite is happening. The consensus seems to be that there should be slower, greener, more “sustainable” growth. But the consequence of continuing slow growth is likely to be more pain for everyone.

There should be a substantial reassessment of economic priorities. If anything needs to be cut it is the attachment to sustainability and “green growth”. Strong growth needs to be put back at the centre of economic policy.

Labels: economics, finance, Fund Strategy, growth

Real Clear Markets has published my latest comment from Fund Strategy.

Labels: economics, finance, Fund Strategy, media appearances

This is my comment from this week’s Fund Strategy.

No doubt the G20 summit of world leaders in Pittsburgh will come out with a pious declaration about the need for international cooperation. Most likely too it will blame the bankers for the economic crisis of the past year. But it will skirt over some of the key tensions that are emerging in the global economy.

On this side of the Atlantic last week we saw a spat between Britain and Germany over the fate of General Motors’ former subsidiaries in Europe. Lord Mandelson asked the European Union to ensure that German subsidies for Opel do not start a “subsidy war”. London fears that such subsidies might convince Magna, the new Canadian owner of the former GM businesses, to sacrifice Vauxhall for the sake of Opel.

Meanwhile, China reacted angrily to Barack Obama’s decision to impose a 35% tariff on the imports of vehicle tyres. Strangely, the president argued that such a tariff would somehow lead to more trade rather than less.

At the G20 summit itself America and Europe are evidently planning to lead a drive to reduce global imbalances. But China, with some justification, seems to be assuming it will come under pressure as a result of this initiative.

These spats point to two competing trends in the global economy. On the one hand, countries benefit from international cooperation. On the other, the economic downturn is intensifying competitive pressures between countries.

Cooperation is immensely beneficial because it strengthens the resilience of the global economy. If one country gets into trouble it can be bailed out by others. International organisations could also play a role in ensuring the global economy runs smoothly.

But the economic downturn puts such cooperation under threat. It increases the pressure on countries to take unilateral action to defend their narrow sectional interests. Such measures, including tariffs and subsidies, threaten retaliation by other parties.

Ultimately the result could be a total breakdown of international relations. In essence that is what happened in the build-up to the second world war. Economic tensions gradually morphed into political and military ones.

Mercifully, the world is a long way from a global war. International cooperation remains broadly intact despite growing tensions around the edges.

But the robustness of such cooperation remains one of the great unanswered questions of the economic downturn.

Despite the earnest statements at forums such as the G20, the world’s leaders are at the same time undermining global cooperation.

Violations of free trade or state subsidies for investment may not be large in themselves but they create a dangerous precedent. If international cooperation cannot be maintained the price will be high.

Labels: America, china, economics, Germany, trade

In the run-up to the Copenhagen summit in December there is no doubt going to be more of an obsession with climate change than ever. One area in which this is clear is in relation to development. A couple of key recent reports on the subject have made a concerted effort to redefine it in relation to climate change:

The World Development Report 2010 from the World Bank on Development and Climate Change The. There is also an accompanying World Bank blog combining the two topics.

- From the United Nations there is World Economic and Social Survey 2009: Promoting Development, Saving the Planet which covers similar ground as the World Bank report.

The combination of climate change and development can only damage understanding of both topics. No doubt there is a relationship between the two – it is a truism that the poor will suffer more as a result of climate change than the rich – but they should be kept logically distinct. Combining the two is essentially a way of putting limits on the possibilities for development. Despite the sometimes ambitious sounding rhetoric what is essentially being said is that development must be limited for the sake of the planet.

This combination of climate change and development also points to a broader and even more retrograde trend. It is what could be called “the climate change-isation of everything”. No doubt there is a snappier way of putting it – any suggestions please email me – but virtually every social problem nowadays seem to be being redefined in relation to climate change. It has become more of a moral category than a scientific one.

Labels: climate, development, economics, environment, growth

The commission of eminent international economists appointed by French President Nicholas Sarkozy to report on measuring economic and social progress (PDF) has published its findings. I have not yet had time to read its 292 pages but, judging from the media coverage, it is broadly in line with what would be expected. Its call for better measures to measure social progress is, in the title of a previous article I have written on the topic, a sneaky attack on prosperity.

To quote the Financial Times’s take on its importance: "It is not the first of its type but it is perhaps the most comprehensive assessment of the limitations of existing data. It also makes clear the scope for improving policy and democratic debate based on good data, well presented, that relate to the issues – such as social cohesion, poverty and the environment – that people find important. It also has some top-level political support."

The commission was chaired by Joseph Stiglitz and included, among others, Amartya Sen, Daniel Kahneman, Andrew Oswald, Robert Putnam, Nicholas Stern and Cass Sunstein.

To coincide with the report Joseph Stiglitz had an article in yesterday’s FT while Richard Layard reiterated his argument on happiness in the Guardian.

Meanwhile, the Organisation for Economic Cooperation and Development has officially welcomed the report and is discussing the subject further at its World Forum in Korea at the end of October.

Labels: consumption, economics, Europe, happiness, progress

The following is my comment from this week’s Fund Strategy on the intellectual crisis of economics. I also wrote a news analysis piece on the first anniversary of the financial crisis.

The economic crisis of the past year has engendered a parallel crisis of economics. Economists from Nobel laureates downwards have engaged in soul searching about their profession.

Considering their record it is not surprising. Not only did they fail to predict the crisis but the vast majority argued that a Great Moderation had set in. By this they meant that the business cycle was likely to be muted as long as central banks and governments behaved prudently.

There was, as I discussed last week, a small minority of economists who argued that a crisis was imminent. But many of them were permanent doomsters while others had the causes of the crisis wrong.

Broadly speaking there are two reactions to the crisis of economics. One is to argue that the basic ideas of conventional economics are right, but its implementation should be improved. Another is that economics needs to move in a behavioural direction. Sometimes the two arguments are combined.

Those who take the first line argue that economists should take finance more seriously. They bemoan its lack of understanding of the financial markets. Others call for a more subtle understanding of risk.

Those who take the second line appear to be more radical. They argue that economics should throw out the assumption that individuals generally behave rationally. Instead they should build models based on psychological insights about how humans behave.

Neither set of criticisms is convincing. Arguably economic discussion is too obsessed with the financial markets. The crisis has largely been understood in relation to the behaviour of financial institutions while the weakness of the real economy is ignored.

Behavioural economics has also long been a mainstream approach. It got the ultimate official endorsement in 2002 when Daniel Kahneman and Vernon Smith, two exponents of the approach, were awarded the Nobel prize.

Yet behavioural economics also has serious weaknesses. Like mainstream economics it tends to attach too much importance to the financial markets. Economic crises should not simply be understood in relation to “irrational exuberance”.

Rather than tweak conventional economics it would be better to start afresh. Many insights from classical economists, such as Adam Smith and David Ricardo, remain valid, including their emphasis on the real economy and the need for economic growth.

Among the key features of the new economics more importance should be attached to production, an understanding of the indirect relationship between finance and the economy, and a more historically specific approach. Above all, economics should be seen as a system humans can reshape rather than as a natural science.

Labels: economics, finance, Fund Strategy

This is my comment from this week’s Fund Strategy.

It is widely accepted that few economists anticipated the economic crisis of the past year. But what about the small minority who predicted imminent doom? Many are being given undue credit for their apparently accurate predictions.

It is easy to forget that until last year the mainstream view was that economics had become “boring”. By this it was meant that the fundamental problems of the market economy had been solved. Central bankers knew how to target interest rates and politicians were wedded to prudence. A Great Moderation of long term stable growth had set in. There would be no return to boom and bust.

It is now clear that the old orthodoxy was wrong. Bust has reappeared with a vengeance. Old rules about fiscal stability have been quietly discarded.

But what about the former doomsayers? There was certainly a minority of economists who long warned of the dangers of rising house prices and expanding household debt. With their reputation enhanced, many are looking to them for future predications.

However, on closer examination they were not really right in the first place. Many of them were predicting imminent doom for years. It was hardly surprising that house prices eventually fell or indeed that the economy dipped into recession.

More importantly, the reasons why they predicted a downturn were wrong. They foresaw a crisis of overconsumption. The build-up of household debt enabled consumers to spend to an unsustainable extent.

But such a view betrays a superficial understanding of the crisis. The surge in debt was itself a result of problems in the productive sphere of the economy. Interest rates were kept relatively low and public spending relatively high to offset crisis tendencies in the economy. There certainly was a boom in household debt but it was largely the unintended consequence of state action to buoy sagging economies.

A flawed diagnosis suggests incorrect solutions. The doomsayers suggest that there needs to be curbs on consumption. They ignore, or at least downplay, the need to revive the productive side of the economy.

Strangely, the doom-mongers and the optimists share a key feature: their overemphasis on the consumption side of the economy. To really understand the current crisis means grappling with the complexities of the real economy.

Labels: economics, finance, Fund Strategy

Ian Abley, the project manager for Audacity, has produced a useful schematic to help understand the regressive tendency for capitalism to go green. It divides thinkers on the issue into four broad categories depending on their views on population and productivity: misanthropists (in favour of low population and low productivity), anti-machine-survivalists (greens whose main focus is low productivity), techno-hedonists (who are more comfortable with technology but wary of a rising population) and materialists (who favour progress).

The schematic can be viewed here .

Labels: economics, Malthus, progress

This is my comment from this week’s Fund Strategy.

Despite the changes in recent years the West has yet to fully grasp the importance of China in the world economy. Although it is seen as immensely more influential than it was a decade ago it is still not studied sufficiently closely.

The headline figures understate China’s importance. Taking GDP at current prices - the best way to compare the sizes of different economies - the American economy is almost three times the size of China. According to forecasts from the International Monetary Fund (IMF) America’s GDP will be about $14 trillion (£8 trillion) this year compared with $4.8 trillion for China.

In addition, the Chinese economy is still slightly smaller than that of Japan, with a GDP forecast to be about $5 trillion this year. Indeed it is true that the importance of Japan in the world economy is also underestimated.

However, there are at least two reasons why these figures understate China’s centrality to the global economy. First, China contributes an enormous proportion of the growth in the world economy. China looks set to grow by about 7.5% this year according to the IMF compared with 1.5% for the developing world as a whole. The output of the advanced economies is expected to fall by 3.8%.

Second, because of China’s role in the system of global economic imbalances (see last week’s Fund Strategy cover story). Contrary to the common prejudice it is Chinese production, rather than American consumption, that has been the engine of the world economy in recent years. Without China’s strong growth the global economy would have suffered an earlier and deeper economic slowdown.

China’s role has become even more important now that the world has entered recession. Chinese growth is playing an important role in the stabilisation and recovery of the world economy.

However, whether China can continue to drive forward its growth at such a rate is open to question. Many commentators argue it can but others insist that it cannot be sustained.

Whether China can maintain economic growth at a rapid rate over the coming years is a question of the utmost importance for the world economy. It is one to which Fund Strategy will return in the coming weeks.

Labels: china, economics, finance, Fund Strategy

This is my comment from this week’s Fund Strategy. I also wrote a cover story which is a guide to the debate on global economic imbalances

Rumbling beneath the surface of the current discussion on economic prospects is a debate about inflation and deflation. Some warn that inflationary pressures are likely to emerge soon, while others insist deflation will remain a key problem for the foreseeable future.

Those most concerned about inflation are generally free marketeers. They worry that the authorities are pumping vast amounts into the economy to bolster activity. Their actions include public spending, low interest rates and quantitative easing.

This huge fiscal and monetary boost is, according to critics, likely to bolster inflation within a year or two. The money supply is increasing far faster than the economy’s capacity.

Those who focus on deflation counter that such an outlook is economically illiterate. The key problem with the economy, they argue, is the enormous amount of spare capacity. At present, any stimulus is likely to have the beneficial effect of putting some of this capacity to work. Now is not the time, they say, to worry about curbing spending or raising interest rates. Such action can be taken when the economy has started to recover.

In reality, there is likely to be an unpleasant combination of inflation and deflation. Certain prices could rise sharply, while others fall in a stagnant economic environment.

The narrow focus on consumer prices obscures the fact that this is already happening to some extent. The recovery of equity prices in recent months can be seen as a form of inflation. Only rising equity prices are rarely condemned because investors are generally happy to see good returns on their investment.

In any case, the focus on prices is a narrow way to look at the economy. Changes to the price level are the result of more fundamental economic factors.

For instance, falling prices can be a sign of economic strength or weakness. If they reflect higher productivity through investment in new machinery they are welcome. The falling costs of computer processing power is a welcome development, rather than a problem. In contrast, if prices fall because an economy is stagnant that suggests something is wrong. The context is all important in assessing the significance of changing prices.

From this perspective, the overwhelming focus on inflation in contemporary economics is misplaced. The importance the Bank of England attaches to its quarterly Inflation Report is just one example of this narrow outlook. In America, the Federal Reserve attaches a similar exaggerated importance to monitoring inflation.

There are far more fundamental economic questions than whether consumer prices look likely to rise or fall.

Labels: economics, finance, Fund Strategy, globalisation

Partha Dasgupta, a professor of economics at Cambridge University and a patron of the Optimum Population Trust, tries to play down the costs of dealing with climate change in a lecture to the Sante Fe Institute. He argues that the costs of dealing with climate change could amount up to 10% of the GDP of the rich countries equivalent to trillions of dollars. But since GDP has grown at an average rate of about 2% a year for the past 30 years such a loss would mean going back to the way things were four or five years ago. Since things were not so bad then, he argues, going back to the recent past would not be a big deal.

Such an outlook reveals exceedingly low horizons. For example, think of the pain caused by the recent global economic crisis. Yet, according to the latest estimate from the International Monetary Fund, output in the advanced economies will fall by only 3.8% this year. In any case the world is not nearly rich enough to tackle all the challenges it faces now – let alone if it was 10% poorer.

Labels: climate, economics, environment, growth, Malthus

GDP is far from perfect as a measure of economic output but the suggestions for replacements are generally worse. The recent attack on GDP by Eric Zencey, a professor of historical and political studies at Empire State College, in the New York Times, is certainly flawed.

One of Zencey’s points is that GDP does not include volunteer work or unpaid domestic work, both of which contribute to economic output. While this is true it should be remembered that such quantities are, by their nature, difficult to measure. It is far easier to quantify transactions for which money is paid.

Apparently more substantial, but also more mistaken, is his argument that GDP should include “natural capital” or “eco systems services”. For example, he argues:

“If you let the sun dry your clothes, the service is free and doesn’t show up in our domestic product; if you throw your laundry in the dryer, you burn fossil fuel, increase your carbon footprint, make the economy more unsustainable — and give G.D.P. a bit of a bump.”

But the characterisation of “free” drying by the sun is misleading. A clothes line has to be manufactured by someone, probably along with clothes pegs, and erected. Then the clothes have to be hung by someone before being collected afterwards. The sun can only help dry clothes with the application of human labour.

The notion of natural capital also creates bizarre results. It means that a barren unusued land could be classified as wealthy whereas one with a lot of development could be seen as poor. Antartica, for instance, could be seen as rich because it has natural resources buried in the ground rather than poor because it has virtually no development.

Labels: consumption, economics, environment

This is my comment from this week’s Fund Strategy.

The optimism about economic recovery in the middle of last week was misplaced. Those who proclaimed that an upturn was underway based on a few short-range indicators had it wrong.

Admittedly, by the end of the week pessimism had set in again. But in many respects the pessimists made the same mistakes as the optimists. Both sides tend to be superficial and short-termist. A different approach is needed to grasp the state of the economy.

The first mistake is to extrapolate from limited data. This could be a short-term indicator such as house price changes or vehicle sales over one month. Or it could mean generalising about the state of the economy on the basis of the performance of a few companies.

Both versions of this error were on display last week. Markets and the media reacted on cue to information on rising house prices and better than expected performance from some of the big banks.

However, later in the week there was an equally negative reaction to the worse than expected results from the Royal Bank of Scotland. It was similarly unjustified to extrapolate from the poor results of this company, despite its large size, to the state of the economy as a whole.

The second mistake is to fail to acknowledge sufficiently that the huge stimulus to the economy is likely to have some effect. A combination of high state spending, low interest rates and quantitative easing has inevitably boosted the economy. The question is more about the likely resilience of any recovery given that the economy is currently benefiting from an artificial boost.

The final error is to confuse a cyclical recovery with the underlying structural weaknesses of the economy. Britain is suffering not only from a recession but from a long-term relative economic decline.

Capital investment in the British economy is ­relatively low. It is not much more than is needed to make up for wear and tear. Therefore the basis for long-term growth is weak.

If Britain is ever going to return to strong long-term economic growth it must first acknowledge its present weaknesses. Short-term delusions stand in the way of this task. Ultimately the key problem ­facing the British economy is not recession but long term structural weakness.

Labels: economics, finance, Fund Strategy

The following comment by me appeared in today’s issue of Fund Strategy:

There are broadly two ways to interpret the rising stockmarkets since March. The first is to see them as a sign of recovery, the second is to view them as the reinflation of an asset bubble.

Last week's American GDP figures gave added impetus to the first explanation. According to provisional figures GDP fell at an annual rate of 1.0% in the second quarter. This may not sound good in the abstract but it compares favourably with the 6.4% decline in the previous quarter.

Britain's GDP figures are becoming similarly less bad. GDP fell at 0.8% in the second quarter compared with 2.4% in the first quarter.

These figures come on top of better than expected corporate profits in many areas. Many companies seem to be benefiting, at least in the short term, from cutting wages and reducing investment.

All of this lends weight to the view that the stockmarket rises are in anticipation of economic recovery. Equity markets, in this view, are a leading indicator of economic performance.

But there are good reasons to question this rosy scenario. State authorities around the world have pumped huge amounts of liquidity into the global economy. Liquidity has been added both through increased state spending and monetary policy.

The fiscal boost has clearly had a beneficial short-term impact. If anything, the combined impact of low interest rates and quantitative easing is even greater.

This suggests that the authorities could have ¬created another bubble as a consequence of their actions to deal with the bursting of the previous ¬bubble. They have eased economic problems in the short term only to exacerbate them in the longer term.

In effect, their actions have created inflation. But rather than being inflation of consumer prices it is inflation of asset prices, including equities.

There will most likely be some kind of cyclical recovery from the desperate economic lows of late 2008 and early 2009. However, as long as underlying economic weaknesses remain, the world economy will be prone to bubble tendencies.

The most striking expression of this underlying weakness is the secular decline in the rate of profit in the West. This is apparent from the falling level of capital investment in the West as a proportion of GDP.

According to a recent study by CrossBorder Capital, a research firm, capital investment in the West is only about 20%, compared with about 40% in Asia. However, once wear and tear is taken into account, the real level of capital investment is lower still in the West compared with Asia.

This trend will be examined in more detail in a cover story in a couple of weeks’ time.

Labels: economics, finance, Fund Strategy, globalisation

The following comment by me appeared in the latest Fund Strategy (20 July).

The current Economist asks an important question: what went wrong with economics? Unfortunately, it comes up with superficial answers.

The magazine identifies three common criticisms of economics. That it helped cause the crisis, that it failed to spot it and that it has no idea how to fix it.

No doubt, these are widely made attacks on economics. But they do not get to the nub of what is wrong with the discipline. For example, in relation to the first one, the Economist says it is “half right”. Economists placed too much emphasis on targeting inflation and too little on asset bubbles.

But this view is far too flattering on the importance of economists, while grossly underestimating the underlying causes of the crisis. No doubt, asset bubbles were inflated in the run-up to the current crisis. But these were a symptom of atrophy in the real economy, rather than the result of policy errors or human greed.

Asset bubbles were inflated largely as a result of state action to offset the effects of a sagging economy. Interest rates were kept low and state spending high in an attempt to maintain economic momentum.

The inability to recognise this relationship reveals the first key weakness of contemporary economics. Its one-sided emphasis on consumption. The production side of the economy is relegated to a subsidiary role. As a result, key measures of economic health get little attention. Profit rates and labour productivity warrant barely a mention in much economic discussion. Instead the emphasis is on such things as share prices, official interest rates and inflation.

This fixation with consumption is related to another weakness of economics. The emphasis on stability, rather than growth.

Such a focus was apparent in the report on the British economy published by the International Monetary Fund (IMF) last week. A related statement said the IMF’s directors: “emphasised the importance of following credible and consistent policies to maintain domestic and external stability, limit downside risks and strengthen market confidence. Resolving the problems in the financial sector and setting monetary and fiscal policies consistent with a firm commitment to price stability and fiscal sustainability are the main policy priorities.”

Such an overwhelming emphasis on stability is central to economic orthodoxy. In Britain, Gordon Brown is one of its leading proponents. Yet it makes little sense. What brings wealth and prosperity is economic growth, rather than stability.

From this perspective, economic disruption can be positive. If it involves a restructuring, which leads to a more dynamic economy, it should be welcomed. Yet attachment to stability, rather than growth is another of the blind spots of contemporary economics.

Labels: economics, finance, Fund Strategy, growth

I have added a couple of new websites to the links library in the left hand column. They are Bureau for Research and Economic Analysis of Development (BREAD and Indur Goklany’s website.

Labels: climate, development, economics, environment, science, technology

The following comment by me appeared in the latest Fund Strategy (13 July).

The government’s white paper on financial regulation is a dangerous distraction from the real challenges facing the economy. It is more an exercise in scapegoating bankers than getting to grips with Britain’s economic problems.

Nearly one year since the collapse of Lehman Brothers the government is persisting with the line that bankers were the main culprits in causing the ­crisis. Such an argument is convenient for politicians of all stripes, since it helps absolve them of responsibility, but it is far removed from reality.
Banks may have benefited from the financial game played until last year but the state authorities set the rules. In a desperate attempt to maintain economic momentum the authorities kept interest rates artificially low and therefore encouraged the consumer boom. New Labour also constantly lauded the City of London because it was desperate for the financial revenue the financial centre provided.

But the underlying problem was economic atrophy. Weak sectors of the economy were buoyed by state spending while new sectors were not encouraged. The virtues of growth were constantly called into question with the attachment to dogmas such as green initiatives and sustainability. What such concepts really meant, despite the confusing rhetoric, was that limits should be placed on economic growth.

This weak dynamic towards genuine growth was the true cause of the crisis. To the extent that there was growth, it was based on a consumer boom rather than real organic development.

The measures proposed in the white paper do nothing to tackle this problem. For instance, setting up a tripartite financial stability committee of representatives from the Bank of England, Financial Services Authority and Treasury cannot remedy the fundamental problem. Economic weakness cannot be resolved by slightly rejigging state institutions.

Indeed, the government is failing to recognise the gravity of the economic challenge. Recent figures show that Britain is facing its sharpest economic contraction in half a century, yet the government is still preoccupied with stabilising the banking system.

Eventually a recovery will come, but it is likely to be anaemic. The government must stop hissing at bankers and start tackling the urgent problem of ­economic restructuring.

Labels: economics, finance, Fund Strategy, growth

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.

Labels: debt, economics, finance, Fund Strategy

The following comment by me appeared in the latest Fund Strategy (29 June).

Last week’s World Bank forecast on the global economy was enough to bring misery to anyone looking for “green shoots”.

The international financial organisation is expecting a 2.9% fall in global output this year. That is appalling. It is rare for global output growth to dip below zero.

Usually, a recession in one area is offset by stronger growth elsewhere. A nearly 3% fall on a global scale means misery for billions.

The detailed figures are as bad as the headline ones. Global trade looks set to fall by 10%, while private capital flows will plummet.

An Economic Outlook published by the Organisation for Economic Co-operation and Development was almost as downbeat with a forecast of 2.2% growth this year. However, it is slightly more optimistic about the prospects for global recovery.

Several lessons can be drawn from these figures. Most obviously, economic recovery is still a long way off. Although some indicators have improved, it is only to be expected given the massive scale of financial and monetary stimulus. Overall, the world economy remains in a dire state.

It also raises awkward questions about the likely nature of the recovery. Although a recovery of sorts will come, it looks set to be anaemic. But most importantly, it raises the need for economic restructuring. The world’s economic authorities have generally been fairly successful if measured by the relatively narrow goal of maintaining stability. The financial system has not collapsed, despite teetering on the edge at points. But restructuring the economy to allow for dynamic growth is another matter.

A cultural shift in the way economics is viewed is necessary for restructuring to be successful. It means ditching the dogma of environmentalism and “sustainability”. Such ideas are essentially about placing limits on economic growth. Yet what is needed is the exact opposite: unleashing growth so it can achieve its full creative power.

It is also necessary to let weak businesses go under. Rather than maintain clapped-out companies for the sake of stability, the emphasis should be on encouraging new, more dynamic sectors of the economy.

Strong economic growth is enormously beneficial to the whole of society. But achieving it means being prepared to encourage a fundamental cultural and economic shift.

Labels: economics, finance, Fund Strategy

It’s official. The leaders of the world’s largest economies have endorsed the dogma of “green growth”. Ministers from the 30 member countries of the Organisation for Economic Cooperation and Development alongside 10 other nations declared their support for the concept at a conference in Paris.

For my take on how “green growth” means austerity see the post of 2 March 2009 and the related link.

Labels: economics, environment, growth

Whatever happened to the “Labour left”? Answer: it has become just about the most conservative and growth sceptic section of society.

Neal Lawson, the chair of Compass and a former adviser to Gordon Brown, is about to have a book called All Consuming published by Penguin. Its subtitle is “how shopping got us into this mess and how we can find our way out of it”. He has also just set up a website with the same name.

Evidently Lawson is organising a debate on the book on Monday 13 July in the House of Commons. Given that two of the other speakers are Madeleine Bunting and Oliver James, who broadly share Lawson’s outlook, there is unlikely to be much disagreement between them. Lawson also says in an email “I’m hoping to get someone from the advertising industry to come and put the case for more consumption”.

If I was not rushing to finish my book I would put in a bid to put the opposite case - although I suspect they would not have me. It is much easier from their perspective to present the debate as simply for and against mass consumption rather than grappling with the benefits of popular prosperity.

Labels: book, consumption, economics, happiness

Many commentators have made the correct point that the next British government, whichever political stripe, will have to make public spending cuts. Forecasts of economic growth, tax revenue and debt repayments suggest cuts will be substantial. What the pundits have missed is that the reluctance of political parties to be open about austerity is consistent with their more general growth sceptic outlook.

New Labour is the clearest example. Gordon Brown’s linguistic convulsions to avoid admitting his party was planning cuts was like watching a worm wriggle at the end of a hook. Brown implied cuts were necessary but was determined not to use the word in relation to his own plans. This is entirely in line with the growth sceptic approach of suggesting austerity is necessary without advocating it openly. He clearly wants to “nudge” people into being more “prudent” but does not want to lose their electoral support.

The Conservatives and Liberal Democrats are little better. Both parties have started to talk openly about austerity and the need for cuts. But only after it became obvious to virtually everyone that the current path of Britain’s finances is unsustainable.

Paradoxically there is probably a roughly inverse relationship between those who believe in economic growth and those willing to talk openly about cuts. The Tory government of the 1980s had many faults but it was explicit about cuts as it believed economic restructuring meant Britain could resume reasonable growth. New Labour, in contrast, is fearful of restructuring and has little confidence in growth.

Of course the ideal solution would be to make the world economy resume a strong growth path as quick as possible. The larger the economy the more scope there is for public spending where necessary. Unfortunately this is a discussion that few commentators seem to want to have.

Labels: consumption, economics, growth, sustainability

It is now possible to listen to a recording of the 16 May Battle for the Economy conference in London online. The sessions include one I spoke at on greedy bankers

Labels: economics, finance, speeches

The following comment by me appeared in the latest Fund Strategy (15 June).

Oh no it isn’t! Oh yes it is!

The debate about whether the world is recovering from recession is getting mightily confusing. Economic discussion has been largely reduced to pantomime.

Last week pundits latched on to several indicators that appeared to show Britain and America are recovering from the economic downturn. Work by the National Institute of Economic and Social Research, a leading think tank, suggested the British economy grew slightly in April and May. In addition, judging by the latest month’s figures, business confidence is rising, factory output is increasing and house prices are up. On the other side of the Atlantic the Federal Reserve’s Beige Book suggested America’s downturn is moderating, while retail sales rose in May.

But hold on. There is also a lot of bad news out there. Many big exporting countries have reported bad monthly trade figures, including China, Germany, South Korea and Taiwan. Meanwhile, industrial production in the eurozone suffered a record fall in April while the European Central Bank (ECB) has forecast that the region will remain in deep recession till mid-2010. The ECB also had to lend €3 billion (£2.6 billion) to the Swedish central bank to help deal with the fall-out from the crisis in Latvia. In addition, several more countries have recently entered recession, including Brazil, Romania and Switzerland.

Nor is the divide between the Anglo-Saxon economies and the rest. Lombard Street Research argued that the jump in retail sales was mainly to do with the increase in petrol prices rather than economic recovery.

What does all this conflicting data show? For a start, reality is complex. Understanding it means more than looking at a few sets of data.

More importantly, far too much attention is paid to short-term indicators. Even when recovery comes, it is likely to be anaemic.

At some point the world will escape from technical recession. Growth will be restored in strict mathematical terms, but looks set to be weak. The economic growth dynamic in the developed world is generally feeble and there is also a large debt overhang.

The key challenge facing the world economy over the coming years is how to achieve a path of strong growth. Far better to discuss this problem than have a pantomime discussion on “green shoots”.

Labels: economics, finance, Fund Strategy, growth

Real Clear Markets has published my latest comment from Fund Strategy.

Labels: economics, finance, Fund Strategy, media appearances

The following comment by me appeared in the latest Fund Strategy (8 June).

A rift is growing between Germany, on one side, and America and Britain on the other, in relation to economic policy

The latest spat followed comments by Angela Merkel, Germany’s chancellor, on quantitative easing. She reportedly broke an unwritten rule by criticising central banks – including the Bank of England, European Central Bank and the Federal Reserve – for their loose monetary stance.

Her comments precipitated howls of protest from America and Britain. Ben Bernanke, the Fed chairman, reportedly said: “I respectfully disagree with her views.” Coming from a central banker, a species which generally communicates with guarded language and the raising of an eyebrow, this was strong stuff.

Perhaps the harshest comment came from Charles Dumas, a director of Lombard Street Research: “Merkel and the German elite are divorced from the realities of the global economy, as well as flouting received economic wisdom from Keynes to Friedman.”

The Financial Times was not as blunt, but also critical. It suggested Merkel’s comments were motivated by short-term political considerations: “With a general election looming in September, German politicians have competed to sound more hair-shirted than one another, frantically attacking foreign profligacy as a means of depicting themselves as inflationary hawks”. However, The Wall Street Journal went against the trend, praising her anti-inflationary language, with a leader wryly headlined “Merkel for the Fed”.

For an outside observer it is possible to see both
sides of the argument. Germany’s main concern is the
threat of inflation and the re-emergence of asset
bubbles. America and Britain, in contrast, are more
worried about the risk of a deflationary spiral. Each
set of arguments broadly reflects the particular economic
interests of those parties involved.

The row reflects longer-running tensions between Germany – often together with France – and the Anglo-Saxon world. From a German perspective it was financial excess in America and Britain that largely caused the economic crisis. Germany also sees itself as often having to take unilateral action to sort out the mess others have created. Germany’s role in the bail-out of Opel from General Motors is a prime example.

In a sense it does not matter which side, if any, is
right. The opening of an overt rift between such big
players is a serious matter.

Labels: America, economics, Fund Strategy, Germany

One of perhaps the saddest and most peculiar intellectual developments of recent years is the development of a “Marxist ecology” (for instance, in the work of John Bellamy Foster and Paul Burkett). Whereas Marxism, at least in its origins, was a theory of human liberation, the project of Marxist ecology is broadly to pose the case for natural limits in radical sounding language. In simple terms it could be said to be taking what are essentially the arguments of Thomas Malthus – to which Karl Marx was vehemently opposed – and expressing them in Marxist language.

Although Marxist ecology is not directly influential it does have an important indirect influence. Many contemporary green ideas are expressed in apparently radical, almost Marxist, terms. Think, for example, of authors who talk of powerful corporations subverting the state (for example, Noreena Hertz, Naomi Klein and George Monbiot). Anti-capitalism, at least of a sort, is in fashion.

For that reason I was particularly struck by the essay on Capitalism in Wonderland in the May issue of Monthly Review. The authors of the article in the self-styled “independent socialist” magazine attack economists and their supposed slavish devotion to economic growth. From their growth sceptic perspective the obsession with capital accumulation (that is economic growth) inevitably leads to environmental degradation. Orthodox economists are essentially lackeys of the capitalist system. The thinkers who figure most prominently in the attack are those who have most prominently criticised the environmentalist viewpoint: Bjørn Lomborg (who is not an economist by profession), William Nordhaus and Julian Simon.

However, it is only possible to sustain such an argument by misrepresenting both neo-classical economics and Marxism. In brief:

* Orthodox economics is much more wary of economic growth than the Monthly Review narrative suggests. Although it is cautious pro-growth its starting point is the allocation of scare resources. In this sense it shares common ground with environmentalism. It is also striking how economists have taken on board the notion of “sustainability” – in other words there needs to be limits on growth. This assumption has become thoroughly mainstream.

* Marx, who was writing at a time when economic growth was generally seen as welcome, was strongly in favour of increased prosperity. His concern was that the capitalist mode of production limited the scope of economic expansion. In other words, growth under capitalism tended to be uneven and crisis-ridden. It is possible to contest Marx’s ideas but to portray him as anti-growth is a gross misrepresentation.

As it happens its environmentalist ideas that are apologetic in character. They are what Georg Lukács, a Hungarian Marxist thinker, referred to as “indirect apologetics”. Rather than directly defend capitalism they argue that the damaging effects of the market system are somehow natural. For example, the current lack of economic growth is the result of natural limits rather than anything to do with the specifics of capitalism. For Lukács: “indirect apologetics crudely elaborated the bad sides of capitalism, the atrocities of capitalism, but explained them not as attributes of capitalism but of all human existence and existence in general” (The Destruction of Reason, Merlin Press 1980, p202-3).

Despite their radical rhetoric the ecological Marxists are deeply conservative.

Labels: climate, consumption, economics, environment, ethics

I was struck by the good sense of Freeman Dyson in his interview with Yale Environment 360 on climate change. The eminent 85-year-old scientist upset the orthodox climate change lobby when he criticised their views in a recent profile in the New York Times Sunday magazine. His views are sceptical in the best sense of the term. For example, he questions the usefulness of models in predicting climate and challenges the view that change is necessarily for the worse. He also takes a broadly humanistic perspective. According to Dyson in his Yale interview:

“I feel very strongly that China and India getting rich is the most important thing that’s going on in the world at present. That’s a real revolution, that the center of gravity of the whole population of the world would be middle class, and that’s a wonderful thing to happen. It would be a shame if we persuade them to stop that just for the sake of a problem that’s not that serious.

“And I’m happy every time I see that the Chinese and Indians make a strong statement about going ahead with burning coal. Because that’s what it really depends on, is coal. They can’t do without coal. We could, but they certainly can’t.”

He also wrote a review of some key books on climate change in the New York Review of Books last year.

Labels: consumption, development, economics, environment, globalisation, science

The following comment by me appeared in the latest Fund Strategy (1 June). It is more technical than most of my articles but is an important component of the discussion on the global economy.

Last week saw a hiccup in the US Treasuries market. Whether the hiccup will turn into a fit remains to be seen.

Yields on 10-year Treasuries jumped on Wednesday. Their current rate is not particularly high, but it could be a sign of a rising trend. Given that the American government bond market is the benchmark for global bonds, it is an important development to watch.

Brad Setser, a fellow at the Council on Foreign Relations in New York, argues that the surge was a result of a combination of rising supply alongside falling demand from private investors. There is also concern about the rising level of public debt in America.

There is even talk of the return of the “bond vigilantes”. These are investors who demand a higher return on US Treasuries in return for the risk of investing in an asset class vulnerable to inflation. Their actions have previously played a role in encouraging governments to keep credit growth in check.

To understand the significance of these fears it is necessary to examine the chain of factors through which problems become manifest.

The immediate concern is inflation. Bond investors clearly dislike it because it erodes the real value of their assets. That is why they demand a higher compensation to invest in bonds in inflationary times.

But the factor most directly stoking up inflation is the rising supply of credit. High public spending in particular is seen as embodying the risk. In the short term, public spending was seen as necessary to stabilise the financial system and the economy. In the longer term, it could bring about strong inflationary pressures.

Unfortunately, this is often where the discussion stops. Conservatives demand sharper curbs on ­public spending while Keynesians tend to be more sanguine about it.

What is missed is that the massive level of state intervention in the economy is itself the result of an underlying economic weakness. The stronger the dynamic to economic growth, the less need there is for debt artificially to prop up activity.

Growth based on credit expansion is highly vulnerable. It risks a financial shock, such as that of recent months, or high inflation to readjust to economic reality. What is needed is real growth based on genuine innovation. Such growth should provide the basis for a solidly based recovery that is less prone to financial instability.

Surging inflation and bond vigilantism should be seen as symptoms of a weak economy rather than problems in themselves. Dealing with them on a financial level, rather than in relation to the real economy, will not resolve the key weaknesses.

Labels: economics, finance, Fund Strategy

Environmentalists often draw ludicrous conclusions from their beloved statistical models. A recent prominent example is the estimate from the Global Humanitarian Forum, an organisation led by Kofi Annan (a former secretary-general of the United Nations), that global warming is causing more than 300,000 deaths and about $125 billion (£77 billion) in economic losses each year. The report is also endorsed by, among others, Jeffrey Sachs.

But the estimates are described as a “methodological embarrassment” by Roger Pielke, a political scientist at the University of Colorado, Boulder, who specialises in disasters, in a recent blog post. He points to several flaws in the model including:

• The stochastic nature of extreme weather events. In other words it is impossible to say for sure that an extreme weather event, such as a hurricane, is the result of climate change. It may be that climate change makes more events more likely but they would probably happen in any case without it.

• A shortage of good quality data. For sweeping conclusions to be justified they must be based on better data than is generally available.

• The role of various other potential factors that act in parallel and interact. For example, with economic development it may be that there are more buildings to destroy in a hurricane. But it does not follow that the physical force of hurricanes has necessarily become more destructive than in the past. .According to Piekle: “the increase in disasters observed worldwide can be entirely attributed to socio-economic changes. This is what has been extensively documented in the peer reviewed literature, and yet — none of this literature is cited in this [Global Humanitarian Forum] report. None of it!”

Piekle has also written a critique of similar methodological flaws (PDF) in the Stern Review on the economics of climate change.

Labels: climate, consumption, development, economics, environment

An interesting piece on the BBC website with the headline “the harsh necessity of child labour”. The article looks at the situation in Bangladesh where dire circumstances force many children to work.

It is easy to condemn child labour in the abstract. But it comes about largely as a result of economic necessity rather than moral depravity.

The solution to the problem is economic growth. Child labour is almost unheard of in rich societies.

Labels: consumption, development, economics, ethics, work

The following comment by me appeared in the latest Fund Strategy (25 May).

Last week’s news about the potential downgrade of Britain’s sovereign debt was not a surprise but it should come as a warning. Stabilising the economy is not the same as putting it on a path to strong growth.

Much of the media seemed taken aback when Standard & Poor’s lowered its medium-term outlook for Britain’s triple-A rating to “negative”. But those in the know had been discussing Britain’s deteriorating fiscal position for a while. Fund Strategy ran a news analysis on the topic in its May 4 issue.

Britain is clearly suffering a fiscal squeeze. Although public spending is being curbed, the ­revenue from tax receipts is falling substantially.

However, it would be wrong to see the deterior­ating public finances as at root a fiscal problem. It is itself an expression of the failure to generate consistently vibrant economic growth.

To step back a minute, it is possible to identify two key and related developments in the economy in recent months. First, the state managed to stabilise the banking system, and consequently the economy, by pumping in huge amounts of liquidity. Second, as a result of this intervention there was, in effect, a massive transfer of debt from the private to the ­public sector.

But although state intervention solved the immediate problem it did so at the cost of creating new weaknesses. The cost of bailing out private financial institutions was bringing into being a more highly indebted state sector.
At best, the government intervention bought time. It saved the financial sector from catastrophic failure. But unless the time bought is put to good use there are likely to be further days of reckoning in the future.

The key task is to put the economy on a path of strong economic growth. Such economic expansion would bolster tax receipts and therefore improve the state’s fiscal position.
 But this goal can only be achieved if there is a ­radical economic restructuring. Resources have to be redirected to economic sectors where it is ­possible to bolster output significantly. The quality of Britain’s infrastructure, including roads and ­communications, also needs to be improved ­considerably.

The necessary restructuring can only occur if there is a transformation in the mindset of the political class. Out must go concepts such as sustainability and going “green”. The emphasis should be on dynamism and growth rather than stability.

Unfortunately the necessary mentality is alien to that of Gordon Brown and New Labour. It is the party that did not bring boom while conspicuously failing to avoid bust. The sooner it is ejected from office the better

Labels: economics, finance, Fund Strategy

Carl Schramm provides a useful review of growth theory in an article for Real Clear Markets. He takes in key mainstream thinkers on economic growth and development including Paul Collier, William Easterly, Deepak Lal, Dani Rodrik, Walt Rostow, Jeffrey Sachs, Robert Solow and Mohammad Yunus.

Two points stood out for me. First, the difficulty mainstream economic theory has in explaining economic growth:

“Harvard economist Elhanan Helpman published an entire book exploring the “mystery” of economic growth only a few years ago, and even Robert Solow, who won the Nobel Prize for his pioneering growth theory, today says there are more questions than answers as to the causes of growth. This failure to understand the sources of America’s own economic performance, let alone the world’s, will be a serious handicap as we try to figure out how to renew prosperity in the face of a dramatic global slowdown.”

Second, the anti-growth sentiment at the root of microfinance:

“Muhammad Yunus, a Ph.D. in economics who won the Nobel Peace Prize, disregards all such evidence in Creating A World Without Poverty (2008). Having created Grameen Bank, an institution that increased remarkably the welfare of millions of the world’s poorest in Bangladesh through the innovation of micro-credit, he appeals for a new world economic order that does not contemplate growth. “The bigger the world economy, the bigger the threat to planet Earth.” For global welfare to increase, he argues, capitalism will have to be reformed through “social businesses”—entities that put people above profits.”

Labels: development, economics, finance, growth

It is rare to find new ways of expressing growth scepticism – the arguments tend to fit into well-established patterns – but Richard Reeves came up with one in an article in the Financial Times yesterday. The director of Demos, an influential British think tank, came up with “progressive austerity”. By this he means cutting public spending in such a way that preserves the programmes that most benefit from the poor.

The fundamental point this misses is that what is needed is growth rather than austerity. Rather than debate which London professional orchestra to cut funding to – he says there are five – we should be discussing how to restructure the economy to bring about vibrant growth.

What next from Demos? Perhaps “how dictatorship can advance democracy”!

Labels: economics, growth, inequality, progress

The Independent, a British daily newspaper, has published a comment piece by me on “greedy bankers”.

Labels: economics, finance, media appearances

The following comment by me appeared in the latest Fund Strategy (18 May).

A fundamental problem with economic discussion is its naturalism. It wrongly assumes that the human world works in a similar way to the natural one.

This error is apparent in the discussion of ­pending economic recovery or, to use the awful phrase, “green shoots”. It assumes that the economic cycle moves like that of a pendulum. All that needs to be done is track the path of the pendulum and it is possible to work out where the economy will move next.

Therefore, a slowdown in the rate of decline of GDP is seen to signal that a start to the upward section of the cycle is imminent.

But in the real world the economy does not follow the simple harmonic pattern of a moving pendulum. Economic cycles can be short or drawn out. Declines can be moderate or severe. Numerous factors can influence the way in which the economy develops.

In recent years the economic cycle seems to have become more muted. This is what was meant by phrases such as “the great moderation”, as used by Ben Bernanke, the chairman of America’s Federal Reserve.

Although such talk has gone out of fashion with the global downturn, it still has some merit. It looks as though the underlying rate of growth of the developed economies has been slow in recent years and is likely to remain so in the future.

With the benefit of hindsight, it is clear that a huge surge of credit artificially bolstered economic growth rates in the years running up to the crisis. The underlying rate of growth was much slower than the headline figures suggested.

Similarly, the future rate of growth in America and Britain is also likely to remain slow. From this perspective the financial crisis can be seen as a mechanism for bringing the underlying rate of growth and the headline rate closer to together. Once the credit bubble burst, the weakness of the real economy was brutally exposed.

It is not that America and Britain are inevitably destined to suffer low growth for ever more. But until they tackle their problems of a chronic lack of innovation and investment they are likely to remain caught in the atrophy trap.

Despite the hype about America’s “new economy” in the 1990s, these problems remain a long-term weakness that needs to be addressed. In Britain the problem is even more severe.

Short-run sets of data reveal little about the character of the economy. Many factors need to be taken into account to work out its likely trajectory – including the impact of human intervention. But it is the long-term trends that are important to identify, rather than small variations in data that is inevitably imprecise or ephemeral.

Labels: economics, finance, Fund Strategy