Tuesday, September 18, 2007
Are We Living on Fantasy Island?
Economics is always a slightly dodgy area for me but it seems most of those who know, judge the government to have been too slow off the mark in underwriting Northern Rock's viability; wider questions about Labour's economic competence are now being asked. Director of the Centre for Policy Studies and respected economist,Ruth Lea wrote in the Daily Telegraph yesterday discussing some of the less flattering aspects of Brown's stewardship of the economy since 1997:
1. Public spending too cavalier: Lea accuses brown of squandering the solid position left him by Lamont and Clarke by splurging on unreformed public services without increasing efficiency or output. Tax increases, moreover, have not been sufficient to fund planed expenditure, leading to dangerously high government borrowing(over £30bn last year).
2. UK competitiveness has not advanced during these years; rather the government has relied on immigrant additions to bolster the workforce.
This list can be augmented the likes of Larry Elliott of The Guardian(see his book Fantasy Island):
3. The economy has been built on i)cheap imports from China which have kept inflation low; ii) cheap money which has fuelled a credit boom leading to £1.3 bn indebtedness by consumers; iii) a housing boom which has further assisted the accumulation of debt.
4. Meanwhile the essential action in training and improving competitiveness has been neglected. The balance of payments have gaped monthly and manufacturing declined even further as a proportion of national income.
So where are we now then? Quite possibly we're in a very vulnerable place when sharp increases in interest rates might cause consumers to default, banks to implode and the whole edifice to collapse. Scaremongering? I hope that's all I'm doing, but sometimes the ancient advice from my dear departed Mum about paying your bills, earning your keep and 'never a lender or a borrower be', seem to make sense after all. Living atop a mountain of debt is a bit like living on the edge of a volcano. It is by no means scaremongering to predict that our next ten years economically are going to be a lot more lean and fraught than the last.
As for Fantasy Island, many savers at Northern Rock seem to have been behaving as though they were in a game show.
I commend the book by Elliott by the same name as it explains the economic arguments much better than I ever could. My attitude is coloured by a tendency when I can't really understand, to revert to the 'certainties' of common sense. Probably the worst thing to do.
1. The argument that increased public spending has failed is commonly connected to the NHS where nurses, in particular, saw their pay increased. Critics complain that this hasn't made them more productive. But I don't recall productivity being the aim. I thought it was about social justice: the new government recognised that nurses were underpaid and so moved to rectify that (at least in part) without expecting anything in return.
But what's social justice to some is waste to others: Tories refuse to understand why nurses should be paid more than the market rate.
2. Immigrant labour has been required because so many new jobs have been created. Your summary of Lea implies these workers have been filling skills gaps, but most have been low skilled and low paid. Much of this is code for saying British workers are too choosey (presumably because the Welfare State is too generous). In truth, British workers reluctance to take on McJobs is more complex.
3i. Imports from China are cheap because the yuan is pegged to the US$. The latter is in managed decline and remains over valued.
3ii/3iii Housing and indebtedness are black marks. Banks have been reckless. But we can expect them to be more cautious from now on and that caution will create downward pressure on interest rates. The upward demographic pressure on house prices will remain.
4. People have long complained that Britain doesn't make anything anymore. But we don't see people encouraging their children pursue jobs on the factory floor, what's left has to import labour. Manufacturing's decline is a symptom of wider affluence.
So where are we now? If interest rates go up then yes there will be trouble. But that's a bit like saying if I steer right as I hit a sharp bend to the left, I'll crash my car. Inflation has fallen even further below the target (and remember too low is a much of a miss as too high). If anything, short term deflation is a small risk.
Interest rates will come down, but not as fast as the base rate as banks are now more dependent on savers. Confidence has been dented and people are preparing for a storm that's unlikely to come. People won't be able to borrow quite so much, quite so easily. The housing market will take a little dive and Dailies Mail and Express will whoop and wail, but it will recover quite quickly.
I'm afraid you really have fallen for Tory scaremongering.
I really hope you're right but The Guardian's Larry Elliott's critique mirrors some of Ruth Lea's and he is surely not as gullible as I am?
Links to this post: