“If we had a debt crisis very clearly risk would have increased and so interest rates would have risen. But they haven’t. Interest rates have fallen, significantly, and not just to reflect inflation.
So first of all we have no gilt crisis.
Second, we have no affordability crisis.
And third, we have a lost opportunity to invest at rates lower than we have almost ever known, which lost opportunity is why we have an economic crisis.”
I thought i’d post a graph of benchmark gilt yields going back to 1984. It shows quite clearly that borrowing costs are at some of their lowest levels ever. There was no spike in yields during the crisis. Investors do not remotely think the government might default, nor do they think spending plans might be unsustainably high. More likely they expect years of stagnation or low growth.
It’s just ludicrous to suggest, as Cameron and Miliband do, that anything other than buttock-clenching austerity will be the “path to ruin”. Any future interest rate payments on debt issued now are profoundly not the main problem. If it wanted, the government would have plenty of wiggle-room within which to reinflate the economy.
The data is from the Bank of England’s series “annual average yield from British government securities, 10-year nominal par yield”.
David Cameron today again repeated the nonsense claim that anything other than swingeing cuts will cause “economic chaos”. In an indication of just how impoverished mainstream British political debate has become, he lambasted Labour’s plans to balance the budget but keep spending on infrastructure as if it were Zimbabwe-esque profligacy.
Yet far from lowering the deficit, the cuts are one reason why the economy has suffered its worst period of growth since the Great Depression in the 1930s. Balancing the budget is exactly the wrong medicine in a crisis. The coalition has sucked so much money out of the economy that demand and investment have collapsed, raising welfare payments and reducing tax revenues.
The mainstream media’s fixation with the last five-minute’s news means that they tend to focus on headline economic growth, which recently hit a quarterly rate of 0.7%. But the economy shrank so much after the crisis hit in 2008 that it was likely to rebound sooner or later. Because of population growth, it’s still smaller per head than before the crisis.
Here’s a graph Cameron doesn’t want you to see:
Data source: Office for National Statistics
Taking inflation into account economic output is now 7.3% smaller per head than at the start of the crisis in the first quarter of 2008. We’ve only now climbed back to the levels of about 2005. Of course averages don’t tell the whole story, and a small minority have become much wealthier whilst most people have suffered much more, but of the G7 group of rich countries Britain’s economy has performed second-worst, ahead of only Italy.
Alongside slowing global growth part of the reason for this economic catastrophe – the worst for 80 years – is that the government has extracted tens of billions of pounds from the economy. These sort of cuts are economically counterproductive during a recession.
The recent fall in unemployment to a still-unacceptable 6% has been the result of an increase in part-time, badly-paid and insecure work. People aren’t being paid enough to contribute to government coffers.
The fall in pay is a remarkable feature of the crisis. Again, accounting for inflation, the wages of a British worker have suffered their longest sustained fall since records began in 1862. The International Labour Organisation says that British pay has plunged more than even in Italy. In the five best performing countries shown in the following graph, wages have gone up.
Average real wage index for developed G20 countries, 2007-13
Because we’ve got less pay in our pockets, less money is spent than it otherwise might be, which in turn suppresses growth. Consumer expenditure collapsed during the crisis and is only just recovering. Business investment has shrunk to unprecedented levels as too few people can afford to buy companies’ products and services, and companies remain uncertain about the future. Productivity remains abysmal. I suspect that a fragile recovery based on the services sector and badly-paid jobs will peter out as the underlying economic conditions remain so bleak.
Instead of the debt falling due to government spending cuts, it’s forecast to keep going up until next year because the economy is doing worse than it otherwise would. In fact public debt isn’t particularly high by historical standards and it’s not the main problem, especially when borrowing costs are at such historic lows.
What the Tories fail to mention is that it was private debt which caused the crisis, not government debt. Private debt, mostly financial sector and corporate, grew to four-and-a-half times GDP, compared with public debt which is now 80.4% of GDP.
The deficit has ‘only’ halved as a proportion of GDP since the coalition took power, to £91.3 billion, despite Osborne’s promise to eliminate it by now. This failure is because of the cuts.
There’s more madness to come. Osborne said in his autumn statement that over the next five years he wants to shrink public spending to levels not seen since before the second world war. £60 billion will come from public service cuts. That’s nearly twice the defence budget or the equivalent of dualling Scotland’s A9 road from Perth to Inverness 143 times. Schools, health and foreign aid are ring-fenced, so some departments will be ransacked. This amounts to a full-scale attack on the state.
What we should be doing – and what Scotland could do given full economic powers – is reinflating the economy. Building infrastructure would encourage businesses to invest. Tackling the housing shortage would stimulate demand. We could develop a modern, strategic industrial policy which built a new, environmentally-sustainable economy based on Scotland’s advantages in sustainable energy. This investment would eventually pay for itself, particularly when borrowing is as cheap as it’s ever been.
Osborne and Cameron have taken us so far down the rabbit hole that we’ve confused up with down, good with bad. We should be rebuilding the economy rather than trashing it; looking after each other instead of accepting the cuts. All that rhetoric about hairshirts and tightening our belts is nonsense. We’re being punished when punishment isn’t the answer.
Here’s an article I published this month with the Commonwealth on the importance of trade and productive capabilities in the sustainable development goals to be adopted next year. In addition to social and climate-related goals, the least developed countries must be helped to build their domestic economies.
This issue of Commonwealth Trade Hot Topics examines how the sustainable development goals (SDGs) that will be adopted in 2015 can better reflect the trade and development-related needs of least developed countries (LDCs) and small island states such as the Pacific island countries (PICs). It draws lessons from four Pacific Diagnostic Trade Integration Studies (DTISs) – a series of comprehensive trade analyses aimed at improving countries’ ability to access global markets and to benefit from trade. The paper argues that, in addition to market access, focus should be placed on behind-the-border measures including infrastructure, rules of origin, negotiating capacity, standards and targeting aid for trade.
Click here (pdf) to read the article.
Rural wages are surging in Asia as fewer people enter the rural workforce and manufacturing growth draws people into cities, according to an important study by the Overseas Development Institute’s Steve Wiggins and Sharada Keats.
It’s a huge story. Wiggins says it’s “almost certainly the end of mass poverty in Asia” although he points out that pockets of chronic poverty will persist.
One of the most interesting impacts is on manufacturing wages: “manufacturers can’t get dirt-cheap labour off the land anymore, and they have to start putting up their salaries.” Industry will have to locate to inland China and low-income Asian countries like Cambodia, Bangladesh and Burma.
Fascinatingly, Wiggins also reckons factories will be forced to move to Africa, the last big pool of cheap labour. Until recently Chinese direct investment in Africa has mostly been resource-seeking, a hunt for oil and minerals. But cost-saving investment is also underway. Millions of jobs may move across the Indian ocean as factory owners try to cut the wage bill:
The World Bank reports Ethiopian factory wages for unskilled labour as being one-quarter those of Chinese wages. Logistics costs are higher, but overall costs are lower. Outside Addis Ababa, the first pioneer wave of relocated Chinese plants can be seen. Now these have broken the ice, how many more will follow? [Former World Bank chief economist Justin] Lin… speculated that 85 million factory jobs could leave China in the coming years. If half of those came to Africa, it would transform a continent where there is a surge in youth entering the labour market.
Duncan Green features the report on his blog under the title: “A wage revolution could end extreme poverty in Asia, with massive knock-on effects in Africa.”
Some of the commenters beneath Green’s blog express scepticism , saying that increased mechanisation will limit the benefits for Africa. Chinese iPhone contractor Foxconn is already replacing workers with robots, points out one commenter. Another cites an Oxford Martin School study showing that nearly half of US jobs could be at risk of computerisation.
Ryan Avent argues in the Economist that:
More manufacturing work can be automated, and skilled design work accounts for a larger share of the value of trade, leading to what economists call “premature deindustrialisation” in developing countries. No longer can governments count on a growing industrial sector to absorb unskilled labour from rural areas. …new work for those with modest skill levels is scarce compared with the bonanza created by earlier technological revolutions.
The rise of the machines, in other words, will rob workers of potential factory jobs.
I don’t buy this story, at least in poor countries. For a start it overestimates the kind of pay and work we’re talking about. Sierra Leone’s minimum wage, the lowest in the world, is 3 cents an hour. No machine can compete with that. The electricity costs of running a robot are higher, not to mention set-up and maintenance costs. According to Wikipedia the minimum wage in Uganda is US$ 29 a year. Tanzanians are lucky in comparison, earning a minimum of US$ 303 a year. (Whether or not many people actually earn the minimum wage and how much it will buy at local prices are different questions.)
The Oxford study might well be true but it’s less relevant in impoverished nations. Plenty of bottom-end jobs will continue to be performed by low-paid workers in the developing world. It just doesn’t make sense to fully automate garment manufacture when people will make t-shirts for a few cents an hour. Unfortunately not much computerisation goes on in clothing factories: it’s just rows of (usually) women sitting at sewing machines.
Premature deindustrialisation is mostly due not to automation but to neoliberal economic policies: sudden trade liberalisation killed off a lot of manufacturers. Inflation-paranoia and overvalued exchange rates added to the pain.
Some commenters worry about Africa’s low productivity and infrastructure. But these fears, too, are misplaced. Fifteen years ago people doubted whether China itself possessed the infrastructure for rapid development. Now much of the country is criss-crossed with highways and high-speed trains. Given the right incentives, foreign (and local) investors will build the infrastructure. Chinese roads and buildings are already springing up across the continent. The promise of profits can achieve miraculous things.
The productivity argument is similarly misplaced: productivity is, by definition, the ratio of output per worker, which is mostly influenced by the capital-intensiveness of production. A shoemaker can produce far more if she works on a production line than if she has to do the job on her own, from scratch. Africans are only less productive because they generally don’t currently work in factories featuring cutting-edge machines and production processes.
Economic development is by nature a process of increased investment. Almost without fail the fastest-growing countries are the ones with higher rates of capital formation. Ha-Joon points out that in China the ratio of investment to GDP was as high as 45% in the last few years. For the world as a whole it’s 20-22%, and in some African countries it’s only 10%. “No economy has achieved ‘miracle’ rates of growth (that is, over 6 per cent per year in per capita terms) over a period of time without investing at least 25 per cent of GDP,” says Chang. Worries about the existing state of productivity in African are really just worries about the lack of investment rather than legitimate fears about future prospects. Productivity is weak because investment is low; low productivity isn’t a deterrent to investment or an obstacle to growth.
The whole debate reminds me of 19th Luddite worries about machines replacing human labour. Whilst the industrial revolution cause a lot of pain, and governments must act to mitigate the impact on the worst-off, eventually new sorts of work emerged in response to the new economy. Workers in rich countries might legitimately fear that robots and computers will take their jobs, and the Economist report cited above points out that it’s mostly middle-level jobs which are at risk. But in much of the poor world the situation is completely different. Poor quality, low-paid work is here for a long while yet (i’m still not convinced that Africa will undergo Asian-style industrialisation, and in many countries the services sector might play a bigger role, but that’s another story).
People have also historically misunderstood the reasons and prospects for the outward expansion of capitalism. Capitalists didn’t just look overseas to get resources or establish new foreign markets; they went abroad to access cheaper (and sometimes slave) labour. Companies will keep hunting for cheap workers.
Little about this story is particularly pleasant — who really wants to flog away on an assembly line for a few dollars a day? — but for unemployed Africans or those living a subsistence lifestyle and facing the horrors of extreme poverty, it’s a bleak source of optimism. Some work is better than no work, and eventually it should enable many countries on the continent to start moving toward higher value-addition and better pay and conditions, not to mention the myriad other benefits of development. Unfortunately there’s only one thing worse than exploitation: not being exploited.
Image courtesy of jiggoja at FreeDigitalPhotos.net
A common worry during the Scottish independence campaign was that a separate Scotland would end up like Ireland: a rump state ravished by the international markets and forced to depend too much on foreign investment. So implied the BBC, Guardian and Independent.
But Alba isn’t Eire.
Scottish-Irish comparisons depend on a misunderstanding of the euro crisis. Lots of mainstream commentators like to blame the euro-victims for their own problems. They say that Greece, Italy, Portugal, Ireland and Spain all borrowed too much, fudged the numbers and failed to collect enough tax , overspending their way into a calamity of their own making.
But in reality the main problems were mainly structural rather than originating with governments. The euro project was badly designed and executed. Investors were never likely to shift funds quickly to economic dead-zones. Workers wouldn’t move to places with loads of jobs available because the chances are they probably couldn’t speak the language and they wouldn’t fit in with the culture. In the jargon, capital and labour mobility were limited and the euro-area wasn’t an optimal currency area, unlike the United States which has much more factor mobility.
To compensate for the resulting economic black spots, the eurozone should have a central tax authority that can redistribute funds and it should act to stimulate economic activity in areas suffering from low demand. As it was the limits placed on government spending were so tight that not much could be done to boost demand or help the unemployed — but in any case the lack of law-enforcement meant that most governments periodically broke the rules. As I said in this post, France breached official spending limits in seven of the 12 years after the euro began and Germany five.
A low interest rate that helped the sluggish north was never going to suit the more volatile economies of Greece, Portugal, Ireland or Spain. Cheap money helped inflate housing bubbles and allowed governments to escape the need for proper tax systems.
The eurocrats blame the Irish, but it was always likely that such a poorly-designed currency and lax enforcement in a global environment of historically low borrowing costs would prompt number-fudging, spending and undercollection of tax. This is not to absolve the Irish bankers and government, but Berlin and Paris like to forget their own misdemeanours. The austerity that accompanies their multi-billion euro bailouts is designed to perpetuate a system that supports themselves and their financiers, not primarily to help the periphery.
Scotland, clearly, doesn’t use the euro and might never do so. To imagine that it will somehow end up like Ireland is to miss this point and is to blame Dublin for structural failings that were not of its own doing.
One failure that can be attributed to Dublin is the 12.5% headline income tax rate, which left the government over-exposed to levels of consumer taxation which were among the highest in Europe. As spending dried up amidst the crisis VAT revenues dwindled, further draining state coffers. An undue reliance on indirect taxation was not only inegalitarian but was always likely to worsen slumps and inflate bubbles.
Scotland, of course, has no such plans to slash income tax or to raise VAT. The Scottish National Party said that if it got into power after independence it would cut the headline income tax rate only to 18%. It’s far from certain that the nationalists would rule in an independent Scotland and it’s not clear that the party would be able to follow through on its promise.
Oil is another issue on which this identikit celtic world comes to grief. Even on the most pessimistic projections the North Sea still holds up to 15 billion barrel equivalents. The SNP quotes a figure of 25 billion, which is up to a tenth of Saudi reserves. The existence of the slippery stuff, however unsavoury it may be in a hopefully decarbonising world, would help prevent a race to the bottom like Ireland engaged in — and Ireland was unfortunately successful in its race.
Partly because it had no natural resources, the Irish government embarked on an effort to solicit more overseas investment than a Dublin streetwalker at a stag party. Annual foreign direct investment inflows have been worth up to a fifth of GDP, with companies encouraged by tax breaks and, allegedly, the turning of blind eyes. Google, Apple and others effectively use Ireland as a refuge from British and continental tax collectors.
An over-reliance on FDI, runs the progressive argument, tends to force governments to liberalise markets and makes it difficult to do things like legislate in favour of workers and the environment or to introduce capital controls. The presence of large foreign players can hinder the development of domestic industry.
Scotland wouldn’t suffer so much from these problems because its economy is more diversified and it relies much less on FDI. No exact statistics exist but my own calculations suggest that annual FDI inflows are only about 1% of GDP (an average of £2.46 billion per year in an economy currently worth £248 billion). This would fit more or less with the UK, which according to the World Bank has yearly net FDI inflows of 1.9% of GDP. UK Trade and Investment data suggest that FDI created or safeguarded 55,034 Scottish jobs in the decade after 2003. Overall, Scotland’s economy generated 76,000 jobs in 2014, of which FDI generated less than a tenth. FDI created 13,000 Irish jobs during 2013 alone, a much higher proportion of the workforce than in Scotland. Irish exports, too, are more reliant on foreign investors than in Scotland.
Scottish FDI is increasingly resource-seeking, argues this recent paper. Normally this might be considered a bad thing. So-called efficiency-seeking investors are considered better for productivity growth; they employ workers for their brains, not heft. But Scotland’s inward investment is increasingly in renewable energy and natural resources, the kind of high-capital investment that stays put for years rather than fleeing at the first sight of a wobbly graph. Most other investors target Scotland because it is a source of innovation or knowhow — think Grand Theft Auto and renewable energy. Both the efficiency-seekers and the resource-seekers are in Scotland for its inherent advantages not its tax breaks.
Lessons can be learnt from the Irish experience: don’t join the euro, don’t lower direct taxes too much, use the oil revenues wisely and court the right kind of foreign investment. But this isn’t to suggest the two economies have much in common.
The kind of celtic conflation seen in the run up to the Scottish independence referendum is exactly the kind of thing I criticise in my book. It amounts to one-size-fits all theorising designed to ignore local circumstances and promote the same solutions everywhere; a kind of blindness to nuance that speaks always of models and types, not people and context. “To be sure, the only thing those tight-fisted wee sleekit celtic-types want is a good craic, so they do,” you can almost hear the financial commentators mutter. Progressives and nationalists can also be guilty of such obfuscatory generalisation — Scotland-Norway comparisons are overdone — but universalism usually benefits the status quo. We need to find out what’s going on from the bottom up and to see things as they really are, not as we’d like them to be.
Another reminder as to why Chris Dillow’s Stumbling and Mumbling is one of best blogs around. Some simple facts about the British economy:
Let’s just remind ourselves of the facts. Back in June 2010 the OBR forecast (pdf) that real GDP would grow by a cumulative 8.2% in between 2010 and 2013. In fact, it grew by only 3.1%. Partly because of this, the deficit is much larger now than expected. In 2010, the OBR forecast that PSNB in 2014-15 would be £37bn, or 2.1% of GDP. It now expects it to be £83.9bn, or 5.5% of GDP.
The economy has grown much more slowly than expected and the deficit is therefore much worse.
But then Dillow questions the very idea of ‘the economy’ as an actually-existing thing. A newer post on Baudrillard’s idea of hyperreality asks whether what we think of as ‘the economy’ might not really be what we think it is. Politicians and the media are “creating a symbol or set of signifiers which actually represent something that does not actually exist”.
All that matters is that policymakers keep the creators and sustainers of that hyperreality happy by seeming to alter those symbols and signifiers in a useful way. Where ‘the economy’ ends and the media begins might be a blur. Looking good in the media isn’t just a means to an end; it might be the end itself.
I’ve long doubted that ‘the economy’ is an object just like a table or an elephant. The concept is probably conditioned by the way in which it is discussed. Even the study of economics has all sorts of definitions, each of which affects the notion of what the economy is. Economists aren’t natural scientists studying fixed objects in an effort to find out the truth. They’re engaged in a process of narrative. And economics is personal, whether we like it or not. The idea of hyperreality might be a good way of thinking about these problems.
As Dillow suggests, it may be irrelevant whether or not the ‘objective’ realities of unemployment and poverty due to economic underperformance cause people physical unhappiness. These people aren’t the creators and purveyors of hyperreality.
The last-minute promise of devo-max is probably the main reason for the Scottish No vote. But lots of voters appear to have had doubts about the economy. According to Ashcroft’s post-independence polls, 47% of No voters cited “the risks of independence when it came to things like the currency, EU membership, the economy, jobs, and prices” as the most important reason for rejecting independence, compared with two other choices.
Keeping the pound was much more important for unionists than for Yes voters; jobs and prices marginally more so. The Aschroft poll shows that 19% of No voters made their minds up in the last month or later, even if the majority of the anti-independence crowd always knew which way they’d vote. Better Together only needed to implant fear about the economy in some wavering minds at a late stage in order to tip the balance toward the union.
I suspect that a more credible economic plan could have swung these no-voters — people who want more fairness and a voice but who were swayed by promises of more powers and were too worried about the economy to vote for full separation.
All potential breakaway nations face economic uncertainty. As it happens Scotland’s worries were nothing compared with most of the countries to have previously split from England. As William K. Black argues on the site New Economic Perspectives: “The risks that the Scots take in voting for independence does not even begin to compare with the risks taken by their Americans and Irish counterparts.”
Consider … the economic results of the major “Western” nations that have chosen independence from England: the U.S., Canada, Australia, New Zealand, and Ireland. Each of those nations must be considered among the world’s greatest success stories on economic, political, and social grounds.
So risk in itself isn’t at issue. Of course an independent Scotland would face an uncertain future, just as it does now. It was the lack of a credible alternative that really put off potential Yes supporters.
One of the victories of the No campaign was its ability to conflate independence with rule by Salmond. The personal
unpopularity divisiveness of the First Minister and his dominance of the campaign (maybe the Darling debates weren’t such a good idea) made it easy to gloss over the realities that Scotland would have an election in 2016 to vote in the first Scottish parliament and that the opinion polls at the time predicted a small Labour majority.
But given that Salmond was a figurehead, he should have admitted that Scotland probably wouldn’t be the land of whisky and cranachan in the years after independence. Voters were too smart for that. He should have instead acknowledged the short-term difficulties Scotland would undoubtedly face after the election, such as a budget deficit of 5.9% of GDP (even though the budget was in surplus on average from 1980 to 2012) and the restrictions on fiscal policy faced under a currency union or sterlingisation. Salmond and the Yes campaign should have focused more on the long-term possibilities for economic expansion that couldn’t be accommodated within the union.
I don’t really know why Salmond refused to be realistic. Perhaps he’s too much the politician, always fearful that the media would seize on any negativity: promise the world and voters will buy half of it. Maybe he was just so blinkered by the proximity of his lifetime goal that he couldn’t even admit to himself that there’d be problems in the early days. Perhaps he was too worried about business, although he shouldn’t have been. Lots of corporate bosses openly supported independence and many understood that an expansionary policy would be good for them because it would boost demand.
So it wasn’t risk per se that swung it for the No camp. It was a lack of a believable alternative and the refusal of Salmond to outline a plausible plan for the currency. Scotland could have launched its own currency several years down the line after establishing its creditworthiness. A credible long-term economic alternative has already been outlined by several prominent economists, in the form of expansionary policies aimed at reflating the shrunken economy after seven years of decline and stagnation.
Given Salmond’s professed Keynesian leanings, you’d think he would have trumpeted his sensible approach here. In a 2012 lecture he talked about safeguarding capital spending, encouraging investment and creating jobs — all of which would help reduce the deficit as unnecessary benefits payments fell and revenues rose. He rightly cited nationalised Scottish Water as an example of success but criticised the Treasury rules which effectively penalise the Scottish Government if Scottish Water decides to borrow. Salmond talked in expansionary, Keynesian terms of the need to alter taxes so as to boost specific parts of the economy, something which Westminster is not in a position to be able to do.
What many people don’t seem to realise, and what the Yes campaign should have hammered home, is that austerity has failed; that the national debt has continued to rise partly because the government withdrew so much money from the economy, shrinking demand. And we’ve mostly bought the lie that the national debt is at historically high levels. Actually it’s about 80% of GDP, much lower than throughout most of history and not particularly large by current global standards. Debt was much higher in the 1930s when Keynes urged governments to spend their way out of recession. Scotland has an opportunity to do things differently to Westminster.
What Salmond was perhaps less likely to do from his conventional perspective was to focus on an alternative vision for the future. With a reflated and more stable economy Holyrood could then afford to focus on redistribution and wellbeing rather than simple individual enrichment. Many Scots seem to acknowledge the need for greater equality and environmental sustainability, not to mention an economy that makes them happier.
Because that’s what I think the economic debate boiled down to: a short-term beancounter’s approach versus the economics of long-term possibility.