From the NICE Decade to the Sticky Brown Stuff

I wrote in Tribune on the 15th June 2007. I argued that Britain could not survive simply as a low tax deregulated financial centre. I said at the end of my piece that, “We could not live beyond our means on this scale forever. The end will surely come with a massive devaluation of the pound or a recession.”

I was wrong. It wasn’t either/or it was both! As the nice decade well a truly ends we are to face at least a decade of austerity. This economic mess has been caused by three things that we are ill equipped to cope with. Let’s face it we would have struggled with a simple down turn. There are still large parts of the country that have seen little from the boom years that benefited the few not the many!

Secondly the “credit crunch” the collapse of the secondary banking system will hurt us deeply because finacial services are a much bigger share of our economy (and an important contributor to our trade balance) than any other major economy.

I suspect the Treasury, having taken control of a large proportion of the banking system, has not done the sensible thing and separated retail banking from investment banking because they feel they may kill the Goose. They hope that our Investment Banking will rise from the ashes.

This I fear underestimates the third factor that will be the most significant element in the current crash. That is the fundamental restructuring of the global economy that is underway. With the most obvious sign being the G8 becoming the G20.

When Brazilian President Lula was humiliating Gordon Brown for the crimes of the white people who had been lecturing Latin America on financial prudence he was doing so from a position of strength. That day the market capitalisation of the Brazilian banks was larger than that of the UK banks.

Whilst we spend a decade digging ourselves out of the sticky Brown stuff this fundamental restructuring of the global economy will continue apace with China, India and Brazil growing at rates we can only dream of.

The Tory response to this is sadly predictable. No recognition that they where the original architects of the edifice that has now collapsed, the ones who laid the dodgy foundations.

No their answer is thrift! As if simply cutting spending would generate growth. Of course we have to live within our means. But the challenge we now face is to grow those means!

Once Gordon Brown knew he had to increase the growth rate of the UK economy. That was before he became a convert to neoliberal orthodoxy. It was his post neo-classical endogenous growth theory phase. He seems to have given up on endogenous growth a) because Michael Hesletine had a pop at him in the Commons commenting on a Brown speech that “Its not Brown its Balls”! (Gordon does like being laughed at).

And b) because when in office the only apparent vehicle for endogenous growth seemed to be a Prescott idea of regional development agencies. Stillborn underpowered and under funded bodies that have made little impact.

This does not mean the idea of increasing endogenous growth, essentially internally generated growth is a bad one, far from it this is the most important thing we can do. We have growing amounts of resource in our economy lying idle, people, land and machinery. The missing ingredient is capital.

That is why we have to continue to spend. Of course we must rebalance public spending and there will be cuts. There will have to be a reduction in spending on prestige projects like in defence, on foreign wars and an end to Britain’s nuclear weapons, spending on the Olympics will have to be scaled back, daft PFI ideas in education, health and transport will have to go and almost certainly the ID cards computer disaster that is just waiting to happen.

In areas where investment increases the competitiveness of the economy public spending will have to increase to compensate for the lack of private investment. Obvious examples are housing – a huge public sector house building programme needs to start now and we need to use the downturn to increase the capacity of the railways and to complete the electrification of all the major routes.

We also need to make huge investments in our energy infrastructure, from clean coal, nuclear, gas and all the renewables, especially wave and tidal. And we cannot afford to cut back on further and higher education. None of this is cheap. Our task is to increase the output of the economy not to just make cuts and hope.

Thrift sounds sensible when it comes to individual households. For the national economy it will lead to inexorable decline and a whole decade of thrift will see the newly industrialised countries over the hill and out of sight.