Duncan Hames writes… We must think more deeply about how to rebalance the economy

Despite the much-vaunted claims of “an end to boom and bust”, the last decade, in fact, saw continuing fossil fuel dependency and a credit-driven boom, followed by a financial crisis. Our economy has been propped up by levels of public borrowing, which in Europe have proven to be impossibly large, and have led to levels of unemployment that are an appalling waste. The Labour Government undeniably failed to deliver sustainable prosperity for the UK.

In the years since the global financial crisis first struck, the economy has consistently remained a dominant public policy concern. The effects of the financial crisis hit low and middle income families hard. It is clear that we must work to develop a sustainable economy which takes into account the financial challenges that households and the Government are facing, but also increases opportunities for employment, allowing people to realise their potential and have it recognised. In achieving this, environmental limits are no less a constraint than labour productivity or financial capital.

For my part, I accepted the invitation of the Lib Dem Federal Policy Committee to chair the Lib Dem policy working group on sources of sustainable prosperity and jobs, which seeks to develop policy to build a stronger, more resilient and sustainable economy. In doing so, we have identified seven key opportunities and challenges:

  • attracting inward investment
  • exporting to emerging markets
  • accessing finance for business
  • fostering innovation
  • developing relevant skills in our workforce
  • sustainably generating energy
  • rebuilding local economies.
We believe that a strong and sustainable economy is vital for lifting the UK out of the environmental and economic mess that previous governments have left behind. To rebuild the economy we must ensure that all parts of the UK can benefit from renewed prosperity.

As part of our inquiry, the working group and I have been hosting evidence sessions to hear from external experts from across the UK. Recently, we welcomed engineers and scientists to speak to us in Parliament and will discuss workforce skills and local economies at our next session.

On Friday 9th March, I will be taking our work to the Party’s Newcastle/Gateshead Spring Conference, in order to canvass opinion more widely on these seven opportunities and challenges. I will be hosting a consultative session between 3pm and 5.30pm in MEC 9 at the Sage, to which I would like to invite all interested conference attendees. You can read, and contribute to our consultation paper here.

Sustainable prosperity will not be achieved by simply trying to turn the clock back and returning to how things were, so now is the time for our party to think more deeply about how to rebalance our economy for the future.

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40 Comments

  • mike cobley 5th Mar '12 - 10:29am

    Oh, now wait a goddamn minute. High levels of public borrowing did NOT lead to high unemployment – I think you’re missing out a couple of intermediate stages, like deregulation of banking controls by New Labour (under advice given by the banking sector), then the general casino banking disaster, helped along by the derivatives insanity (as advised by the banking sector) and the collapse in housing prices, etc. High unemployment derives from the Coalition’s demented belief that in order to save the economy you have to destroy it. 100s of thousands of public sector workers are and will be made redundant, and apparently this party is okay with that.

    Whenever I hear anyone wittering on about rebalancing the economy I have to laugh, since it is now clear that the term is just code for decimating the public sector in favour of the private sector. Such a shame that the private sector continues to sit on its hands.

  • Mike – are the ‘intermediate stages’ you refer to not covered by ‘a credit-driven boom, followed by a financial crisis’?

    Under Labour: unemployment hovered around 5%. Now: unemployment hovers around 8%. Given that any unemployment has distressing consequences at a personal level, why is 5% acceptable and 8% catastrophic?

  • Sid Cumberland….’a credit-driven boom, followed by a financial crisis’?’….How might ‘any’ administration prevented the credit boom? Bearing in mind worldwide minimum interest rates and constant bank lending publicity could only have been countered by artificially raising UK interest rates to make borrowing unsustainable, would we or our coalition “partners” have done that?. Our “partners” were calling for less, not more, regulation of the financial sector whilst promising to match Labour’s public spending.
    The unemployment rate will almost certainly rise to “hover around 1980’s rates”; a more pertinent question might be…are such rates of unemployment acceptable?….The last Tory administration certainly accepted that high unemployment was a price worth paying to ‘fix the economy’; the current administration seems to accept high unemployment without fixing the economy.

  • Richard Dean 5th Mar '12 - 11:55am

    This is essential work, but very very difficult to find solutions. Here are some random thoughts, hopefully helpful …

    Unemployment is an excess of the supply of available labour over the demand for labour. So we can reduce supply or increase demand. Or we can change the whole system somehow. Following on from Mike, making people redundant is counterproductive since it increases supply and reduces demand.

    Reducing supply might involve many unacceptable things, like restructing EU nationals from working in the UK. Or costly things, like increasing the extent of subsidized edcuation or reducing the age of retirement.

    Increasing demand means increasing demand for the products of labour or for the profis available from employing labour. Your first six items look like increasing the profits, which is not always attractive to electorates, most of whom are the people the profits would be taken from. Item 2 looks a bit colonial too – remember those economies will have problems too. Your seventh item looks like reducing the profits, in the sense that smaller operations can sometimes make for fewer economies of scale.

    Changing the system – looks to me like the banking and wider financial systems need major re-design- they have the ethics component completely missing.

    Sorry being so negative, and for not having a miracle cure! Your work is vitally important, so please keep trying!

  • mike cobley 5th Mar '12 - 12:10pm

    Sid – criticism of Hames’ piece does not imply that I favoured Labour’s record. I found them a government of gross hypocrites, who conducted a schizophrenic economic policy which came back to bite us all in the backside. They did a few good things between 97 and 2012 but they were far outweighed by the Iraq invasion and a wide range of authoritarian idiocies and economic follies. To reiterate – it is possible to critique the Coalition without being pro-labour, you know.

  • Richard Dean 5th Mar '12 - 1:05pm

    An unemployed person will usually spend less – produce less demand. So unemployment can be interpreted as as too wide a gap between low-demand and high-demand people in society. The solution might be to take some of the demand that the high-demand people have, and transfer it to the low-demand people.

    Does this mean tax the rich? Maybe, maybe not. How about taxing profits from uninvested savings higher than from invested ones? Taxing unused properties higher than used ones? Tax safe investments more than unsafe ones? Bias the tax rates just enough to tip the markets’ risk-return models in favour of investment that creates jobs.

    Another suggestion – produce guidance on how to be an entrepreneur – something better than the rubbish now on sale. Include a guide to the bureaucracy involved – excessive form filling is not the problem for a business like mine, it’s knowing what forms to fill in when and for who.

  • Paul Walter Paul Walter 5th Mar '12 - 1:13pm

    @Rachel Coleman Finch – Now corrected to 3pm – 5.30pm

  • Mike – sorry if I implied that you supported Labour ( a heinous calumny) … my first comment was addressed to your comment, the second just a wonder-out-loud – is it really the case that 8% unemployment is the end of the world while 5% is acceptable?

    Jason – my comment was directed at Mike, who said that Duncan had missed a couple of stages; I was suggesting that he hadn’t. I have no comment to make on the credit boom. (At the moment.)

    Simon – ‘cheap (ish) energy sources’ !!!

  • I can’t read the consultation paper because someone hasn’t embedded the fonts. 🙁

  • jenny barnes 5th Mar '12 - 2:10pm

    Energy prices. Simon – have a look at this website. http://www.eia.gov/oiaf/aeo/electricity_generation.html
    You’ll see that on-shore wind, dirty coal and nuclear all cost about the same for electricity delivered to the grid, while gas is cheaper. However – fossil fuel is a finite resource, and once we’ve used half of it (peak oil/gas/coal) the remainder would only last another 35 years till it’s all gone at that rate of consumption. So it might be a good idea to put some renewables in place? When fossil fuels are gone, like it or not we’ll be running on 100% renewables.

  • This consultation is a welcome and much needed effort to develop a comprehensive and stategic approach to rebalancing of the economy.

    That the econonic growth of the past two decades has been largely fuelled by an explosion in the level of private credit and resultant build-up of unsuustainable household debt is well recognised.

    Ultimately, irreversible improvements in general standards of living can only come from productivity gains in both the private and public sector. Just as importantly, these productivity gains need to be reflected in the level of real wages across the economy and not exclusively captured by the financial sector or other sectors of society.

    When easy credit is substituted for earnings growth, the gap in income and wealth equality is exacerbated and an ever increasing proprtion of the discretionary income of low and middle earners is absorbed by debt servicing costs.

    The unavoidable tax increases and cutbacks in public services resulting from the banking and financial crisis further exacerbate what is already a dangerous level of inequality in the UK.

    A key aim of cconomic rebalancing should be the restoration of sensible and sustainable income to house price ratios. This can be aided by a major shift in government transfer payments away from corporate/higher rate tax exemptions and relefs to investment in job-creation and financial support of demand at the lower income distribution range.

  • Richard Dean 5th Mar '12 - 9:58pm

    Joe : “Irreversible improvements in general standards of living can only come from productivity gains”. But productivity gains produce unemployment, don’t they? Unless a new need arises? Is this where we are now?

  • @Richard Dean
    “But productivity gains produce unemployment, don’t they?”

    Do they? Couldn’t it also be said that productivity gains can lower unit cost and increase sales, thereby requiring additional staff to meet demand?

  • Richard Dean 6th Mar '12 - 12:11am

    @Chris_sh.
    Oh dearie me! I had not appreciated that, thanks. But only if there is demand to meet.

    There is a US school of thought that says that productvity gains caused the Eurozone crisis. Increased profits from German and French productivity gains were not passed on to workers in increased wages, but did lead to saturation of home markets. So, the excess profits were put into banks, who lent the money to Greece and others, so that Greece and others could buy the excess products. This “solution” seemed to make everyone happy since it kept German and French employment levels high and owners and banks seemingly rich. So Greece was always going to fold, and then, … crisis

    So I think productivity gains are only part of the answer. My question is, what are the other parts?

  • Bill le Breton 6th Mar '12 - 9:33am

    Rebalance? – Are economies ever in balance?

    Restructure? – Yes.

    Being Pro- Business? Despite the propaganda, business detests competition – it does all it can to destroy/evade competition. It erects every barrier it can to entry and uses every trick it can to drive competitors out of its market.
    Pro-Competition? – yes.

    What is required is a massive reorganization of the way we tackle anti-competitive and monopolistic behaviour.
    But that is sadly not on your list.

    It is difficult to win support for this degree of change while the Bank of England remains firmly wedded to a low inflation policy which is keeping growth in this country far below its pre 2008 trend rates. It is the Bank of England that is keeping growth at 1%.

    Oranjepan’s is the voice that delayed recovery in the 1930s for a decade and recovery in Japan for two decades.
    It would be interesting to calculate the size of the national economy that would exist now if that pre-2008 trend had continued and the prospective level regained. A calculation of the size of the public sector that could satisfy Simon’s 40% collar would surprise a lot of people.

    Oh, and why do editors allow MPs to use this site as a notice board, rather than a conversation opportunity. If an ordinary poster took over 24hr to comment on comments they would get a flea in their ear.

  • @Richard Dean

    I don’t think it’s just a US school of thought, but yes you are right. It’s also a school of thought that, in my opinion, seems to be about right. The other issue of course was the single currency, it allowed Greece to continue on it’s inefficient path at the same time as the Germans increased theirs. It seems possible that Greece may only be the start of a slow motion car crash. However, that’s a discussion for another time I feel as it may upset to many of the “believers”.

    There are obviously plenty of other factors, as a couple of e.g.s:
    Innovation (mentioned above), you need people capable of “thinking outside the box”, but you also need people who can think inside the box as well, just to make sure you don’t chase a dream to the point of destruction (am I talking about the Euro again 😉 ).

    You need capital to get those innovations into the market place, which may mean using venture capital. If you want people to risk their money on something that may fail, then you also have to be willing to let them keep a lot of the reward. So you need a tax system that encourages these people (note – I’m not talking about what happened with banking, I’m talking about people who are willing to risk their own money).

    Intelligence – not spying on competitors, but making sure you know what’s going on. This obviously includes competitors, but should include suppliers and your own company of course. This means that organisation like the FCO has to stop being EU centric and start thinking of the world again.

    I don’t know if I would have used “sustainably generating energy”, I would have said a “stable supply of energy” – which can obviously include sustainable.

    Not certain why it’s not on the bullet points, but definitely infrastructure. There’s no point in trying to make stuff if you can’t get the raw material or get it to where it’s going to be sold, there’s no point in selling it if you can’t get the money to your bank etc etc etc.

    The list could go on forever I suppose, .

  • Richard Dean 6th Mar '12 - 1:11pm

    Is no-one in favour of joining the Euro? Changing currencies is a huge cost and seems totally unproductive.

    Do we really want the freedom to devalue? Don’t markets take that sort of thing into account anyway in their risk-return valuations? Doesn’t it actually mean markets are using our savings as collateral – they get the freedom to make us all poorer, what do we get in return?

    Nationalisation destroys competetion and so leads to all those bad things – what about national health?

    Would we be better off without the City? The Financial Sector gives much in taxes – does it take it all back in bailouts?

  • @Richard Dean
    “Is no-one in favour of joining the Euro? Changing currencies is a huge cost and seems totally unproductive.”

    There’s nothing wrong with a common currency, the problem is when the underlying dream is gaining political union without the courage to campaign for it. That’s what got the Euro into it’s current mess, the economic idea is (at face value) quite sound.

  • David Allen 6th Mar '12 - 1:43pm

    There is everything wrong with a common currency shared by independent nations (whether allied or not).

    Just suppose that the BRIC countries were told that they had to share a common currency, and set up a common central bank to manage it. They would scream blue murder about how the unwanted straitjacket would ruin their individual abilities to compete effectively on the world market, wouldn’t they?

    Well, that’s why the unfortunate nations trapped in the Eurozone should all be screaming, too.

    Incidentally, if an independent Scotland is allowed to keep the pound, we’ll have created our own little variant on Hell with a Sterlingzone.

  • @David Allen

    Actually, I think that’s what I was trying to say but in a very rubbish way, so thanks 🙂

  • Richard Dean 6th Mar '12 - 2:18pm

    @Dave – you’ve given no reasons at all, just said someone else wouldn’t like it!

    Alex Salmond is a clever chap. Perhaps the rest of the UK should immediately join the Euro? – we’d then be protected from the Hell you imagine!

  • Richard Dean 6th Mar '12 - 2:39pm

    I am so old you cannot imagine. I remember the European Coal and Steel grouping, and some of the reasons given for it … including to develop economic inter-dependency to the extent that cooperation would always be more profitable than war. So, it has always been a political project. The economic one was just a part of that wider picture. Most of Europe always understood that. DC’s veto was an ill-timed inept combative bluff that went wrong, and his justification in terms of the UK’s self-interest, demonstrates the complete misunderstanding that has developed in the UK for the objectives of the EU, which we fully supported at the start. I start from this rather different perspective. In doing a valuation of participation in the Euro, I include the huge value of the reduction of the risk of continent-wide war.

  • @Richard Dean
    Perhaps Dave means that it would be a possible hell for Scotland? If the BofE is supposed to act in the interests of the UK economy and Scotland isn’t part of the UK, then there may be occasions where the interests of Scotland would require a different course than the one set.

    At the moment we have a common UK currency because we’ve joined and formed a bloc that has effectively become a country in it’s own right. If the Euro Zone merge (which is slowly starting to happen without to much help from democracy) then it may suit them there. But the cost to the people for the convoluted route to union is going to be very high, nor does it seem that all of the current players will be there at the end.

  • Richard Dean 6th Mar '12 - 2:47pm

    Is the European Central Bank supposed to act in the interests of one country, or of all of them? I think you would find that the BofE would need to act in the common interest. Which would be a nice change. Isn’t it their attempt to control inflation that has restricted the money supply to such an extent that the crisis had to be addressed by QE?

  • @Liberal Eye
    “There is everything wrong with it”
    We have one now in the UK, so it can work – but as I said the Euro was an attempt at political union without the hard work, i.e. they got it the wrong way around. So I have no particular issue with anything you say.

    @Richard Dean
    “I include the huge value of the reduction of the risk of continent-wide war.”
    Except the whole debacle is currently creating tensions that may yet lead to war – aside from that mentioned by LE, 2 cases as an example:

    Greek/German Tension
    http://www.spiegel.de/international/zeitgeist/0,1518,817995,00.html

    Internal Italian Tension
    http://www.spiegel.de/international/europe/0,1518,819430,00.html

    “So, it has always been a political project.”
    But when did it change from a political project about economic co-operation to creating a country called Europe?

    “Most of Europe always understood that”
    The economic part yes, but is there an evidence base to suggest that the majority understood that there was a drive to create a separate nation?

    “DC’s veto was an ill-timed inept combative bluff that went wrong”
    Why?

    “developed in the UK”
    Any evidence to suggest that it is just the UK?

  • @Richard Dean
    “I think you would find that the BofE would need to act in the common interest.”
    Why? If you’re going to say that we should act in the interest of other countries, why don’t we currently do that for other near neighbors (e.g. Ireland, France)

  • Richard Dean 6th Mar '12 - 6:32pm

    Who presently owns the BofE? I think the Scots have a share, because it’s a UK institution, not an English one. Or am I worng? So if the Scots go their own way, either they ratain their part of it, or we have to pay them a lot of money!

  • Richard Dean 6th Mar '12 - 7:19pm

    @Chris_sh. Those tensions are as nothing to the world wars that erupted last century, essentially as a result of problems in the Balkans. Those world wars killed millions. They led to the development of the concept of Europe so that, when those Balkans erupted again into a local civil war in Yugoslavia, the end result was not another world war.

  • Richard Dean,

    “There is a US school of thought that says that productvity gains caused the Eurozone crisis. Increased profits from German and French productivity gains were not passed on to workers in increased wages, but did lead to saturation of home markets. So, the excess profits were put into banks, who lent the money to Greece and others, so that Greece and others could buy the excess products. This “solution” seemed to make everyone happy since it kept German and French employment levels high and owners and banks seemingly rich. So Greece was always going to fold, and then, … crisis.”

    I am not familiar with the above analysis, but there is a paralell with our situation in the UK. A recent report by the Resolution Foundation’s Commissionon Living Standards found that over the period 2003-8,median real wages were stagnant despite GDP growth of11%. Over the thirty years from 1977, the proportion of every £100 of value generated by the UK economy, which went to the bottom half of workers in wages, fell from £16 to £12(or £10 when bonuses are included). Over the period 1996-2007, calculations by the High Pay Commission based on Her Majesty’s Revenue and Customs (HMRC) data show that incomes of the top 0.1% of income earners rose by 68.7% whilst those of people in the middle of the income scale (50th percentile) only rose 9.5%.The Commission on Living Standards calculates that, of this relative fall in the share of national income going to lower paid workers, 14% of the fall was due to an increased share of profits in the economy, and 16% was due to increased social contributions by employers (employer National Insurance payments and pension contribution). But the vast majority– some 70% – was due to growing wage inequality. This growing inequality affected all sectors, but finance, business activities and retail show the greatest growth in inequality.As these are the sectors which have grown over the past 30 years, at the expense of manufacturing (where inequalities are somewhat less) it is hardly surprising that the trend has been so pronounced.

    It is this growing wage inequality that has fuelled the increasing reliance on credit to support demand in the economy. Capital has increasingly concentrated at the the top level of the income distribution range and is recycled in the form of lending to the middle and lower income ranges. Having reached a point where household debt levels can be extended no further as a means of driving economic growth, we have to look to increases in the level of real wages in the economy.

    While inequality at the very lowest levels of the income range can be mitigated to some extent and an stimulus to demand generated by redistributive tax policies; it is only productivity gains that can deliver the increase in real wages that provide a more stable platform than easy credit for economic growth.

  • Unfortunately I feel that this analysis misses out price changes. If a worker only gets 12% of every £100 as opposed to £16 before but everything now costs only half as much then they are better off.

  • Tommy,

    I think a worker earning an average wage will have seen an improvement in living standards over the past three decades but that has stagnated in recent years and we are now seeing falls in the general standard of living taking into account inflation adjusted purchasing power. Much of the Resolution Foundation’s Commission’s report tells us what we all know – there has been a large shift from relatively well paid skilled jobs in manufacturing and extractive industries to lower paid unskilled and semi-skilled jobs in the service sector in recent decades. One of the consequences has been a major shift in relative incomes from the lower and middle ranges to the higher income ranges.

    The point made by Orangepan above is well made – “Changes made to the labour market since Blair was in Downing Street have been directly at odds with many of the changes made to the education system, and this has resulted in growing divergence in performance between individuals on skills and knowledge, providing super-employability for some, but non-employability for others. In addition the emphasis on career development has shifted onto the individual, meaning those who are left behind face a double hurdle.”

    The key areas indentified in the consultation paper, perhaps none moreso than developng relevant skills in our workforce, can all aid in developing productivity – the means by which this relative income shift can be addressed:

    -attracting inward investment
    -exporting to emerging markets
    -accessing finance for business
    -fostering innovation
    -developing relevant skills in our workforce
    -sustainably generating energy
    -rebuilding local economies.

  • @Richard Dean
    “Who presently owns the BofE”
    I’m not certain if that is a serious question or rhetorical. If you you don’t know who owns the BofE can I suggest you google the question as you may be surprised.

    As to your other point, I find such complacency actually quite scary, however we’re probably so far off topic that we’re gonna get “Mod Prodded” any second now, so. The balkans were the fuse that blew the powder keg, the keg was the ongoing rivalries/tensions between various European nations. After WW1 there was Versaille of course, with Germany ending up taking all off the blame and the cost, this led to extreme hardship. Step forward one charismatic politician who was able to convince the people that he and his party could solve the problems and lo and behold 50+ million dead. Obviously a lot more complicated than that, but like I said, we’ve probably pushed the “off topic” boundaries to far anyway.

  • Richard Dean 8th Mar '12 - 1:28am

    @Chris_sh. Is the BofE not owned by the Treasury Solicitor, on behalf of us all? Since “all” includes Scots, the Scots own part of it. Now I expect you are keen to correct me, and I am certainly keen to learn, so … go go go!

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