Opinion: Lib Dems must avoid “all growth is good” fallacy

Every politician who remains in the public mind, after their term in office has ended, becomes associated, in time, with a particular sound bite or phrase.

John Major will forever be associated with “back to basics”. Tony Blair with “pretty straight kind of guy” and Gordon Brown with “abolishing boom and bust”.

At this stage, David Cameron is probably hoping that “hug a hoodie” is the phrase with which he becomes synonymous, though the outcome of Leverson and the grandstanding opportunities presented by the Olympics may change that.

Since entering government, Nick Clegg has tried to corner the market in the use of the phrase “jobs and growth” in the hope that this becomes the sound bite which defines his time in government.

While job creation is, of course, important and necessary, the Liberal Democrats must be wary of embracing the popular myths that growth is either a) hard to achieve in the short-term or b) always desirable.

It is, in fact, quite easy to achieve short bursts of growth and thus political popularity. Thatcher’s government was the archetype, creating booms in a blaze of glory, usually to be followed by a bout of economic stagnation.

By following the Tory blueprint of deregulation for the financial sector and dismissing the manufacturing sector, the Blair/Brown governments basked in the reflective glow of economic growth until the last few years of their time in office.

The problem, of course, is that both Thatcher and Blair pursued policies which ignored the long-term stability of the economy, focusing instead on the short-term opportunities presented by the City of London.

The coalition has, since its formation, been shrewdly aware of the need to ensure that any growth is delivered as part of an overhaul of the entire economy, ‘re-balanced’ says the rhetoric, towards manufacturing, and away from financial services.

The coalition passed the first test on delivering this, by confirming that the recommendations of the Vickers report into banking regulation would be implemented, alongside the wider requirements of the Basel Commission into banking reform.

It would be far easier to fudge a more banker-friendly approach to banking reform, which would allow the banks to return to some of their previous habits, and produce, on paper at least, a growth spurt from financial services.

It would also be easy for the coalition to adopt an approach which merely uses borrowed money to achieve short-term headline growth, while disregarding the longer term consequences of this action, which are inflation, and a return to the boom and bust cycle of the 70s and 80s.

But the coalition have thus far avoided any recourse to such easy answers, focussing instead on reducing the deficit in the first half of the parliament, which should ensure that any growth achieved by infrastructure spending in the second half has its roots in sustainability.

There are some who might mutter that those of us who profess to be unconcerned about growth are doing so simply because the economy is not growing. – Well, Vince Cable made his name railing against the ‘all growth is good’ mantra of the Gordon Brown years.

The poor local election results suffered by the Lib Dems in 2011 and 2012 have spooked many members, while many outside the party have been fazed by the advent of a double recession as a result of the eurozone crisis. This has led to calls for the government to take a different approach.

Those on the right want more cuts, and less regulation, many in the Lib Dems want something called ‘plan B’ which involves spending more borrowed money to achieve growth.

Liberals of all persuasions must do as the party has been doing for a century, and make decisions based on what’s in the national interest for long-term benefit, not party interest for the term of an electoral cycle.

It’s certainly not the easy thing to do, but that’s what has always distinguished the Lib Dem approach to politics from that of our rival parties.

* David Thorpe was the Liberal Democrat Prospective Parliamentary Candidate for East Ham in the 2015 General Election

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34 Comments

  • Bill le Breton 10th Jun '12 - 10:53am

    Growth stimuli have different effects at different stages of the economic cycle.

    The present situation shows the Bank of England’s medium term inflation forecast at close to its target of 2%, so any fiscal stimulus will lead to the Bank of England tightening monetary policy to off-set that stimulus.

    Any further fiscal stimulus could only work if the Bank and the MPC was given a new target.

    To achieve that present inflationary target the Bank is running a deflationary monetary policy that is the major limitation on growth.

    Money as measured by M4 is contracting at a rate of 4% a year. People’s caution about spending is reducing the velocity of exchange. This is what is supressing recovery. A similar defaltionary policy is being conducted by the ECB.

    As a consequence GDP measured in money terms is increasing at only 0.2%. The real GDP is contracting at the rate of 1.2%.

    Any growth now (from loosening monetary policy) will increase NGDP and employ presently unemployed capacity.

    The moderate inflation that it would cause would increase consumption and the private sector understanding that this would be its effect would start gearing up in anticipation.

    As it is, we are destroying life chances, reducing liberty and increasing debt – that is what deflation does. Growth now, from a looser monetary policy would be entirely beneficial.

  • david thorpe 10th Jun '12 - 11:17am

    @ bill

    the BofE excpect inflation to remain above target until at least , inflayion expecations are quite high at the moment…

    @ dave page

    cuts which can be achieved withotu reducing aggregate demand are usfeul, but by and large cuts impact on demand, while spending increases it.

  • @Matthew Green
    “distorting incentives and generally robbing savers to reward the imprudent.”

    Not really a fair reflection as it is also those with mortgages who are benefiting. Without this, higher inflation coupled with often less than inflation pay increases many would find themselves facing foreclosure. Negative equity means that for many home ownership is not something they are stuck in not something they continue by choice.

  • I don’t think anyone, in any party, thinks ” all growth is good “. I have never met such a person.

  • IMHO, might I suggest that although economic growth is desirable, it is unfortunately not now possible. But please read any of the following for a broader analysis of why this is the new reality.

    The End of Growth by Richard Heinberg
    The Crash Course by Chris Martenson
    or visit http://www.chrismartenson.com and watch the excellent crash course lecture, on video.
    The Long Descent by John Micheal Greer
    Small is Beautiful by Schumacher
    The Limits to Growth: The 30year Update by Donella H. Meadows
    Reinventing Collapse by Dimitri Orlov
    The Collapse of Complex Societies by Joseph Tainter

    But it is not all negative.
    If you haven’t already come across it, the new groundswell of social activity, is likely to be developed around the concept of Transition Towns. If you Google Transition Towns, you may be lucky to find one within cycling distance of where you live right now. And if there isn’t one, it might be worth starting one.
    If you want the new economic paradigm in sound-bite form it is this :
    ” Simplify your life, before it gets simplified for you ”

    J. D. 10/06/12

  • Bill le Breton 10th Jun '12 - 2:26pm

    It is important to get this right factually, David.

    The Bank of England’s MPC targets the forecast for CPI. According to its May meeting minutes the last bout of QE moved the forecast to the point where CPI will reach 2% by the end of this year and remain at just below 2% into 2014. Check the facts here: http://www.bankofengland.co.uk/publications/minutes/Documents/mpc/pdf/2012/mpc1205.pdf

    Whilst the forecast is on target they will not change monetary policy. However that policy is based on existing assumptions for fiscal policy. If fiscal policy were to provide further stimulus, the MPC would tighten monetary policy to off-set it. That is what they have been doing since 2010. And what they would do unless they were told otherwise by the Treasury.

    Mathew low interest rates are not in themselves a sign of loose monetary policy. In fact they are a sign that monetary policy is too tight. If they were loose, they would be rising and they are not. https://www.libdemvoice.org/opinion-its-time-for-a-change-in-monetary-policy-28752.html

    Also, how can you say that the problem is not lack of consumption or aggregate demand when the reason firms are sitting on cash is that it is safer to do so than to invest in new projects, because of insufficient demand?
    Forms are waiting for demand to show signs of increasing before undertaking investment projects.

  • Bill:

    Forms [sic] are waiting for demand to show signs of increasing before undertaking investment projects.

    Because they have long since given up on the idea of a market interest rate signifying people’s time preferences. Because the state manipulation of interests rates utterly masks that signal. To extend Keynes’s “animal spirits” nonsense, this is the point at which the pack comes across trails of aniseed deliberately laid by policy makers to confuse the hell out of entrepreneurs time after time.

  • Bill le Breton 11th Jun '12 - 9:25am

    Jock, what is the medium of exchange in your world? To ensure you don’t misconstrue this, it is a genuine question. B

  • toryboysnevergrowup 11th Jun '12 - 10:24am

    Perhaps some LibDems should avoid the “no growth is good fallacy” first!

  • er.. it depends on what you mean by ‘growth’.. perhaps its time to do some defining and clarifying..

  • @John Dunn
    the idea that no growth is now possible is as laughable as the fact you’re reheating an age-old theory as the zenith of hyper-actuality while citing a list of books (including some which directly contradict your thesis) published as much as a half-century ago!

    Progress has not declined in those 50 years, either at a national or international level. Opportunity abounds for anyone with vision and imagination. Though obviously not you.

  • Richard Dean 11th Jun '12 - 3:09pm

    Someone said that the present crisis was caused by the housing bubble bursting. Is not the obvious solution then to re-construct the bubble?

    The problem cannot be firms sitting on mountains of cash. If they have mountains, they put them in the bank. The bank either lends it (or most of it anyway, consistly with their reserve requirements), or invests it in government debt or shares. So the cash does get used productively after all.

    Perhaps the problem is that these kinds of investments are not the riskier kinds which are needed to start growing again? Perhaps there is just too much sovereign debt available to be bought, soaking up any spare cash and so preventing the kind of investment we need?

    Everyone can’t pay off their debts at the same time! If everyone tried to, everyone would consume less, so people would be forced out of work, and would need to borrow more. Can we have a managed plan fpr staged debt repayments, perhaps, so that over time everyone eventually gets a fair opportunity of getting back into good shape?

    If I start saving now to spend later, the government’s best bet is to arrange that I get paid to make the things that I will later buy. If all 20-year olds saved till they caved, industry would need to switch to the new consumption patterns, so labour would need to be able to switch to making new things. Is this called “labour mobility” perhaps? Is it part of what is needed to resolve future savings/debt crises?

  • Richard Dean 11th Jun '12 - 3:21pm

    It also seems that some of the strategies being developed by Transition Towns may be foolish. Trade between A and B can be beneficial to both if A is better at amking product Alpha and B is better at making poduct Beta. By specialiing in what they do best, and trading so that each has both, they operate more efficiently. What this means is that, when towns like Totnes introduce their on currency to discourage such trade, they are just practising good old-fashioned protectionism, and making things worse, not better. Including worse for the environment!

  • Oranjepan. Thank you for the response.
    You are right, ‘Progress has not declined in those 50 years’
    That is exactly the point. Progress (and growth) has been phenomenal in the last 50 years. We (especially boomers), have had the most fabulous economic ride humanity has ever known.
    However, that phenomenal economic ride was based on cheap oil in the region of $20 per barrel (average).
    Oil production peaked in the USA in 1970/71
    Oil production peaked in the UK in 1999/2000
    Oil production (aggregate), peaked/plateaued in the World in around 2005/06
    We are at Peak Oil ( Which means peak production of crude oil)
    As a result of this fact oil prices shot up to $147 per barrel in 2008 (July)
    As a result of this astronomical price rise, the world economy (read growth), had a severe heart attack in 2008(Sept/Oct), and is still on life support.
    The price of oil is still hovering in triple digits ($100 to $110 per barrel)
    So, the growth/progress/prosperity, that you rightly say we have had, (till 2008), is now dead in the water, because that level of growth cannot thrive in a world of triple digit oil prices. Even China’s growth levels are beginning to succumb to this new energy reality.
    And, before someone mentions renewables, please, please, study thermodynamics, EROEI, and the BTU values of different energy sources. We are never going to run motorways full of Toyotas and Volvos on wind, wave and solar energy. Take a look at AutoTrader and see how many (almost new), electric vehicles (not hybrids which use petrol), there are for sale, second hand.
    Oranjepan. If you think the above is wrong, then with your ‘vision and imagination’, please inform us, in clear practical details, ” Where is future growth going to come from?”

  • Richard Dean 11th Jun '12 - 3:38pm

    Does anyone have a plan of how a no-growth economy might function, given the requirement to be socially acceptable, in a world where most nations have yet to develop?

  • Richard Dean.
    You are right to question the Transition Town movement, as do I. But it is best to see it [TT], as a growing movement of people who have grasped that the future is going to be a lot less energy intensive than the last 50 years we have enjoyed. They are attempting (with some mistakes along the way), to build more localized communities that can function on less, (of everything), and recognize that the absurdity of flying in, fresh strawberries from Egypt to grace the Christmas table, will very soon be a distant memory, that will be relayed in exciting stories to our grandchildren.

  • Richard Dean 11th Jun '12 - 5:20pm

    Flying in fresh strawberries from Egypt is NOT absurd! It means that people here can enjoy things that the Egyptians do best;hopefully the Egyptians will buy something we do best, and the whole trade thing will work efficiently. Everyone benefits.

    A strawberry doesn’t take a whole aircraft to fly in, it flies in cheap with many other strawberry passengers.

    If you’re worried about the envronmental cost, then price aviation fuel in terms of the damage it does to the environment, rememebreing to take account of the benefits to Egyptian people and the Egyptian environment of growing strawberries there, rather than developing car factories that might pollute their air space more than the UK ones.

  • Richard Dean
    Tesco, Asda, Morrisons, etc., will all continue to fly strawberries in, from Egypt to your Christmas table for £4 per punnet, .. £8 p/p ,… £12 p/p,…… £30 p/p.
    At what price point, would you as a customer, pick up the punnet of strawberries, at put them down again?
    That’s the point when Christmas strawberries stop appearing on the supermarket shelf, and become a memory of extravagant Christmas treats.

  • Richard Dean 11th Jun '12 - 5:52pm

    Quite. Price is a measure of the benefits of trade. So while strawberries sell well at £4, there is beneft, and the exercise is not absurd. If those strawberries become so expensive they do not sell, then that will be the time when trade becomes dis-beneficial, absurd, and indeed dead. Simple. And that time is not yet here, so it is not yet absurd. Maybe it never will be!

  • Richard Dean 11th Jun '12 - 6:00pm

    Why is the UK economy so uncompetitive? That really is a big question!

    Perhaps it is because we are making the wrong things. Trade is beneficial to the parties involved when the parties spacialize in what is best done by them. So perhaps we are not doing what is best done by us, or pehaps there is not much that is best done by ourselves. In the latter case, we may be doomed, perhaps unless we can get creative.

  • Richard Dean says ‘In the latter case, we may be doomed,’
    No, we are not doomed. But we must recognise changes and adapt.
    The British Isles is (arguably), one of the most productive, creative, inventive, adaptable, places on earth. The Industrial Revolution was born here in the north of England, , and Transition Towns, with all of its flaws, was born here in Cornwall.
    The thing we have to do (and seem to do well), is recognise when one paradigm is in decline, and another is in the ascendant.
    I know of no other nation who is quietly, creatively, stoically, humorously!, co-operatively, able to deal with that than the British.

  • Richard Dean 11th Jun '12 - 6:45pm

    @John Dunn. Yes, we must “we must recognise changes and adapt”.But there are many nations who do as well as us at those things.

    Travel to the third world. See the progress people are making there, the changes they are accepting, the ways people are taking “our” industrial revolution and adapting it to their preferred ways of life. Look at the humour, tolerance, stoicism, creativity, tolerance, and determinism to succeed in our former colonies, including some where we ran slave plantations within the memory of grandfathers of todays gradfathers.

    Transition Towns seem to be adopting an outmoded, protectionist paradigm that will take us backwards not forwards.

  • Richard.
    Let’s finish on what we agree upon. ‘ we must recognise changes and adapt’
    Take care.
    J.D.

  • Richard Dean 11th Jun '12 - 8:40pm

    @John Dunn. Ok, agreed. Though I normally prefer to find ways to disagree on principle – how in a realistic world can progress be made if everyone agrees with everyone else? 🙂

  • Apologies, Bill, I thought I was following this thread by RSS.

    In answer to your question, I’d have a free market in currencies, as perhaps best illustrated by Hayek’s short essay “A Free-market Monetary System“. However, while I am decidedly not a “gold bug” I do recognise that a true, non-state, commodity backed money might well win out in such a competitive money system. For me the most important thing is that it must not be a monopoly that can be manipulated by a single privileged authority that seems reckless as to the actual distortions created by its manipulation as the state fiat system is.

    Whilst he is definitely a gold advocate, I reckon everyone who thinks it’s okay for the state to manipulate fiat money supply by artificial non-time preference based interest rates to have a read of Detlev Schlichter’s recent “Paper Money Collapse” to get a feel for the gross injustices and distortions imposed on different savers, borrowers and entrepreneurs by the current central bank system and its manipulative reckless macro-economic levers.

    Money supply only remains a state monopoly in my opinion because when Charles I’s 1624 Statute of Monopolies was passed legislators already recognised the value of retaining the money monopoly for the state was that it could systematically loot the system for its own gains.

  • Alex Sabine 12th Jun '12 - 3:34am

    It doesn’t make much sense to talk of a national economy being ‘uncompetitive’ without reference to the exchange rate. On this (if not in his fiscal policy tastes in my view), Paul Krugman is instructive. Talk of national competitiveness misconstrues the nature of economic competition, which in free democratic non-militaristic societies takes place at the level of firms not regions or nations. While we can observe the ways in which national governments and regional blocs ‘compete’ for inward investment, happily international trade is not a zero-sum game. We can all get richer at the same time.

    It is true that the ‘peripheral’ eurozone countries (ie most of them) have a competitiveness problem relative to the ‘core’ (Germany), but this has a specific meaning which is that their high relative cost inflation is such that they cannot achieve an equilibrium in their trade with Germany while locked into the same currency. It is specific to the traded sector of the economy, and is reflected in the current account deficits which they then have to finance by public and private borrowing (ie by absorbing foreign savings). The result is a microcosm of the more general global ‘imbalances’ between creditor and debtor nations, albeit worsened by the monetary straitjacket of the single currency.

  • Larry Elliott and Dan Atkinson are two financial journaliists that were credited with warning of the imminent financial collapse in their 2007 book ‘Fantasy Island’. Their most recent publication has the foreboding title of ‘Going South: Why Britain Will Have A Third World Economy By 2014.’

    They have published a precis in the Guardian that echoes many of the comments in this thread Little Britain: why the UK is no longer a superpower .

    The conclusion to the article states:

    “To arrest and reverse our current “submerging” status, we need a development model. There is no miracle cure, but there are lessons to be learned, not just from the postwar history of the developed world, but also from the emerging market economies that are rapidly approaching in Britain’s rear-view mirror.

    It is not just a question of adopting a different system of taxation or limiting the ability of the commercial banks to create credit – however commendable those individual ideas may be in themselves. One hundred years of pretending to be a “big beast” have to end now. There has to be an acceptance, like that in Germany, France and Japan in 1945, that the country has hit rock bottom and needs to change. In football, this happens all the time: a new manager goes to a struggling club and proceeds to clear out the dead wood. This has never happened to the UK, and even now the country does not seem ready for the sort of cathartic moment that the defeated Axis powers had at the end of the second world war. Even now there is a belief that all will be well, that something will turn up, that Britain will muddle through. The temptation, as ever, will be to look at the events of the past decade as another occasion where disaster was averted by a whisker. The reality is different: this is the moment when the UK has to face the truth about its diminished status in the world. “

  • Stuart Mitchell 12th Jun '12 - 5:59pm

    “The reality is different: this is the moment when the UK has to face the truth about its diminished status in the world.”

    Didn’t most people realise that the UK was clapped out several decades ago?

  • Richard Dean 12th Jun '12 - 7:46pm

    @Liberal Eye

    “In the UK some firms do very well but too often they are foreign owned – the car industry has become a classic example of how an industry that failed under British ownership has blossomed under foreign owners (and note: that it is about owners rather than managers – who remain overwhelmingly British).”

    I agree that this seems to be the surprising state of affairs. Does anyone have an idea of why foreign ownership has this beneficial effect?

  • Richard Dean 12th Jun '12 - 7:56pm

    “The reality is different: this is the moment when the UK has to face the truth about its diminished status in the world.”

    Yes. For instance, we need to be part of Europe, we need to stop using Europe as a scapegoat for our own failures. We perhaps need to get rid of a City of London whose costs in terms of bailours and badwill probably far ouweight its benefits in terms on income and jobs. We perhaps need to de-centralize, so that all road no longer lead to London. We need to find out what is best doen in the UK – gather green energy perhaps? – and we need to do that. We should perhaps give up our seat on the UN Security Council, making way instead for a seat for Europe. We should perhaps educate ourselves in several foreign languages, and free ourselves from US cultural imperialism. What else?

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