The boom years were the dream. This is reality

Pieces of writing can do lots of things: challenge, comfort, exasperate, inform, entertain. Occasionally, though, one reads a piece that, in prose far more clear, lucid and fluent than one’s jumbled thoughts, nonetheless perfectly describes those thoughts.

I’ve long been a fan of The Economist’s David Rennie, and have praised him here on the Voice before. Last summer he took over the paper’s Lexington column (in tragic circumstances), but before that he was for two years British political editor and author of the weekly Bagehot column.

In May last year he wrote one of those columns I describe above. Unfortunately, I read the piece on a bus at 4.30am, and didn’t have the foresight to save the link. Some months later I wanted to re-read the piece, but couldn’t find it anywhere on the site, but have now re-discovered it thanks to Twitter’s archive download facility.

What Rennie does is something that should be done far more often: he puts the current economic situation in the historical and global context in which it must be seen.

Here’s how he opens the piece:

IN “The Night Face Up”—a 1956 short story by Julio Cortázar, an Argentine master of magical realism—a young man lies in a hospital at night, one injured arm held aloft by weights and pulleys. He is tormented by a recurring nightmare in which he is being hunted by Aztec warriors. The dreams are vivid, from the cling and reek of the jungle swamp in which he is captured to the chill of a dungeon floor and the hands dragging him up stone steps to an altar slick with human blood. The gore is mostly hinted at. The story’s menace turns on the man’s repeated struggles to wake and return to his darkened ward.

Across the rich world and above all in western Europe, lots of voters know just how that young patient feels. They yearn to hear that today’s unhappy realities—of austerity and spending cuts, debt, intermittent growth and relative decline—are a nightmare from which they can wake. They long to return to the “normality” of the boom years ended by the credit crunch of 2007. As incumbents wobble or fall across the continent, opposition politicians fall over themselves to agree with voters that today’s miseries are a bad dream which their policies would end. Dismaying numbers have turned to extremists, peddling fantasies that would do this trick: vows to “reject austerity” and confiscate elite wealth; plans to slam the door on foreigners or enact rules to keep global competition at bay.

And he puts Labour firmly in the category of “if only” politics, promising escape from reality:

Ed Balls, Labour’s shadow chancellor of the exchequer, blames Britain’s economic woes on the government’s plan to eliminate the structural deficit within five years (a plan that nonetheless saw Britain run a deficit above 8% last year, a hefty support to the economy). Mr Balls talks up micro-wheezes that would supposedly change everything: plans to tax bank bonuses to create 100,000 jobs for young people, tax breaks for small firms that hire workers and a temporary cut in VAT. In one sense, Mr Balls’s Keynesian conscience is clear, because he is merely making a technical argument about the optimal pace of deficit reduction and the impact of stimulus spending. Labour “can’t reverse every Tory cut,” concedes his boss, Mr Miliband. Yet for all that supposed realism, lots of voters are meant to hear a simpler promise—that they can wake from the nightmare of austerity, because Labour has “pro-growth” plans that pay for themselves. As Mr Balls puts it, Britain’s recent return to recession was “entirely avoidable”.

He returns to Cortázar’s story at the end of his piece. And it’s his final paragraph that most eloquently, yet concisely, sums up the position of the over-indebted West:

Cortázar’s story ends with a twist: the man realises that he is, in reality, an Aztec prisoner. Modern life, the hospital, his motorcycle like “an enormous metal insect, whirring away between his legs”, was the absurd dream, falling away as he awaits death.

Britons and other Europeans need to go through a similarly vertiginous moment. For decades workers, faced with exploding global competition, were compensated by governments with cheap goods, early retirement and welfare on credit: a dream of affluence for life to replace jobs for life. Now the competition is as intense as ever, societies are ageing and their nations are poorer than they thought only a few years ago. The boom years were the dream. Hard work and tighter belts are the new reality.

“A dream of affluence for life to replace jobs for life” – 11 words that sum up the twenty years of economic policy that preceded the financial crash.

Weening ourselves off our addiction to debt – both private and public – used to fund ever-increasing living standards will, by its very nature, be difficult. The pain now will be intensified by not having confronted reality many years ago. But that makes it no less necessary. Those who advocate short-term ‘fixes’ are arguing for nothing more than delaying such a confrontation for longer still. That might sound attractive now, but we can’t go on dreaming forever.

* Nick Thornsby is a day editor at Lib Dem Voice.

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  • Absolutely right. Hard, hard choices ahead – particularly in light of the ageing population. Something – many things – we are accustomed to will have to give. This will be unpopular in our promise-it-all, sympathise-with-all Party, but it must be faced up to and hopefully we can (re)discover a definitively Liberal approach and underpinning to do so.

  • While you are essentially right this piece does overdo the gloom a bit. This recession, like all recessions is temporary. The debt is finite & can be paid off. We are an ageing society because we are living longer. I rather like being alive, mostly.

  • I can’t do anything other than agree with this article. The “boom” up to 2008 was founded on borrowing by building up household debt to unsustainable levels, selling off our companies to foreign investors (otherwise known as Gordon Brown’s “record inward investment”), creating massive private equity leverage and running down reserves of North Sea Oil which, once gone, are gone forever. Our nation’s standard of living, i.e. its claim on the world’s precious resources, was not justified in terms of the value of what we were actually producing.

    This does not put me among the gloom merchants, however. We need to level with the British public about the job in hand and then set out the tools with which we propose to tackle it. Labour shows every intention of going back to the bad old ways of simply “spraying and praying” with government money. We as Liberal Democrats need to show that there is a better way – not an easy way – but a better way, to rebuild the UK’s prosperity in a sustainable fashion. And unlike the Tories (and certain Orange Bookers), we believe that, used correctly, action by the state can be one of the tools by which UK society can start to earn its way in the world again.

  • It’s not just the debt; it’s the fact that all jobs that can be automated and replaced by machines and computers are – with our active connivance – being so replaced and/or outhoused to lower-wage economies AND that we have a huge reservoir of (some) bright and relevantly-qualified graduates facing new competition from not only all the other bright EU graduates who are flocking to the UK but all the bright graduates worldwide – USA, India; you name it AND that we have a similar vast reservoir of under-educated would-have-been manual workers with nothing to do and no prospect of ever doing anything. The economic and social future looks very bleak to me. And yes, ageing is good, but who is to pay the pensions and also bear the increased maintenance of the medical/social fabric on a lower tax base? Is anyone facing up to all this?

  • I agree totally with the article and its message.

    However, I don’t see any truth in David’s comment “This will be unpopular in our promise-it-all, sympathise-with-all Party.” I don’t know any Lib Dem councils which were seduced into the “free money for ever” philosophy of the Conservatives and Labour. Scepticism about PFI, prudent budgeting careful spending were and still are key cornerstones of our Local Government successes.

    Don’t believe what people tell you about us. look at the facts.

  • Matthew Huntbach 14th Mar '13 - 2:32pm

    Nick Thornsby

    “A dream of affluence for life to replace jobs for life” – 11 words that sum up the twenty years of economic policy that preceded the financial crash.

    Weening ourselves off our addiction to debt – both private and public – used to fund ever-increasing living standards will, by its very nature, be difficult

    Why twenty? Why not thirty? Or 34?

    What about those who have gained from the debt? Those at the top of the financial services industry taking their cut? We have seen this gradual build up of debt for the many and for the nation, while a few have accumulated vast wealth from it. We were told – and still are – by those who act as their spokespersons, that all these people at the top with their vast salaries and even vaster bonuses were some sort of rare genius, who have to be pampered in this way because they are “wealth creators”. Now you tell us they were just debt creators, twisting us into agreeing to all this through a false prospectus.

    Now it would seem to me that those who made this supposed wealth on this false prospectus should be the ones to pay for getting it wrong. We have given them so much because of what they promised, cut their taxes as they said we should, privatised our nation’s assets so they could take control of them as they said we should. If it is as you say, shouldn’t we now be saying to them “You had your chance, you failed”? So why are we STILL getting this message that the road to future prosperity is low taxes for those people paid for by austerity for the rest of us?

  • Andrew Martin 14th Mar '13 - 2:35pm

    I recall the article and, not for the first time, the Economist is spot on.

  • @ Matthew Huntbach

    “So why are we STILL getting this message that the road to future prosperity is low taxes for those people paid for by austerity for the rest of us?”

    Clearly because rich people STILL control most of the media, which means they can attack and undermine anyone suggesting that they should be paying more tax and fulfilling some basic corporate obligations (e.g. decent wages, pensions and working conditions) by saying it will “hold back growth” or “undermine the economy”.

    You only have to look at the Telegraph to see what this means in terms of a daily output of columns spouting the formulaic nonsense based on the naked self interest of its proprietors (Allister Heath: Osborne needs shock-and-awe tax cuts to avert a 1970s-style disaster).

    This kind free market ideological indoctrination has been going on for decades, but at least now in the wake of the crash there is a window of opportunity to rebalance the debate and luckily, with people like Vince Cable in government, at last there is someone who can actually make a start in showing that public intervention can be a force for good, when done in the right way and where there are specific market failures.

    If we can develop this into a comprehensive programme and vision of what a Liberal Democratic society would look like, I think we can start to win back lost left of centre voters. Unfortunately, I fear that with David Laws in charge of the manifesto working group, this kind of social democratic standpoint is going to get muted and drowned out.

  • Liberal Eye 14th Mar '13 - 6:32pm

    At one level, the descriptive, this article is quite right – we have been lulled into a false sense of prosperity by easy credit and so on. Or at least some of us have. If anyone had bothered to notice the boom years were accompanied by the growth of an economically disenfranchised underclass. But what should have been the canary in the coal mine was too esily dismissed as down to laziness etc. on the part of an undeserving poor – a message the government is still pushing. We would all have been better off if we had undestood from the outset that, at times, we ARE our brother’s keeper and paid heed to the accumulating stresses, thought about why they were growing and what we could do.

    Clearly we are now starting from a much worse place than we would have had we bitten the bullet several years ago and to that extent Rennie is correct. But the solution is not, as Rennie sort of hints, simply that workers will, belatedly, have to accept lower pay. Some been doing that for years – a trend that’s now spreading to the middle classes. (In the US the collapse of their middle class has been hitting the headlines). Workers, all of us, may have to take lower wages in the interim but high pay is hardly the problem.

    Rather it is that the economy has been accumulating costs as a ship accumulates barnacles and no recent government has been prepared to tackle this problem (except where the ‘costs’ were unions).

    Think about it. We have a City that pays itself obscene amounts of money yet is unwilling or unable to discharge its core function – to provide finance for growing firms (David Boyle in his blog say unable and I agree with him). There has grown a massive disconnect between its reported accounting profit (huge) and its economic value to the country (negative).

    We need to stop pretending that unregulated markets are always and everywhere the answer. They are not – which is why inter alia, it is being reported that we are almost out of effective antibiotics – developing new ones apparently isn’t ‘profitable’.

  • Thumbs up to Nick Thornsby for incisive this article. At last the message is starting to become clear. This recession is not temporary. It is the new reality that we will all have to adjust to. Economic growth was a (brief !), 250 year blip, fuelled by CHEAP and easily accessible fossil fuels. But the cheap stuff has gone. NO!, we are not ‘running out of oil’, but we ARE running out of CHEAP oil, and that is the crucial point that many economists do not get. Cheap energy, not fiat currency, is the blood of a growing economy. We (globally), have gorged on credit, but that credit was a ‘forward purchase’ of energy or ‘work’. When that energy was cheap, it was ‘doable’, but that forward credit, now has to be paid back in ever more expensive energy. That is why the ‘machine’ has stalled.
    A growing global economy, cannot function on a triple digit oil price. It is no coincidence that oil hit $147/barrel shortly before the world had an economic heart attack in 2008. Without cheap energy, economic growth cannot be resurrected, to the levels we have enjoyed for the last 60+ years.
    It is going to be very traumatic to a population used to more of everything, year-on-year. I wouldn’t like to be the politician tasked with selling this new painful reality, but unfortunately, it is the new reality. Growth is NOT coming back anytime soon, and we have to develop ways to adjust to this new reality.

  • Nick T Nick Thornsby 14th Mar '13 - 7:39pm

    @ Jedibeeftrix

    Thanks very much for highlighting that paper, which I’d not come across. Will have a read!

  • paul barker 14th Mar '13 - 8:19pm

    Trend growth of 2% is fine, thats enough to triple real income over a typical lifetime. That & living longer.

  • Eddie Sammon 14th Mar '13 - 9:43pm

    Geoff, from your website it says: “Geoff Crocker studied economics and philosophy of science in the UK”. Which University offers this course?

  • Eddie Sammon 14th Mar '13 - 11:17pm

    I was just wondering because I find your claims that the financial crisis was caused by automation and that the solution is crediting money to people’s bank accounts frankly absurd. I understand the notion of confidence but this goes beyond that.

  • Eddie Sammon 14th Mar '13 - 11:43pm

    Sorry I didn’t mean to go off topic. I agree with your broad argument Nick that there are no easy solutions and the western world needs to recover from its addiction to debt and quick fixes.

    I think a constructive solution is to come up with a new way to measure the economy, GDP takes no account of sustainability and the drive for ever increasing GDP contributed towards the whole crisis.

    It’s not all doom and gloom though because busts are always followed by booms; private sector innovation will help to save the day, but not on its own.

  • Eddie Sammon 14th Mar '13 - 11:56pm

    No I don’t mention my qualifications on my website but I don’t half mention them either. Regardless, I’m not the one going around saying :

    “As the illustrious Bob Crow correctly puts it, if we have robots build cars, who is going to buy the cars? This is the real problem and the cause of the crisis.” and;

    “To limit money emission to less than GDP under the title of austerity will guarantee recession. Just watch it coming. As the film line goes ‘you’ve seen nothing yet’.

    Spurious claims with no scientific argument.

  • Eddie Sammon 15th Mar '13 - 12:01am

    The writer of the Blog post is Nick Thornsby, he is the Nick I was apologising to. OK Geoff I am sorry to question your academic credentials.

  • I don think most people have ever been that affluent. Rags like Economist talk about the last few decades as if everyone were multimillionaire rather mostly moderately comfortable to poor. All this article amounts to is rich people telling peasants to get used to gruel again. It’s a you need to work harder so I can stay wealthy sort of argument. Plus the economic arguments that lead to high levels of personal debt and false wealth were largely the result of listening to people who write articles for rags like the Economist.
    The thing is no one earns anything if there are no customers. That is the problem with austerity and the ” realism” on offer here. ,

  • Eddie Sammon 15th Mar '13 - 12:17am

    I do not continue to insult, I was merely challenging your arguments.

  • Richard Dean 15th Mar '13 - 12:25am

    Everything is real. Boom and bust. The reality now is that lots of us are somehow in debt. The plan was that our debt repayments would fund new growth which we would somehow benefit from, but unfortunately our need to repay the debt does not leave us with any money to buy the things that the new growth would have produced.

  • Nick,

    I am with the contrarians on the Rennie article. The same kind of misguided analysis was offered up during the depression era of the 1920’s and 1930’s with the same kind of disastrous results. It took the insights of Keynes to pull out of the slump, neatly encapsulated in a radio broadcast in 1933 in which he asserted ‘Look after the unemployment. and the budget will look after itself’. The booklet ‘We can conquer unemployment’ published by Lloyd George for the 1929 election was entirely based on the ideas that would later appear in Keynes General theory in 1936 and set the agenda for the 1929 campaign.

    We have seen how the economic theories of what in the US they call the ‘freshwater or chicago’ schoo,l have delivered over the past three decades an increasingly unstable environment. The application of the efficient market hypothesis, Capital Asset Pricing Model and rational expectations theory have driven nominal interest rates to zero and both debt levels and asset prices through the roof.

    Geoff Crocker offers important insights. It is technologocal progress and innovation that drives real increases in standards of living and GDP He is equally right to point out “The ultra primitive belief that money had to be backed up by gold is thankfully gone, but we now have the equally primitive belief that it has to be backed up by debt owed to someone else, ie that there is only a finite amount of money, like energy or matter. This is incorrect. It only has to be backed up by real output GDP, and as long as this is the case, money emission will be non inflationary. To limit money emission to less than GDP under the title of austerity will guarantee recession”

    Geoff offers the prescription of a helicopter drop of money in the form of citizens income to close the gap between increases in real GDP and disposable consumer income. If this is not to your taste there is a menu of equally radical approaches, neatly summarised by the BBC Budget 2013: Radical options for the UK economy.

    The correspondent highlights five novel ideas currently doing the rounds at the Bank of England and the Treasury for how the UK might break out of this economic slump:

    – Negative interest rates
    – Promising to stoke inflation
    – Helicopter money
    – Old-school public works schemes
    – A debt jubilee

    At the death of Lloyd George in March 1945, Winston Churchill paid tribute to the significance of LG’s drive to open up a social and economic dimension to Liberal Politics, saying “The stamps we lick, the roads we travel, the system of progressive taxation, the principal remedies that have so far been used against unemployment – all these to a very great extent were part not only of the mission but of the actual achievement of Lloyd George.

  • Eddie Sammon 15th Mar '13 - 12:56am

    Guys, with respect, this is commenting, not post your own economic thesis. Ask Lib Dem Voice if you can write for them if you wish to make extended comments.

  • Arthur Graves 15th Mar '13 - 7:38am

    Oddly (because the people above seem to be either for or against) I agree with the article but not with the way out of the situation. I say that yes, we did run up big debt (as individuals, and as a nation) and so that debt needs to be paid off/back. Shouldn’t though the broadest shoulders, ie those who made the most from the debt period, pay the higher amount back now though? I don’t just mean the highest amount per £’s but also %. Those at the bottom of the financial tree are being made to pay off the debt in a far higher % than those at the top.

    One cannot outsource huge volumes of jobs to India/China etc, and not recognise that the people who previously did those jobs are far more adversely affected than the remaining senior management paying an apparently eye-watering and hugely unfair (I said apparently before you all jump on me…) 45%tax rate. I don’t now about most of the people commenting here but I’d rather pay 45% on a high wage than have my job disappear.

    How is it also possible that banks that are hugely in debt to the people (bail-outs), go on paying bonuses? You say, that’s the market rate, I say the market got us in the mess to start with – they can suck it up till we’re out of the mess. You say they’ll go elsewhere but I say the elsewhere market is much smaller (thanks to their actions to start with) and even if they do go, there are plenty of other bankers who would be willing to do the job for a decent wage, without excessive bonus scheme.

    We are squeezing the wrong people and should be investing in schemes that can employ more people, on low-medium wages.

    Oh and for all the academic ‘wonderers’, I have no degree. Left school at 15. Worked as a chef for many years. Hurl all the insults you want. I’ve heard far worse.

  • Joe Bourke has listed 5 ( tools/levers/options ), that Keynesians are considering to right, the upturned economy.
    – Negative interest rates
    – Promising to stoke inflation
    – Helicopter money
    – Old-school public works schemes
    – A debt jubilee
    It might be quite useful if LDV split these 5 options into articles for discussion separately.? Followed by a conclusion article ?
    To be honest, I think Keynesianism, is not much more than trying to read goat entrails, And when you read a Keynesian say :-
    “We are told that money doesn’t grow on trees. But it does. We don’t even need to print it, we can electronically credit it into people’s bank accounts.”
    You surely have to do a double take, on the validity on Keynesianism?

  • As a life long Liberal and a Keynsian, I have recently been re-reading Keynes and come to the conclusion that most of those who cite Keynes in support of their theories have never read him.

    Keynes was almost paranoid about debt. He urged Governments to pay for the two world wars not by going into debt – which they did – but by higher taxes. He also didn’t want more current spending to get the country out of recession, but capital expenditure on things the economy lacked like roads, railways, forests, canals and housing. Indeed that’s what the Liberal Party offered in the 1929 election, where it did relatively well.

    However, we have to be aware that the engine that delivers growth, the so-called multiplier, relies on people saving part of the new income and spending the rest. What is now happening is that people are not spending but using their new income to pay down debt, with the result that the effect of the multiplier has dropped drastically. Result, no growth to speak of and because the banks are not using the new savings (or reductions in debts) to fuel new lending, there’s little investment either. Confidence, which is so crucial to recovery, is wholly lacking. At best we can hope for a long time lag between increases in employment/income and growth in spending.

    I think that Vince is on the right track. Long term investment in Green Infrastructure by the government will ultimately lead to a recovery, but all political parties will need to be honest and tell voters that a return to even modest prosperity will be a long time coming.

    And all of that presupposes that economic growth is a good idea in the first place, but that’s an argument for later…

  • Fascinating article which raises a number of questions.

    First, I think we need to question what colour the lenses in our glasses are. We need a clear perspective.

    Yes, overindebtedness is a major problem, but it is not affecting segments of the population uniformly, and benevolence or austerity is not the full answer.

    Debt is not a class-based problem, nor is it a geographically-based problem. Just like obesity – the glutton’s disease – it’s about the choices we make. It is about vice and virtue.

    There is a moral to the story of economic woe: you can blame others but you still have to find your own solution.

    We have experienced an information revolution on a scale and within a timeframe unmatched by any of the great technological revolutions in history, and the effects are comparable.

    We can harp about individual or communal tragedies, but we must also celebrate the human triumph.

    For every income-deprived suburbanite, or discontent in a rusting regeneration zone, a thousand are accessing new opportunity as they develop their economies in what was formerly known as the second and third worlds – because they have learnt and applied the lesson we’ve forgotten… it’s about what I can do for you, not what you can do for me.

    I don’t think we’ll be rewarded by any electorate for lulling them into complacency and inculcating dependency. Nobody (with limited exceptions) should rely entirely on others – it leaves them at the mercy of the unknown.

  • Julian Critchley 15th Mar '13 - 10:22am

    @Matthew Huntbach

    Pretty much spot on. I get a wee bit annoyed when commentators and journalists drawn from the very richest groups in society, write articles about how the very poorest are going to have to accept that the world has changed and they’ll have to lower their standards of living to meet Chinese factory fodder. Meanwhile, after penning said article, they head off to a nice London restaurant to meet their nice friends, the bankers and directors, for whom nothing changes, and another 20% pay rise is on the way.

    The debate about growth, or its absence, is always couched by the Tory press, politicians and right-wing economists, as if we are a national unit : GDP goes down, everyone has to tighten their belts; GDP goes up, we can afford to pay ourselves more. Yet this is simply not true. It is unarguable that the richest 10% in society has continued to become fantasically richer whether GDP is rising or falling, while the poorest majority see their real incomes either falling in hard times, or stagnating in good times. We have, as a country, developed a parasite class (calling themselves the laughable phrase “wealth creators”) who are building dynastic fortunes while using their influence to tell the rest of us that there’s nothing we can do about our own falling incomes. We have to pay down the debt which provided their wealth.

    The UK is a very rich country. There is a lot of money in circulation. We have control over a lot of policy levers which could improve people’s standards of living. The argument put forward in the economist that we can’t afford to maintain our standard of living is simply not true. A one off wealth tax on just the richest 10,000 individuals in this country could pay off the national debt, end this self-flagellating austerity, and still leave those people with enough money that they would never need to work again. But no, There Is No Alternative. We all have to suffer. We’ve all lived beyond our means. Except the very rich. They’re exempt.

  • Mickft,
    the only way to encourage savings rates is to revive interest rates. It is a dangerous cocktail.

  • Matthew Green 15th Mar '13 - 11:13am

    This is an interesting if over-long discussion. Arguing about what dead economists might have thought is a bit irrelvant in my view, as is comparing our situation to the entirley different economy of the 1930s. The argument turns on whether you think the “boom years” 1992-2007 were mainly sustainable growth, or whether most of the growth was illusory. If you think the former then a bit of stimulus of one sort or another will get you back on the path. If not these policies will set off bubbles and make the hole deeper. Unfortunately even highly distinguished economists are struggling to answer this question properly, getting stuck on economic aggregates and avoiding the reality beneath. Hence comparisons with the 1930s.

    I tend to the view that the growth was illusory. Exhibit A is the current account deficit, combined with an appreciating currency in these years. These are classic signs of excess aggregate demand, which is fully supported by the micro-picture. Worryingly the now-depreciated pound has not improved the current account yet. At least it looks as if the outsourcing of jobs abroad has stopped and is reversing.

    There is a quite separate, but equally important argument about how the proceeds of higher productivity are distributed – at the moment too much is going to the owners of capital.

  • Matthew Green 15th Mar '13 - 11:17am

    Geoff the increased propensity to save is probably due to skewed distribution, in my view. Richer people saver a higher proportion of their income, and the fact that they are getting all the growth is one of the things that is strangling the economy. This points to stimulus being well targeted rather than being just bigger. QE and other forms of monetary stimulus might prove to be totally useless because they put money in the wrong pockets. Look behind the aggregates!

  • Matthew Green 15th Mar '13 - 11:36am

    Geoff. Respectfully I don’t think you have caught the full implication of the trade deficit (even bigger than the current account deficit). That shows the country was/is consuming more than it was producing. All the jobs you mention were real enough of course, but there were a lot of Chinese jobs at work too, assembling the things we all wanted to buy, but weren’t producing enough to pay for. Pumping up an economy without fixing this is the road to disaster, surely? As the pound drops ever further, prices (especially energy) increase and living standards fall. That is in essence what this recession is about – not armies of unemployed.

  • Matthew Green 15th Mar '13 - 12:14pm

    Of course we should refer to the works of dead intellectuals, but we shouldn’t go back to careful textal analysis to speculate what they might have thought about the current situation … not as a substitute for figuring things out for ourselves. I really don’t think Keynes would approve :-).

  • Oranjepan
    The third world and counties like China have growing economies because they export lots of stuff and import very little. All they are doing is exploiting a Western Economic Liberal obsession with stocks ‘n’ shares and market forces., They don’t themselves operate a free market system. They in fact block a lot of imports. In the case of China you can be executed for profiteering, bad management and endangering your workforce. India operates a bureaucracy so Labyrinthine that it would give Kafka nightmares. Africa has in fact benefited hugely from Chinese expansionist policies rewards lotalty with roads and power. You could just as easily look at the results and say what we need is planned economies , totalitarian dictatorship and the death penalty..
    Personally I prefer to look at Germany and Northern Europe who seem to manage fine by having a better standard of living rather than racing to the bottom.

  • Matthew Green 15th Mar '13 - 12:37pm

    So raw materials costs are rising because of emerging market demand. British consumption has to fall relative to income in order to rebalance the economy so that the trade balance is restored. Add in a shrinking workforce and growing demand for health and care services from an aging population. Plus the supply of ever cheaper Chinese manufactured imports is drying up. Even if you do think that unemployment can be cut sustainably through appropriate macroeconomic policies this still looks a bit like Rennie’s nightmare?

  • Paul in twickenham 15th Mar '13 - 12:48pm

    This is a bit of topic but it feels like there is a correlation between the current economic situation and aspects of nanotechnology.

    Most people are familiar with Moore’s law which states that the number of transistors on a unit size of silicon will double every two years. This has proven remarkably accurate over a long timescale.

    The problem with this is that we cannot actually make the chips go faster any more because the transistor density is so great that heat cannot dissipate quickly enough. That’s why you haven’t seen CPU clock speeds go up for about 5 years now. You get more cores but not more speed per core.

    The solution is to have a paradigm shift – divide the task into many parts each of which runs in parallel divided across all the available cores rather than as a single task that needs to run on a single core.

    Economies also require a paradigm shift. The old models simply will not provide the required throughput. New technologies will play a key role and British scientific research can be a major economic driver for the future.

    I don’t subscribe to the “end of growth” hypothesis. Growth means maximizing the utility of the available resources and the understandibg to develop game-changing technological innovation is well within our grasp if we make the necessary investment in research and development.

  • Mixing Keynesianism with a Dunning Kruger syndrome is a very challenging outcome.

  • AC Trussell 15th Mar '13 - 2:09pm

    Getting back to David Rennie’s article; I think that most people would be quite happy to live in the dream world- just look at Labour- Land (La-La Land). Most didn’t really care; as long as the money was rolling in! If we leave it until it becomes unsustainable and the s**t hits the fan, then there may well be a revolution and the “rich” may find that the security of their money becomes a fatal liability!
    I do think the Great Leveling is at hand.
    People talk of pump- priming- is that Keynesian? Anyway, it may have worked in the past when you could just sell whatever you made to the rest of the world/commonwealth, We can’t pump-prime the rest of the world- they have “grown up” and are looking after number one!
    Looking after number one is the main reason for a human’s survival- but may well be the main reason for our demise.
    Have you seen the program about the ants? The most successful creatures on the planet- their entire life is for the community. Not the life I would choose of course but I do think people should be educated more about life, and not totally indoctrinated from birth that the only reason for education is to make money for the rich to use, Life is incredible- but we are making such a mess of it! We need someone with a honest Vision not a plan to make money!!
    (that is a person; not a magic man in the sky!)

  • Getting back to: ~ The boom years were the dream. This is the reality
    A recent report, out of Europe by The Greens | European Free Alliance.
    The first sentence reads :- “Plentiful and cheap oil has enabled Europe to become one of the world’s wealthiest modern economies. But today, this has also become Europe’s main weak point.”
    The last sentence reads :- “The transition to a post-oil society is inevitable, so governments must give their citizens the chance to take the initiative today, so that they do not have to suffer the consequences.”
    So, whilst Keynesians contemplate ever newer ways to print, and juggle, fiat confetti, every day, more and more are beginning to understand that oil is the ‘Killer App’, when it comes to a growing (or not), economy.

  • “The growth to 2007 was not illusory, it was real.”

    Well, not all of it.

    I perfectly accept that many countries across the world don’t operate a perfectly free market system, including our own (and I don’t support wholly unregulated trade anyway), but it’s very difficult to argue that the growth in global trade hasn’t resulted in billions of new higher-value jobs which simply didn’t exist before the information revolution began.

    Neither am I suggesting that ‘planned economies , totalitarian dictatorship and the death penalty’ have increased over this period, or that this was ever a driver of growth. Quite the reverse in fact.

    The world has massively liberalised, with standards improving on all sides, although it remains true that progress is patchy and never secure.

    When one of my relatives emigrated to Spain in the year Franco died, the country was considered an economic backwater and the current levels of unrest at unemployment and deprivation would have been considered a significant improvement. There mere fact that Spain could now jeopardise our own prospects is a credit to the scale of integration and the equality of opportunity afforded by globalisation.

    A generation later it was Eastern Europe which threw off the chains of repression, and now Polish is apparently Britain’s second language.

    Now it’s the Arab world.

    The process of liberalising these formerly closed countries is precisely what has driven growth: where Japan was once the exporter par exellence of cheap goods it made strides in areas like cars and electronics and then began taking chunks of the creative sector. Where Taiwan was formerly synonymous with cheap clothes, it is now one of the most high-tech economies with hilarious animated news too. Where China started trading basic foodstuffs it has a space programme.

    Now look at the manufacturing labels on your High Street – it’s places like Bangladesh because the standard of living for Chinese workers has risen to levels such that margins are squeezed, and many second or third generation migrants have higher aspirations to fulfil their potential. Sure, there are problems with child labour and sexism, safety and various other conditions in Bagladeshi factories, but in 1970-1 the problem was widespread persecution, famine and disease after war and natural disasters – that’s a whole different scale.

    Frankly I think it is extremely myopic, if not also casually racist, to concentrate exclusively on the model presented by mature north-west European democracies and denigrate the advances made elsewhere. Britain went through the same transformation aver the period of more than a century, and yet you seem to be making the false assumption that the journey can or should happen overnight.

    If we want to talk about inequality within Britain then it’s only fair that we should compare inequality globally.

    We were the 1%, and now we’re unhappy that the gap is shrinking as we stand still!

    Look at the Syrians, trapped for decades in a stagnant economy, are we to begrudge them their liberty because it may mean we can’t have the third chocolate cake, or we may have to wait to move house?

  • Nick T Nick Thornsby 15th Mar '13 - 6:27pm

    Two more pieces worth reading on this subject, both in the FT:

    First, this from Chris Giles:

    “To sustain the “austerity is the main cause of weakness” argument, you therefore really need to convince people that UK austerity somehow caused more pain to French, German and Spanish households, and hence to UK exporters, than it did to UK households directly. It did not.”

    And this pre-budget analysis from Chris Giles and George Parker, with a particularly interest bit on the “productivity puzzle”:

    “The recovery of gross domestic product – goods and services produced – has undoubtedly been the worst of any in the past century. Output remains 3 per cent below the peak achieved in 2008. But unlike the US economy, and unlike all recessions past, employment has surged ahead. In employment terms, rather than the deepest and longest downturn, the post-crisis period has been the shortest and shallowest. The consequence is that productivity – output per hour worked – has plunged.

    The Treasury’s favourite explanation for this productivity puzzle is that the pre-crisis UK economy masked deep-seated weaknesses that the crisis exposed. Looking in detail at the areas of the economy that ex­plain the productivity drop, aides to the chancellor say that not much short of half of the problem comes from two sectors: oil and finance.
    North Sea oil is dwindling, with output down almost 40 per cent since the coalition assumed office in 2010, while the number of people needed to work the offshore drills has not decreased. Similarly in finance, the way the UK measures the output of the financial sector – to a significant degree by the size of banks’ balance sheets – ensures weakness as banks are forced to retrench without much labour shedding.”

  • Interesting articles from Chris Giles.

    In the first article Chris concludes “The most alarming economic statistic is the 1.3 per cent growth in nominal GDP on the year to the fourth quarter of 2012, since it guaranteed a shortfall in tax revenues and disappointments on government borrowing. If Mr Osborne wants to sort out the deficit he will need to get nominal spending growth back to its historic average of about 5 per cent a year. If ever there was a time to set the BoE such a target, this is it.”

    In the second aricle he notes the Treasury’s explanation for the productivity puzzle. It is also, however, notable that self-employment numbers grew by 367,000 in the period 2008-12. The most common self-employed occupations being taxi drivers, small-holding farmers and jobbing builders. Additionally, In the past five years, the UK population has been boosted by net migration of around 1,000,000. Migrants are more likely to be of working age – such as, students, and those looking for jobs. They may bring dependants, but generally net immigration leads to increases in the labour force and should therefore increase the potential output capacity of the economy.

    Paul in Twickenham comments “I don’t subscribe to the “end of growth” hypothesis. Growth means maximizing the utility of the available resources and the understandibg to develop game-changing technological innovation is well within our grasp if we make the necessary investment in research and development.”

    This reminded me of a quote “Everything that can be invented has been invented.”, erroneously attributed to Charles H. Duell, the Commissioner of the US patent office in 1899 . What he actually said, in 1902, was “In my opinion, all previous advances in the various lines of invention will appear totally insignificant when compared with those which the present century will witness. I almost wish that I might live my life over again to see the wonders which are at the threshold.”

    Who could plausibly insist today that the 21st Century will not eclipse the 20th Century as the greatest era of technological and scientific progess in the history of humankind.

  • Oranjepan.
    The japan example actual proves my point. It grew on cheap exports, and imported virtually nothing. It still imports virtually nothing. And adds in a another point. Japan in fact grew like Germany and America by pumping massive amounts of public money into new technology in a war effort. Computers, satellites, the rockets that launch them, nuclear power, bio fuel, improved manufacturing methods, jets, and even non stick frying pans have their origins in massive public spending during WWII and then then cold war.

    As for what is going on in Syria. It’s a violent revolution and is driven by all sorts of desperate forces. What I see happening in the Arab world has little to with liberalism.


  • Matthew Huntbach 18th Mar '13 - 9:32am

    Liberal Eye

    We need to stop pretending that unregulated markets are always and everywhere the answer.

    Yes, and yet we have a government where this idea is at its heart, it is the thing that motivates almost all it does.

    There was a time when socialism was the dominant ideology. People who wanted to seem clever adopted a socialist pose. If you wanted to look really clever, you’d learn all the socialist jargon, and the answer to any political problem was socialism. If it was pointed out that socialism in practice didn’t seem to be doing what its supporters said it would, the answer was always that it had not been tried in an extreme enough form, that what we saw called “socialism” was in fact “state capitalism”. The politics shelves in university libraries and bookshops groaned with socialist texts. The whole of political discussion was based on a left-right spectrum which was essentially a measure of how socialist you were. It was assumed that socialism was natural and modern, the world was moving that way anyway, to try and halt it was just to be obscurantist and was the mark of a rather dim person.

    Those days are over, and the dominant ideology is this belief in the efficacy of free markets. This ideology never had a proper name, so those who hold to it have attempted, with some success, to steal the name “liberalism” and use it to mean it. If you replace “socialism” by this new ideology in what I have written above, it all works to describe the political scene as it is now.

    In the 1980s there was indeed something of a freshness about the free market ideology, it challenged the old socialist assumptions, it made us think in different ways. You could indeed adopt it and feel like a nonconformist, like a new thinker challenging the establishment.

    But now, just as in the 1980s one of the biggest questions that needed answering was “why didn’t socialism work?”, and it was a mark of the failure of the socialist movement that it did not answer that question, so the biggest question that needs asking now is “why didn’t free markets work?”. It’s not to say there was never any benefits in them, just as there was a time when socialism in those countries which implemented it seemed to give some benefits. However, they have not fully delivered the permanent paradise that was promised, in fact the more we go on with them, the more those who suppose themselves to be clever and those in charge answer to the question “why didn’t they work?” with “because we didn’t have them in an extreme enough form”, the more they fail to deliver even the most basic things they were supposed primarily to be about.

    The “Orange Book” and those who promoted it was such a disaster for our party because it came out, supposing the ideas it was promoting were new and innovative at just the time the cusp was turning and what was needed was to query why this sort of thing wasn’t working, not the promotion of it with missionary zeal. It was like bringing out a book advocating state socialism in the 1970s, with those associated with it going on to become the leaders of the party, still assuming they were the clever ones, they were the innovators, they were shaking up old assumptions. And it’s like they were paid to do it by “Moscow gold”, because the equivalent today is the money big corporations will throw at supposedly independent “liberal” think tanks to promote this sort of thing.

    I’m not saying the Orange Book was bad – it was something that needed to be thrown into the debate. But we badly need something else to balance it, some new thinking. There are many reason why this sort of thing hasn’t worked out. Some are around it being promoted by people who derive personal power from it. Some are around what constant promotion of the ideology does to the human psyche when it becomes the main source of values in society. So that’s very much like socialism in the socialist countries as well, isn’t it?

  • Matthew Huntbach 18th Mar '13 - 9:43am


    As for what is going on in Syria. It’s a violent revolution and is driven by all sorts of desperate forces. What I see happening in the Arab world has little to with liberalism

    Yes, and this very much falls into the theme of old answers becoming stale, what was a challenge to orthodoxy becoming the orthodoxy that needs challenging – and that challenge often coming from forces which are themselves dubious.

    The regimes that are being challenged by the “Arab Spring” in many cases stem from the previous Arab Spring. The Ba’athist movement in Syria and Iraq, was all about modernising and liberalising. It was very much about challenging old conservative religious ways of thinking, and building a secular society. To some extent it worked, Ba’athist Iraq and Syria were countries where the various religious minorities felt safe in their culture. Similar was seen in other countries where the old dictators had come to power with this sort of modernising secular idea being what they stood for. Their dictatorial nature was excused by the suggestion that it was needed to challenge religious conservatism.

    Unfortunately, while the overthrow of these dictators seems to have involved some liberal elements, the pattern seems to be that the dominant force, or at least the one most capable of organising and taking control, is Sunni extremism.

  • Excellent peice Nick – the sooner we realise that the world before the crash wasn’t based in any sort of reality the better we will all be. In many ways our living standards haven’t slipped backwards and stumbled but instead have found themeslves on a more realistic footing.

    Not a pleasant reality, but reality all the same.

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