Kindle Notes & Highlights
About a quarter of the debt is owed to the Bank of England, and there is an easy solution for this debt: don’t pay it back! It was never actually there in the first place: the advantage of having our own central bank is that it can create money out of thin air.
Non-economists, and even some economists, find this will-of-the-wisp nature of money difficult to believe. But money is like a myth: it requires only imagination for its creation but faith for its effectiveness. And as there is such enormous confidence in the Bank of England, both here and abroad, it simply has to say it has the money and, hey presto, it does have the money!
Osborne/Merkel austerity did enormous damage last time; an unyielding commitment to even sharper austerity poses a new and enormous threat. As David Blanchflower, respected economist and former member of the Bank of Engand’s Monetary Policy Committee notes, Many of us tried to explain that to George before he embarked on his reckless austerity path that produced the third worst recovery in 650 years, behind only the Black Death and the South Sea Bubble. The economy was growing at escape velocity when he inherited it in May 2010 but then the economy flat-lined for three whole years until
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The truth is that poverty and misery have been inflicted on people of modest incomes and less, by the sins of very rich bankers. It is a great irony that, led by a Tory-dominated press, the electorate’s response to this has been to (almost) elect a Conservative Party funded by the banks and led by a man whose family wealth comes from banking.
Automatic stabilisers limit fluctuations in the economy through counter-cyclical changes in the fiscal balance between government expenditure and taxation.
It is calculated that during the five-year coalition government the Chancellor collected £65 billion less in taxes and paid some £25 billion more in benefits than had been forecast.
As Nick Clegg, the Deputy Prime Minister, admitted in January 2013, the coalition made a mistake in cutting back capital spending when it came into office.
This is all unnecessarily fast and risks a renewed suppression of growth.
So, voter, when looking at the various manifestos bear in mind that in reality there is no critical doomsday date for a surplus.
The markets want growth – and growth above balanced budgets. In truth, it is more than likely that the date of reaching balanced budgets will gradually shift to later years, as fundamentally changing the structure of the UK economy to a more sustainably productive one with a strong investment and export sector is likely to prove a much harder challenge than the authorities had anticipated.
As part of their measures, the Tories have introduced an arbitrary cap on welfare spending. Voters should ask if an unnecessary, ideology-driven reversal of the gains in welfare provision since the Second World War really is an appropriate policy for an ageing population, a population hit by unnecessarily prolonged austerity, and a population that has seen large increases in inequality since Mrs Thatcher’s government.
During the long boom of the 1990s and up to 2007 it was therefore rational to assume that there would be a bail-out if such extreme events were to take place. This is called ‘moral hazard’ by economists: there was no incentive to write in extreme events to models, as such extreme events trigger government intervention that covers their risk. Therefore, the implicit underwriting of the bulk of risks in large financial institutions provides little incentive to create models that predict events that will be the subject of large government bail-outs.
The UK followed the US, which actively encouraged mortgage lending institutions – the state-supported Fannie Mae and Freddie Mac – to extend credit to poorer individuals who did not have to prove their income but were allowed to self-assess their ability to repay the mortgage they were being granted.
They have no incentive (and would not secure appointment) if they were to suggest in interviews that they are ‘a safe pair of hands’; that the company should retain cash reserves and reduce leverage.
The EU directive fought and lost – or rather, abandoned – by the Chancellor in the autumn of 2014 will now restrict bonuses in the financial sector to only 100 per cent of basic salary – or 200 per cent if shareholders agree.
In an environment running on what was essentially a Ponzi finance scheme, no board had an incentive to adopt a long-term approach. In the present environment, do we expect boards to be able to adopt a long-term focus now?
We have entered a stage of one regulation or initiative being heaped on another. Following a review for the Department for Business, Innovation and Skills (BIS) and the Treasury by Sir John Vickers, we are about to ring-fence retail banking from investment banking within financial organisations in the UK, well ahead of anyone else. We have tightened mortgage approval processes, raised the toughness of capital requirements well ahead of the rules that will come with the implementation of the new European Basle III regulations, implemented tighter solvency rules for insurance companies and
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As a result we have seen a clamour for different ownership structures that would, it is thought, inevitably lead to more long-termism. John Lewis workers’ shared ownership has certain attractions, as do partnerships where the owners are also the managers, or other structures such as mutuals. But that didn’t stop Arthur Andersen, the accountancy firm run as a partnership, from collapsing after being embroiled in the Enron scandal in 2001, while the problems recently faced by the Co-op bank, whose major attraction was meant to be the ability to better combine business with ethics, have all cast
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Figure 9 shows how the size of government has varied in the UK since 1979, when the first Thatcher administration embarked on a period of austerity to reduce its size. We can see that during the 1980s the size of government dropped from just under half the total value of economic activity (total managed expenditure) to around 39 per cent at the end of the decade. The recession of the early 1990s raised government spending back to 43 per cent of all economic spending in the mid-1990s (as unemployment benefits and other expenditures increase during recession), and then we see a fall to 35 per
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As we saw in Chapter 2, there is an argument that overly large government stifles the very engine it depends on to fill its tax coffers and engage in redistribution.
In the extreme, we can see that this would happen, but whether this situation occurs when government constitutes above 40 per cent of GDP (as the Thatcher government suggested) or 50 per cent of GDP, or 60 per cent, is debatable and tends to be an issue of faith.
Even those with little economic understanding can discern the problems of an economic recovery based on ‘eating, drinking and a new hairdo’. Business confidence and investment are vital to longer-term recovery, but the present recovery in growth is being driven by a housing boom, stoked by continued low interest rates and the printing of money (quantitative easing).
The UK has historically had levels of productivity that compare poorly with those of other countries, but from the beginning of the 1990s up to 2007 we closed the gap on some key competitors.
The ideal outcome is to be in the top right-hand quadrant of the diagram, where labour productivity and employment are high. The UK is in this quadrant, but it does relatively better on employment than it does on productivity.
As of May 2014, 73.1 per cent of those aged 16–64 were in employment, a high that has not been seen since 1974 and
By contrast, labour productivity (output per hour) fell by 0.3 per cent between the second quarter of 2013 and the second quarter of
All indications are that the UK’s excellent employment performance will continue into 2015, with the 2014 autumn statement predicting a fall in unemployment to 5.4 per cent. In contrast, Figure 10 suggests that when we compare ourselves to countries at a similar stage of development, there is room for significant improvement in productivity.
Continuous productivity gains in the economy are essential to start us on a path of sustainable growth.
So, what economic fundamentals do we need in place and which policies do we need to implement to achieve this? How are governments to re-tune the engines of growth?
In addition, we need a skilled and well-educated workforce to ensure that all the business investment in computers and factories is put to the most productive use – we need to invest not just in the physical capital of business, but also in our human capital: education, training and skills.
To ensure that the economy benefits from this entrepreneurial input, we need a range of basic rules and regulations in place that ensure we have a competitive economic system.
A good measure of the innovative capability of a country is the amount it spends on research and development (R&D) as a percentage of GDP.
Increased R&D activity accounts for a large part of the difference in productivity between countries.
Manufacturing has now fallen to about 10 per cent of GDP, while employment in the sector has fallen by some 3 million since 1982, to 2.6 million.
But before we start pulling our hair out and feeling nostalgic for our industrial past, it is worth remembering that despite it all, the UK has remained a major manufacturing country – the sixth largest in the world.
And manufacturing in the UK still accounts for over three-quarters of total business investment in
But R&D on its own may give the wrong measure of innovation in the economy. Much of the innovative activity that businesses engage in is not immediately visible or measurable or even easily identifiable. Instead, it is what we term ‘hidden innovation’, which is not seen immediately and is not spent on technology. A report for the think tank Nesta in March 201410 estimated that the UK market sector invested £137.5 billion in knowledge assets whereas it invested only £80.8 billion in tangible assets.
Innovation is estimated to have accounted for some 40 per cent of productivity growth in the UK in the ten years to the onset of the recession.
The benefits could be significant if the UK plays it right. In one area alone, the Centre for Economics and Business Research (CEBR) has forecast that the big data marketplace could benefit the UK economy by £216 billion and create 58,000 jobs by
The UK has undergone a substantial expansion in the numbers going to university and other forms of higher education, especially since 1992. This has resulted in 27 per cent of the working-age population, or approximately twelve million people, possessing a degree or equivalent higher qualification.13 However, during this time nearly all of our competitors have also expanded the proportion qualified to this level, leaving our relative position unchanged.
When we look across the EU, the UK has the lowest proportion of employees who report that their skills match the requirements of their job.
For instance, one perennial problem that has plagued the UK economy is the lack of skills among managers, with only 43 per cent of UK managers having a degree compared to 58 per cent across fourteen countries of the OECD in 2007.
Rather, it seems that variability in the skills of graduates causes some to be in non-graduate jobs, as well as the fact that many are studying in areas where there is less demand, e.g. arts and humanities;19 while many employers find it hard to find staff in areas such as science, technology, law and, thankfully, economics.
However, even with extensive FE and HE education supporting a universal secondary education system, research undertaken in 2008 found that about 14 per cent of the UK working-age population (or about six million people) lacked the basic literacy skills needed to function in the economy and around 8.5 million were missing a similarly basic level of numeracy
Theoretical models used by labour economists often suggest that stronger unions and higher benefit replacement ratios (more generous unemployment benefits, relative to average earnings) can lead to persistently higher levels of unemployment, especially among the low-skilled.
In addition, a number of theories suggest a similar rise in average unemployment rates if we increase the protection afforded to workers (for instance, making it harder to fire workers in a downturn, and more generally increasing the ‘power’ workers have in the employment relationship).
Unemployed individuals can claim benefits only for a limited time before having to attend mandatory interventions to improve their job chances (including skills training), and policies have resulted in relatively less generous levels of UK unemployment benefits.
Similarly, we have gone some way to mitigate the concerns of business over the perceived costs of employment tribunals25 – do we really need to cut back further on employment protection legislation (EPL)?
Since Birch’s early studies, debate has tended to focus on evidence that smaller firms create more jobs but also destroy more in any given time interval when compared to larger firms, and thus the net job creation picture hides a more volatile underlying story.
Recent studies32 suggest that the highest rates of net creation are among the youngest business start-ups (which also tend to be small). On average, we can expect somewhere in the region of 266,000 firms to be starting up in the UK in any one year (with some rise during recessions) and at the end of five years, just under half (44.4 per cent) of these
