Friday, 10 March 2017
UK's Economy: a basket case.
As noted in the previous post the Tories are good at choosing effective words and phrases to disguise reality. For much of the past seven years we've had their "long term economic plan" which most serious analysis demonstrated was getting us nowhere at all. Now the buzz-word to describe the economy is "resilient," the use of which is justified by claims of a level of growth higher and level of unemployment lower than most of our immediate neighbours.
The key macro-economic variables I was taught, and have taught hundreds of others, to examine are growth, employment, balance of external payments and price stability. A look at each of these in turn reveals fragility, to put it mildly, rather than resiliency.
Growth is now forecast to be 2% this year, and a little bit less in the following years. Compared with the 3% with which we taunted Sir Alec Douglas Home in the 1960s because he failed to achieve it this is hardly world-beating. And, of course, much of the growth we have is due to the immigration the government is trying to curb. ( Add extra productive workers to the economy, and most immigrants are, and the over level of output rises.) On top of that the benefits of growth are not evenly distributed: most of the benefit is going to the top10%, even 1%, as asset prices, including houses, rise as a result of the extra money resulting from Quantitative Easing. And furthermore, like the railways who complained of the wrong sort of snow, it's the wrong sort of growth. "Good" growth is export-led growth, or investment led growth, not growth fuelled by consumer expenditure based on unsustainable credit.
And all the above evades the real and urgent issue we need to be tackling: how to achieve sustainable growth and ultimately, "prosperity without growth"
Full Employment has been defined in most of my career as 97% of those wanting a job having one, hence a level of unemployment of no more than 3%. The current level is 4.8%, which is certainly better than the 8+% reached in 2011, but it amounts to 1.6 million people, a great many more than the 250 000 or so usual in my youth. And, of course the figure is made to look more attractive by not including those involuntarily self-employed, those in part-time jobs who would like full-time ones, those on zero-hours contracts, and the highly qualified graduates and others forced to take routine jobs.
The over-all scene is far from healthy, featuring precarity rather than security, for a substantial number, professionals included, of those who feel lucky to be in work.
Price stability for most of my life was understood to be a low level of inflation. This we have experienced since the finial crash, and it may seem churlish to criticise. But the low level of inflation has been the result of a stagnant and listless economy rather than a vibrant and healthy economy in which productivity is increasing at a higher rate than costs. And, with the depreciation of the £ sterling by over 12% as a result of the Brexit vote this stability is unlikely to continue. We are likely in the coming years to be faced with the most dangerous cause inflation of all - "cost push" inflation, as rising import costs resulting from the weak pound push up prices with no increase in productivity
The Balance of External Payments is the issue which, above all others, occupied chancellors of the exchequer for most of the second part of the last century, yet now rarely gets a mention. Yet its importance far exceeds that of the government's internal deficit. We are currently buying goods and services from abroad at a rate of almost £100 billion a year more than we sell abroad. As an economy we are living hugely beyond our means, and, unlike the government's deficit, which is mostly money we owe ourselves, this is wealth which will sooner or later, have to be paid back by us, our children and grandchildren.
For the moment, national bankruptcy is delayed by flogging off valuable assets, from the high-tech company ARM to football clubs, to foreign ownership. Each sale harms our potential for future net foreign earnings, so makes the long-run situation worse. But the day of reckoning will come.
Mr Hammond budget is essentially limited to housekeeping matters on the Thatcher model (see here for a more sophisticated explanation) rather than designed to tackle our fundamental economic problems. Re-arranging the deckchairs on the Titanic springs to mind.
Resilient we are not, and nothing in the government's present mindset is designed to make us so.