#75. Britain – old, new, borrowed, blue

LIFE AFTER GROWTH IN PRINT AND PRACTICE

After the weighty material we’ve dealt with in recent discussions, the subject-matter here is the (relatively) lighter matter of Life After Growth. By this I refer both to the book, which has reached a paperback edition, and to the practice of coping with an ex-growth economy.

The latter, whether she knows it or not, is the primary task facing new British premier Theresa May. Though I wish her luck – and she will need it – Mrs May would not have been my first preference. For a start, she opposed Britain’s decision to leave the European Union (EU), which has been supported by modest but decisive majority of voters, and, pretty clearly, by a larger majority within her own party. Second, and more seriously, she is another “moderniser”, seemingly every bit as committed to that cause as outgoing Prime Minister David Cameron.

Back to the future

For those with better things to do than follow British politics, a brief explanation of “modernisers” is in order. With the kind of irony with which politics abounds, “modernisers” are really stuck in a time warp, existing in a 1990s Britain when Tony Blair was popular, and his policies seemed progressive.

Back then, Mr Blair changed his party fundamentally, even renaming it “New” Labour to underline the transformation. Left-wing economic ambitions were ditched in favour of what amounted to an accommodation with neoliberalism, but this was combined with a commitment to social policies traditionally associated with the Left. Government was both centralised and casualised, the latter typified by the term “sofa government”. PR, or “spin”, was elevated to new heights of prominence.

Though the economic policies of “New” Labour were comfortable for the opposition Conservatives, Blair’s social agenda was more challenging. Party opinion divided between those who supported “traditional” Tory values, and a faction, known as “modernisers”, who advocated adopting the Blairite social agenda as well. Theresa May was one of the most prominent “modernisers”, and indeed described her party to its face as “the nasty party”.

The enthronement of David Cameron marked the triumph of this faction, and the accession of Mrs May reinforces the modernisers’ control of the Tory machine. If one single attitude defines the “modernisers”, it is a crusading belief in “equality”, though a cynic might argue that it is an “equality” cleverly defined to exclude equality of wealth and income.

Mrs May has promised to tackle this, and it will be a major achievement if she does.

Essentially, the Conservative “modernisers” decided that, if they couldn’t beat Blairism, they would copy it.

“The future isn’t what it used to be”

Unfortunately, the problem with this combination of economic neoliberalism and social crusading is that it doesn’t work. Of course, the social dimension is a matter of personal opinion, though the rising tide of coercion (including restrictions on free expression) does sit oddly with a so-called “liberal” philosophy.

The economic agenda seemed successful under Blair, but only because his government was presiding over an economic “boom” which amounted to nothing more than the spending of borrowed money. The hollowness of the economy was laid bare in 2008, with massive fiscal deficits, the near-collapse of a bloated banking sector, and a 25% slump in the value of Sterling, to an index weighting of 74.4 at the end of 2008, from 98.3 at the start of the year.

David Cameron, in coalition with the Liberal Democrats, steadied the ship, but didn’t – or rather, couldn’t – fix the holes below the water-line.

For a start, Britain remains massively indebted. “Real economy” debt, at £4.65 trillion or 250% of GDP, may not sound too onerous, but this excludes the financial sector, which adds a further 183% to this ratio, establishing the United Kingdom very firmly in the category of “debt-ravaged economies”. Nor is this all – the British government has massive off-balance-sheet “quasi-debts”, with its commitment to government employee pensions alone standing at about 55% of GDP.

More seriously, the British economy remains addicted to debt, with little or no growth remaining once incremental borrowing is stripped out. Nowhere is this more stark than in the current account, where an enormous deficit – a completely unsustainable 6% of GDP – is bridged by a combination of selling assets and borrowing from overseas, currently at a combined annual rate of £100bn, and rising. Though trade remains in deficit, the big change since 2008 has been in the income part of the equation, where outflows of profits and interest now massively exceed the equivalent sums coming in.

A frightening spiral

This, of course, is a circular equation – the more a country borrows, and sells assets, to meet short-term funding shortfalls, the bigger will the net financial outflow become in the future. The British establishment seems not to have noticed this, but what they lack in economic understanding is compensated by a preternatural determination not to upset public opinion – they are not, then, about to tell the voters to start living within their means.

A debt-addicted economy tends to use housing finance (as well as consumer credit) as a conduit for pouring more debt into the economy. This has resulted in bloated property values, which are socially distorting as well as detrimental in the sense that the property sector is a nil-return “capital sink”.

Worse still, speculation has increasingly trumped innovation as the route to individual prosperity. If there is a single measure that government needs to implement without delay, it is to rebalance the equation by taxing all short- and medium-term property gains, and using the proceeds to remove the burden of Business Rates from small enterprises. Needless to say, this is completely outside the realm of practical politics.

Of course, it is perfectly possible for a country to “earn” its way out of such problems, especially when its exchange rate weakens. But Britain has precious little scope for increasing exports, because globally-marketable output (GMO) has fallen steadily, combining shrinkage of manufacturing with the relentless decline in energy production. Energy has been another area of cluelessness on the part of the governing elite, which has done little or nothing to invest effectively in replacement sources of supply. Britain relies on French and Chinese investors to fund its next generation of nuclear power stations, preferring to ear-mark its own resources for schemes like the HS2 rail link, and buying a new nuclear deterrent.

Meanwhile, the use of asset sales and overseas borrowing to bridge a current account deficit requires both that a country is seen as a reliable borrower and that its assets are desirable.

This in turn depends on global confidence in its currency…..

No way out?

Anyway, so much for this intrusion into private grief. With the opposition Labour party divided between Blairites and a resurgent Left, the Conservatives pretty much have the field to themselves. Another pro-EU “moderniser” was exactly what the doctor didn’t order, but Mrs May has the job, and the best that can be done is to wish her luck.

To end on a more – well, relatively more – cheerful note, my publishers have given me a publication date for the paperback version of Life After Growth, which will go on sale on 3^rd October. However, they actually expect to have some copies well before that, possibly even before the end of July, which can be pre-ordered here. Though the text itself is unchanged, the paperback includes a new introduction and after-word, reflecting on what has happened since first publication in 2013.

Of course, I hope you will read Life After Growth, if you haven’t already. It might be a good idea for Mrs May and her colleagues to read it, too – but there’s not much chance of that……………

#74. An Age of Unreason

WHY ARE ELITES SELF-DESTRUCTING?

Whilst I have no intention of adding to the mountain of commentary about “Brexit”, the British decision to leave the European Union (EU) is an extreme example of broader and more important trends developing throughout the Western world. Essentially, governing elites are not just ignoring the unpopularity of their policies, but seem blind to the spectacular failures of those policies as well. Is this simply arrogance and idiocy – or is something more fundamental happening?

This question matters, because this is no time to leave the lunatics in charge of the asylum. The global economy has stagnated, the financial system is stretched, and political and social tensions are growing, yet all too many of those entrusted with the levers of power seem sublimely detached from what is going on.

Remarkably, they seem wholly unaware that their favoured doctrine of economic neoliberalism has been holed below the waterline, and that continuing to cling to it can only mean sinking with it.

A troubled world

As regular readers will know, the surplus energy approach to economics leads to a conclusion that the global economy has reached a plateau, after which a steady decline is to be anticipated. Meanwhile, the financial system has become a gigantic bubble, along Ponzi lines, because the system of money and credit has been allowed to expand far too much in comparison with the underlying economy.

Thus far, a financial crash has been averted – or at least delayed – only by the use of increasingly surreal monetary expedients. Money newly created for the purpose has manipulated yields down to near-zero levels in line with policy interest rates, and bonds worth more than $11 trillion now trade at negative rates. The main calming effect of ZIRP (zero interest rate policies) has been to ease the pressure of servicing gigantic global debts, whilst repayment, too, can be rolled over in an environment of unprecedentedly loose monetary policies.

Even so, areas of tension are multiplying throughout the system, exacerbated by the virtual disappearance of growth in an environment dubbed “secular stagnation”. Tranquilisers may calm nerves, but they aren’t exactly conducive to the taking of effective action.

These disturbing economic and financial patterns have political corollaries, a recent example being the popular revolt against the establishment which was sufficient to swing the British electorate against continued membership of the EU. Of course, with its governing Conservatives leaderless whilst the opposition Labour party tears itself apart, the British political situation is more chaotic than most. But tensions are increasing across much of the Western developed world, with many emerging market economies (EMEs) in deep political trouble as well.

What is abundantly clear is that the backlash against the elites is closely tied to the troubled state of the economy. One of the main reasons for this is that many Western countries have pursued an economic philosophy variously known as “neoliberalism”, “the Washington consensus” and “the Anglo-American model”.

Whatever name is used, this philosophy is turning out to have been a disaster, not just in economic terms but politically and socially as well. The choice facing the ruling elites lies between, on the one hand, abandoning neoliberalism and, on the other, sticking with it and being swept from power.

A very British shambles

Because of its dysfunctional, insufficiently-democratic system and the abject inadequacy of its political class, the United Kingdom is obviously somewhat exceptional, but it is an instructive example nonetheless. In essence, and under successive governments, Britain has pursued policies which have undermined the economy whilst driving a wedge between governing and governed.

A glaring example of this is that, whilst affluent bankers were rescued from the consequences of their own folly, no such help has been given to workers in industries such as steel-making and retail, whilst savers (including those investing in pensions) feel they have been sacrificed in the rescue of the feckless. This seems unfair – and is.

No ruling elite which treats the public with such arrogant disdain can expect to retain popular legitimacy, which is one reason why dire official forecasts for the economic consequences of “Brexit” failed to convince voters to remain in the EU.

Yet neither of the major parties shows the slightest sign of having learned from this experience. Many Conservative MPs want to choose as their leader Theresa May, another “moderniser” in the Cameron mould who, like him, who opposed “Brexit”. Meanwhile, Labour MPs keep insisting that they know better than the party membership which elected Jeremy Corbyn as leader. They might succeed in getting rid of Mr Corbyn or, with the help of the members, he might get rid of many of them. Either way, Labour is crippled.

Neither party seems remotely conscious of the need for fundamental reform. Worse still, many of those who opposed “Brexit” still seem to be in denial. As well as asserting that the millions of people who disagreed with them are xenophobic idiots, some have advocated ignoring the popular decision, holding a second referendum, or hoping that the Scots (9% of the British population) can somehow stymie departure from the EU. Any of these expedients would cause a crescendo of anger, and rightly so. The voters have decided, the “metropolitan elite” has lost, and the only adult response is to accept the fact, and respond accordingly.

European unreality

The leaders of the EU have grounds for resenting British action, but it is at the behaviour of the British government, rather at than the decision of the electorate, that they should vent their spleen. At a time when the economy and migration needed to top the EU agenda, David Cameron instead made a series of spectacularly ill-judged gambles. Having first wasted EU leaders’ time with demands for “reforms” which he failed to get, he then called a referendum for no very obvious reason, and duly lost it.

But the EU should not dismiss this as “a little local idiocy”. For a start, dissatisfaction with the status quo is by no means confined to the United Kingdom. A popular backlash against the elites is particularly visible in France, the Netherlands, Austria, Spain, Italy, Greece and Poland, whilst even Germany is witnessing the rise of the radical AfD, partly in response to Angela Merkel’s advocacy of an “open doors” policy on immigration.

Part of the EU’s problem is the euro, an economically-illiterate attempt to combine a single currency with a multiplicity of budget processes. The only way to resolve this problem would be fiscal union, but any such idea has a zero chance of popular acceptance. It seems wildly implausible that the EU will ever contemplate reverting to national currencies, despite the imperative need of many Eurozone members for devaluation. Because conventional devaluation is denied them, weaker Eurozone economies have instead had to opt for “internal devaluation”, which means pursuing greater competitiveness by driving labour costs down. As well as fanning unpopularity, this hasn’t worked, because an obvious by-product of this “austerity” route to competitiveness has been the undermining of demand.

At the same time, weaknesses seem to be emerging across much of the Eurozone’s banking system, with a huge flight of capital out of banks apparently contributing to upwards pressure on the prices of such “safe havens” as German government bonds. The sharp fall in the prices of bank shares is instructive, and started long before the British decision to leave the EU.

Global paralysis

More broadly, the capital created by ultra-loose monetary policies is swirling around the globe in pursuit of (relative) safety, and worried investors are now prepared to pay “safe” borrowers for the privilege of lending to them. Of course, the “safety” offered by lending to blue-chip borrowers provides no guarantee against losses of value through inflation, a material consideration, particularly where long-dated bonds are concerned. At the moment, the dominant price pressure is deflationary, reflecting a moribund economy, but ultra-loose monetary policy is obviously capable, under certain conditions, of triggering an inflationary spike.

In any normal world, borrowers pay lenders for the use of their money, whilst investors expect to earn positive returns. One reason why this is not happening is the apparent paucity of investment opportunities. Though ultra-cheap money is available in abundance, big companies prefer to buy back their own stock rather than invest in new ventures. This judgment may be logical, particularly in a world with massive capacity surpluses (most obviously in China), but it underlines quite how weak the economy has become.

Obviously, if the economy is moribund, and the generality of the population is suffering hardship, the rich should not expect to keep getting ever richer. Their opponents are not simply articulating “the politics of envy”, though this is certainly an influence. The real problem is that the lives of millions of working people are plagued by uncertainty, with many corporate bosses treating employees as expendable, and companies as counters in a crap-shoot. Further enriching the already rich has the politically and socially dangerous by-product of creating a “precariat”, a risk to which ruling elites seem oblivious.

It may be human nature to pursue ever greater wealth, but what is remarkable is the willingness of governments to assist. The way in which QE (quantitative easing) has been enacted typifies this. Since using newly-created money to drive up asset prices is bound to be a hand-out to those already asset-rich, logic surely suggests accompanying QE with higher taxation of capital gains – yet no government has done this. Many governments still treat capital gains as the reward of effort, even where they are self-evidently the result of speculation or good luck.

At the same, and whilst the rescue of banks may have been necessary, the rescue of bankers clearly was not. Despite the obvious social strains and inefficiencies (not to mention the risks) that arise from inflated property prices, no government has sought to prevent this bubble, or even to impose higher taxes on its beneficiaries in order to compensate its victims.

The investment playing-field has been tilted decisively in favour of speculation and against entrepreneurship, yet governments profess themselves baffled by deteriorating productivity.

No-one is as blind as someone who refuses to see.

Why persist?

Many theories might account for the continued adherence of governing elites to failed nostrums, and their inability or unwillingness to look facts in the face. One of these is a long-standing failure to block the “revolving doors” between government service and corporate wealth. Another, probably more important influence is a simple reluctance to admit to failure, a reluctance bolstered by the arrogance always engendered by the trappings of power.

The irony is that, before Western leadership cadres embraced the destructive theories of neoliberalism, we already had most of the tools necessary for the effective management of the economy. Adam Smith revealed the critical importance of competition, and the damage that is inflicted where monopoly and oligopoly are allowed to prevent its effective operation. John Maynard Keynes explained how to manage macroeconomic flows, whilst long experience should have taught us the dangers of excess, and of allowing speculation to trump innovation.

What neoliberalism brought to the party was a new emphasis on immediate gratification, together with an intellectually-spurious justification for inequality. This was typified by the mishandling of globalisation through an approach which relied on cheap and abundant credit to bridge the gap between ever-rising consumption and the haemorrhaging of well-paid jobs. This in turn led seamlessly into reckless deregulation of financial services.

All of this has rendered the elites incapable of facing up to the facts. Even if they cannot grasp the theory of the eroding energy basis of the economy, or understand the implications either of climate change or of demographic shifts, they should have become aware by now that the economy has ceased to deliver reliable growth.

The established business model – which involves pushing ever-greater consumption as a route to ever-expanding sales and ever-growing profitability – is heading for extinction. No amount of speculative finance, or of monetary manipulation, is going to revalidate this failed philosophy.

What is really frightening about this state of denial is that it has contributed to a dramatic weakening in our ability to provide security in old age. Pension investment has been ravaged by the deterioration of growth, and by the undermining of longer-term thinking. It is implicit in a philosophy of immediate gratification that it undermines preparedness to provide for the future. When the public comes to realise that the future security of the many has been sacrificed on the altar of immediate enrichment for the few, their fury will know no bounds.

An astute response would involve rebalancing, checking speculative excess, re-emphasising equity, and building bridges between governing and governed. Tsar Nicholas II was too half-witted to realise this, just as King Louis XVI was too closeted in Versailles to know what was really going on.

Today’s elites are exhibiting the characteristics of both.