The end of an era
by Matt Grist
This Autumn statement by the Chancellor marks the end on an era of credit-driven growth. We knew that things had changed irreversibly after the financial crash of 2007 but with the Eurozone crisis and the failure of Obama’s stimulus-led policy in the US, now we know just how much things have changed. What pieces of received wisdom have been shattered?
First, that growth based almost solely on consumer-driven demand, financed by asset bubbles and over-leveraged banks, is not only unsustainable but foolhardy. Countries take a very long time indeed to recover from the debt crises that follow such growth. It is no accident that there is a direct correlation between the amount of economic output lost by a nation and the size of its recent property bubble and over-indebted banking system. Growth built on these foundations is not just built on sand but quicksand - out of which it takes years to crawl.
Second - and closely related - you just can’t ignore trade imbalances. The root cause of the problems in the world economy are trade deficits that suck out demand from domestic economies (countered by easy credit and asset bubbles!), while at the same time encouraging an influx of cash from nations with trading surpluses, who are looking for investment opportunities (buying up debt and so making borrowing cheaper in debtor nations). The only sustainable way out of these imbalances is for debtor nations to export more and import less. And thus the long hard slog towards growing our manufacturing sector continues.
Third, the hands-off combination of monetarism and ‘human capital theory’, whereby governments support growth simply by making sure there is enough cash available and by investing in education and skills, is over. Yes, we need to really up our game in terms of education, but this is no longer enough. We also need what used to be called an industrial policy. Such policy must focus on supply-side reforms to encourage more investment in manufacturing, but also on much better support for existing competitive advantage in industry. For the UK that means investment in life sciences, creative industries, car manufacturing, high-tech engineering, and the fabled green technologies (as Demos argued in The Entrepreneurial State).
Fourth, it might look like the days of private sector investment in infrastructure are over, given the nightmare of PFI and other investment vehicles. Not at all. More than ever there is a need for the cash that sits in pension funds and other wealth funds to be invested in public goods such as infrastructure, for governments simply don’t have the cash themselves. But also, a billion pounds invested in infrastructure will often mean a billion less invested in dodgy debt ‘assets’. The Chancellor’s ideas on pension funds investing in social housing are particularly interesting on this score.
This Autumn Statement is the first that will have been drawn up under the new paradigm of government activism in the real economy. It has taken the Treasury some time to accept the new situation, but then, old habits die hard. This change in thinking has nothing to do with ideology and everything to do with brute economic facts. But this does not signal the end of politics and the beginning of a new era of technocracy. Politics can come alive again as the arguments start over how the Government manages the economy.