...a blog by Richard Flowers

Wednesday, February 27, 2013

Day 4437: AAA-rrrgh!


The Chancer of the Exchequer – known to you and me as Master Gideon – is in a UNIQUE position in Government: he's the ONLY person who DOESN'T resign when things go disastrously wrong, on the grounds that his resignation would panic the markets and make things go even WRONGER!

So even though Great Britain has, like America and France before, lost our Triple-A credit rating, and although this is obviously a total HUMILIATING FAILURE for Chancer Gideon who has based our entire economic policy on maintaining CREDIBILITY with the markets, he won't be going.

Which is a pity.

The papers of course are full of this story giving pages and pages of coverage to...oh, a sex-scandal instead. OBVIOUSLY the sex sells.

In spite of talk (by ministers trying to make excuses) of the markets having "priced in" the "expected" loss of the triple-A, the immediate consequences of being downgraded were a weakening of sterling. Now that's been somewhat masked by the Euro taking another dive after the Italian elections produced a less than clear outcome.

(PHEW! No one will notice we've fallen flat on our face because they're all watching Europe fall off a cliff!)

There's a fairly simple relationship between the value of the pound and the level of interest rates. If borrowing gets more expensive (which it does if the lender thinks it's more risky to lend to you – which is exactly what downgrading from AAA to AA1 means) then you have to put up interest rates OR your currency goes down in value.

(Look – boring maths bit – suppose your interest rates are 2% and 100 rouble-dollars will buy you a £100 government bond that will return £2. If you get downgraded, and people now want 2½%, either you have to start giving bonds that return £2.50 OR people are only going to be willing to pay you 80 rouble-dollars for your £2 return (2/80 = 1/40 = 5/200 = 2½/100 = 2½%). Okay, non-mathmos can wake up again now!)


But a weaker pound means more expensive IMPORTS, specifically ENERGY and FOOD, which means HIGHER INFLATION.

In THEORY devaluing the currency should also provide a boost to exports... which is why (among other things) Hard Labour's Alistair Darling crashed the currency following the 2008 banking meltdown.

That of course contributed to the high INFLATION that we had for the first couple of years of this government.

(World events – drought affecting rice and wheat crops, declines in energy production, China taking more resources – all contributed, of course, BUT weakening our currency meant that those world events had an EXAGGERATED effect on the UK. Just as Labour's over-borrowing and reliance on the financial sector to grow the economy meant the financial meltdown had an EXAGGERATED effect on us too.)

However, it appears that our industrial base is so worn away by the Thatcher and New Labour years that devaluing did NOT have the boost to growth effect that was hoped for.

So all round this is BAD, and that is WHY Chancer Gideon was trying to avoid it happening, and why now it has happened it's going to be harder still to meet our targets of getting down the deficit.

(That is, remember, just slowing down how fast we spiral into yet more debt.)

So where was the GROWTH supposed to come FROM? There are THREE theories:

The CLASSICAL theory that says that you grow the economy by increasing the number of workers. (e.g. you increase immigration in order to farm more fields)

The INDUSTRIAL theory that says you grow the economy by increasing the CAPITAL available (e.g. you borrow more capital in order to buy machinery that allows your workers to produce twice as much)

And Mr Frown's favourite, the POST NEO-CLASSICAL ENDOGENOUS (i.e. from within) theory that says you grow the economy by training your workers and trading up to more productive jobs. (e.g. you teach your widget factory workers how to design computer chips and gain a more lucrative export.)

As a footnote, Hard Labour did not really DO the endogenous thing. Education, education, education turned out to mean requiring people to get degrees for the jobs that already existed rather than creating new and better jobs. Most of the "growth" of the Hard Labour years was in fact fuelled by BORROWED money – like the Victorian INDUSTRIALISTS – except we didn't use the money to buy machinery to power up our economy but instead frittered it away on consumables.

On the other fluffy foot, the Coalition appears to have set its face against ALL THREE methods of growth:

The Conservatories' irrational xenophobia means that we cannot import cheap labour for growth.

The nature of the bubble and crash mean that the public and government are both massively averse to borrowing, and indeed the stated aim of the Coalition is to reduce and ultimately reverse the deficit and thus slow the growth of and eventually start to reduce the national debt.

And, although the Liberal Democrats have fought for and won a Pupil Premium and more Apprenticeships, the Conservatories have forced upon us the Tuition Fee debacle and the slashing of Educational Maintenance Allowance, while Mr Michael the Borogrove's "reforms" seem keener to return the education system to the Victorian classroom than to adapting it to the needs of fast changing modern industry.

(The advantage of apprenticeships here is that they do an end run about this sort of silliness and, to borrow from "Yes Minister" (back when it was GOOD) give young people a comprehensive education to make up for their Comprehensive Education.)

Okay, but the Government's policy is not ENTIRELY as DUMB as it looks when spelled out like that.

The Government THOUGHT that growth could come from the PRIVATE SECTOR.

Remember: the prevailing belief of ALL governments for the last thirty years (yes, since Queen Maggie's "revolution") is that governments are NOT good at running industries. This is based on a LOT of experience during the Seventies which pretty much tested the opposite theory to destruction.

Therefore, whether you're a Keynesian devotee or a member of the Church of Thatchianity, the idea is that the government should leave PRIVATE industry to do the borrowing, investing and growing. The more LEFTY (i.e. pro-State spending) view has been that the State should spend MORE on SERVICES (health, transport, schools) to SUPPORT the private sector; the view from the more RIGHTY has been... much the same but for a percentage point or two LESS of GDP.

So the Hard Labour's government's borrowing was NOT generally going on "investments" that would return greater growth; MOST of what they were borrowing was spent to fund these SERVICES that (by definition, since we were borrowing) were MORE EXPENSIVE than we were willing to pay for even BEFORE we lost twenty-percent of the economy.

But even where they WERE spending on building useful things – new roads, schools, houses, power stations etc – it was infrastructure for SUPPORT rather than direct investment in growth.

(Of course, Prof Keynes would say that those sort of generally useful support things are exactly what you borrow money to spend on during a downturn in order to keep the workforce working and to have useful stuff to help when the recovery comes. And the Coalition HAVE pretty much admitted that they should not have cut those investments when they cut everything else!)

So, the Government THOUGHT that growth could come from the PRIVATE SECTOR, and that they could ENCOURAGE this by:

a) reducing corporate tax and regulation, enticing foreign companies to move their investment to Great Britain and home grown ones to expand. (At least until people stated getting into a flap about Corporate Tax avoidance.)

b) introducing schemes and wheezes and government guarantees to make it as easy as possible for companies to borrow from the banks. (If it were not for the fact that the public demand for tighter regulation of the banks has made those banks very, very much more reluctant to lend!)

You can see that, to a certain extent, the Government's plans FAILED because their main tools to encourage traditional capitalist growth were thwarted at least in part by external factors, while their own – and let's face it mainly Conservatory ideologies – blocked either the very old or the very modern routes to growth through anti-immigration and anti-education/anti-green development policies.

So how do we get growth? We're going to need a BETTER ANSWER.

We have to start by UNBLOCKING those ideological barriers.

We need a more sensible approach to the problems of immigration than standing at Dover with a "No Entry" sign! The REAL problems, and we've said this lots of times before, are pressure on housing and services and the downward pressure on wages caused by a large free labour pool.

We need to tackle those problems at SOURCE and the good news is that that means building lots of houses and schools and roads which means JOBS. We also need to protect low end wages from being driven down further. The Tories may not like it, but all the evidence points to the Minimum Wage being set well below the level where it would start to put companies off employing people, so progressive steps should be taken to increase the minimum wage ahead of inflation towards the LIVING WAGE.

(NB: this WILL make it harder to raise the personal allowance to the level of the minimum wage. More people will go back into paying income tax as their minimum wage rises, but they will still be better off for the rise, and the government will have more money too and/or more leeway to raise the allowance above inflation too.)

But we ALSO need a COMPREHENSIVE review of our education, and the needs of business, and the needs of universities, and of course the needs of schools themselves. We cannot continue to rely on "ideas wot Michael the Borogrove thought up"; simply IMPOSING another set of changes is just going to cause yet more strife. We need, if you like, a CONSTITUTIONAL CONVENTION for SCHOOLS, to bring together industry and universities with teachers, parents and pupils to try to deliver a wholly new and world-beating education.

But although these plans might sow the seeds of future sustained growth, the key to growth NOW is CONFIDENCE, that elusive SPARK that comes when something – I don't know what it will be – comes along and convinces people that there's money to be made and so they start going out to make it. That thing that, at the moment, continues to be absent from the British economy.

And sadly, the BIGGEST source of ANTI-confidence at the moment is the Chancer himself: Master Gideon is Mister Austerity the piggy-faced face of the recession. His "We fight on we fight to win" response to the downgrade shows that he's succumbed to the same BUNKER MENTALITY that claimed his predecessor-but-one, Mr Frown. Even Queen Maggie needed to exchange Exchequers before we moved from bust back to boom in the Eighties.

And that, even more than the total humiliating ruination of his plans, is why we 'd be (probably quite literally) better off if Gideon did the one thing he won't do, which is go.

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