Recessionary paradoxes

The global recession has highlighted two paradoxes at the heart of government policy (old and new) – I’ve been reminded of this by two articles I’ve read this week.

Firstly, why are we so concerned about retaining the parts of the financial services sector whose reckless practices resulted in one of the worst contractions in UK economic output in history?

On the one hand bankers are vilified for their part in the recession and the attendant increases in unemployment and reductions in tax revenues; on the other we are reticent to do much about them for fear of losing jobs and tax revenues.

Secondly, why are politicians of all colours at pains to ensure that interest rates remain low primarily to ensure that houses (by which, strictly speaking, they mean mortgage debt) remain affordable when overleveraging of households both contributed to and compounded the effects of the financial crisis?*

On the one hand we are concerned by over-indebtedness of households; on the other we want household debt to be affordable.

I suppose you could argue these are consistent positions to hold by appealing to practical issues of addressing the issues in the short term.

While parts of the financial services sector contributed to the global financial crisis, it is difficult for the UK to wean itself of them in the short term – how would you replace foregone tax revenues? If this isn’t possible, would it result in steeper and faster fiscal contraction? Would this make recessionary pressures worse?

As for household debt, it’s reasonable to have a short-term concern about the potential impact of rapid household de-leveraging: the potential for a vicious downward spiral of consumer expenditure. (See The Economist this week on the related issue of interest rates).

And yet. And yet.

Arguments about the forgone taxes bank relocations would cause seem overblown to me. A Reuters special report argues that it would be harder for banks to relocate than they would have you believe.

And I sense politicians – like most of the country – have an irrational love of home-ownership; affordable mortgages are at least as desirable as a means of allowing first-time buyers onto the housing market, or existing home-owners to trade up, as they are of reducing recessionary pressures.

If we prioritise short term imperatives over longer term considerations, then we are unlikely to find much reason to change at all.

Alex Baker is Secretary of the Young Fabians.

* A related issue is supply of new homes – other things equal, home ownership would be more affordable if the government built more houses. If that’s the policy goal, then you’ve got to ask why successive governments have shied away from building more homes.

What is THE alternative?

Tomorrow, tens of thousands of people will descend on London to “March for the Alternative” – an anti-cuts demonstration organised by the TUC, but which is likely to draw broad support amongst the left.

In my mind, the name of the event – “March for the Alternative” – encapsulates two strategic issues for the left when opposing the cuts.

1. What is THE alternative? Does it even exist?

I’d wager that there will be a multitude of different reasons for people attending the march – they are a public sector worker facing redundancy, their local library is being closed, an elderly relative is seeing their care reduced.

And it is entirely rational for these individuals to oppose cuts in government spending for these personal reasons.

But as Arrow’s Impossibility Theorem implies, you are unlikely to achieve a coherent macro-policy simply by aggregating individual preferences – if you agree that government spending will need to be reduced, then at some point you will have to make choices as to how this is achieved.

So I don’t agree there is one alternative – THE alternative. March for AN alternative might have been a better slogan.

This isn’t a trivial point, and links to a potentially more significant issue for the left and Labour in particular in opposing the government.

2. Focusing on THE (or AN) alternative is a strategic error.

By defining clearly what you stand for, you take the focus off what you are against. Opposition should, by definition, be primarily about opposition.

But if Labour pretends to be in government* by setting out specific alternatives, rather than general guiding principles, it will become a hostage to fortune; a lot will change between now and 2015.

*Something Ed Balls is more than a little guilty of. For example, in yesterday’s Commons debates he said:

“Under Labour’s plan, the economy was set to grow strongly, unemployment was falling, and we were on track to halve the deficit in four years.”

But Labour lost an election on their plan. So it’s probably time to reflect on alternatives, while opposing the only plan being implemented – the government’s.

Alex Baker is Secretary of the Young Fabians.

Budget – Webchat LIVE

We’re teaming up with Left Foot Forward, Labourlist, Liberal Conspiracy and others to bring you a live Budget webchat from midday on Budget Day 2011.

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A ‘maxed out credit card’?

Ahead of the Chancellor’s Budget announcement this week, Young Fabian Member Mark Anderson takes the coalition government to task over its positioning of its austerity measures.

One argument given by the UK government for its vast programme of public sector cuts is that the UK has ‘maxed out its credit card’.  Such a crude and misleading analogy bears no resemblance to the reality of Britain’s financial situation, yet it goes largely uncontested in public debate and serves to legitimise the devastation that is being wreaked on public services, the welfare state and public and private sector jobs and working conditions.

Far from the UK being no longer able to borrow money on the international financial markets, the interest that the UK pays on its debt is currently at a historically low level, as is the UK’s debt-to-GDP ratio. UK ten year bond yields are marginally higher than those for the US and far healthier than those for Australia and New Zealand, for example. In the run up to last year’s General Election, amid scaremongering about a potential debt crisis and the dangers of a hung parliament, yields on government bonds remained stable.

In a September 2010 article entitled ‘Can bond yields fall even further from these historic lows?’, Ross Watson, portfolio manager with Securities and Trust of Scotland told the financial journal Investment Week that:

“For the taxpayer, it is excellent news that the Government can fund its deficit at such low returns.”

Such sentiment presumes against a country close to bankruptcy.

Another argument the coalition government gives for frontloading public sector cuts is that it is unfair to saddle future generations with a mountain of debt. This argument is a perversion of the realities of private sector-induced deficits on several counts.

Firstly, it fails to take account of the fact that over 70 per cent of interest payments on government debt remains within the UK, going into savings and pension schemes – yours and mine.

Secondly, it bypasses the fact that you can’t cut your way out of a private sector-created budget deficit. Trying to do so simply condemns an economy to years of low growth – as seen in Japan over the last decade (when the Japanese government cut its stimulus too soon after recession, before Japan’s private sector had had a chance to recover) or in the UK in the 1930s (the last time that a post-recession public sector cuts programme was implemented in the UK on such a scale). Economic slowdowns make it harder to address structural deficits and repay government debt.

Thirdly, taking demand out of the economy when the private sector has not fully recovered risks a double dip recession which would increase government debt, not decrease it. Despite the Coalition’s best efforts to mislead the public, the UK’s structural deficit is a product not of Labour overspending, but of the collapse in output of the private sector following the collapse of Lehman Brothers in 2008.

Fourthly, at a time when the economy is already on its knees, it leaves the economy ill-equipped to compete against its healthier, better educated and better connected, more meritocratic international competitors.

Ending the previous Labour government’s fiscal stimulus, public sector cuts, a contraction in UK GDP at the end of 2010 and increases in unemployment and associated welfare payments, combined with the damage that the prospect of deeper cuts to come has done to business confidence and investment, have exposed the continued weakness of the UK’s private sector and led to a rise in government bond yields, thus further increasing the amount that the UK has to pay to service its debt.

Austerity is doing the opposite of what we are told it is aimed at achieving, and all this before the cuts have really started to bite.

A version of this post has previously appeared on Left Foot Forward.

What is government for?

This isn’t a glib question. Or the start of some quest for anarchy. Rather, it strikes me that this is the one question which is absent from much of the noise about deficits and cuts and economic policies.

Politicos claim the state is either too big or not doing enough, too powerful or not powerful enough, and that is either a good thing or a bad thing (or you’re indifferent), depending on your tribe. Cuts are either good because they reduce the deficit or the amount of tax payable, or they are bad because some people use the services or it will affect employment.

Economists aren’t much better. Theorists either claim that the only way to stave off impoverishment the likes of which we’ve never seen before is to engage in a slash-and-burn fiscal policy, or they claim that only way to reduce debt is to spend more, presumably on roads and infrastructure which may or may not be used.

But surely discussions around what to cut and when should be second order to a view of what government is actually for? Where intervention is desirable and necessary? And how best to implement any intervention? Economic policy should flow from this, rather than the other way round.

In some senses the role of the government is implicit in much of the discourse, but it isn’t explicit. And in any event, the cart appears before the horse.

We’re in a state where the dominant political ideology is defined by the direction of public expenditure, not about why, where or how the state intervenes. And the opposition to that ideology is just that – pure opposition to an ideology, with no tangible sense of what the government ought to do either.

In my mind this leads to some pretty perverse outcomes. For example – surveys claiming public sector workers, if made redundant, would struggle to find new employment being used as a justification to keep them on the public payroll (it’s not clear to me this is an unambiguously good thing); or cuts to existing benefits whose wider consequences seem ill-considered relative to the benefit the taxpayer derives.

Seemingly, not being able to articulate a vision for government beyond the amount it contributes to public expenditure is a problem for the right. And not being able to articulate a vision for government which justifies its contribution to public expenditure is a problem for the left.

Of course, it might be naively optimistic to hope for anything different.

Alex Baker is Secretary of the Young Fabians.

The New Generation: how do we make the economy work for everyone, home and abroad?

Margaret Dantas Araujo, member of the Livelihoods and Resource Security Young Fabian Policy Development Group, uses the comprehensive spending review as a lens to look at arguments made in the just published Young Fabian pamphlet, The New Generation. We are very keen to hear what you think of the pamphlet – please let us know your thoughts by posting a comment. This is the fourth in a series of posts on ‘The New Generation’, which you can read by clicking here.

The ring-fencing of UK aid in the spending review is right and in the country’s interest. Right because even during these austere times we have a moral duty to help the world’s poorest people and in our interest because it plays an important role in making the world a more stable and prosperous place.

But that’s only half the story. The coalition has proposed a significant shift of focus in the aid budget towards failing and conflict-affected states. This approach risks ignoring the fundamental dilemmas of resource scarcity that underlie the real development challenges of the coming decade: the carbon intensive growth that underpins current development gains, the high inequalities present in many middle income economies and the huge increases in urban poverty.

Progressive development policy must begin with these dilemmas in mind, bridging development, environmental and distributive concerns. Failing to address these issues or the series of interdependent, systemic challenges they relate to – energy and food security, jobless growth, climate change, global governance – will leave the UK and developing countries more, not less vulnerable.

The most powerful way that the UK can lead in a changing world is by example. Domestic action towards sustainable development strengthens the moral and political foundations needed for a global role as catalyst and reformer, impacting positively upon the environment and the world’s most vulnerable. Cutting investments in UK renewable energy as the coalition government has done is short sighted and in the long run increases Britain’s dependence on energy imports and undermines our international efforts. Why should other countries invest in renewable energy if we do not?

The UK’s economy should be synonymous with sustainable products, design and construction, clean energy and technology, ethical consumers and attractive, green cities. These would be the true green shoots of a balanced British recovery and it is vital therefore that this moment is used to press for a new, greener, more equitable path to growth in Britain and overseas. The UK should push for the G20 to broaden its sights from the immediate and much needed reform of the global banking and financial system, towards green and equitable growth.

Without such leadership the $70 trillion held by investment funds ready to invest; such investment could help the least developed countries leapfrog dirty development by building low carbon energy infrastructure. Such investment could spur growth by investing in communications systems, such as broadband, that encourage entrepreneurship by enabling people to connect market information and local knowledge, enhance opportunities for civil society organisation and help in the provision of efficient and effective basic services.

This post originally appeared on Left Foot Forward.

Recession expression

There is an old addage: “It’s not what you say, it’s how you say it that matters”. Never is this more true when talking about economic issues, which are usually baffling to non-experts (and, as recent history has shown, equally as baffling to experts too).

Terms like ‘quantitative easing’ or ‘fiscal stimulus’ bear little relation to the lives we lead: Jane Bloggs is more concerned about paying her bills, then whether the Bank of England is creating money to buy bonds.

But Gordon Brown is a substance man – not bad in times like these – and his oratory shows it. Consider this section from his New Year’s message:

The scale and speed of the global financial crisis was at times, almost overwhelming. I know that people felt bewildered, confused and sometimes frightened.

That is why the response had to be swift and decisive.

That is why we acted so quickly to get money into the banks.  Not for any desire to finance bankers, but because if we didn’t it would have put at risk that which is most important to you and me – your jobs, your homes, your savings, your standard of living.

What keeps me up at night, and gets me up in the morning are the hopes and aspirations of the British people. My guiding principle, at all times, is the welfare and well being of British families and British businesses.

All of this would have been put at risk if we had not intervened and simply done nothing, as some would have had us do.

This will be a challenging year for the economy but I believe, with the right policies, we can build a better tomorrow, while dealing with the challenges of today.

The failure of British governments in previous global downturns was to succumb to political expediency and to cut back investment across the board, thereby stunting our ability to grow and strangling hope during the upturn.

This will not happen on my watch.

The lesson of this crisis is that we do not let recession take its course, yield to defeatism, or simply muddle through and just hope for things to get better.

The message is – we take action: we are providing an extra £60 to pensioners immediately, on top of the winter allowance; increasing child benefit from January 1st to £20 per week; and helping 22 million basic rate taxpayers with a £145 tax cut. Added to that, the cut in VAT this year will knock around £275 off the average family household bill. Not to do this would be imprudent.

Today the risk of attempting too little is a greater threat than the risk of attempting too much.

But then contrast this with a speech David Cameron made in January:

So let me tell you my vision of a good future for our economy. It’s an economy where government and its citizens live within their means, save for a rainy day, waste not and want not. It’s an economy where everyone has the chance to own their own home with space to live and breathe – and where we work to live, not live to work. It’s an economy that’s more productive, where people can work shorter hours and spend more time with the things that matter – family and friends. It’s a better balanced economy where we spread ownership and opportunity throughout Britain, so it’s not just concentrated in the hands of the few in one corner of the country. And it’s a more modern economy, where we create rewarding, good-paying jobs in the green and technological industries of the future.

If we achieve this vision, our country will be both richer and happier – with our standard of living and our quality of life rising together. And let us be clear, the quality of life matters.  It matters a lot. It is not just something for the good times; not just something for the richest. The richest in our society can already buy themselves a decent quality of life: it’s not the rich we need to worry about. So our economic vision is not driven by money alone, but by our view of what is right.

Spot the difference? Gordon’s tone is matter-of-fact, laden with economic terms and sprinkled with figures from policy announcements. David’s tone is soft, empathetic and somewhat lyrical.

Being in Government shouldn’t prevent Gordon, or Labour, from talking in more poetic language. Instead the electorate is bombarded with fact after fact, or with terms used by policy wonks but which aren’t always understood on the doorstep. At this time in the economic cycle, the party needs to appear sympathetic to the needs of the electorate; Labour needs to focus on people in its communications, not policies.

The same Labour communications technique has been in use since 1994, and has worked well for three elections. But in this new economic reality, isn’t it about time it was decommissioned?

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The goalkeeping performance of Brad Jones

This may seem a strange title for a Young Fabian blog post but it shows just what the Labour Party is up against politically.

Irish broadcaster and challenger to the Murdoch monopoly, Setanta, today published their FA Cup ‘plums of the weekend’; the players adjudged to have performed the worst across the three FA Cup quarter finals and one 5^th round tie that took place on Saturday and Sunday. Everton’s victory over Middlesbrough put a big smile on my face but it also got Brad Jones, Boro’s goalie, a place in this list. In Setanta.com’s justification for his selection, his performance was described as ‘about as convincing as a Labour party economic forecast’.

Let’s put aside the economics here and the unique circumstances we are in. Instead, the politics. Over the course of the 1990s – and definitely by 2003 and Iraq – television satire began to move away from a heavily anti-Thatcherite agenda to being critical of the Labour government. Natural, most people would argue, whether or nor they found it funny or agreed with it. This slightly obscure internet article, however, goes beyond critique and hits a severe level of either distrust, disdain, hatred, or all three, for the Labour party and the government. It’s a very light-hearted piece, and not at all about politics, but that in many ways serves to emphasise the anti-Labour feeling.

Never mind the polls, Labour politicians, advisers, organisers and candidates should be under no illusions as to the scale of the challenge that this indicates. The public must be convinced of three things. Firstly, that Labour is capable of governing (which the Setanta article seriously questions) and secondly, that we have the ideas and values not just to manage the recession but to improve the country in the more typical economic times that will return soon I hope. Thirdly, we must be explicit about the risk of electing a Tory government led by David Cameron.

Let’s start here on the latter. For me, Brad Jones performance was about as convincing as David Cameron’s claim to be truly progressive. His vision of a fair society is no doubt different to most people and now is not the time for government to withdraw.

Over to you for more suggestions …

Is Brown the new Barack?

I missed the beginning because of work stuff – yes the Young Fabian Executive have day jobs too – but I thought our Prime Minister did very well just now in his address to Congress.

He came across as passionate, knowledgeable, a man with ideas about bringing us out of recession and preventing similar failures in our interdependent financial world in the future. And at times human. These are the characteristics that many Labour supporters have seen before at private or party events but which he has struggled to convey to the wider British public. It will be interesting to see which clips are shown on the TV tonight and whether the slightly pointless ovation count is played up.

On The Apology that most of the Cabinet were apparently advocating, he was absolutely right not to do it. Yes, because of the poster argument, but also because the key benefit of apologising would be to draw a line under the past and be able to focus on plans for now and for the future. But this would not have happened. The media – particularly the tabloids and Tory press – rather than say thank you, would have plagued Brown for apologising in America and he would have faced increased pressure to ‘tell us to our faces’. The Prime Minister and his Cabinet colleagues are beginning to find some more appropriate language about how we got here, and hopefully it isn’t too late, because acknowledgement (but not apology) is necessary. It is frankly ridiculous that the whole of the world’s financial trouble is being seen as something Brown should take the blame for and he is right to try and ride the clamour.

Despite the ups and downs of yesterday’s scheduling, a successful trip. But if he learns one thing from Obama, and the behaviour of the White House yesterday, it is that he can not just be the world statesman he’s playing to be, but must also be seen to be concentrating on Britain. The public here will want to know how global solutions to recession will keep them in work and keep the roof over their heads.

Look out soon for Young Fabian work and events - with international and domestic focuses – on what this means for young people.

Valentine’s Day in Brussels

I spent last weekend in Brussels as the UK representative on the Expert Group on the economic crisis for ECOSY, the young European Socialists.

Beforehand I was intrigued about my fellow group members and how they would view the UK and the Labour Party, (despite it being Valentine’s Day, I didn’t expect it to be all love and roses). We’ve come a long way from the late nineties when the centre-left was in Government in most of Western Europe. Now I believe only the UK, Spain and Portugal have centre-left Governments, with Germany and Netherlands in coalition. But far from blaming Britain for the economic crisis due to our large and underegulated financial markets, my comrades from around Europe were looking to Labour for the solutions. They credited Gordon Brown with being the first to act and thought that through decisive action to protect British banks he had shown an alternative to the US approach which saw Lehman Brothers collapse. Most other countries have followed, and in some of our larger European neighbours such as France and Germany, second bailouts like the one we had in January are expected.

I found that very similar debates are taking place across Europe on issues such as bonuses, transparency and regulation. Some countries, such as Germany and Greece, had placed greater conditions on banks who had received Government funds than we have in the UK. The Group all agreed that bonuses should be based on long-term success and that we needed stricter regulation and greater consumer protection.

Our discussions convinced me of the need for effective co-ordination at the EU level, and beyond. In a globalised world, the level of regulation in other countries can have direct impact on British people and may require taxpayers’ money to bail out banks or protect consumers. A prime example was the uproar when individuals, companies and even charities realised that their deposits in Icelandic banks would not be protected should they fail. In the new financial system that emerges in 2009 and beyond, we need to be confident that our economy will not be destabilised by actions taken by banks in another country.

We also discussed how to protect our citizens from the negative impact of the recession, in particular to avoid mass unemployment and repossessions. Even countries that have a small and highly regulated financial sector, and therefore had no exposure to US sub-prime problems, are also now in recession and looking for ways to minimise its length and effects.

Here, the variation in existing welfare state provision can make a big difference to the level of flexibility Governments have and the levels of fear that workers feel about losing their jobs. In the Netherlands for example, workers get 70% of their salary for a year when they become unemployed, so that when they lose their job they don’t immediately have to worry about losing their home. The Government there is considering giving this money to employers for six months to enable them to reduce working hours or lay off workers temporarily. This long-standing investment in welfare means that the Government has much more scope to move the money around and direct spending in places that it will make the biggest difference. Of course the generous welfare systems in Scandinavia and other parts of Europe have long been the envy of the UK left, but I completely agree with James Purnell (writing here and in ippr’s latest Public Policy Research) that in order to improve welfare benefits and make them as untouchable as the NHS, we need to reform the system. It should focus much more on supporting people rather than simply handing over benefits each week and leaving them there for years and, we should create “a system that offers real help for people who play by the rules”. By moving towards a system more like the Dutch or Danish models, we can protect the welfare state from Tory and tabloid attack and improve the lives of millions of families, through the recession and beyond.