A return to recession

Posted: April 1, 2012 in Uncategorized
James Meadway
Senior Economist


And we’re back in recession. Not that most of us would have noticed anything like a preceding recovery: real incomes fell by 1.2 per cent over the last year, the steepest decline since 1977, coming on top of consecutive years of falling living standards. Unemployment, meanwhile, remains the highest for a almost two decades, and is at record levels for the young.

This graph puts it in historical perspective (taken from here). By this point in the Great Depression of the 1930s, Britain was already returning to growth. Not this time. A brief recovery has unquestionably ended.

There are three reasons the recovery isn’t happening.

The first is George Osborne. Prime contender for hotly-contested title of Worst Chancellor Ever, part-timerOsborne’s slash-and-burn austerity package is the biggest single reason the UK economy is going nowhere fast. Two years in the job have failed to drum into him an elementary macroeconomics lesson: you don’t cut in a recession. A weak economy can’t handle it. Demand falls, firms cut wages and make redundancies, and confidence evaporates. A vicious circle is set in train.

That’s the deadly mechanism now at work in the UK. It’s no use Osborne blaming the admittedly grim news from Europe. The biggest contributors to the slump are domestic –consumer spending is flatlining, while investment by businesses has fallen by over £40bn since its 2008 peak. If households and firms aren’t spending, the economy limps. If the government also cuts its expenditures, the economy slumps. Taxes on household consumption, like the VAT increase, just add to the problem.

We’re only two years into Osborne’s axe-swinging. The worst is yet to come, with 88 per cent of cuts scheduled between now and 2015 – and this how things are turning already. Osborne’s one-track mind won’t admit any deviation from austerity. If he won’t change course, he should step aside.

The second is a harder nut to crack. The UK economy is a train-wreck. The boom years of the last decade hid the wreckage with cheap credit, leaving us with the highest aggregate debt in the G10. That’s nothing, by the way, to do with the public debt that so obsesses Osborne – at 68 per cent of GDP, it’s low historically, and low by international standards. The real crisis is in private debt – the credit ladled out to millions of households with stagnant or falling real incomes, and the eye-watering disaster-in-waiting of the financial system’s own debts, now totalling around 600 per cent of GDP.

This is a huge burden to shift. It’d be a terrible weight even on an economy motoring along. British capitalism barely crawls. It’s misshapen, with financial services grossly dominant. A recent, provocative paper by Tim Morgan argues – convincingly – that 70 per cent of the whole economy is accounted for by sectors that have no realistic future chance of prosperity.

The private sector cannot create jobs on the scale needed, even during the good times. Research by CRESC at the University of Manchester found that when manufacturing employment shrank, from 1979 to 2008, by some 4m jobs, it was the state that consistently plugged the jobs gap. Even under Margaret Thatcher, 650,000 new public sector posts were created, masking the weaknesses of the private sector. And the UK’s infrastructure is shot to pieces, with Prof Dieter Helm estimating£500bn of investment is required over the next 10 years to bring it up to scratch.

Even beginning to turn this wreck around will require an immense effort. Investment will need to take place on a grand scale, and, if decent, sustainable employment is to be provided, public policy will have to take a lead. The free market alone has not delivered in the past and there are no good reasons to expect it to deliver in the future. The years of laissez faire and neglect must end. An effective Green Investment Bank, with a sizeable pot of cash and the ability to make loans for investment in green infrastructure, could take a lead.

The third factor is the most intractable: the advanced economies have slowed down (Figure 3). Growth doesn’t happen here like it used to. The economy is ageing. The reasons are complex, tying together failed financial systems, growing resource pressures, and low profit rates, in particular. Some of this sluggishness could be removed by purging the system of its debts –writing off loans on a grand scale. But even allowing that some dynamism might be restored, the physical barriers to growth are becoming pressing. Restricting greenhouse gas emissions implies that we cannot simply grow forever more – the impact on the environment, for each new pound sterling produced, would be too great.

Not only is the system itself old, and slow. We cannot simply restart the motor, and drive on as before. A transition out of the old high-debt, high-carbon economy is needed. Ending austerity is the first step. The second is investing in green infrastructure and sustainable employment. The third means overhauling the very purpose and function of our economy, directing it towards the public good over private profit.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s