Duncan’s Economic Blog

The Past is Another Country

Posted in Uncategorized by duncanseconomicblog on March 27, 2009

We all know we are in a recession, and today came the news that last quarter was worse than originally though. But we also all realise the recession will not last forever. Few seem to be discussing post-recession Britain. The assumption seems to be that it will resemble pre-recession Britain: house prices will continue their march upwards, the FTSE will quickly ascend to its old highs, consumers will rush back to the high street and business will return to normal.

I’m not so sure. Psychologists have a term called ‘recency effect’, a cognitive bias whereby if someone is exposed to something for long enough they tend to think of it as ‘normal’. It strikes me that many are suffering from this. The last two decades were not ‘normal’.

Fund managers like to differentiate between ‘cyclical’ and ‘structural’ shifts. A cyclical movement is a typical recession – the business cycle which is an ordinary part of capitalism. A structural move is something bigger, the slow but significant turning points of economic history.

Whilst most observers seem to think that Britain is only undergoing a cyclical downturn, I believe the movement is structural. The cyclical downturn will end – maybe at the end of this year, maybe in the next. The structural shift is more long lasting.

Without capital flows from Asia Britain will have to learn once again to live more within its means.

So what will the post-recession world look like? If I were to hazard a guess I’d suggest the following: permanently lower house prices, much less credit availability, less of a dominance of financial services and property in the economy. Consumer spending will simply not grow as quickly as we have become accustomed to. We’ll have to manufacture more. Savings rates will be higher.

The economy will simply not be as buoyant as in previous years. Although the economy will grow, if consumer spending does not grow as quickly as previously, people will not feel as well off. This has profound political implications. One that all parties must accept.

The agenda must be based about managing the transition. The Tory record on managing such structural shifts is terrifying, a legacy of destroyed local economies across the old manufacturing and mining communities. Labour will need to embrace a more active industrial policy, something Lord Mandelson seems to understand. We will need a rigorous focus on re-training and re-skilling. We will need to counteract the potential effects of what economists dub ‘Hysteresis’, the fact that a short term rise in unemployment can have more permanent effects.

All of those issues need to be engaged with in the next manifesto.

12 Responses

Subscribe to comments with RSS.

  1. CharlieMcMenamin said, on March 27, 2009 at 1:46 pm

    I know my limitations around interpreting economic data, but my gut feeling is also that we are facing a structural shift.

    I think you’ve scratched the surface of the changes that will occur if this is actually true. Never mind house prices – what about pensions? They’re not going to be of the level most of today’s fifty-somethings thought they would be. There will be difficult times ahead as middle aged middle England realises they harsh nature of the choice they face between paying university fees for the kids and saving more for their retirements.

    Also – there may well be a greater emphasis on manufacturing, but we’re surely never going to see mass employment in manufacturing again. It will be high-end, computerised manufacturing that creates handfuls of jobs. I think there is a big unanswered question bubbling up here which may dominate political discussion for a generation: what is it, exactly, the UK is going to do for a living?

    • duncanseconomicblog said, on March 27, 2009 at 3:40 pm

      Charlie,

      I agree I’ve only scratched the surface. And your right, I missed pensions out of the analysis – in a world where government bonds yield sub 5% for the long term (sub 2% in Japan for the best part of twenty years) and the FTSE isn’t rising as fast, we have problem there.

      I don’t think we can go back to manufacturing being our largest employer. We do have comparative strength in several industries- pharma, aerospace, chemicals etc. That can be build upon. We lack (outside arguably Amec and Balfours) major engineering companies like the French Alstom, German Siemens, Swiss ABB. This is an area where we can aim to build up our strength. We can aim to rebuild our railway business – actually making locamotives and tracks rather than relying on foreign companies. Green technology is an area where we can aim to build up expertise. I”m open to any other suggestions.

      Maybe a major programme of social housing building will help the construction business?

      I find it especially ironic that Mandelson is one of the few openly talking about the need for an active industrial policy. He’s right.

  2. CharlieMcMenamin said, on March 27, 2009 at 5:22 pm

    We must certainly back Green and bio-technology, and supporting civil engineering projects such as the Severn Barrage. &, obviously, a programme of house building – and of mass house insulation – would be a pretty effective counter-cyclical step.

    For ecological reasons I’d want to avoid anything like an expansion of the aerospaceindustry. & I note you left arms manufacture off your list of our supposed national industrial strengths, despite our being one of the top 4or 5 arms exporters in the world. So please forgive me for falling into a traditional leftist posture about all this, but I do think there is a case for a ‘swords into ploughshares’ industrial strategy which I struggle to imagine Lord Mandelson endorsing.

    It’s true he is now sounding the dirgisme tocsin. On my blog I’ve joked about him sounding like that eager young technocratic interventionist Paymaster General of the 1960s, Anthony Wedgwood Benn. But it’s very to-down stuff, not anything likely to involve real enagement by the mass of the workforce. I think it will fail for that reason.

    In any event I suspect that whatever industrial policy we adopt, most replacement employment for the shrinking City will have to come from elsewhere. We do have advantages in business services and the cultural industries by virtue of simply speaking English. But it’s gong to take an awful lot of media advertising, computer games and TV resales of ‘Who Wants to be A Millionaire’ to make up the employment numbers….

    • duncanseconomicblog said, on March 27, 2009 at 5:37 pm

      Sorry – fund manager speak – aerospace includes defence… don’t you just love euphemisms.

      On the structure of the British economy, it’s worth having a quick look at the make up of ther FTSE 100. I won’t pretend this is perfect proxy for the UK PLC, but it’s not a bad place to start. Currently 35% of it consists of materials and energy companies (many of them actually foreign and just listed in London, like Rio Tinto, Eurasian Natural Resources, etc) – that does though include Shell (admitedlly Anglo-Dutch) and BP. I don’t think we can rely on oil for our future prosperity.

      Other big sectors – financials 16%, again not a viable strategy. Pharma is now 10% and Astrazeneca and GSK are world leaders, plus lots of smaller firms. Not a bad place to start. Industrials are only 4%! Really need rebuilding. (Although in the broader FTSE 250 index of mid sized companies, industrials are 25%, so maybe a lot we can work with).

      The rest of the FTSE is domestically focusssed – retailers, BT, etc.

      Yes, creative industries will help but, as you suggest, how much?

      I agree that the industrial strategy as currently discussed is far from ideal. But I think it is an important step in the right direction.

      I’d rather we fought the next election on a series of concrete plans to help reshape the economy than a vague desire to turn back the block to 2006.

  3. CharlieMcMenamin said, on March 27, 2009 at 5:24 pm

    Er..that should have been

    “..all very top-down stuff…”

  4. CharlieMcMenamin said, on March 27, 2009 at 6:01 pm

    I’m much less interested in whether UK industrial firms are big enough to figure on the FTSE 100 than in whether they have a significant capacity to generate employment opportunities for the people. In theory at least a lot of SME enterprises – perhaps including some co-ops or other non capitalist enterprises – could do that as well as a handful of big ones.

    My point is that, whatever the size of the average manufacturing enterprise in the future, it is all but inconceivable that mass employment opportunities will return in that sector. We can’t complete in labour intensive manufacturing industries without lowering wages to Chinese or at least Korean levels. That’s not going to happen.

    If we do rebuild manufacturing surely it is going to generate only niche employment – high-end, value added stuff , perhaps often closely linked to R&D and design. Such production will generate many fewer, but more highly skilled, jobs than existed in the sort of factory my Dad worked in forty years ago.

    We certainly do need a new national ‘business plan’ – but I think it would be more realistic to call it a national economic development strategy, not an industrial strategy. I really doubt manufacturing can take the strain on its own.

    • duncanseconomicblog said, on March 27, 2009 at 6:09 pm

      Charlie – I was using wieghts in the FTSE as a rough example of the structure of the economy, rather than as a policy target.

      I’m more than happy to use the phrase national economic development strategy rather than industrial strategy. Might well be tiem to dust off the archives on the Department of Economic Affairs. And I agree on manufacturing, it certainly isn’t enough by itself but it is one area where we can build on existing talent in certain sub-sectors.

      This probably does require a lot more government involvement than the economy has had for decades. Planned investment, government aid to help target certain industries, specific skills training, lots of co-ordination between business/unions/government. I just wonder if the civil service can handle it.

  5. CharlieMcMenamin said, on March 27, 2009 at 6:41 pm

    Duncan,

    I’m not having a pop or necessarily even disagreeing. As a 50 year old leftie, I just have a largish sens of going round in circles.

    I think you’ve hit the numb of the problem when you ask if the civil service is up to it. It isn’t and couldn’t possibly be – it can’t be done from the centre. We discovered that in the 1960s. I think the realisation that it couldn’t be done on a top-down dirigisme basis is what turned the technocratic young Tony Benn into a radical. I’m not holding my breathe for a similar transformation by Lord Mandelson.

    Envisaged as a top-down strategy alone, there’s a missing ingredient: popular engagement. We used to talk about this in terms of planning agreements and workplace democracy when I was a young man. We called it the Alternative Economic Strategy as I recall.

    I know the old AES is dead* and gone but I think Chris Dillow (Stumbling & Mumbling) is worrying away at different version of the same issue when he constantly returns to the question of ownership and co-operatives.

    & the case for a new type of socially engaged activism on the part of pension funds seems to me to be critical: these bodies own a lot of the FTSE, they need to use that ownership to direct investment in line with a broadly agreed national economic strategy, not seek to make quick bucks from a form of absentee landlordism’ .

    You can’t fundamentally restructure an economy and society solely from the ‘top-down’ – you need a critical mass of people to feel a sense of ownership in the change. Finding ways of unlocking that potential is the key to a coherent Left response to this crisis.

    *Possibly apart from the bit about nationalising the banks…..

    • duncanseconomicblog said, on March 28, 2009 at 10:10 am

      Charlie,

      No probs, I don’t think you’re having a pop, I’m enjoying the discussion.

      You’re almost almost certainly right on the civil service. I like the young Benn/Mandelson analogy.

      Chris is right on the ownership stuff. It’s an issue that doesn’t get anywhere near enough attention.

  6. Mike said, on March 27, 2009 at 9:29 pm

    Recycling a comment made against one of your posts elsewhere :-

    Where I agree:
    Too much short-term foreign investment in the stock market, then housing, causing overvaluation of both. This money needs to be invested long-term in our industry.
    The house price falls are a good thing. High prices destroyed job mobility, and are not a genuine increase in wealth for most people.
    Where I disagree:
    This is the result of Thatcherite policy from 1979 onwards. City deregulation, big-bang merging of retail and investment banks, exchange control removal.
    Specifically: by taking on mortgages likely to default and falsely branding them AAA, the bankers were fully aware that the securitized debt market would collapse. They just didn’t care.
    What to do for manufacturing:
    Manufacturing has been allowed to decline for decades. Even growth areas like biotechnology are suffering through lack of finance. (Products take longer than expected to develop.)
    City financing is short-term (shareholder culture) and favours M&A (where the City gets its commissions) over organic growth. Manufacturing needs long-term partnerships between company and bank, similar to the German approach of several decades.
    Manufacturing has its own internal problems:
    It has relied on EU protectionism (goods sold in the EU having a minimum EU content) and cheap labour. Hence, industry has deskilled. As the EU expands east, the jobs go east.
    The deskilling and focus on cheap labour have in turn promoted chronic ageism; new graduates are recruited while the middle-aged are laid-off.
    Manufacturing needs to challenge itself to develop more technical products, where experience is an asset, and cannot be directly challenged by Asian manufacturers.

    • duncanseconomicblog said, on March 28, 2009 at 10:13 am

      Mike, thanks for the comment.

      This is the result of Thatcherite policy from 1979 onwards. City deregulation, big-bang merging of retail and investment banks, exchange control removal.
      Specifically: by taking on mortgages likely to default and falsely branding them AAA, the bankers were fully aware that the securitized debt market would collapse. They just didn’t care.
      What to do for manufacturing:
      Manufacturing has been allowed to decline for decades. Even growth areas like biotechnology are suffering through lack of finance. (Products take longer than expected to develop.)
      City financing is short-term (shareholder culture) and favours M&A (where the City gets its commissions) over organic growth. Manufacturing needs long-term partnerships between company and bank, similar to the German approach of several decades.

      I agree with much of this. City short termism may be dealable with through thr ownership stuff that Charlie is referring to. Worth a look anyway.

  7. newmania said, on March 30, 2009 at 12:40 pm

    Ducan you are probably too young to remeber but the miners was not only an economic issue it was the closest we have come to mob rule replacing democracy . They had to be beaten and the sudden transition is as much Callaghans fault and succesive statist administrations as Thatcher`s.
    The Primary blame lies with the closed shop over mighty Unions , we could not go on subsidising dead industry forever .


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 )

Twitter picture

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

Facebook photo

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

Google+ photo

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

Connecting to %s

%d bloggers like this: