The Deficit, Currency Wars & Global Imbalances: The Social Democrat Solution
The biggest issue facing the world economy over the next decade is the global imbalance between the “over consumption” in the West and “over saving” in the East. The large trade imbalances this causes, coupled with the potentially destabilising flows of hot money are at the root of the threatened “currency wars”. Currency wars which make for a grim outlook for UK exports.
Meanwhile the biggest issue on the economic agenda for the UK is (in the popular imagination at least) the deficit and the question of reducing it.
There is one policy agenda which would tackle both issues – and it’s one that only the Social Democratic left can offer: state backed investment.
The largest driver of the recession was a collapse in investment as the confidence of businesspeople vanished. I’ve argued for a long time that only policies designed to increase investment will ensure strong growth and rising prosperity.
Solving the “investment problem” is the only way to reduce the budget deficit, as long as the private sector is accumulating but not investing a large surplus, as Chris Dillow has frequently argued, then the UK will be faced with a large budget deficit.
David Cameron’s plans for growth speech yesterday, as Hopi Sen has noted, asks the right questions but then avoids answering them. The £200mn for regional innovation is welcome, but no where near enough.
A real growth plan, as Ed Miliband hinted at in his own CBI speech, will require a far more active State. Not necessarily a bigger state, but certainly one that is prepared to intervene more heavily in the economy in order to unlock, and “crowd in”, private sector investment.
Fiscal policy alone cannot, and will not, return the economy to growth. What is required is a far more fundamental rethink of policy and the use of tools that have stood all but idle for three decades or more.
The exact mix of policies required to increase investment and reduce the private sector surplus will vary with the economic outlook, but one crucial component will be some form of state backed development bank (David Miliband certainly “got this”).
A state backed investment bank to fund business investment, a state backed infrastructure bank to fund large scale projects, a state backed green investment bank to fund the technologies of the future could all be combined with state backed venture capital firms to incubate new firms. All of these measures would have one real purpose – to take the private sector surplus and turn it into real assets that increase employment, create high skilled jobs and ultimately help reduce the deficit.
The laissez faire approach of the coalition (essentially, create the right conditions and hope for the best) represents the triumph of ideology over experience. Thirty years of this approach led to a seriously unbalanced economy, one that favoured investment in property over investment in real assets. Without state action to redirect investment, I see no reason that the future won’t resemble the past.
My basic position is that fostering the kind of structural economic transformation and innovation that has been laid bare as essential by the financial crisis is a – maybe the – central public purpose. The private sector cannot make the running here – certainly not yet. We have no choice. A national infrastructure bank that facilitates and channels the excess money in our economies towards, say, new and alternative energy technologies, and the type of infrastructure that might revolutionise manufacturing processes is a worthy pursuit.
But state backed investment, isn’t only crucial to reducing the deficit, it is crucial to controlling the global economic imbalances (as George Magnus notes).
By increasing domestic investment, especially in much needed infrastructure, the UK can play its part in increasing global demand without resort to “export led growth”.
There is a need for this investment and the means to finance it exist in the UK, all that is required is the political will to act.