It was nearly 10 years ago when I completely lost faith in what is called neo-classical/neo-liberal economic thinking. That wasn’t easy for me as at university the neo-classical approach was presented as the only plausible option. Everything else, we were told, was old fashioned: quaint ideas with no place in the new economic reality. Back then it seemed the human race had had an epiphany and the evolution of economics had ended. We had unlocked the secret to economic success. People really believed that and Gordon Brown even announced that he had delivered “an end to boom and bust”. The halcyon days of economics – or was it just a halcyon daze? Many bankers (of the casino banking mindset) even started referring to themselves as the masters of the universe, not realising the moniker was originally intended to be sarcastic.
Watching personal debt and house prices rise unchecked, I was worried the economy was becoming unbalanced. Growth was driven by consumer spending, credit cards, store cards and easy access finance at levels I just didn’t think were sustainable. At one meeting with a leading member of the Bank of England Monetary Policy Committee I pleaded for interest rates to be increased to curb consumer lending, for higher inflation and a weaker pound to curb imports and improve the balance of trade.
“People owe too much and the poor are borrowing at even higher rates of interest,” I said. “No,” I was told. “The retail figures were strong and steady and we have never had it so good”. Personal credit levels weren’t seen as a real economic measure as the market would self-regulate and lending would stop when people and banks realised the repayments were getting unaffordable. I had no idea at the time about the over-investment in the American sub-prime market and when the credit crunch came it papered over the cracks in personal debt exposure.
The problem is the markets can’t self-regulate personal borrowing any more as we don’t live under capitalism now, we live under a system of global consumerism. They look similar but most of what we buy we don’t need – and most of the things we don’t need, we borrow to buy. As consumer spend drives some 75 per cent of our economy, if people ever realise they are slaves to debt for things they don’t need then the economy will stall in the short term and collapse in the medium term. Then we will know the meaning of crisis.
There are three key factors that could suddenly apply the brakes to consumer spending: 1. A global ecological shift in values away from consumerism and towards sustainability, upcycling and reusing – but that’s probably a medium-term shift. 2. An increase in interest rates that makes borrowing too expensive and forces creditors and home owners to reel in their spending. Highly unlikely now as interest rates are at an all-time low. 3. Unless sterling rallies soon (and with weak leadership, no planning, and uncertainty over Brexit that looks unlikely), the weaker pound will drive up the cost of imports and debt-ridden consumers may decide to hold on to their phones, computers and cars that little bit longer, thus slowing spending, lowering growth in the face of currency rate-led inflation, creating stagflation. Economists are arguing over whether the economy will enter recession (I think it will) but recessions come and go. Stagflation at a time of austerity wouldn’t be temporary, it would be the new normal.
Mark Carney, the governor of the Bank of England (BoE), signalled in early July that we have “entered a period of uncertainty and significant economic adjustment” and announced his intention to act to address economic instability post-Brexit. At the time I said that stimulating the economy through buying bonds and releasing £70 billon into the banking sector whilst reducing reserve requirements to stimulate lending “simply adds to the potential for more personal debt and business debt to be added to an already debt-laden system with a poor balance of payments, whilst reducing bank reserves”. We bailed out the banks already! We need to bail out the people or the whole engine of the economy will seize up.
Pension funds and insurers are struggling with funding shortfalls that are so bad we are way past the point that even panicking would do any good. They don’t want to sell Government bonds and look to the riskier stock market or make loans to a debt-fearing market. It wouldn’t surprise me if the market refuses to sell the Government anywhere near its target of £70bn of bonds unless it pays significantly over the odds.
Even then demand for loans will fall due to falling business confidence, so the stimulus package will fail as the money won’t reach the real economy. If it does work then returns on Government gilts will fall, deepening the already chronic pension-funding crisis. Put simply, neo-classical economics has failed. It has no more answers. Every medicine at its disposal has deadly side effects, so we need a new cure – a new approach to economics.
Try to see the economy as a bicycle with a worn-out chain. Every time you hit a hill it starts slipping off the big sprocket, you lose momentum and can’t go as fast as you need to. Imagine that’s been happening for months. What do you do? Do you spend loads on fancy new brakes, a new saddle, new tyres or mudguards? It’s obvious, right: you fix the bloody chain! Well the UK Government, the City of London and the BoE are philosophically, almost religiously opposed to fixing the chain as their dogmatic belief system says the chain will self-repair. They are in denial because their entire economic belief system has failed.
Fortunately, opposing voices are starting to come through loud and clear. Last week, 35 top economists (via the Positive Money campaign) wrote to Philip Hammond asking him to support a new form of monetary policy. They called for central bank money channelled directly into the real economy rather than through bonds, such as via a citizens’ dividend, housebuilding programme or investment in infrastructure. That’s what I would do with at least £40bn of the planned stimulus, and given the longer-term nature of housebuilding and capital investment versus the immediacy of the citizens’ dividend, the dividend would be the first medicine I would apply.
Last week the Scottish Government announced plans to accelerate capital infrastructure spending to create additional support for job-creating projects. That’s a positive step but not enough in itself, they don’t have the powers required to make a difference. Such actions will only treat symptoms, not the disease. We need to discuss, on a global scale, the restructuring of the economy, a new Bretton Woods-style agreement. This is not another run-of-the-mill economic crisis – this is a crisis of economics and we need to redesign and reboot before the system crashes completely and irreversibly. The UK economy is sinking and Scotland needs to man the independence lifeboats and lead the new economic thinking. The best the BoE seems to be able to do is plan to rearrange the deckchairs.
I would be interested to know how many universities are still teaching neo-classical/neo-liberal economics as the only plausible option, and how many graduates are out there in positions of influence still believe in it.
At a recent conference I attended All the undergraduates in a show of hands (over 60) claimed that their University taught only Neo classical and ignored all heterodoxical stances or gave them scant regard. They were all pretty angry about it.
“We need to discuss, on a global scale, the restructuring of the economy, a new Bretton Woods-style agreement ”
That’s a monumental task which the Scottish government has no appetite to tackle at the appropriate global political forum, the G20. ‘Wall Street’ and the increasingly huge developing world [especially China] are happy with the present arrangements, so far.
Monumental task agreed – I never thought was one for the Scottish Government – it would need a global movement – and China are following a different model to the West – same playing field but different system and everyone is interested in secure future prosperity.
Consumers have already been ” bailed out” via low interest rates; infrastructure projects are dogged by massive cost overruns and poor benefit: cost ratios. All this discourse is driven by macroeconomic fixations with state activity . The answer lies in microeconomics- the entrepreneurial firm and allocation of capital on merit, not fiat. If the state had regulated finance with less naïveté we would be in a different place today!
Agree with he second half completely – however most infrastructure projects in Scotland recently have been common in on time and on budget except for exceptional weather and accidents etc. Public sector waste is a concept that was proven true in the 70s and 80s in the UK but public sector efficiency has been proven true by Scandinavian countries and Singapore for example. Essentially I fell that the public sector is run correctly then it can be used effectively as a stimulus if it is run badly then it can be a drain and ineffective. Just because the UK has past of inefficient public sector just means that traditional we have been bad at it it doesn’t mean it’s a global truth that public expenditure bad private good. Look at the wealthiest nations in the world with the hight living standards and most equitable societies – many have high public sector spend.
I enjoyed reading this.
I help run a positive money group in Edinburgh and we are looking to raise awareness about the Issues with money ahead of any future referendum. If we can be of any assistance in anyway please get in touch.
Want to do a joint event with Positive Money in October in Edinburgh – will get in touch soon
You can’t rearrange deck chairs when you haven’t got any. I don’t think I can ever remember a time when UK government was so bereft of ideas: even poor ones. The challenge that we’re not addressing in Scotland is to develop coherent, integrated and believable policies that can stand out in the political vacuum that currently exists. Time is of the essence: we can either lead or forever follow.
As ever ” spot on ” if I can remember just 10% of your piece when discussing Indy 2 I’ll be doing very well !!! See you soon cheers Ian
Thanks Ian, We can be a better nation.
Great article Gordon! Thanks for the reference to PM. Hope you are well!
Thanks and keep up the god work – will be in touch soon to get the idea of a joint event back on the table.
I agree the government should be looking to bail out the citizens this time around. I’m not suggesting that all personal debt be written off, but an amnesty of some sort could be worked out, with the costs paid by the banks. The banks have been completey irresponsible in their lending, allowing massive personal debts to be built up and they should take some responsibility for that.
The banks used the bail out money to improve their balance sheets and continued with the bonus culture. They didn’t help struggling buisneses or individuals. The Icelandic government paid a citizens dividend to mortgage holders of around £25k. Could this be the reason Iceland currently has strong growth in it’s economy?