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An Economic Nightmare: Keynesian Growth v Hayekian Austerity

I am no economist, as the state of my bank deficit can testify, nonetheless I have taken some time to try and understand what the hell has gone on with the global economy in the last few years. I lived through the boom and bust of the late 1980s and early 90s and my experience with credit then, gave me a good grounding in how fragile life becomes when we live on a play now, pay tomorrow basis.

On the other hand I still live in a Western capitalist economy, some people live without debt, but they are probably the minority. I learned from the 1980s but I could not entirely mend my ways. I did learn one thing though. Don’t buy a buy now, pay later sofa – that’s just stupid.

And that’s where Friedrich August Hayek comes in. His economic theory can be loosely applied to DFS, MFI and the like. If too many people buy sofas they don’t strictly speaking need, with money they don’t strictly speaking have, we have created a sofa purchasing bubble. The bubble contains too many bums on sofas that will be paid for later, and when easy credit becomes hard to come by, the sofa bubble bursts. Suddenly, the demand for new sofas, or kitchens, or white goods decreases sharply. Companies that manufacture or retail these items make less money and worse might not even be receiving the money for the sofas they sold two years ago. Production slows, jobs are lost; it’s not a pretty sight.

Hayek said that to return to a sustainable model of production, liquidation was inevitable. Liquidation of companies and jobs – that’s the pain of a recession. Sustainable production and the accompanying modest consumption, as a model is not all bad surely? However, in a recession I find I am far more drawn to the Keynsian way of doing things. John Maynard Keynes promoted the idea that government could control the business cycle of boom and bust and that in times such as now the government should spend to stimulate growth. There’s sense in both. The weakness in the Keynsian model is that national government most evidently cannot control the business cyle in a global economy that relies so heavily on the financial sector. The weakness in the Hayekian approach is that he would see us all return to subsistence farming, living hand to mouth whilst the sustainable model of production found its feet.

Given that both these influential economists were knocking about in the 1930s and 40s isn’t it well overdue that we quit with the either or approach, where we put the notionally opposing ideologies in conflict, and try to take the elements that might work in a 21st century context?

Take the state sector in Britain, it is true to say that the public sector payroll swelled under the last Labour government, but the proportion of people employed did not exponentially increase. Employment of workers by the state is unevenly distributed regionally. Putting the same proportion of state sector workers on the dole in areas of low industry and high unemployment is not going to make Hayek’s model kick in, as if by magic. It might work better in the South East, where the spread of private and public sector employment is more equally balanced. On the other hand it might not, and it has not so far. Cutting jobs as George is doing is effectively making the poor poorer and increasing unemployment in places where you are more likely to stay unemployed – which is why Keynes’ growth model is so much more attractive.

Having said that Hayek was right at a fundamental level, which is that false demand for consumer goods will lead to boom and then bust. Equally, Keynes was right about the state spending to stimulate growth either; note no Plan B George Osborne’s announcement about a building programme to enhance rail and road infrastructure – jobs and income to stimulate the economy.

To be bold and try to decide which came first, the chicken or the egg you might conclude that the generation of state income needs people employed in the private sector. I have heard it said that the split for public sector and private sector employment is around 40/60. Apparently it has not changed much in the last half century and was actually the highest it’s ever been, in terms of jobs in the public sector, under Thatcher and not Labour, which is interesting and not much advertised. Therefore despite the private sector apparently driving things we may surmise that the state and the private sectors’ fortunes are now inextricably linked – which probably puts Keynes back in the driving seat. After all, when the banks were deemed too big to fail, who bailed the private sector out – the public purse.

In a sense, the balancing act is to cut carefully and judiciously, not quickly and savagely, and to implement a more finely tuned tax system where the rich, the 1%, are not getting wealthier at the expense of the majority. As President Obama asks ‘Is it right that Warren Buffet’s secretary pays more tax than he does?’ Warren says no, I think Obama says no. Certainly the Occupy movement say no! I am not so naive as to think that slamming the super-rich against the wall and fleecing them through higher taxes is going to generate enough money to reverse the tide, but it is can’t be beyond the wit of man to develop a fairer tax system – the paltry 0.001% levied on bank trades is a joke.

To be fair to the coalition government it appears the Big Society, with its focus on the development of social enterprise at its heart, does aspire to take a combination of Keynsian and Hayekian theory – the state funding new businesses with a heart (not for profit). The problem with this approach is that the cutting of the public sector does not immediately covert into quantities of social entrepreneurs kicking their heels. Becoming an entrepreneur, even a social-minded one, takes a particular vision and skillset, an low aversion to risk and a willingness to work every hour of the day – making money available to set these businesses up does not guarantee a supply of people wishing, or able, to start and run them.

The best that could be hoped for is that voluntary sector providers going to the wall due to lack of funding manage to rejig themeselves into a social enterprise model. There’s another problem too. Sustainable business develops at a steady pace, the subsequent impact on unemployment and growing the economy is a very long way down the line and in the meantime the unemployed (former public sector workers included), especially those in regions of high unemployment, cost the state money and generate precisely zilch state dividends. As much as I fulminate against the current regime, there’s no doubt, particularly set against the Eurozone backdrop, we are in a tight spot indeed.

Here’s some food for thought. I was listening to a radio programme at the weekend that contrasted our Chancellor and his career to date with that of his opposite number, Ed Balls; the link is here. It turns out that although Osborne has been an MP for a number of parliamentary terms, his most notable achievement has been his contribution to consistent team failure (Back to Basics, BSE, four election defeats for his party).

You might well argue that creating the largest deficit in history is nothing to be proud of either (Balls), but Labour’s subsequent management of the crisis did indeed seem to be shepherding the UK economy back to some sort of mini recovery until Osborne came along and put the skids under that with his swingeing cuts, incidentally the largest and fastest programme of its kind ever, in the world. As I personally carried on in some degree of debt having learnt my lesson partially in the last millenium, so did the Labour government and every other Western capitalist government, more, or less. What we are not told by the government when we are being given the message that budget and household deficits are bad, is that debt long since became a commodity in itself. That much of the crisis was caused by the slicing and dicing of debt and the selling it on, and on, and on, in various forms for profit. Bad, wrong, mad? It doesn’t really matter now, it is a fact. And to deal with the situation we have to deal with the facts at hand. Putting growth and austerity into head-to-head conflict with each other undermines both approaches – and in the meantime the Eurozone, lead by Germany and France, try to repackage their member states debts to make them more attractive to traders and our own government offers start-up loans to social enterprises willing to develop and sell more financial loan products to new social enterprises…

And that’s kind of what happens with this whole debt-ridden thing: we all start chasing our tails and it needs to look like we’re not because at a corporate or national level this kind of behaviour rattles the markets, stocks and bonds take a tumble and we are back to chasing our panic-stricken tails in ever decreasing circles. Which is a bit how it felt trying to write this.

It’s broke folks, and it needs some fixing. We need some radical responses to effect some real change. I wish I knew where they were coming from. In the absence of that, we probably are stuck with an ideal of cautious austerity with a little bit of growth. It’s like nursing the Selfish Giant’s garden back to life when the children have all gone away. But before we can do that, the Giant needs to drop the Selfish bit…

Living in a Time Warp

I like to entertain the notion that I am not such a narrow-minded individual as to immediately lie down in the road and object to every last thing that comes of out of our coalition government’s mouth, but yet again my heart sinks as George Osborne has his moment of: Georgie Porgie’s not for turning on the television yesterday.

He has to stick to the plan of cuts, he said, because mind-changing would induce market panic. Maybe so. Then he was so dismissive of the unions that I would like to poke him with a sharp stick. Apparently, he hopes to sort out a possible wave of strikes by having a “mature” conversation. Of course the implication was that a union was not capable of such a thing. He also said he’d be willing to change the union laws to prevent striking if necessary and, if that were not outrageous enough, he proceeded to tell unions what was best for their members anyway i.e. what he proposes.

What rank arrogance. How long I will have to wait for that man to come a cropper, I do not know, but please let it be soon. Get after him Mr Balls, and get after him good.

Aside from the jaw-dropping conceit of the Chancellor, we are also witnessing the Tories scratching around like Old Mother Hubbard for the odd crumb on the floor to flog to private interests. Maggie only left them the Royal Mail and the Forestry Commission (the NHS they only dare to give to GPs to run). I can be reasoned with over the Royal Mail, but the idea of handing over forests and woodlands to charities or community groups, knowing full well private landowners are going to pick up the slack, is plain depressing.

Many communities can barely function as a community; thanks in part to this shower’s ideological inspiration. Remember there is no such thing as society…just individuals…and families. Those communities that remain, struggle to effectively run a community centre without support from the local council, so how the heck are they going to effectively manage a forest? It’s not just a case of listening out for falling trees and letting nature take care of the rest; it involves hard work, dedication, skilled management and conservation. In fact, all the things the Forestry Commission currently delivers. Please don’t be hoodwinked people. The Government say they want to hand us our own forests to share and enjoy together, but we haven’t got the time, the energy or the expertise to do it. This is nothing more than a money-making exercise that will leave much of our forests in the hands of private individuals. And don’t think they’ll want the likes of us tramping about on their land; not unless we are prepared to pay handsomely and join a pheasant shoot or summat.

Thankfully, and I never thought I would write this, Melvyn Bragg is on the case. Go Melvyn…

The Forest of Dean: not being flogged

A “Brazenly Elitist” Blog Post

I know I said I would stop bitching, but I changed my mind.

Every time David Cameron has opened his trap this week he has come out sounding like the horrible Tory we hoped he might not be. Yesterday he was banging on about marriage in relation to “broken Britain”, which is the most simplistic view of raising balanced children I can think of.

Earlier this week he declared that 16 year olds that had elected not to shine in Maths and English could not become teachers, and a worse than Second in their degree would also consign them to the teaching scrapheap.

I have blagged my way through life with a handful of O’ levels and now find myself teaching adults, some of whom are blessed with the gift of the blag and many who are not. Does having a First mean you will be able to teach the 30th child in your class who sits silently, believes they can’t do anything right and will hold that belief so close to their heart that it might as well be stamped through them like a stick of rock for life? Does having a First mean that when they still believe they can’t spell or do much at all as adults, yet remember your name and face like it was yesterday that you will have any memory of them at all? Probably not.

Some of the brightest stars are the most blinding David, and a piece of paper does not an enduring union make.

I am practically in love with Ed Balls now and that is a terrible thing to type and I am pretty certain who broke Britain too (and it wasn’t Winston Churchill).