Last week’s major UK economic news was the publication of trade figures showing exports failing to drive the economy back towards growth. What caught my eye was exports falling in every one of the UK’s 10 biggest markets – so not a problem we can just blame on the Euro-zone. As one City economist noted, re-balancing an economy is very difficult indeed when external demand is this weak. Earlier in the week the Bank of England again downgraded its growth forecasts and, more importantly, has now concluded the trend rate of UK growth is permanently lower than it was before the crisis, at just 2.1% a year.
Where, then, can we eventually expect growth to come from? Under the government’s austerity plan we’re in for another four or five years of depressed public sector spending – so not there. Export earnings, as we’ve seen, are declining – so not there. That leaves consumer spending or corporate investment. If the government wants to move things along faster, it either has to tax these ‘Can spend, won’t spend’ corporations (see previous blog), risk the wrath of the bond markets by relaxing its self-imposed limits on spending and borrowing, or find more effective ways of putting new money into the economy than the failing mechanism of ‘quantitative easing’.
That new money could either go directly to consumers (sometimes termed a ‘helicopter drop’ after Milton Friedman’s proposal that money be just dropped from the sky to deal with low demand – though funnily enough my kids have much the same idea of economics) or via the government. Expect that to be the next political tussle, with the State route the more likely winner.
And spend it on what? Investment in infrastructure that will enhance future economic productivity is the usual answer. Which frequently translates into projects that will make the cars, trains and planes go faster or involve new spending on schools, hospitals and energy infrastructure. Though a better idea would be to invest in social needs and things that can directly improve people’s quality of life – health, education, social care, culture.
Instead of cramming money back into consumers pockets for them to spend as they wish, the idea behind the Keynesian investment approach is to make sure the new money increases the country’s stock of assets as well as its debt liabilities. Furthermore, argue the advocates of this approach, we shouldn’t worry about the extra debt, because it isn’t that big, and the State can’t go bust anyway. The debt we have now was caused by a collapse in economic demand, not profligate government spending, and will disappear fast enough once growth returns. All sensible stuff.
So why do I have doubts about it? Firstly, the debt may not be as much of a problem as we’re led to believe, but it is undeniably a risk. Not so much the debt stock, which can roll on forever, but the debt payments which have to be met out of current tax receipts that could be put to much better use.
Second – under this policy State investment in some types of asset (transport, energy) is justified by the argument that it will eventually lead to an increase in productivity – more produced by the same resources. The ultimate imperative, then, is still to create new growth in consumption – the demand to meet the extra supply from higher productivity. At base the success of the investment approach still depends on permanently higher levels of future consumption. The difference between the investment approach and an expansionary policy that directly puts money into the hands of consumers, is partly just about timescale – gratification now or tomorrow (though it’s true there is another – if the productive capacity doesn’t exist to meet higher levels of current demand either inflation or higher imports will result).
The issue which the ‘investing in capital assets’ model skirts is that the services we really need more of now – education, social care, health – are, typically, not produced by the private sector but by the public sector. The costs of producing these are largely fixed in real terms over time, as they depend so much on labour inputs. One of the great ironies of the crisis is that the only organisations with the cash to get us out of the hole, can find no profit incentives to use the money in the ways we most need.