Current economic and social developments

My friends often ask for my views on recent economic and social developments, so here goes….

 The Euro project has been a disaster, leading to a massive trade surplus in Germany, matching deficits in Greece, Italy, Spain, Portugal and many other countries and France, and severe unemployment in Greece and Spain, with associated illness, early death, suicide, destruction of young careers and political bad feeling. The growth and well-being of the whole EU has suffered and is still suffering as a result. Economic growth is not the only important thing in the world, and, yes, we do have to worry about the environment, but contraction and stagnation tends to be pretty bad, especially for the young.

 Germany has exported unemployment since the Euro was founded and done little to help its friends but has done a good job of accusing them - see the horrors of the German press. The continuing high level of unemployment in many Eurozone countries is due to their attempts to squeeze public and private consumption and reduce the debt that the Germans benefited from as these countries happily spent money on German products. The result has been severe and continuing under-performance of the Euro zone. This tendency is clearly visible in the economic statistics from the year the Euro was launched i.e. 1999 – a growing German trade surplus and growing deficits in the other countries mentioned. It is not a result of the credit crunch, though was exacerbated by it. The forecast is still bleak, and the IMF talks about Italy’s wasted years. Ital’s banking crisis continues, and the poor state of their economy means that they can’t grow out of it.

 One of the two good things Gordon Brown did was to keep us out of the Euro zone, despite pressure from Blair, who knew nothing about economics (or much practical stuff at all other than self-aggrandisement and making money for himself). The other was to give the Bank of England independence. These are the two great legacies of an otherwise profligate and business-obsessed Chancellor of the Exchequer (and Prime Minister). Remember who knighted Fred Goodwin and Philip Green!

 Iceland, in trouble for other reasons after the credit crunch, solved its problem quickly by halving of its currency. This was not open to Euro zone members. Until they get rid of the Euro (or until other members leave), the Euro zone and the EU will be an economic basket case. The only Euro zone country which managed to deal with the German problem well was Eire, but at great social cost. The Baltic states and many East European states linked to the Euro or encouraged into debt by a German-led European banking industry are suffering too.

 So although we were not in the Euro, we are now exiting its contaminating influence, though it may mean turbulence for a few years. The risks? Exaggerated! The economic centre of gravity of the world has shifted dramatically towards the East since the EU was founded, largely to companies with which we trade a lot and are our friends. That is why our government is now focusing on India and China (and of course our many other friends, particularly the Far Eastern giants and our Commmonwealth cousins).

 The worry about risks of reduced Foreign Direct Investment into the UK from the EU is a myth, as most of that investment has been in our very profitable service industries, not in industries that export back to the EU (the motor industry is the big exception that proves the rule). One of the best examples of this is London United bus company, which is owned by the Paris Transport authority, RATP. This is one reason for the recent and much needed (it was overvalued) decline in sterling, as our overseas investments are primarily in commodity-producing firms (think oil, minerals etc.), and earnings from these have fallen sharply, while earnings in our services industries are booming. Foreign Direct Investment in our successful economy has been massive in the last decade (we used to own four times as much abroad as others owned in the UK, but the two amounts are now roughly equal).

 Our farmers will be very happy as we move back to income support, and our food will cheapen. The Australians, New Zealanders and other Commonwealth farmers will be happy about that too as they restore their exports to us.

 The EU’s initial unpleasant reaction to Brexit has unsurprisingly been much moderated given our importance to the EU (and Germany), but we may be in for a less easy time. For this reason, our new leadership is engaging strongly with the rest of the world, continuing with our current relative economic success and avoiding pledging deficit reduction and being assertive towards a German-dominated EU. Meanwhile, the initial reaction of stock markets was that the German stock market fell three times further than the UK one proportionally. The day of exporting unemployment will be over soon, but not soon enough for the young people of Southern Europe, as they will have to learn to grow without so many German goods. However, then Germany will need us even more, as it will no longer have its export surplus with the rest of the Euro zone. With which country does Germany have its second biggest export surplus today? The UK, and that was before Germany put pressure on the rest of the Euro zone to reduce their trade deficits and hence German imports. What do they think they are doing?

 Meanwhile, a few encouraging facts about the UK economy and society:

• A high volume of good new immigration - skilled people who claim little benefit, work hard and keep our population young to avoid the geriatricisation being suffered by Germany (and already present in Japan) and the real reason for Merkel’s disingenuous and possibly dangerous open-door policy. Immigration into the UK is slightly at risk in the years after Brexit, but the number of young people already in the UK will stand us in good stead demographically for the next couple of decades. From recent EU declarations, it seems that they value the ability of EU workers to escape the unemployment disaster caused by German economic policy enough to give us some bargaining power in this area.
• A steadily growing successfully service-based economy (please don’t be Mercantilist) with low inflation and low unemployment, likely to be sustained by the sensible Keynesianism of the new chancellor.
• A relatively affordable public pension system compared with other EU economies (we have bitten the bullet on raising pension ages, though there are still many parts of the public sector with liabilities which will be expensive to fund)
• A public sector settling into its role as provider of benefits which we all agree are rights (though there is disagreement about whether they are high enough) and critical investments in infrastructure, health and education, not as an employer of bureaucrats, though with some naivety about how you make the health system efficient (all the independent research shows putting financial pressure on hospitals – which absorb most of the NHS budget – produces not only greater efficiency but more importantly better quality health – people die more quickly and catch more diseases in inefficient hospitals, and these trends are related to the survival of weak management in inefficient hospitals), and the same naivety about education, but with the latter the management of change is compounded by the constant meddling of politicians from both ends of the political spectrum
• A world-beating high-tech culture, matching California and Tel-Aviv
• The preferred home of many foreign direct investments and the source of expertise for their owners as they try to shift their economies from 100% dependence on oil, basic manufactures etc.
• A world-beating creative industry

 We do have some longer term problems, such as lower average productivity (partly caused by too low a level of investment in recent years, in turn associated with the erroneous squeezing of the economy under Osborne after the 2007-9 debacle), and a higher degree of income inequality than some European countries (but not all - and note that we have a much higher degree of wealth equality than most developed countries), but as a nation seem to be happier with the low unemployment that seems to go with how we run things. The housing shortage is a self-inflicted problem of not allocating resources or space and nothing to do with any of the above. That the benefits of the economy have been skewed towards the old is a problem, but most of the beneficiaries of our pension policy have been elderly poor, so we do have to work out what to deal with this. One example might be ensuring that those who continue to earn after retirement age continue to pay National Insurance, unlike now. Another might be to increase income taxation at the top end and abolish profits tax (which yields only a small amount of profit and then becomes taxable when received as income). This would be beneficial for those on small pensions which increasingly depend upon profits (because of the end of final salary schemes) but raise more tax from rich pensioners. By the way, the argument about multinationals avoiding taxes is silly, because our tax yield Is dominated by income tax, national insurance and expenditure taxes. We need multinationals to create lots of employment here, so their workers earn and spend a lot.

 One reason I am writing this is that there is a danger of talking ourselves into problems. I know that that phrase can just be a way politicians tell us to shut up, but some believe that despite the terrible situation created by Brown, we were able to exit from it relatively gracefully just by talking tough (Osborne did not reduce government expenditure and debt anything like as much as he said he would). Confidence is a weird and fragile thing. It is therefore sensible to remember the good things while trying to rectify the bad.

 I am refraining from commenting on the performance of the new May government on the grounds that it is still too early to say, though if pressed I would say that I think they are making the right moves, but let’s wait and see.

 Finally, I am often asked what I think about Corbyn. As a declared Conservative and member of the party, there is one obvious response. But having a weak opposition is bad. Labour does need to determine what it stands for in today’s society economy. Equality of outcome (a phrase currently bandied around) is not enough, and probably bad for workers, as most workers are employed by businesses owned by small businessmen who are motivated by the opposite. And as I mentioned above, wealth outcomes are very good here compared to most of the developed world. I welcome the day when someone emerges in the Labour Party who can think clearly, use good evidence and not demonise, unlike the new young supporters of Corbyn, some of whose violent and racialist behaviour has been quite shocking. Oh for the 1960s!