This posting brings together three separate strands with a common
theme - ‘what does the future hold’?
The first makes it quite clear that to avoid being permanently sunk
in a trough of despair because we, and those that come after us, are
burdened down with crushing national debt it should be the absolute
priority to reduce the size of the state altogether and drastically
cut government expenditure not by trivial tweaking here and there but
by major changes in what the state actually does. Roger Bootle
accepts that this will be politically difficult.
So - fortunately - does George Osborne. In an interview (somewhat
badly written!) by Edmund Conway He muses on the pitfalls that a
British government will face. These are so daunting and liable to
change, that Osborne does not lay down specific action now, nor does
Conway probe him! But he leaves no doubt that very soon Britain will
face the full force of the crisis with no strategic resources left
and with the present government hurling ever more cash in a wanton
way at each problem, thus making the fiscal gap ever worse.
Of course this course of action is superficially attractive to the
public for it is a token that the government is “doing something”.
Unfortunately what it is doing is making the future ever more bleak.
But then we come to the third article which puts everything else into
the context of our changing demographic structure. What governments
have to do is balance the needs of the generations. The baby-boomers
(aka ‘the sixties generation’, now in their middle fifties) are now
in the driving seat but what does the future hold for them? Their
savings - if any - have been devalued when they haven’t actually been
confiscated! Their private pensions will be much less favourable
than those of their parents now in their eighties. At the same time
they will in most cases want to help those parents in the final
years. Meanwhile their children are graduating from a very diverse
range of “universities” but are finding that their degrees have, in
many cases, done little for them except land them them with massive
personal debts. This is desperate for them but equally unnerving for
their parents (the same baby-boomers) who may have to support them
while they find gainful employment . Indeed, the age of affluence
is over, though the age of reckless spending doesn’t appear entirely
dead - yet!
So I pose the question. Do we have a future?
xxxxxxxxxxxxx cs
===================
TELEGRAPH 2.2.09
1. We must prepare for the recovery - whenever it comes
The gloom seems to be deepening by the day. Don't think I am
confident, let alone bullish if, I turn my attention this week to
recovery, writes Roger Bootle
By Roger Bootle
I have been musing on the shape of what lies ahead, once the economy
starts to climb out of the mire once again. No, I am not forecasting
that this will happen any time soon – but eventually it will. And we
should be prepared for it.
I suspect that the recovery will be slow and halting at first. For a
start, as far as aggregate demand is concerned, it will run into a
headwind from the public sector. The Government has embarked on a
Keynesian policy of expanding the budget deficit in a bid to mitigate
the recession. I have supported this policy.
But once the recovery has begun, there will be a need to reduce the
deficit sharply in order to stop the debt to GDP ratio from
ballooning to unmanageable levels. Of course, as the economy
recovers, the deficit will normally tend to come down naturally as
tax receipts rise. But bearing in mind the extent of the ballooning,
the Treasury may well want to tighten policy further to bring the
deficit down sooner.
Meanwhile, the housing market is likely to remain subdued for years
and unemployment will continue to rise well after the GDP numbers
have bottomed. Accordingly, whenever the statistics say that the
recession is technically over, we will face a long hard slog to get
back to prosperity and full employment.
When we get there, the economy cannot take the same shape as before.
Although I have argued that the immediate task is to keep consumers
spending and to bolster this by government support, as the recovery
begins, the balance must change in order to bring sustainability in
the medium term.
No, our recovery will have to rely more on net exports. A good part
of these exports will be services, including business services, at
which we excel. But the bulk will have to be manufactured goods. The
recovery will have to involve a mini-revival of manufacturing.
I say mini because there isn't the need or the scope to return to the
days when manufacturing accounted for 30pc of GDP. Nor is this
process going to change the likely comparative advantage for the UK
over a twenty year period. Over such a time scale I expect the share
of manufacturing in the UK's GDP to be even lower than it currently
is. But it is perfectly possible to have cycles around this downward
trend. I believe that the relative size of manufacturing in this
country declined too far, too fast, driven by the high pound. Once
the recession is over, that excessive contraction can be reversed.
This will have an employment dimension. The City should not hold the
same allure for young graduates as it did a couple of years ago.
Good. It will be far healthier if fewer of them do financial
engineering and more stick to the real thing instead.
There may also be a regional dimension. The share of services has
risen sharply in the Midlands and the North, which used to be
strongly bound up with manufacturing. But although the extent of
regional differences has been eroded, they still remain. So the
recovery is likely to favour the Midlands and the North over London
and the South East.
There is a view that the recession is going to lower the UK's growth
potential as investment falls back, skills are lost and capital is
made redundant. If this is true, then our subsequent growth path will
be lower than it used to be.
I do not share this pessimism. Interestingly, the normal rate of
growth of productivity in manufacturing is higher than in the
services sector, so a shift from services to manufacturing could be
expected to raise overall productivity growth. Whatever capital
investment is lost in the recession because of credit shortage may be
largely made up once the recovery gets under way. Moreover, the City
does not use much by way of fixed assets, except buildings, and they
will still be there when the recession is over.
Furthermore, the recession will offer huge opportunities to make
things better. Life is full of examples of good things coming out of
bad. What matters is how you react to the bad times. The right thing
is to use them as an opportunity to do the things which you should
have done anyway but didn't.
In this country, the most important task is to reduce the size of the
public sector. This should have been a top priority without the
recession and its attendant upsurge in public sector debt. But the
debt splurge will offer a spur and an incentive. Once the recession
is over, the primary task of the next government will be to cut
public spending in real terms, so that as the economy recovers and
tax receipts rise, the deficit can come down sharply. The benefit
will not only be financial. Releasing resources from the clutches of
the state will itself raise the potential growth rate of the economy.
Of course, this task will be politically difficult. So much so,
indeed, that the idea is doing the rounds that the next election will
be one which both major parties should want to lose. I do not take
this view. When things are grim and you have your back to the wall,
much can be achieved. The reason why the Conservatives were rejected
in 1997, after five years of good economic management and soundly
based recovery under Norman Lamont and Kenneth Clarke, was not that
the electorate resented those policies. It was because people did not
forgive the Conservatives for the blunders which landed us in that
position in the first place.
Moreover, although the recovery will be slow at first, it is
remarkable what 10 years of growth can do. When Mrs Thatcher was
elected in 1979, she was not greeted by an economy flush with
success. On the contrary, the country had just gone through the
"Winter of Discontent", and three years previously we had been forced
to go to the International Monetary Fund (IMF). It seemed that our
destiny was continual decline into mediocrity. Few people then would
have dreamed that by the end of the 1980s we would be booming again,
still less that 20 years on, a Labour chancellor would be boasting
about being top of the G7 exams in all subjects. I know both bouts of
euphoria were overdone. But so is the current gloom about our medium-
term prospects. Precisely because things are currently looking so
awful, for whoever sorts them out, the rewards could be enormous.
--,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-
roger.bootle@capitaleconomics.com
--------------------------------------------------------
Roger Bootle is managing director of Capital Economics and economic
adviser to Deloitte.
=============
theme - ‘what does the future hold’?
The first makes it quite clear that to avoid being permanently sunk
in a trough of despair because we, and those that come after us, are
burdened down with crushing national debt it should be the absolute
priority to reduce the size of the state altogether and drastically
cut government expenditure not by trivial tweaking here and there but
by major changes in what the state actually does. Roger Bootle
accepts that this will be politically difficult.
So - fortunately - does George Osborne. In an interview (somewhat
badly written!) by Edmund Conway He muses on the pitfalls that a
British government will face. These are so daunting and liable to
change, that Osborne does not lay down specific action now, nor does
Conway probe him! But he leaves no doubt that very soon Britain will
face the full force of the crisis with no strategic resources left
and with the present government hurling ever more cash in a wanton
way at each problem, thus making the fiscal gap ever worse.
Of course this course of action is superficially attractive to the
public for it is a token that the government is “doing something”.
Unfortunately what it is doing is making the future ever more bleak.
But then we come to the third article which puts everything else into
the context of our changing demographic structure. What governments
have to do is balance the needs of the generations. The baby-boomers
(aka ‘the sixties generation’, now in their middle fifties) are now
in the driving seat but what does the future hold for them? Their
savings - if any - have been devalued when they haven’t actually been
confiscated! Their private pensions will be much less favourable
than those of their parents now in their eighties. At the same time
they will in most cases want to help those parents in the final
years. Meanwhile their children are graduating from a very diverse
range of “universities” but are finding that their degrees have, in
many cases, done little for them except land them them with massive
personal debts. This is desperate for them but equally unnerving for
their parents (the same baby-boomers) who may have to support them
while they find gainful employment . Indeed, the age of affluence
is over, though the age of reckless spending doesn’t appear entirely
dead - yet!
So I pose the question. Do we have a future?
xxxxxxxxxxxxx cs
===================
TELEGRAPH 2.2.09
1. We must prepare for the recovery - whenever it comes
The gloom seems to be deepening by the day. Don't think I am
confident, let alone bullish if, I turn my attention this week to
recovery, writes Roger Bootle
By Roger Bootle
I have been musing on the shape of what lies ahead, once the economy
starts to climb out of the mire once again. No, I am not forecasting
that this will happen any time soon – but eventually it will. And we
should be prepared for it.
I suspect that the recovery will be slow and halting at first. For a
start, as far as aggregate demand is concerned, it will run into a
headwind from the public sector. The Government has embarked on a
Keynesian policy of expanding the budget deficit in a bid to mitigate
the recession. I have supported this policy.
But once the recovery has begun, there will be a need to reduce the
deficit sharply in order to stop the debt to GDP ratio from
ballooning to unmanageable levels. Of course, as the economy
recovers, the deficit will normally tend to come down naturally as
tax receipts rise. But bearing in mind the extent of the ballooning,
the Treasury may well want to tighten policy further to bring the
deficit down sooner.
Meanwhile, the housing market is likely to remain subdued for years
and unemployment will continue to rise well after the GDP numbers
have bottomed. Accordingly, whenever the statistics say that the
recession is technically over, we will face a long hard slog to get
back to prosperity and full employment.
When we get there, the economy cannot take the same shape as before.
Although I have argued that the immediate task is to keep consumers
spending and to bolster this by government support, as the recovery
begins, the balance must change in order to bring sustainability in
the medium term.
No, our recovery will have to rely more on net exports. A good part
of these exports will be services, including business services, at
which we excel. But the bulk will have to be manufactured goods. The
recovery will have to involve a mini-revival of manufacturing.
I say mini because there isn't the need or the scope to return to the
days when manufacturing accounted for 30pc of GDP. Nor is this
process going to change the likely comparative advantage for the UK
over a twenty year period. Over such a time scale I expect the share
of manufacturing in the UK's GDP to be even lower than it currently
is. But it is perfectly possible to have cycles around this downward
trend. I believe that the relative size of manufacturing in this
country declined too far, too fast, driven by the high pound. Once
the recession is over, that excessive contraction can be reversed.
This will have an employment dimension. The City should not hold the
same allure for young graduates as it did a couple of years ago.
Good. It will be far healthier if fewer of them do financial
engineering and more stick to the real thing instead.
There may also be a regional dimension. The share of services has
risen sharply in the Midlands and the North, which used to be
strongly bound up with manufacturing. But although the extent of
regional differences has been eroded, they still remain. So the
recovery is likely to favour the Midlands and the North over London
and the South East.
There is a view that the recession is going to lower the UK's growth
potential as investment falls back, skills are lost and capital is
made redundant. If this is true, then our subsequent growth path will
be lower than it used to be.
I do not share this pessimism. Interestingly, the normal rate of
growth of productivity in manufacturing is higher than in the
services sector, so a shift from services to manufacturing could be
expected to raise overall productivity growth. Whatever capital
investment is lost in the recession because of credit shortage may be
largely made up once the recovery gets under way. Moreover, the City
does not use much by way of fixed assets, except buildings, and they
will still be there when the recession is over.
Furthermore, the recession will offer huge opportunities to make
things better. Life is full of examples of good things coming out of
bad. What matters is how you react to the bad times. The right thing
is to use them as an opportunity to do the things which you should
have done anyway but didn't.
In this country, the most important task is to reduce the size of the
public sector. This should have been a top priority without the
recession and its attendant upsurge in public sector debt. But the
debt splurge will offer a spur and an incentive. Once the recession
is over, the primary task of the next government will be to cut
public spending in real terms, so that as the economy recovers and
tax receipts rise, the deficit can come down sharply. The benefit
will not only be financial. Releasing resources from the clutches of
the state will itself raise the potential growth rate of the economy.
Of course, this task will be politically difficult. So much so,
indeed, that the idea is doing the rounds that the next election will
be one which both major parties should want to lose. I do not take
this view. When things are grim and you have your back to the wall,
much can be achieved. The reason why the Conservatives were rejected
in 1997, after five years of good economic management and soundly
based recovery under Norman Lamont and Kenneth Clarke, was not that
the electorate resented those policies. It was because people did not
forgive the Conservatives for the blunders which landed us in that
position in the first place.
Moreover, although the recovery will be slow at first, it is
remarkable what 10 years of growth can do. When Mrs Thatcher was
elected in 1979, she was not greeted by an economy flush with
success. On the contrary, the country had just gone through the
"Winter of Discontent", and three years previously we had been forced
to go to the International Monetary Fund (IMF). It seemed that our
destiny was continual decline into mediocrity. Few people then would
have dreamed that by the end of the 1980s we would be booming again,
still less that 20 years on, a Labour chancellor would be boasting
about being top of the G7 exams in all subjects. I know both bouts of
euphoria were overdone. But so is the current gloom about our medium-
term prospects. Precisely because things are currently looking so
awful, for whoever sorts them out, the rewards could be enormous.
--,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-
roger.bootle@capitaleconomics.com
--------------------------------------------------------
Roger Bootle is managing director of Capital Economics and economic
adviser to Deloitte.
=============
2. AS CONUNDRUMS GO THIS IS A BIG ONE
By Edmund Conway in Davos
It is a little known fact that George Osborne is a real whizz-kid
with a Rubik Cube. At Davos 2008 the shadow chancellor wooed
onlookers at the Google party by solving one of the shuffled 1980s
cubes in less than a minute
“Ah yes, I think I’ve still got that at home” he laughs, “I think
it’s in my son’s room”.
But even Rubik’s solving of these proportions will struggle to find a
solution for the economic challenges facing the UK and world
economies. The World Economic Forum which came to an end yesterday,
was dominated by gloom and soul-searching from bankers and
politicians in the face of the financial crisis.
Meanwhile back home, the UK’s international reputation was dented by
news that the international Monetary Fund expected a more severe
recession in Britain than in any other major economy. What worries
Mr Osborne is that if the Tories win the next election they will
inherit an economy which is paralysed, potentially for years.
“Whoever wins the general Election is going to be faced with the most
difficult economic situation arguably any post-war British government
has faced,” he says. “It’s certainly comparable to 1979 and
potentially worse than that.”
“On the fiscal front, the budget deficit is a massive hole in the
public finances and, as the Institute for Fiscal Studies made clear
this week, the implications for debt in the long term are enormous”
So great are the pressures on the public balance sheet that he
refuses to rule out that the UK has to be bailed out by the IMF as
pressure on the pound intensifies.
“We need to warn the country about the consequences of running very
large budget deficits and that is one possible consequence you run”,
he says.
The summit has proved to Mr Osborne that there are no easy
solutions. Even a ‘bad bank’ idea - now under consideration by
Barack Obama - is no silver bullet, in the view of the economists
meeting in Davos. It is a humbling realisation, says Mr Osborne -
particularly for Gordon Brown,
Another probable solution, to the economic slump at least, is to
start pumping extra money into the economy - known in the trade as
‘quantitative easing’.
The Bank of England last week confirmed the structure of a new asset
purchase scheme which will allow it to do precisely that. Mr Osborne
was scathing of the move to quantitative easing - to the shock of
most city economists.
However, the shadow chancellor says: “My view is you don’t rule it
out, and I’ve been very careful not to - particularly in the current
economic environment.”
“However, when you get to it, it is an admission that everything else
hasn’t worked. That’s why I describe it as the last resort of
desperate governments.”
“At the moment there is a serious disconnect between what the
government is doing and public trust in what the government is
doing. Another danger is a retreat to domestic banking and economic
nationalism,”
“It is a very real problem” says Mr Osborne. “We need to avoid a
retreat to domestic banking, Inevitably, because of the credit
crunch, that is happening to a degree.”
Ironically, given the Conservatives troubled relations with the
European Union, Osborne believes the EU should step in.
“One area where I think there is a very important role for the EU is
in preventing pseudo-protectionism - in other words, domestic support
measures in the economy not just on banking but on employment
support and the like, violating the principles of the single market.
Those really will return us to the days of the 1930s. It is the thin
end of the wedge.”
And that was the parting warning from Davos this year: that the ugly
ghost of the Great Depression looms larger than ever.
=============
Who is going to pay for all our old people?
An ageing population was not a problem - until the crunch came along,
says Philip Johnston.
Philip Johnston
We are facing an age crisis, not just because we are living longer
but also because our children will have to bear the burden, yet are
singularly ill-equipped to do so. A two-year study commissioned by
the Children's Society, for which 35,000 youngsters were interviewed,
has concluded that they are less capable than any previous
generation. It blames poor education, broken homes and the
"excessively individualistic ethos" of contemporary Britain. The
lives of children, it says somewhat dubiously, are more difficult now
than they were in the past.
Presumably by "past" the researchers mean since the mid-1950s. How
could it possibly be said that children now lead a more difficult
life than they did when they had to leave school and start work at 14
or were raised in the squalid slums of Victorian England or were as
likely as not to die from a ghastly disease? Have these people never
read Mayhew's London? But if today's children, with all the material
goods they have, consider themselves miserable now, they should see
what the future holds. Not only will they have to spend the next 25
years paying off the accumulated debt of the past 10, including the
additional borrowing needed to bail out the banks, they also face
something that is by any definition a great economic and social
transformation: the rapid ageing of the population.
As a member of the baby boomer generation who is now closer to
retirement than to the beginning of his career, I thought it prudent
to attend a conference last week with the title Ageing Population.
This was a government event for "professionals and experts" who deal
with the exigencies of old age, including residential and health
care. It was chaired by George Magnus, an investment bank economist
who has become something of a guru on the subject and wrote a well-
received book, The Age of Ageing, which explores a phenomenon with
which the world has never had to deal and whose implications are not
fully understood. Mr Magnus has an impressively scary list of
statistics at his fingertips. In this country, there are more people
over 65 than under 16. By 2017, the numbers aged over 65 will be 50
per cent greater than now. Whereas until fairly recently, four people
of working age supported every pensioner, from 2020 the ratio will be
2:1.
Until a year or so ago, this was considered a benign development.
After all, what is wrong with staying alive longer? More than that,
in the West at least, most of us would grow old retaining both our
wealth and our health. It was all going to be so easy: the silver
surfer would ride the crest of a booming economic wave whose like we
had not seen before. The grey pound would be all powerful. Most
people would live longer but (provided they could avoid the risks of
dementia) would be more vigorous in their old age and sustained in
comfort by the money made by realising the equity in homes that had
trebled in value and by pensions that had benefited from years of
economic growth. The younger generations could get on with their
lives while their parents and grandparents travelled the world.
An ageing population was never going to be a problem, provided there
was not an economic shock. Then, crunch.
So many solutions to the problems of ageing were predicated upon the
good times never ending. As Chancellor, Gordon Brown behaved like a
reverse alchemist – selling the nation's gold and making everything
else worthless. He took one of the most damaging decisions possible
by removing tax breaks from private pensions because he thought the
ever-booming economy would sustain the value of the equities to which
they were linked. Mr Brown was told at the time that this was
tantamount to larceny. Its disastrous impact is now obvious,
especially for people about to retire or buying an annuity worth one
third less than it was just a few months ago.
Judging by last week's conference, the Government, voluntary agencies
and think tanks have not fully taken on board what has happened. It
focused almost exclusively on what the state could do to provide
residential care, housing, relieving "fuel poverty" and the like, all
of which are crucial for older people. There is still talk about free
care for all, as in Scotland – except that it is only free at the
point of delivery. Who is going to pay for it?
Public sector pensions must come into line with those in the private
sector to release more money for people to provide for themselves.
The ratio of dependants to workers can be improved by letting people
work longer if they choose and ending the requirement for children to
stay on at school or go to college if they do not want to. The Turner
report into pensions a few years ago proposed compulsory savings for
old age, which because of the mess we are in may now have to be
seriously contemplated – though since that was supposed to be the
purpose of National Insurance, the money must be placed into accounts
protected from the rapacious grasp of the wasteful state or it will
be frittered away.
The alternative is penury, both for those heading for retirement and
their miserable children.
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