by Jonathan Todd
We continue to live through the hangover from what Mervyn King called the NICE decade – non-inflationary continuous expansion. Just like all hangovers what we are living through is consequence of what came before. The supposed NICE decade was always pregnant with the nastiness of now.
This nastiness includes growth that is so feeble that GDP remains 4 per cent below its 2008 peak; a longer contradiction in growth than the notoriously grim 1930s; youth unemployment worse than in the 1980s; and an unprecedented incomes squeeze. It’s hurting but it’s not working: we’re told this is all the price for reducing the deficit but government borrowing is on the rise.
In what senses was the NICE decade pregnant with this nastiness?
Outside of London real median wages began to stagnate in 2003. The level of investment in the real economy was also weak over this period. Public finances became increasingly dependent on one sector of the economy (finance, obviously). The problem of youth unemployment, as David Miliband says, didn’t originate with this government but they made it worse. That can be said for other kinds of nastiness as well.
What was happening in the financial sector – the credit that it extended to households allowing them to live lives their incomes could no longer sustain; the taxes and bond purchases that it provided to government enabling them to spend more than otherwise – disguised the scale and extent of the structural problems with median wages, investment in the real economy, public finances, and youth unemployment.
We’ve transitioned from a “let them eat debt” era into a protracted period of public and private deleveraging and as we’ve done so, the structural problems have become more apparent and more pronounced – but they haven’t been created; they were always there.
Jonathan Portes makes strong arguments for a series of measures that would get the economy out of its present trough: take off the shelf investment projects that were put on it in the last Spending Review; a temporary, but large, cut in National Insurance Contributions; and scrapping the new burdensome and bureaucratic rules and regulations on immigration “that are designed expressly to make it more difficult for businesses to employ the workers they want”.
Portes makes eminent sense, but beyond these measures and beyond any upturn in the economy’s performance, the structural problems, which the excesses of the NICE decade camouflaged, will remain. Of course, Labour must advocate measures, such as those proposed by Portes, which would provide an immediate economic boost. However, our longer term objective must be to correct the structural problems that have their genesis in the supposed NICE years.
This correction is the great long-term economic challenge facing the UK. The capacity of the Chinese state to focus upon and deliver the important and the long-term shines as strongly from When China Rules the World as the propensity of the American state to be sidetracked by the urgent and the short-term resonates throughout Time to Start Thinking.
Obviously, the British would not wish and would be unable to wholly replicate Chinese approaches. Still, we miss the important point if we think that what matters is more or less government. What the contrast between the recent effectiveness of the Chinese and American states highlights is the importance of having economic institutions capable of intelligently devising and implementing a long-term economic strategy.
Larry Elliott and Dan Atkinson have recently written of the challenges facing the UK:
“There are different models that can be followed by a developing (or redeveloping) country as it seeks to built (or indeed rebuild) its economic base. They involve a greater or lesser role for the state, for private enterprise, for foreign investment, for public welfare, and so on … There is a case for choosing one model or another. But make no mistake, a choice has to be made.”
What is necessary is to, first, identify the structural problems that the NICE years incubated, as well as the causes of these problems, and second, to create institutions capable of pursuing a long-term strategy to tackle these causes.
As Elliott and Atkinson argue, we need a plan. And the centralisation of political and financial power in the UK suggests that this plan must involve a dispersal of this power. While there are nine effective lending banks in Britain, there are more than two thousand in Germany. At the same time, grants from central government make up 64 percent of local government funding, which is much higher than the OECD average.
The resuscitation of our economy will achieve little unless the causes of our slump are tackled. While these causes are involved with a state too top heavy to adapt to local economic circumstances and a sector too dominated by too-big-to-fail banks, some of the causes are bigger than the UK. And so, as my next blog will consider, should the solutions also be.
Jonathan Todd is Labour Uncut’s economic columnist