Economics News : 28 May
May 28, 2010
Avoid lying, except in matters of taxation;
there’s a special dispensation to cover fiscal falsehoods.
Giovanni Morelli—the exemption applies as much to those who govern as to those governed
Having dealt with the Constitution . . .
The economics priorities of the Lib-Con Coalition became a little clearer last week. Addressing an audience in Yorkshire, the Prime Minister pledged to change things on a number of fronts. He said that the public sector had become bloated, that the huge national debt was debilitating and that most welfare programmes had failed. He wanted to ameliorate things on each front.
. . . the Prime Minister could turn his attention to economics.
It was largely politics, of course, but fairly sensible stuff nonetheless. The main anxiety related to taxation. Many of those who were listening thought raising it would be counterproductive. Brown’s lot, it was recalled, hadn’t incurred the debt by cutting taxes but by lifting expenditure.
Taxation may be the sticking point.
Taxation was already too high; businesses already leaving the UK for less penal jurisdictions. If GDP were to be boosted, the imposition had to be reduced, not increased. The Prime Minister was said to be sympathetic to lower Corporation taxes, but had still to be persuaded of the case for a more moderate CGT.
It may unglue the coalition
It was the LibsDems who were causing the problem. Although they accepted that capital gains taxes could never raise significant sums of money, they argued that the principle of “fairness” demanded it be levied at a nominally high rate! Not a good omen: these guys value perception above reality. They live in their own little world; not in ours.
Welfare is a mess, and always has been.
What was said about welfare was true enough. But it remains to be seen if a fairly accurate analysis of the defects of the current system can be transformed into a sensible alternative in the future. It’s not the first time the task has been attempted. Most others have been swamped by bureaucratic inertia within a year. The objective, always, a system that’d be cheaper and more efficient; the result, almost always, one that was more expensive and less efficient!
Britain’s GDP is stagnating.
News of an upwardly revised estimate of Britain’s GDP in the first quarter of 2010 did not get much coverage in the press. Understandably so. The revision was disappointingly small—from 0.8% per annum to 1.2%. The key question was what would happen in the remainder of the year. Would growth return to respectable rates? The outlook wasn’t good: taxation was likely to stay penal; and demand in much of the rest of the world might stumble.
America’s not quickening.
In this respect, the news from the States was significant. Growth in the early months of 2010 was revised down—but to a still satisfactory 3% per annum. What was more important was the second differential. Would the rest of the year see a further slowing or a new quickening? Probably the former: the chronology of the cycle indicated that the US had already embarked upon its phase of moderating growth.
Nor Japan’s.
Japan was doing a little better, but not much. Activity there was rising, but unspectacularly. Price levels, though, were falling. The Japanese Government had accepted that this would be the norm for some time to come. So had the people. The main variable was China. When its demand was strong, Japan’s exports rose and GDP quickened. When China paused for breath, Japan retreated, probably recessed.
Europe’s is subsiding.
Europe, of course, was the worst of the three majors. It was paying the price for its monetary hubris. It’d not recover until it had resolved the issue of the single currency. But that might take a long time. The Merkels and Sarkozys of this world, the Barrosos and Trichets, had set their brains in neutral. They absolutely refused to review the data or to consider the options. They said that to break up the euro would be apocalyptic. So childish! Shall the rest of us have to wait for them to grow up before the problem is tackled?
Did Cameron really get a first? If so, he hides it well.
Cameron said in a recent speech that it was in Britain’s interests that the EuroZone be strong and the single currency stable. What a strange duality. Did he really think it was possible that the two might go together? In reality, they’re inimical. If the currency bloc persists, the economies will be weak. It’s only if the bloc disintegrates that economies will be strong.
Outlook bleak: bankers are dispensable.
In the foreseeable future, in any event, Britain’s economy will suffer: its growth inhibited by the EU’s scleroticism; its finances impaired by the crippling cost of membership. A double whammy. And securities valuations will be periodically undermined as well. Banks are in trouble. A few high profile failures might help!
Economics Views : 26 May
May 26, 2010
The State doesn’t just do big things badly;
it messes up small ones as well!
John Kenneth Galbraith—the moral is: don’t let the scallywags get their hands on your money.
The stock market is saying that there’s a problem.
Financial markets are imperfect forecasters of economics developments, but much less imperfect than most other mechanisms. The comparison is not one that flatters humans. The latter tend to react defensively, therefore. Galbraith was not atypical. Presented with the evidence, he retorted petulantly that the equity indices had forecast eleven out of the previous eight recessions.
It’s probably right.
He’d intended to disparage the stock markets; to belittle their predictive value. But what he actually did was to endorse them; unwittingly, to acclaim their track record. How many of those recessions, his audience had to ask itself, had professional economists forecast? Very few!
Europe’s next cyclical downturn could be severe.
It’s much the same these days. The markets continue to make mistakes, but fewer than economists. That’s what makes the steep slide in valuations in recent weeks rather disturbing. The immediate outlook may be satisfactory, but that twelve or eighteen months hence might be grim; possibly very grim!
Banks are the spanner in the ointment again!
What’s the problem? Nobody knows with any certainty, but the financial system seems to be short of liquidity. The authorities are pursuing highly expansive credit policies, but intermediaries—banks and investors—are reluctant to pass on the funds. Everybody is suspicious of the creditworthiness of everybody else.
Some may be teetering on the edge of oblivion.
The urgent problem relates to commercial banks. They got themselves into trouble in 2007/8 and, despite huge handouts from the taxpayer then, may be back in difficulty now. If so, there’ll be no respite; they’ll get no seconds. Investors no longer trust the authorities. They’ll not buy the Treasuries that would finance another bailout. Instead, if the rumours were to prove well-founded, there’d be a systemic implosion.
In which case . . .
Greece demonstrates the problem. Nobody’ll buy the securities issued by Athens; not locals nor foreigners. If Greece is to stay in the EuroZone, it’ll have to be the Germans that finance the bailout.
. . . there’ll be no salvation.
Spain is going the same way. There are rumours that many banks are unsound and, unsurprisingly, Madrid is now being treated in much the same way as Athens. Will Germany come to the rescue? No.
Systemic collapse is possible.
The denouement is obvious. Europe will have to change: the single currency being abandoned and a number of commercial banks being allowed to fail. Concurrently, economics activity will soften: unemployment rising and inflation falling. But how quickly? Will politicians and bureaucrats be helpful or obstructive? Will they opt for reality, or fantasy?
Britain is not much better placed.
The “likely lads” running Britain these days are no better informed than their European counterparts. At the Opening of Parliament, the Queen’s Speech made it clear that they don’t yet understand the magnitude of the problems the economy faces. Do they really think that a £6bn reduction in public spending is of any significance in the context of annual borrowings of £150bns?
Valuations falling before they rise.
They say they’re prepared to take tough decisions, but their actions belie their words. Not until the public sector’s DB pensions are abandoned and its retirement age lifted to 70 will action and rhetoric be aligned. In the meantime, the stock market is likely to be unrewarding. Dividends may rise and inflation dip, but capital values will suffer.
Economics News : 21 May
May 20, 2010
A man’s intelligence is measured by
his ability not to flap in times of crisis.
On this basis, until recently, many Europeans (Trichet, Barroso, Merkel et al) looked very clever. Cameron and Clegg still do.
Most of the time, Europeans are sensible . . .
Europeans have many fine qualities, but an understanding of market psychology is not one of them. They distrust laissez-faire and opt instead for dirigisme. In industry, that works well, but in finance it doesn’t.
. . . but, when they get it wrong, they . . .
They don’t value the investor, but disdain him. They see him, not as an identifier of problems, but a creator of them. In a crisis, their knee-jerk response is to deny the existence of an imbalance, and to ban the activities of the speculator. They invariably fail.
. . . get it very wrong.
The euro is a case in point. It was always going to implode. The only uncertainty was the time it’d take to do so. We didn’t know how quickly investors would react, nor how quickly the authorities would throw in the towel.
The euro was their folly.
The Franco-German decision to apply punitive regulation to hedge funds was ill-judged. It wasn’t just hedgers who were taking positions again the euro; everybody was. Anybody who could see the numbers and analyse their implications was bound to be wary. And anybody but a Eurocrat would have realised that the measures taken would be counterproductive. Psychologically, they validated the anxiety. They implied the authorities were scared.
They shut their eyes to its illogicality.
The subsequent ban on short-selling made matters worse. It suggested that the situation was desperate. Until then, the flight had been moderate; subsequently, immoderate. Beforehand, the majority was saying that the problems were serious but containable. Afterwards, a significant minority thought them uncontainable.
And blamed everybody but themselves for its failure.
The problem now is much worse than it ought to be. Investors don’t trust anything the Commission or the ECB says; nor anything stemming from national governments. There is a fear that the euro will be re-jigged and that some market participants, those who’ve dealt unwarily, will be on the wrong side of the new arrangement. Accordingly, there’s a reluctance to buy anything European.
Now, they’ve combines an economics and a financial crisis.
Even German bonds are spurned. Why? Because, in the event of a reversion to national currencies, the euro’s value would be highly uncertain. Will a “German” euro be worth more than a “Greek” one? Perhaps so; perhaps not. Better to wait; or, in extremis, to demand a compensatingly high risk premium.
The banks may be teetering again.
There is an additional problem. The economics crisis is not over. The huge slump in activity two years ago was followed by only an anaemic recovery. It was much feebler in the “old” world than the “new” one. It was particularly disappointing in Europe. As a consequence, the banks there may be in trouble again.
They should have been allowed . . .
In 2008, investors (quite logically) refused to lend to the banks. The authorities circumvented the market’s apprehension by issuing debt themselves and giving the proceeds (absolutely outrageously) to the banks. Now, though, the lessons having been learned, investors won’t lend to the authorities!
. . . to fail two years ago.
If the banks are in trouble again, it won’t be possible to save them a second time (thank goodness). And the countless billions of taxpayers’ funds spent on their behalf then will have been wasted. The consequences for the economy will be frightful. There’ll be no respite on any front. No possibility of tax reductions. Nor any of interest rate cuts.
Britain is barely any better placed.
Britain will fare slightly better than Europe. It hasn’t been handicapped by being locked into the euro. And its authorities tend to be more open-minded about markets. That said, the judgments of the last Chancellor and Prime Minister were appalling, and those of their recent replacements seem little better.
The two C’s are a comedy Act.
Cameron and Clegg are faffing around playing at being philosopher kings. They’re redesigning society in their own image: jokily shallow. They appear not to be worried about the economics situation; nor fussed about finances.
Hopefully, they’ll grow into their jobs.
They’re still indulgent about public sector waste. They think that higher rates of VAT and Capital Gains Tax will balance the books. They aren’t panicking about companies moving their domicile overseas.
A bit of backbone wouldn’t go amiss.
There’s no near-term promise of toughness. No thought, for instance, of closing down British Airways. None of imposing a higher retirement age on public sector workers. The formula that worked so well in the Thatcher era is rejected as much by Cameron as by Clegg! It’s a corollary, of course, of coalition.
Go for the currencies that others will go for.
Securities markets are in trouble. In Europe (especially) and in Britain (tangentially), there is anxiety about national debt and commercial banks. Low interest rates may no longer be enough to compensate. The US dollar is going to be the favoured unit for the big boys; the Singaporean dollar for the small ones.
Economics Views : 19 May
May 19, 2010
Most people claiming to be reformers aren’t.
Politicians are the worst offenders. They see the mote in others’ eyes, not the beam in their own.
Peter’s Principle applies in politics as well as business.
The Deputy Prime Minister, Nic Clegg, seems to have an extraordinarily high opinion of himself and his potential to contribute to the process of governance in Britain. He’s come up with a set of minor amendments to current practice, and he’s comparing them to the genuinely earth-shattering changes implemented in the Representation of the People Act of 1832! Really? Does the man have a bizarre sense of humour, or just a serious lack of judgment?
The more Clegg tries to show he’s got vision . . .
His recommendations—scrapping ID cards, reviewing the use of CCTV cameras, changing the rules relating to DNA databases and encouraging grassroots legislation—are generally to be welcomed. But if he were to want to do something that lived up to his hyperbole, if he were to want to eliminate the abuses that blight the British political process, he’d focus elsewhere.
. . . the more he demonstrates he hasn’t.
Lord Grey, the Whig who steered the 1832 Act through Parliament, would have found the EU an intolerable burden. He’d have argued that only Britain’s Parliament be permitted to legislate for Britain’s citizens. And he’d have required that constituencies be regularly redrawn to keep them roughly equal in size. Will Clegg do likewise? Not a chance.
He’s likely to get squeezed in the months ahead.
He doesn’t object to undemocratic practices perpetrated in Brussels and Strasbourg; only to those committed in Westminster. He doesn’t object to the huge over-representation of Scots and Welsh in the London Parliament, nor to that of Northern English. Why not? Because he and his party benefit from such abuses. The man isn’t driven by principle, but self-interest. Lord Grey must be turning in his grave!
What does he think about public spending?
Clegg hasn’t yet commented on revelations about public spending excesses in the run-up to the election.
Nor has his chum, the Prime Minister. The indications are, though, that Labour Ministers set out to make like as difficult as possible for their successors. They deliberately over-spent in order to embarrass the incoming administration. Some senior Civil Servants objected to what they perceived to be “wrecking” tactics. But most didn’t.
Does he favour discipline or abuse?
So how ought the Lib-Con coalition to respond? By saying that near-term spending cuts should be increased correspondingly. The £6bn figure was always too modest. It must be doubled, perhaps trebled.
The civil servant’s silence is tantamount to his assent.
And the terms of service of bureaucrats need to be reviewed. Why did most of them not object to Ministerial misbehaviour? Should their principal loyalty be to the Government or the People? Oughtn’t those who looked the other way then be censured now?
He hasn’t served his country well.
In any event, pay and conditions should be tailored to the country’s circumstances. No salary increments for five years therefore; no recruitment during this period; and an immediate increase in retirement age to 70! That’d work wonders for the fiscal deficit, and it’d probably improve the standard of governance at the same time.
Understandably, markets have tumbled. They’ll probably recover.
Predictably, the political shambles has not helped the financial markets. In world eyes, the UK is little better than Greece or Spain or Portugal—its democracy perverted and its finances abused. The only good news is that interest rates will be kept low for quite a while. And that, despite the awfulness of the economy and the politicians, will provide some support for equity valuations.
Economics News : 14 May
May 14, 2010
Acting is all about honesty.
If you can fake that, you’ve got it made.
George Burns—politicians are less competent than actors, but keep opting for fakery!
Another cast-iron guarantee?
Almost immediately after forming his new Government, the Prime Minister turned to the tricky topic of Europe. Recognising that Tory activists distrusted the Lib-Dems’ instincts in this area, he sought to calm nerves by clarifying the position of the coalition. Without a prior ratification by referendum, he said, there’d be no further surrender of sovereignty to Brussels.
That’s the way it’s looking.
Was this a political promise or something to be taken seriously? When the chips were down, would it be repudiated or honoured? He didn’t say, but we may find out in the next few days. That’s when he’ll have to decide how to react to legislative proposals (drafted in Brussels, Paris and Frankfurt) to regulate London’s Hedge Funds.
The City will have to defend itself.
Will he be true to his word or false to it? Will he defend the City? Or join with its enemies in attacking it? Probably the latter. Europe’s bureaucrats, it has to be appreciated, are desperate for a scapegoat. They’ve been profoundly embarrassed by the euro’s difficulties. They can’t admit that the cause was administrative incompetence or economics failure. They have to find an alternative. And what could be better than speculative excess? It gets the legislators and central bankers off the hook. And, played skilfully, it might additionally undermine London. A double whammy!
It might have to descend to the tactics of the politicians!
In Europe, meanwhile, anxieties about the euro have subsided. Funds totalling a trillion dollars have been readied to defend the currency. Investors are impressed. They hadn’t realised the problem was so bad. They’ll not launch a raid for a while. They’ll wait to see how the fundamentals go.
Is Greece on the road to recovery? Very doubtful.
Will fiscal austerity make Greece competitive? And if so, how long will it take? Will the country be able to live with the same currency as Germany in the foreseeable future? Is insurrection in the meantime a serious risk? Nobody knows. There are dangers, though. The conjunction of negative inflation and higher interest rates will raise the real cost of credit. Might it go so high as to drive activity irreversibly into depression?
Lib-Dems can’t think for themselves.
The Greek tragedy has not been without its effects on the thinking of the Lib-Dems. Clegg and his acolytes always approve of European dogma. If Brussels and Frankfurt and Paris think it right that countries reduce their fiscal deficits, then so must the spineless fifth-columnists in Britain. Before the election, the party claimed it would be hazardous to cut the deficit too quickly. Now it’s worried about doing so too slowly.
They have to wait until Brussels thinks for them.
Sadly, there’s a predilection for tax increases rather than spending cuts. And, insanely, there’s no mention of the need to rationalise public sector pensions. Ministerial salaries are to be cut by 5%. But that’s irrelevant. It’s the outrageous emoluments of civil servants and local authority workers that have to be slashed. It’s the budgets for the Quangos and the regions that have to be reviewed. But there seems to be no intention to do so. Brown’s body may have been evicted from No 10, but his ghost lives on.
The global economy is growing.
Elsewhere in the world, economics numbers have been quite good, but second differentials appear now to be declining. Last week brought publication of the US’s April employment report. It showed a big increase (it’s a lagging indicator, of course), but a rise nevertheless joblessness.
But not very quickly.
In Asia, the picture’s not dissimilar: good but not as good as it was a few months ago. Things may slow a little more in the months ahead: Beijing is hinting that the yuan is shortly to be allowed to rise again. The authorities in the central bank want to stem domestic inflation and to neutralise the case for protectionism.
Autumn 2011 will be a testing time.
Commodity prices are consistent with the thesis of moderating growth. They fell sharply at the height of Europe’s financial difficulties and didn’t recover much afterwards. Most Australian data are still looking good, but there are one or two signs of impending slowdown.
Markets are all right for the moment.
Securities markets’ valuations were slaughtered during Europe’s crisis. Investors feared, with some justification, that swathes of sovereign debt would become worthless. And they worried also about the implications for commercial banks. The latter hadn’t rebuilt their balance sheets, but were already vulnerable to another black hole!
London, a little more vulnerable than most.
The latest news is a little better, but only a little. Valuations will rise, but not confidently. London may lag somewhat. There are barbarians without; and possibly within as well.
Economics Views : 12 May
May 13, 2010
In politics, as in high finance,
duplicity is regarded as a virtue.
Mikhail Bakunin. Brown and Clegg must then be exceedingly virtuous; Cameron less so because he’s too easily conned.
Even the fanatic core of Brown’s administration has now conceded defeat.
In his bunker in Downing Street last Tuesday, in one last throw of the dice, Brown and Mandelson and Campbell toyed with the idea of a Lib-Lab pact. But it was rejected by virtually all members of the party who’d been elected to their jobs. It’d go down very badly with the general public, argued John Reid. It’d be seen as a coalition of losers.
Cameron and Clegg, unconvincingly victorious, will take over.
That left the way clear for the other coalition of losers, the Lib-Con one, to take centre stage. It did so. By the end of the day, Cameron was Prime Minister and Clegg his Deputy. All that remained to be decided was policy. A veritable minefield! There were two obvious areas of contention: public spending and Europe. On both, it looked as if Cameron had made the greater concession.
The LibDems seem to have been calling the shots.
Likewise, “electoral reform.” The coalition partners recommended that there be fixed Parliamentary terms and a referendum on Proportional Representation. But what would the electorate as a whole think? What, in particular, would be the reaction of Tory activists?
Stability? Transparency? National interest? Hmph!
Cameron and Clegg both maintained that the proposals, designed to protect the national interest, would promote stable Government. Really? To many observers, the plans looked shambolic; a recipe for instability; justified only by personal interest. Time would tell.
Germany’s debt may be stable, but its politics aren’t.
The political news from Germany, Clegg’s model because it gave the country’s least popular party an almost continuous role in government, was not good. Elections in North Rhine Westphalia were disastrous for the coalition partners. The CDU’s share of the vote fell from 45% to 35%; the FDU’s from 15% to 7%. The coalition no longer commanded a majority in the Upper House.
The will of the electorate is likely to be ignored again.
There’d have to be a session of wheeling and dealing amongst the parties. The German equivalents of Mandelson and Campbell would shortly emerge from their dens and engage in secret negotiations. Would that demonstrate political transparency? Or governmental stability? Was that the model to which New Britain aspired?
No party reflects the views of the people.
The German coalition’s problem stemmed from its persistent refusal to listen to the people. Voters didn’t want to bail out Greece. They knew how much it had cost to deal with the DDR. They knew they couldn’t afford to do the same to the EuroZone’s failing economies. But German voters could find no party to voice their concerns! The SDP was as Europhiliac as the CDU or FDP. Henry Ford had said his customers could have a car of any colour so long as it was black; German politicians pursue a similar line in relation to EZ integration!
The pace of economics activity is worryingly slow.
The world’s economics numbers, meanwhile, are quite good. But only quite good. The revival in demand has been modest in comparison with what occurred in equivalent phases of previous cycles. Given the extent of the stimulus, monetary and fiscal, it’s been exceedingly modest.
The banks may be in trouble again.
That being the case, there’s unlikely to be a significant monetary tightening for a while, possibly for a couple of years. Investors are relieved. They’d begun to worry about another banking meltdown. Two years ago, the threat was posed by the private sector’s debt; today by the public sector’s.
Scotland the Brave
May 10, 2010
I look upon Switzerland,
as an inferior sort of Scotland.
Sydney Smith, speaking at the end of the eighteenth century. Which country has performed better since?
There is perversity in economics . . .
In ethics, it’s said to be better to give than receive1. Is it the same in economics? Might recipients be more handicapped by gifts than helped by them? Is it possible that human inadequacies are reinforced, not remedied, by handouts?
. . . those giving generously seem often to end up with . . .
These are not questions that the bureaucratic establishment is prepared to ask. There’s a presumption, semi-religious in its nature, that redistribution is beneficial. It’s heresy to think otherwise!
. . . more than those receiving lavishly.
Occasional failures in the procedure are acknowledged. But they’re attributed to the transfers being too modest. The remedy is not to revise the policy, but to extend it.
Compare the dysfunctional indigenous . . .
Really? In Britain today, there’s an underclass of families in which nobody’s had a job for two generations or more. The men are feckless and the women ineffectual. Both are ill-educated and ill-disciplined. The children of these families grow up not expecting ever to have a job; not expecting ever to contribute to society. And their expectations, remorselessly, are fulfilled.
. . . to the hungry immigrant.
Some analysts, a tiny minority, think the problem is caused by the system. They argue that failure is encouraged by being excused. They’re suspicious of the line that recipients who’ve been severely disadvantaged in the past shouldn’t be expected to try in the future, let alone succeed.
It looks as if handouts are ineffective; possibly counterproductive.
They note that there are numerous categories of individual who, though they’ve been treated appallingly in one period, bounce back resiliently as soon as they have the chance to do so. And these successes very rarely get government-sponsored aid. They do it all themselves. Indeed, there appears to be an inverse correlation between the help that’s supplied and the success that’s achieved.
Likewise with countries.
It’s much the same with countries2. There are some that have received huge sums of aid, but have made no progress at all. None economically, none culturally, none politically.
Why has there been an inverse relationship between aid and success?
There are others that have been given nothing3. Financial capital has had to be borrowed, unsubsidised, in the world’s markets. The money’s been deployed efficiently, though. It’s generated substantial returns and that has allowed incomes to be lifted and capital to be repaid. The economies of these countries have sparkled, their culture’s been reborn and even their politics has bloomed.
Why, in the last century, has Scotland fared so badly?
Into which of these categories does Scotland fit? Is it these days a producer of global resources or merely a consumer of them? Is it succeeding or failing? Does it pay its own way or subsist on handouts from others? Sadly, the latter!
It was once a model of ingenuity and resourcefulness.
It wasn’t always thus. In the second half of the eighteenth century and throughout the whole of the nineteenth, the country was a star. Economically, it outperformed England. And, intellectually, it was a beacon (Edinburgh was said, justifiably, to be the Athens of the North!). In medicine, engineering and finance, it contributed as much to the world as the rest of Europe put together.
Why not now? Why has the country succumbed to a culture of dependency?
Why so brilliant then and so dull more recently? Has an insidious culture of dependence undermined its vitality and self-respect? If so, what’s to be done? Is the country prepared to start afresh? To review facts honestly and face consequences bravely? Of course: Scots are renowned for their courage.
Does the problem lie with those who are too willing to condone failure?
Look at the history. In 1707, England and Scotland opted (reluctantly) for political union4. It was, initially at least, an unequal partnership. England was much the larger and much the richer—per capita incomes in Scotland’s lowlands were about half of those in England; in its highlands, about one quarter. The big difference was agriculture5. Geography made it impossible for the one country to compete with the other on equal terms.
If Scotland wants to regain the laurels, it must do again . . .
Scotland had to find other things to do. Its people had to discover what they could make better than the English, better than anybody else in the world. There were a few difficult years while they searched—unaided and unsubsidised—but the success, when it came, was phenomenal. And, arguably, the glory afterwards was the direct consequence of the straitened circumstances beforehand: it was the difficulties encountered initially by the Scots that forged their adamantine determination to win subsequently6.
. . . what it did before.
But one set of brilliant calls is insufficient to last forever. The sectors in which Scotland specialised so successfully in earlier centuries began to lose their lustre at the start of the twentieth century. And, in each subsequent decade, the deterioration continued.
Not rely on gifts from nature, nor subsidies from neighbours.
There was a brief respite with the discovery of oil in the seventies, but it was temporary and unsatisfactory. It wasn’t the result of Scottish innovation or enterprise, just fortuitous geology. It didn’t rekindle Scottish inventiveness, but may, counterproductively, have fanned the flames of Scottish defensiveness.
But earn its crust.
The most worrying feature of Northern British society became its reliance on public sector jobs—a higher percentage than in any non-communist country7. Scotland’s fiscal affairs, net of oil and finance, were a disaster. And both of these sectors were, towards the end of the twentieth century, in steep decline: the one because the stuff was running out; the other because competitiveness had plummeted. Within a decade, there was going to be a crisis. And so there has been.
Don’t play the victim; don’t sponge.
Have the Scots done anything constructive to forestall calamity? No, they’ve wrapped their heads in blankets and hidden themselves under their beds. Vote for the SNP, says Alec Salmond, our party can extract more money from the English than any other.
Don’t be just a consumer; aspire to be a contributor.
That’s the Greek solution. And it butters no parsnips. The only way forward is to repeat what was done in the eighteenth century: find what the Scots can do better than others, and do it. Forget handouts and charity; opt for efficiency and enterprise.
Political independence is irrelevant
It doesn’t matter whether the country is independent, or part of the UK, or part of some other unit. Hong Kong and Singapore became world beaters while still profoundly dependent. But, as manifest superstars, they earned the right to be asked about their futures. It’s the productivity and resilience of the people that matters.
If the economy is bad, it’ll bring no respite.
Scotland has now to stop looking for handouts, and start discovering a new and viable role for itself. It wasn’t defeatist in the aftermath of political union in 1707. It mustn’t be now.
If good, it’ll be achieved effortlessly.
So, will a new and glorious phoenix arise from the ashes of the disaster that is twenty-first century North Britain? Let’s hope so.
Paul was a clever psychologist.
1. In the King James Bible, it’s said to be more blessed to do so. Paul make the point in Acts 20;35. Interestingly, there’s no confirmation in the Gospels.
Contrast Africa . . .
2. The failures in the last hundred years or so have been concentrated in Africa. Nobody knows why. It’s nothing obvious. It’s not intellect or resources or politics. Is it perhaps psychology? Is it low expectations? i.e. defeatism?
. . . with Asia.
3 . Asia, on the other hand, has performed spectacularly well. It started with Hong Kong and Singapore, Taiwan and Korea, but it’s spread to a few other countries in the region, most recently to China. Why these and not others? Theories abound but most are unconvincing.
Political union ignored economics. Perhaps that’s why it worked!
4. Neither England nor Scotland was at all keen on Union in 1707. For both, it was regarded as the least bad option, rather than the best one. The implications for Religion were deemed to be important; likewise those for Strategic Defence. Nobody seemed to refer to the consequences for Economics. They’d likely have been considered irrelevant.
Scotland couldn’t win at agriculture. It had therefore to devise other strategies.
5. Samuel Johnson, though probably a covert admirer, affected an overt disdain for Scotland. He wrote that “oats” was a grain generally given to horses in England, but which supported the people in Scotland. Unsurprisingly so. Giv¬en the farming technology of the time, the latitude of Scotland and its climate, it could not have been otherwise.
Does moderate adversity make people try harder?
6. It’s noticeable that every economically successful people has had to struggle to achieve its success. Adversity seems to be no disincentive. On the contrary, it looks as if it might be an essential requirement. It’s possible also that an element of anxiety is needed to prompt people to work hard. The obverse is probably also true. Complacency is an economics killer. It undermines effort and encourages underperformance.
Should we promote emotional angst to get economics virtuosity? Should we similarly curtail public spending?
7. The public sector is an indulgence. It is affordable only if the private sector is performing well. Scotland’s isn’t. Why, though, do Scots wish to work for it? Why, when there are insufficient public sector jobs available in Scotland, do Scots seek public sector jobs in England? They must know it’ll end in tears.
Economics News : 7 May
May 7, 2010
Politicians make strange bedfellows,
but they all talk the same bunk.
Edgar Shoaff—greater self-love hath no man than this, that he surrender his principles for political advantage.
Pollsters are not like economists and meteorologists . . .
So the opinion pollsters were right! Not us. We’d imagined that, in the privacy of the ballot booth, Labour’s natural voters would withdraw their support. They didn’t. The Prime Minister might have been widely disliked, but so were the alternates.
. . . they sometimes get things right!
The big loser was Cameron. Expectations of him had been high, but they were unfulfilled. Trying to appeal to the community as a whole, he’d irritated the party faithful. He was now vulnerable. If he were to fail to make amends in the end-game, he’d become an ex-leader.
Brown won the electoral contest; Cameron lost it.
The big winner was Brown. Expectations of him had been low, but were exceeded. The Labour party’s losses in Middle England were substantial but not catastrophic. Its gains in Scotland and Wales, meanwhile, were significant.
What follows now doesn’t bear thinking about.
What happens now? There’ll be closed-door wheeling-and-dealing amongst the parties in an attempt to secure a Parliamentary majority. There are two basic solutions: Labour and LibDem, UDP and Green; or Tory and UDP, SNP and Plaid Cymru. Some of these constitute strange bedfellows, but that’ll not be a constraint. There’ll be another election, probably under new rules, within a year.
There’ll be an unholy alliance.
Could Clegg bring himself to prop up a party that the electorate had rejected? Of course he could. If he were to be offered a leading Cabinet position in the immediate future (possibly Prime Minister) and the prospect later on of Proportional Representation, he’d jump at it. Brown might then quit—his footnote in the history books no longer wholly disparaging.
Brown and Cameron ought both to retire.
Could Cameron bring himself to do a deal with the Nationalists in Scotland, Wales and Ireland? Of course he could. The Union hasn’t been a Union for a generation or more. Let the people have what they say they want. Let them have more powers in their own Assemblies (possibly full nationhood) and let them have correspondingly fewer representatives in Westminster (possibly none). If Cameron could free England from its peripheral encumbrances, he too might then quit—his place in the party rehabilitated and that in constitutional history similarly elevated.
Economics are going to be horrible.
But the near term outlook for the economy is unlikely to be favourable. Any negotiation, whether conducted by Brown or Cameron, will involve the payment of huge bribes. And it’s the English taxpayer who’ll have to foot the bill. There’ll be no attempt to contain the deficit, none to rein in the public sector. Finances will deteriorate for six months, possibly a year.
London, the Athens of the North?
Investors will take fright. They’d been assuming a rapid return to orthodoxy. Now, they’ll see the UK as another Greece. Bond yields will rise and sterling fall. Later on, inflation could become a problem again. If resources continue to be taken from the productive elements of society and given to the unproductive ones, price rises will quicken worryingly.
World growth is beginning to lose momentum.
Elsewhere in the world, there are the first signs of moderating growth. Some 70% of data items are still upbeat, but that compares with a 75% reading three months ago. Look at the numbers from the US and China: still excellent, but noticeably less so than previously. In Europe, of course, they weren’t strong then, and they certainly aren’t now.
Another credit crunch on the horizon?
Everywhere, but particularly in Europe, there’s an anxiety that there’ll be another leg to the credit crisis. What we saw in 2008 was an unwinding of private sector extravagance. What lies ahead is the denouement of something comparable in the public sector.
More bank failures?
Governments that tried to ameliorate the one with an intensification of the other were bound to fail. Commercial banks that borrowed money from taxpayers to invest in other countries’ Treasury issues may have to write off a second mountain of debt. Another tranche of banks may yet bite the dust: this time, hopefully, not bailed out by delinquent Finance Ministers!
No credit availability?
There is fear and loathing in the bond markets. Cash rich investors don’t trust borrowers. Effective interest rates are therefore rising despite central bankers’ accommodative money policies. That’ll slow economics growth and undermine tax collections. Treasuries will have to seek to borrow more, and may be refused. Catch-22!
And dimwits in charge!
London is not well placed. Its economy is fragile; its politics worse. Brown and Darling didn’t understand the problem they faced; nor do Cameron and Osborne. The country has one advantage only: it’s not in the euro. Long may it be so.
Economics Views : 5 May
May 5, 2010
Some things are so blindingly obvious,
that it’s not worth the bother of forecasting them.
Not many, of course. And very few relating to economics, politics or finance.
Forecasters don’t often get things right.
There were few surprises for forecasters last week. The economy advanced modestly; opinion polls favoured the Tories; and the euro slumped. Had anybody thought things might be otherwise?
But, just recently, the world has seemed more than usually predictable.
On the economics front, the cycle proceeded much as expected. Activity in the second quarter was still rising, but appeared no longer to be accelerating. That was because the inventory rebuild—the main driver of recovery in the last eighteen months—was now largely complete. In the period ahead, final sales would be crucial. And the picture there wasn’t good. Personal consumption was growing only moderately while public spending was poised to fall sharply.
Economics has behaved as expected.
Politicians pretended that the recovery was about to broaden and deepen, but they must have feared it wouldn’t. They must have known that the cost of their reckless spending in the past would prejudice economics conditions for quite a while in the future. The next downturn (due to start in autumn 2011) would be painful and the subsequent upturn (spring 2014) might be anaemic.
And so, albeit to a lesser degree, has politics.
Britain’s electoral affairs had also gone largely as expected. The LibDems’ support proved to be only skin deep. It bloomed because of the public’s dislike of the other parties, but it wasn’t able to survive questions that dealt with substance rather than style. Clegg was right to say that the election was a two-horse race; wrong to imply that his party would be one of the runners.
Tweedledum has replaced Tweedledee.
Unsurprisingly, opinion polls had swung progressively towards the main contender. Many of those published in the last few days (though not all) suggested that the Tories were headed for an absolute Parliamentary majority. But only a very small one! Why so? Were voters not being entirely candid with pollsters? Possibly. We’ll know on Friday.