Time for another pause for reflection

Arthur Conway Young “Sacrificed to the fallacy that war can end war”

Earlier this year I said I would scale back my twice-weekly postings in order to give me time for reflection. I was profoundly disturbed by the world around me. I used the word “depressed”, and though this sparked worries by friends about my mental health, this was, and remains, a good word to describe my feelings. I am being numbed into a sense of apathy. After that pause a surprise General Election was called. I was swept up in the excitement of it all, and indeed the British political landscape changed profoundly. But as the British situation regresses to stalemate, the excitement has gone. I don’t feel that my thinking is adequate for the situation the world is in. I need time to reflect, and, if need be, to change course. So I will scale back my postings again.

That process has already started, as I haven’t posted for about two weeks. Last week I went on a centenary battlefield tour of the Western Front, from the Somme valley near Albert, and north to Ypres and Arras. That was an experience enough to cause a pause for reflection in itself. It was an example of how political misjudgements can lead to devastating results for millions of individuals. It is hard for us to say what it was all for, even if we accept that many of the changes that the war ushered in were good. These changes were a profound understanding of the futility of war and the brotherhood of man, across class, nation and sex (alas it took another war before entrenched attitudes on race started to change). But, as the remarkable epitaph on the tombstone in my picture, taken in the Commonwealth cemetery at Tyne Cot near Ypres, says, this war did not end war. And indeed, what I find so depressing about now is that in so many ways the lessons humanity learned a century ago are being cast aside.

Look at Myanmar, where the hundreds of thousands of Rohingyas are being ethnically cleansed, with many thousands murdered while others are forced into inadequate refugees camps. This has caused barely a ripple in world affairs. The recent coup in Zimbabwe, which changes little, is causing more fuss. Chinese, Indian and Russian politicians, who these days constitute great powers in the emerging world order, couldn’t care less. The Americans are doing a bit more, but it is not in the new “America First” philosophy to care that much; and, to be fair, their power in the neighbourhood is greatly diminished. Europeans worry a bit more, but they are so far away that closer concerns crowd them out. This is the new normal: people’s lives just don’t matter compared to narrowly defined national interests.

Meanwhile, closer to home in Europe, grand liberal gestures, like Germany’s acceptance of Syrian refugees simply generate a fierce backlash. Polish and Hungarian leaders stoke up Islamophobia; our own politicians mutter about how foolish and “unrealistic” the German policy was. Meanwhile, in Britain we are distracted by the colossal act of self-harm that is Brexit, while the retreat of government services and benefits reeks profound social damage, which most people prefer to ignore. People respond to disturbing changes in the world around them by narrowing their horizons and saying it is all somebody else’s problem.

Still, there is hope. When I visit my local, 90% minority primary school, I don’t see the picture of hopeless and profound division that the conservatives say is inevitable. I see people working across ethnic and social barriers towards a common purpose: living together and promoting the values of tolerance and inclusion. I see the challenges of restricted resources being met imagination and resolve. There is a better way if only we had the courage to take it.

I am an optimist. But right now I need to work out how to channel that optimism more effectively. I plead the need for a little more space to do that.

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Household debt: the slowly developing crisis of capitalism

This week there is much debate on whether the Bank of England or the US Federal Reserve should raise interest rates from their current rock-bottom level. Behind this lies an important debate on the future of our economic system. A crisis, arising from high levels of household debt, is in the making.

Let’s set this in some sort of context. In the 1950s and 1960s levels of household borrowing (that is mortgages, car loans, consumer debt and such) were strictly managed, in a system designed to ensure financial stability as part of the global Bretton Woods system of managed exchange rates. This era is often viewed as something of a golden age by people on the left, as there was steady growth across all levels of income, and high levels of social mobility. There is a tendency to attribute this to the Keynesian consensus, of which the Bretton Woods system was a part. In fact it also had a lot to do with the explosion of  consumer goods industries which set in motion a virtuous circle of job creation and increased household consumption.

By the 1970s this system had broken down. The Bretton Woods system collapsed as the United States sought to finance the Vietnam war without raising taxes. We entered the world of floating exchange rates, which allowed much greater freedom for both public and private sectors to borrow money. Middle East tensions saw a spectacular rise in oil prices, which disrupted developed world industries. The consumer boom started to reach saturation, and growing productivity halted the job creation machine. Much heavy industry, such as coal-mining, and steel production, became obsolete, along with other job-rich industries like textiles. Keynesian economic management simply led to inflation while unemployment continued to rise.

Enter the neoliberal era, starting in the 1980s. Governments embraced the freer financial system. Consumer demand was now sustained by growing levels of household borrowing. Alongside this came an expansion of world trade. Developed countries bought growing amounts of goods from developing economies in Asia; the first wave were the “Asian Tigers”, especially South Korea and Taiwan; these were followed by the giants of China and India. This expanded trade reduced prices for consumer goods, and allowed a period of steady, if somewhat uneven, income growth in the developed economies. Slowly the developed economies reshaped themselves to a combination of highly productive high technology jobs, and a mass of low productivity service jobs, especially in healthcare. But the uneven nature of income growth, sustained by household borrowing was creating strains by the mid 2000s. In Britain household debt had increased from about 50% of national income in 1980 to 160% in 2007.

Then the great financial crisis struck in 2007, reaching its climax in 2009. This was only indirectly linked to high levels of household debt. The crisis mostly arose because the finance industry was allowed to grow in a very unstable way. This gave the illusion of growth, especially in Britain, in the years before 2007, only for the awful truth to be revealed when the government had to bail the system out. By and large, that source of instability has been fixed. But meanwhile globalisation as a source of growth for the developed world has run its course, while increasing productivity has become like running up a down escalator. Improvements in one area of the economy are most likely undermined by the creation of low productivity jobs in another, in a process economists call the Baumol effect. We are stuck in an era of low economic growth in the developed world.

Which is why some people are starting to worry about levels of household debt. Since the crisis household debt in Britain has been bumping along at about 140% of income, and it has been trending up in the last two years. But people’s capacity to repay debt is weakening. Back in the 1980s it was assumed that rising incomes would make debt more affordable. This is plainly not the case.

A further risk factor is that central bank interest rates are rock bottom. These interest rates are not the same as what is charged to real people and businesses (something we learned during the crisis, when the central bank cut interest rates, but most consumer interest rates went up). But it doesn’t look as if the interest rates people pay are going to get any lower, and so debt become more affordable. In the past central bankers could help alleviate crises by cutting interest rates, but now they have run out of road.

A third risk factor is asset prices: the price of property, shares and bonds. All three look high by objective measures, and so could fall. The process by which asset prices are set is complex and mysterious. But if assets are sold to unwind debt, then prices are liable to tumble.

Stagnant incomes; interest rates that can’t be cut; asset prices that look too high. This is a toxic brew. Some people hope that by raising interest rates gradually, we can slowly normalise the financial system, with overall levels of debt stabilising or even falling. Others fear that any rise in central bank rates will trigger a downward spiral.

But we need to understand that wider perspective. The neoliberal system has become unsustainable, and developed countries (especially the British and American ones that embraced it so wholeheartedly) need some fresh thinking.

One point should be clear, but still remains under-appreciated. Levels of private debt need to fall, and the safest route to doing so, without a disastrous collapse in demand, is for public debt to replace it. In other words we should not be so worried about budget deficits and national debt. However government spending needs to focused on things that will support the transition to something more stable, rather than just propping up structures that will be unsustainable in the long run. Ultimately national debt can be unsustainable too (though just when that point is reached is very much a matter of context; Japan has public debt of 200% of income without much sign of trouble). This is a national debate we badly need to have.

A second point also seems quite clear to me: asset prices must fall. This includes property, shares and bonds. This is required to correct some of the toxic inequalities of wealth. That will clearly create hardships and problems, but the government must stand ready to tackle these. Putting off the evil day will not help. That is why I think that central banks need to start the process of raising interest rates.

And a third point is that we need some serious policy ideas on how to tackle the issue of low pay for low-productivity jobs. It is no use hoping that productivity is going to resume the steady growth it saw in the later 20th Century. The forces that drove that – automation of manufacturing, and globalisation – are played out. In my view that means a much bigger role for the state in supporting society – but not by an unaccountable and out of touch central government.

These are radical changes. History teaches us that such radical change only comes from crises. There will be a new economic crisis. The only question is when, and whether our leaders will be intellectually prepared to manage its aftermath.

 

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