Secular stagnation: the curse that still haunts developed economies

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The financial crash of ten years ago was something of a paradox for conventional economists. It took most of them by surprise, and dented their reputation. And yet economists became more important than ever to the running of our world. But now, to listen to most of them, the equivocation is over. We’re back to normal, as the global economy looks in much better shape. This looks complacent.

The crash was a double shock to economists. The first was how it happened at all, when most economies seemed to be purring on at a relatively steady rate of growth (often referred to as the trend rate), which seemed to relate to growing productivity, and which most economists, driving through the rear-view mirror, assumed to be a law of nature. The second shock was that developed world economies, especially the British one, were so slow to recover. Economists  simply assumed that with a bit of stimulus, economies would not just return to trend growth, but make up for lost ground too. I don’t think any advanced economy has done this – and in Britain we lag far behind. In the years after the crash an expression was coined, or rather resurrected, to describe this second problem: secular stagnation.

The person whose name is most attached to this is Lawrence Summers, who had been prominent in the Clinton administration. By it he meant that economies could only achieve growth by extraordinary and unsustainable efforts to stimulate it. And, as Mr Summers recently pointed out in the FT, you cannot say that it has disappeared. Growth has returned, but the measures required to produce it are unsustainable. What he is referring to is the extraordinarily low interest rates prevailing in the developed world.

This has been going on for so long that we have become accustomed to it. But what do negative real interest rates mean? They mean that in order to use up available savings we have to create investments that have little or no financial return. Now that is at the margin, not on average, but even so it does not suggest an economy that is at all healthy. If investments don’t produce a return, productivity will not advance, and growth will not be sustained. And in particular we will accumulate debt that cannot be paid off. Or not without inflation which destroys the accumulated wealth of the middle classes. And sure enough, many economists are warning us about mounting debt levels. In due course this will lead to a financial crisis.

Why are we in this situation? And what can we do? There are many speculations as to why, and most commentators, including me, tend to gravitate towards the one that suits their overarching narrative. Many blame a skewed distribution of income for creating a surplus of savings that cannot be used properly. Others say that modern businesses don’t need so much traditional capital (Google doesn’t need to issue debt or share capital to keep its investments going). Then there is the gradual ageing of the population reducing the size of the workforce. Others blame the wrong sort of stimulus – if only government spending hadn’t been cut back (“austerity”), we’d have bounced back in no time. My favourite is the Baumol effect which suggests that we are in a transition towards industries, like healthcare, that are less financially productive, though still improve human wellbeing. Whatever it is (and it could be all at once) it’s a problem because it is dragging down the potential growth rate.

And what can we do? People often talk of unconventional policies, but what are they? The most interesting idea is  to run up bigger government budget deficits. Piling up government debt is much safer than piling up private debt, as we are doing now. Why? Because governments can finance that debt by a process that is usually referred to as creating money, and the burden can be shared more equitably.

But piling up debt and creating money often ends in tears. The best current example of that is Argentina, with rampant inflation and impatient foreign creditors. The problem for Argentina is that its monetary system has been mismanaged for so long that much borrowing, public and private, has to be in foreign currency, which the central bank cannot create. But there is an opposite example. Japan has been piling up public debt for decades, and the central bank has been buying up debt, with few apparent ill-effects.

So how do you know whether you are Japan or Argentina (and no doubt Argentina looked like Japan once)? The first, obvious, difference is that Argentina has had a current account deficit for some time, while Japan has generally been in surplus. That means that Argentina is importing more than it exports and requires financing by foreigners – who are less likely to be happy to take payment in domestic currency. Current account deficits usually flow from budget deficits – though not always, as the recent crisis in Spain showed. That would be a bad sign for countries like Britain that also have a current account deficit. But Britain’s standing in international markets looks a lot more like Japan’s than Argentina’s. The government has no trouble in borrowing in sterling, and the same goes for most British businesses.

So why are we in Britain so worried about budget deficits and debt? One explanation is that we have been persuaded into this view by malign political forces who use the analogy of household financial management to make their case. But there are deeper worries. The first is how do you tell when you have gone far enough with budget deficits and need to stop? The traditional economists’ answer is when inflation starts to take hold. But it might be too late by then, and anyway it is not so clear that in a modern, globalised economy inflation works in quite the way economists think. You know it is too latewhen there is a rush of people trying to change domestic currency into foreign, creating a panic and to people, including the government, having to borrow in foreign currency. That can happen without inflation.

The problem behind that is the politics of it. Opening up the possibility of more government spending is a huge boost to the power of central government politicians, who do not have strong incentives to apply the brakes when they need to – any more than those bankers did before the crash of 2008. It is too easy to believe your own hubris. I think this happened to the Labour government in the mid 2000s when the government should have started to tighten spending but decided not to. This didn’t cause the financial crisis, but made it harder than it should have been to manage. Even now, though, it is impossible to get anybody on the political left to accept that. It’s the one thing that unites Jeremy Corbyn with Tony Blair.

Still, we should be able to find ways increasing government borrowing that helps stimulate demand more sustainably. Building public housing is one idea. Other infrastructure policies should help (but not all of them). There’s also a case for taking a longer view on some public spending, like education , community policing, mental health services and public health that heads off future trouble. But not building more navy frigates or, even, hospitals. We might need these, but they need to be securely funded by current taxes. The trick politically is to create a system of checks and balances that lets you invest productively and not let central government managers run away unchecked.

Behind this lies an important but rarely acknowledged idea. It is that, in the 2010s and onwards, public investment is often more productive than private investment. And that, I think, is one of the causes of secular stagnation. So in the developed world we need more public investment, and that we can afford to borrow much more to pay for it than most people think. And we need less private investment, much of which is wasted on asset recycling schemes that will end in tears. It may well take another financial crisis before we start to realise this.



Life in the tunnel. Being a Liberal Democrat

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I just want to ask: when will the party face up to the fact that whatever it is doing isn’t working even in the slightest?

This was from Lib Dem blogger Nick Tyrone before the recent local elections, after a London opinion poll showed weak figures for the Liberal Democrats. The party’s appeal to Remain voters had pretty much failed, he thought, with the party lagging even the Conservatives in this group, never mind Labour.

Then came last week’s local election results. If you are going to take a cold, hard look at them in the round, they were nothing to shout about. They were perfectly consistent with that poll. In equivalent vote share they even marked a slight fall from the rather dismal 2017. And yet. Look at the London results (as a Londoner, I have an excuse for being London-centred – though my story works just as well outside it). The two most spectacular results for any party on the night were the Lib Dem gain of 25 seats from in Richmond, and 21 seats in Kingston, mostly at the expense of a Tory party that collapsed to a rump in both boroughs. And at last the party started to win seats from Labour, gaining seven in Haringey, for example. And the party had its Wandsworth moment too, fending off a sustained and confident campaign by Conservatives in the one borough it controlled in Sutton. Minds aren’t swayed by dry statistics but by stories – stories that show what is possible. In London, and across the country, the Lib Dems had plenty of good stories to encourage them. That made them a much better set of results than the party has had for a long time, even in 2017 when the equivalent poll share was higher.

Not that you would have guessed this from the media coverage. Even in its later coverage (when the Kingston result was known, giving resonance to the Richmond story) the BBC chose to highlight the relative failure of Labour in Wandsworth to the spectacular écrasement of the Conservatives in two neighbouring boroughs, which went unmentioned. Why were the non-events in Wandsworth and Westminster more important? Because, apparently, they are a “flagship” boroughs. Actually I think the Wandsworth result is an important story, but this prioritisation is an interesting window into the current journalist mindset, even at the politically balanced BBC. This may not be bias; it may just be a bid to cover up the humiliation of the editorial team of not getting the story right in advance, and sending its big guns to the wrong places. News is made on expectations, not real events.

Which, I think, is the issue at the heart of Nick Tyrone’s critique. Whatever the party does, nobody in the media, mainstream or otherwise, is listening. The only stories that are of interest are the sorts of stories that Ukip still manages to pick up: ones that point to the parties final, humiliating death spiral. I don’t think it is fair to blame that on the party’s leadership or messaging.

Life as a Liberal Democrat supporter is like being in a long, dark tunnel. Things are miserable; nobody can see you; and too often any small flickers of light vanish, rather than grow into that light at the end. But last week’s small chink of light just could be what we hope it is.

The point is this: the problem isn’t the message, it is getting people to listen to it in the first place. It is nearly hopeless achieving this through the media. It is just possible that a moment of genius or massive good luck suddenly does the job. But waiting for such a moment does not amount to a strategy. The other way to get noticed is to go out and talk to people directly – through door-to-door canvassing and attractive literature pushed through letterboxes, and with videos promoted through paid-for advertising. This is inevitably very localised, and it tends to happen in the run-up to elections, when people have a good reason to take notice. The good news is that when the party was able to do this, it, by and large, raised its share of the vote. And sometime spectacularly – in Remain-voting Richmond and South Cambs, in Leave-voting Kingston-upon-Hull, and in the somewhere-in-between Kingston-upon-Thames. That suggests that Nick Tyrone is wrong. What the party is doing is working at least a bit more than the slightest.

And the hope is that if the party keeps going, the general public, and the media that follows it, will start to notice. Even now, the BBC must start to question its policy of giving the party so little coverage compared to Ukip, which has now virtually ceased to exist.

But why soldier on in the cold, dark place, where hope is but fleeting? Because we believe in our liberal message. That humanity is more important than the nations and religions that divide it. That all humankind benefits when we listen to different points of view with respect. And that we should look at facts and evidence rather than let our prejudices run riot. No other party is doing that as much as the Liberal Democrats in British politics. It is worth pushing on through the tunnel.


Complacency undoes Labour in Wandsworth

The Conservatives in Wandsworth know the price of everything and the value of nothing.

That isn’t a quote from this year’s council elections in Wandsworth, where Labour gained 7 seats, but fell 5 short of what they needed to take control of the council. It comes from Labour’s final week literature in their campaign in 1990, when they also expected to take control. To me it sums up Labour’s complacency in both failed campaigns. Elections are won with grit, no waffly ideals.

Labour’s spin machine are desperately back-peddling, to say that they never really expected to win control this time, and that the advance shows that things are slowly moving their way. That is nonsense. They had the Conservatives on the ropes and, to mix metaphors, they threw them a lifeline. The results were very close in a number of wards. A more effective campaign would have secured control for Labour. And what a victory that would have been! The Tories, weakened by Brexit in a strong Remain borough, could have imploded without the business of running the council to hold them together. Resourceful and resilient, they may well punish Labour, who have their own internal issues, when the next meeting with the voters happens.

This year I often thought back to 1990, which was a few years after I moved back into the borough of my birth. Then Labour only needed a net gain of one seat after making gains in the previous elections in 1986. The Conservatives were doing badly in national polls. It should have been easy. But reading that leaflet I immediately understood that Labour wasn’t up to the job. And so it proved: the result was a catastrophic loss of 17 seats, including that of their leader. This was a massive propaganda victory for the Conservatives, who used it to deflect attention from bad results elsewhere in the country. Old Labour hands have not forgotten this; winning back the council this year would have been a powerful signal of Labour’s rise.

And there was every reason to think that it was possible. Labour did very well in the borough in last year’s general election, without even trying very hard. They picked up Battersea, and came close to picking up Putney too, to add to Tooting which they already held. Recent council by-elections, in which Labour did well, confirmed this trend. In 2014, the previous elections, Labour had shocked the Conservatives by making strong advances. The EU referendum then dealt a body-blow to the local Conservatives which give Labour the chance to do something special.

What made the Tories so resilient in 1990 and able to hold off the challenge this time? In 1990 the party was in peak form, with a number of very capable and clever leaders, who had seized control of the borough from Labour in 1978. They adopted strong financial management, when most local Labour politicians didn’t think this mattered, while being remarkably alive to middle class sensitivities on things like recycling. They oozed competence where Labour resorted to waffle. An efficient, but low profile, local propaganda machine got this gritty message out to voters, many of whom had benefited under the then Conservative government’s right-to-buy legislation for council housing. This year things were much more propitious for Labour. The Conservatives have lost their shine; they are often complacent and out of touch; their new leaders are not of the calibre of the old ones. They have lost a lot of members. Meanwhile Labour (thanks to Gordon Brown) have addressed some of their reputation for financial incompetence, and they had more help from members than they knew what to do with.

So what happened? The Tories stuck to the same old gritty message about competence. No matter that this is less true than it has ever been – local Labour are firmly in the Sadiq Khan, centrist, competent wing of the party. And the council’s once-vaunted efficiency is now nothing special. Changes to the law under which council tax operates means that differences between boroughs are completely down to decades-old historical legacy, and tell you nothing about how things are likely to change in the future. But the Tories were able to plant doubts about Labour to which Labour had no convincing answer.

But Labour could surely have won. After their success in 2014, I remember thinking that the party needed to focus hard on what it needed to do to take control in 2018. The five wards they already held looked secure. They needed to win the five seats they didn’t have in the three split wards, and seven more seats from other wards. That meant a minimum of three more wards, four to be on the safe side. That was a big ask, but the reward was surely big enough to warrant a serious effort, starting in 2014. This should have meant identifying which four wards they needed to target straightaway.

But there was nothing. Residents of wards which the party eventually targeted heard practically nothing from the party until this year. Candidates weren’t in place before this. When it came, the campaign was almost completely generic, with nothing more than a few photos geared to the locality in which they fighting. Candidates did not have time to meet enough of the electorate and build trust – and didn’t really try. To them it seemed that controlling the council as a whole was what mattered, not looking after their ward. A personal vote of one or two hundred built up over two years or more would have made all the difference. and it would have been the best possible counter to the doubts that the Conservatives were trying to spread.

A lot of the same criticisms can be levelled at my own party, the Liberal Democrats. The party was too late to put in place its candidates and get out and about meeting the electorate. Too much of the literature was generic, making too much of issues like Brexit which, in the end, did not motivate voters much. We had an excuse. Though the party was in quite good shape in 2010, the coalition trough nearly destroyed it. The party made a dramatic recovery following the 2015 election and especially after the 2016 referendum, but trying to turn this new energy into an effective political force proved too much. The party made a lot of progress in the campaign, but too late have much impact.

All of which points to a disturbing aspect of modern politics. The parties are too interested in talking to themselves about their own political concerns, and not enough in meeting voters and solving their problems. There seems to be an idea that politics is about condemning abstract nouns like “austerity”, and putting “radical” ideas in front of the electorate and being swept to power in a tide of enthusiasm. Labour has succumbed to this. The Lib Dems are not immune.

But the Wandsworth election contained one shining rebuke to this politics of the abstract. The highest number of votes won by any candidate was by the independent Malcolm Grimston. Back in the 1980s I remember Mr Grimston as an obnoxious, fat young Tory (though the fatness should not be held against him, it was very much part of his persona). I have watched as he turned into somebody else entirely. He lost weight and became a gracious, polite politician who listened to people. We worked hard for his local electors, who came to know and respect him. After the 2014 elections he became so fed up with the arrogant Tory regime in Wandsworth that he defected. And he triumphed. Meanwhile another Tory councillor defected at about the same time. But he was much more of an abstract modern politician; he chose to adopt the label of the new Renew Party. But vacuous promises were no substitute for the graft of getting to know and help your local area. He had the ignominy of being beaten by a Lib Dem who did not campaign at all in the ward.

There is a lesson there that I hope local Lib Dems can learn. I suspect the current Labour Party would find it all too difficult. I wouldn’t have minded if Labour had won in Wandsworth, but they did not deserve to.