Tuesday, August 02, 2011

The economy: Keep calm and carry on

Nick Thornsby has written a post drawing our attention to an article in the Economist that argues there is no easy way out of our current economic difficulties.

In Nick's own words:
Much of the economic growth in western Europe and the US was driven not by economies becoming more productive, more competitive and embracing technological advances but by consumers spending more and more borrowed money.

People improved their quality of life and stimulated the economy by buying things that they couldn’t really afford – most notably, and disastrously, houses.

In 2007 the bubble came to an end. Confidence collapsed, people stopped borrowing and the economy shrank.

The subsequent recession was, unsurprisingly, both deep and long.
Nick has reminded me of a recent Independent article by Hamish McRae, which I had intended to blog about. And it says much the same thing:
So slower-than-hoped-for growth has led to a clutch of calls for the Government to have "a growth strategy". The trouble with such a notion is that it assumes that the Government is able to increase growth by passing a few laws or cutting a few taxes, whereas the relationship between government policy and economic growth is much more tenuous. We know that it is possible for a government to puff up growth for a while by borrowing and spending more but we also know that this is a short-term fix that has long-term consequences. 
We are paying now for the artificial boost to the economy given by public policy between 2003 and 2007, where the combination of high government borrowing and easy credit led to an unsustainable consumer boom. We cannot go back there even if we wanted to.
But McRae does not conclude that we are all doomed:
Surely the sensible response to those GDP figures is to say that insofar as they are right (and they feel intuitively to be OK, though wait for revisions) they confirm what we already guessed: that the economy is growing slowly. Actually, if you exclude offshore oil and gas output which has been weak recently, this recovery is running a little ahead of the climb out of the 1980s recession. Not great, but not dreadful.

1 comment:

dreamingspire said...

The call for the growth strategy I believe is legitimate, particularly since we seem to have a govt that largely (i.e. the Tories) wasn't ready for govt. The assumption that the strategy can only be spend, spend is wrong. I keep thinking that I must look up how Canada came out of its own shock a few years ago.

What is disappointing is that I have not found any of the commentators, expert or lay, offering us any pointers to a strategy that will work. How about encouraging inward investment by cash rich countries (i.e. China)? In fact it is starting, as China follows the Nissan pattern of assembly here, components from the home country. And we already have Honda in Swindon as well. Such inward investment creates jobs here during the preparation phase, so it gives a quick lift. It also starts to use our expertise in design as well as our indigenous willing workforce.