Economy: Growth

Lord Desai Excerpts

Tuesday 29th January 2013 Lords Chamber

[Lord Desai]

My Lords, I, too, congratulate the noble Lord on his new appointment. I am afraid I was out of town when the Olympic Games were going on, so I missed the full glory of his achievements, but I am sure that he will match them in his new position.

It is a strange debate in which 25 men and only one woman are speaking. What is wrong with economics that it puts off women? It happened to us last Thursday when we discussed the banking union, and only the noble Baroness, Lady Falkner of Margravine, from the Liberal Democrats was speaking. The noble Baroness is also the only Lib Dem spokesperson, so she is unique in two different respects.

My perspective on this crisis has been different to that of many other noble Lords. It is a much deeper crisis than we think and will take much longer to sort out than we think. The idea that we will get rid of our deficit in five years was never on. We will have to work much harder for this because the roots of this crisis go much deeper.

There are three parts to this. First, around the early 1970s we started de-industrialising, losing our industry, and our industry started migrating to Asia. This happened not only to us but to many other European countries. Germany is an exception, to which I will come. Incidentally, Germany has never adopted any Keynesian policies that I know of. It has always been a non-Keynesian-run country and has always taken horrendous cuts in real wages. Even now, its consumption to income ratio is lower than in the UK, regardless of what growth it has. It is a very different kind of economy and we are not about to replicate Germany. We can forget that.

Conservative voters do not like infrastructure development, such as HS2. Forget about Labour; our prosperous people are anti-growth with regard to HS2. Our prosperous people are against the third runway. We have a deeply anti-growth mentality. This is not my main point, but I want to point out that we are somewhat perverse in our desire for growth. When it actually comes to our doorstep, we say, “Take it somewhere else, thank you very much”.

But to go back to my point, we got into de-industrialising early in the 1970s, and this happened to quite a lot of other countries. When we finally lost a lot of industry, some of which we could not keep here because we had priced ourselves out of international markets, we replaced it with a service sector through much of the 1990s. Economics is a strange subject. In neoclassical economics, it does not really matter whether you dig ditches or make a car or make candyfloss. It is all income. If you make candyfloss and not cars, you are still growing. In the 1990s, we had the longest boom, for 15 years, but it was entirely based on the growth of the financial services sector. Our wealth creation was in the financial services sector. I know it is no longer fashionable to like the financial services sector and we find it not socially useful, but we lived off that sector for 15 years. We did not reindustrialise or do anything about upskilling. I have been in this country for 45 years and every year we say, “We should have more apprentices, German-style”. Wow, there we go again. We have not reindustrialised; we have been happy with the financial services sector.

As a part of that, we stopped saving. Households stopped saving, and Governments stopped saving. Our crisis has arisen from over-spending, under-saving and over-borrowing. It was not only us; almost the entire western world under-saved and over-borrowed, and the poor, fast-emerging Asians were lending us a lot of their money. They were not only lending us money, they were also exporting goods to us which we bought with the money they had lent us. So, in a vicious circle, we went on having balance of trade deficits thanks to the money they had given us. It was like a drug dealer giving you money to buy drugs and then you need more drugs.

Getting out of an over-spending crisis is not easy, as the noble Lord, Lord Skidelsky, pointed out. This is a portfolio of a stock disequilibrium crisis, and it will take a long time for our savings to recover to anything like a decent standard. The noble Lord, Lord Lang, talked cogently about our problems with the pensions industry, and so on but, given our demographics, we need to get to a level of savings higher than what it was in the 1990s. The question is what we are going to do to get our level of savings higher than it previously was. How are we going to get to that stage?

I know that there is a clear division between Keynesians who think that one more bout of spending will get us out of this crisis. I have studied Keynesian economics and I have been a Keynesian economist, although I am not one during this crisis. Our problems arise from what we did during the prosperous years about spending. It is not what we borrowed after 2008 that is the problem; our problem is that we borrowed at the top of the boom and that our debt to GDP ratio went up in the good years. Had it been the case that borrowing was self-liquidating, we would not have been in this situation. So, to some extent, there is a problem, not about borrowing but what you spend it on. Some spending is self-liquidating, while other spending is not. Obviously, we had a balance between the public sector and private sector or, perhaps, between the wealth-creating sector and the welfare-creating sector. That balance went awry somewhere during the boom years. We started at 36% of GDP being spent by the state in 1997, when Labour came to power; it was 44% by 2007 before the crisis hit us. At the end of all the misery that this is going to cause us, we are going to return to 44%. All the adjustments, no matter how long they take, will only get us back to 44%, and there will still be a lot more structural adjustment to do when we are through with this. After we have eliminated the deficit and stabilised the debt level, we will start rebuilding the economy. This is just patchwork. We have to think about this problem more seriously.

I believe, and have always believed, that QE was a disastrous mistake. When you need to raise your savings, if you cut interest rates you discourage savings, a point made by the noble Lord, Lord Lang. Furthermore, we know that while households and Governments are in debt, corporates are in surplus cash and no one is investing. One reason could be, of course, that there is no demand, but another problem is the uncertainty about interest rates. Everyone knows that one of these days QE is going to come to stop and interest rates are going to go up. Until I see how interest rates are going to go up, why would I invest? Why would I invest now, when interest rates are 0.5%, when I know that they are going to 6% further down the line?

One thing that Mark Carney can do—although I do not think he will listen to me, if anyone—is to stop QE. Let us get out of QE as fast as we can. A very loose monetary policy and a very tight fiscal policy have so far not had much effect on the economy. We are bumping along at the bottom. Minus 0.3% is neither here nor there because, in any of these things, the standard error is plus and minus 1%. It is like opinion polls; we are always told that error is plus to minus 3%, so do not take the actual numbers assessed as serious numbers. We have been bumping along at the bottom for roughly three years, as has the eurozone economy. The Americans are doing slightly better. However, relative to their potential growth rate, they are also quite far down, and this is a problem of the entire western world.

It is not easy to be convinced, and I am not convinced, that a reinvigoration of the Government’s spending programme on the capital side will necessarily lead us out of this problem. This is partly because, if you are going to spend on investment projects, the pay-off is delayed and long. So your spending today is not going to bring economic growth immediately. The IMF studies show that if in one year the multiplier is one-half and in the second year it is two-and-a-half, the model needs re-examination. What sort of model is it? Next year it may be three-and-a-half or one-quarter, I do not know, but it is not a Keynesian problem—it is a very different problem—and we will have to bump along on the bottom.

Many of the policies suggested will not work, partly because of the delays which feature in infrastructure, as the noble Lord, Lord Birt, pointed out, and as we well know. So even if we planned to spend money, even if the Government were to announce £50 billion of investment, that £50 billion is not going to enter the economy at any time soon and, if it does, it will not lead to income growth rates. I am very gloomy about bumping along the bottom until confidence revives in the private sector and it starts investing again. The noble Lord, Lord Sheikh, mentioned that stock markets are feeling very happy. They must know something that we do not, but they are clearly feeling euphorious. People are into junk bonds and equity markets, so maybe there are some undercurrents of optimism, but we do not know what it is.

Everyone else has spoken about infrastructure, so I will not talk about that. One reform that I hope we can accomplish, I do not know how soon, is to start not taxing income but taxing expenditure. It is a long-delayed reform. If you have an economy which needs to save more, you do not tax income, you tax consumption and expenditure. Secondly, I do not think we should tax profits. We should tax material consumption or carbon emissions, but not profits. Nor should we tax employment, as we do with national insurance contributions. We are doing everything wrong. If we are going to permanently change the economy, stop taxing income and tax expenditure; stop taxing profits and tax material consumption; and stop taxing employment, as far as possible. If we begin to make those kinds of long-term changes, perhaps we will get back into the spending habit and, if the savings are there and interest rates fall back into the normal pattern, we will have growth coming from the private sector and not necessarily the public sector.