Is austerity working for Britain?

[RandBlade]

Not just because I'm a Brit so naturally concerned but the UK is I think an interesting economy at the moment for a couple of reasons since the financial crisis of 07/08. Starting from a low debt base a decade before the fiscal deficit by the time the crisis hit the deficit was one of the worst of all the developed nations, the economy is one of the most dependent upon the financial sector, in Europe but not the Euro, and one of the few nations to have attempted "austerity" by choice at a ballot box rather than being forced to by the markets.

After slipping back into "double-dip" technical recession for the last three quarters there has been a spate of good news recently:

Employment during the recession has actually improved. The government has been shrinking and public sector employment has steadily declined over recent years, but private sector employment has been increasing faster than the public cuts. Even towards the end of this recession to the point where we now have record employment - though partially due to record population.
Inflation has been falling in recent months too. CPI inflation in September is the most important of the year (as in the annual April budget "benefits" will be increased by the rate of the previous September's inflation) - that fell to 2.2%
Borrowing while still massive is steadily coming down, the deficit is now down by a quarter of what it was 2 years ago.
Growth has been the one thing missing. While the US has had a jobless recovery, we've been having a job-filled recession. That ended today with an unexpectedly large growth of 1% for this quarter. As the Americans would report it, that's 4% at an annualised rate.

I would not want to pretend that all is rosy. Growth certainly is something to be concerned about as there's been a number of exceptional factors ... not least the Olympics. Olympic ticket sales alone accounted for 0.2% of the increase in growth, regardless of when they were sold even if last year they all class as this quarter. There are a number of other reasons to be concerned, not least the mess in the eurozone for which we are exposed. However given we are 2.5 years into an austerity government now it is reassuring to see some positive news - and that austerity doesn't mean disaster.

I note with interest that the NYT columnist, the economist Krugman, has been pointing to the UK's recession as a reason NOT to have austerity in America. I wonder if Krugman will look at our recent figures and reconsider?

[Nessus]

Just yesterday he posted to the contrary, so most likely not. You did just manage to give Loki a nose bleed and I'm sure he's fairly unhappy.

[Dreadnaught]

Rand- Do you think that several years of relatively low Pound to Dollar/Euro/Yuan has helped at all with not killing the services industry?

I note with interest that the NYT columnist, the economist Krugman, has been pointing to the UK's recession as a reason NOT to have austerity in America. I wonder if Krugman will look at our recent figures and reconsider?

You forgot to put quotation marks around the word "economist". And "columnist". Krugman is a singularly vile personality who has problems with facts and he will never reconsider anything, ever.

[RandBlade]

Yes I do believe that a freely floating currency helps as an automatic stabiliser.

[RandBlade]

No thoughts on this Loki/wiggin?

[agamemnus]

One big difference between a job-filled recession and a job-less recovery is who gets the money. If slightly less money is distributed to more people rather than slightly more money to fewer people, AND we are still in capitalism, I think that is a win.

[Hazir]

One big difference between a job-filled recession and a job-less recovery is who gets the money. If slightly less money is distributed to more people rather than slightly more money to fewer people, AND we are still in capitalism, I think that is a win.

Well if all else fails, all you need to do to get your economy from no-growth to aenemic growth is organize Olympic Games. Have one of those every quarter and you'll have put an end to the boom and bust cycle

[Loki]

Not sure if this can be attributed to austerity per se, but it does show that austerity isn't the end of the world, despite claims of certain has-been economists.

[wiggin]

No thoughts on this Loki/wiggin?

Sorry, wife's birthday over the weekend trumps posting.

Hmm. I'd say it's very hard to see a true counterfactual for the UK so it's hard to judge the efficacy of austerity measures. I readily recognize that the UK has had a decent crisis, and that despite the double-dip recession, they are looking better than much of Europe (and, on some but by no means all metrics, the US). It's hard to know if the policy response put in place by Cameron and the tail end of Brown's government was the best of all possible outcomes, or if better medium/long term outcomes could be achieved with less pain.

One significant challenge IMO is that even with extremely accommodative monetary policy (and inflation pushing above targets at times), it's been challenging to see much growth, which would likely have been enhanced with less extreme austerity. I think that the UK's credentials as being serious about deficit/debt are great now, but I doubt they would be that much worse if Cameron had slowed the pace of austerity in favor of somewhat more loose fiscal policy. That being said, the response was not bad, just maybe not the best possible one. I am still concerned about the financial sector, though - employment in London's financial sector has dropped by a significant margin (~100k employees IIRC?), and I don't know if those jobs are coming back. Given the importance of financial services to the UK economy, it's a not-insignificant concern for medium term growth. My understanding is that UK banks are doing better in the crisis than eurozone banks, but nowhere near as well as US banks, which were quickly recapitalized/restructured and can rely on a much larger deposit base. Given regulatory risk in the EU and beefed up domestic supervisors, I think the UK needs to be very careful about not losing their financial services to new (or competitor) hubs.

My broader critique of UK policymaking in the crisis doesn't have to do with austerity per se. It has to do with wasting the crisis as an opportunity for fix NHS. Cameron is very interested in doing so (at least I think he is?) but has largely been unsuccessful at it. This is a serious medium term fiscal challenge that was not adequately addressed during this crisis. A secondary issue is with Tories caving to populism on immigration. It's an absurd and xenophobic position, and trying to cut immigration to 100k is not only unworkable but also wrongheaded. I get that it sells well to voters in tough economic times, what with lump-of-labor fallacies and unfounded claims about immigrants sponging off the welfare state, but it's wrong and should not be pursued.

[Steely Glint]

One of our long term aims should be to shift the UK economy away from it's dependency on financial services, and towards something more useful, such as high tech manufacturing and IT so I don't see the loss of jobs in the finance sector to be necessarily a bad thing - so long as it doesn't happen too quickly.

[RandBlade]

I don't feel a need to reduce financial services per se but away from an over-reliance on any single industry. Regarding financial services I would be concerned that many (especially lower level) jobs in London could always be lost anyway but not to Frankfurt, New York, Tokyo etc but to somewhere like Mumbai. We do need to reduce our reliance on public sector employment too which has been shrinking, so to have both public and financial jobs going yet net employment increasing overall isn't such a bad thing.

I do agree with the dislike of attempting to reduce (especially skilled) net migration. OTOH it seems to be all talk and not actually happening too much at least.

Regarding the banks, the UK banks have been recapitalized (though I do agree more exposed than the US). One irony of the UK ensuring its banks aren't covered by the new eurozone banking supervisor is that despite the French etc going on about the evils of Anglo Saxon banking, we want to ensure are banks (like the US is) are more capitalised and secure than the new system will require.

[Steely Glint]

I don't feel a need to reduce financial services per se but away from an over-reliance on any single industry.

The thing is that financial services are so lucrative that anyone with a good degree in a subject that requires a head for numbers - physical sciences, computer science, mathematics - can make an absolute fortune in the City rather than doing whatever it is they trained to do. These highly skilled individuals are therefore not starting or working for the next Microsoft or IBM in industries that are going to be a big part of the future econony - biotech, nanotech, renewable enegy, internet - but working out how to make someone who is already rich slightly richer. If the shrinking of the cities frees up smart people like that to do something else then it'll be better for the country in the long run.

Of course that's wild speculation about what specific types of jobs are being lost.

[RandBlade]

I'm not sure, biotech is one industry as it happens we do well in, as coincidentally or not are the others you mentioned. Brain drain can be an issue, but I think the biggest brain drain issue is a regional one - the talented individuals all either move south or up north try and join the public sector. So get fewer entrepreneurs here than you do down south.

[Loki]

One of our long term aims should be to shift the UK economy away from it's dependency on financial services, and towards something more useful, such as high tech manufacturing and IT so I don't see the loss of jobs in the finance sector to be necessarily a bad thing - so long as it doesn't happen too quickly.

Governments have a pretty terrible track record of picking winners.

[Steely Glint]

Not bowing to the financial sectors every whim OR THEY'LL LEAVE would be a start, though.

[Aimless]

Governments have a pretty terrible track record of picking winners.

They may have a marginally better chance of avoiding likely losers aka. much of the financial sector

[RandBlade]

The financial sector aren't losers. They've contributed far more to the economy (and exchequer) than the government has ever supported them with.

Its not healthy to be overly reliant on anything, but being overly reliant on say biomedics would not be an improvement over being overly reliant on financial services.

[ar81]

Employment during the recession has actually improved.

Look at the chart in this link...

14 December 2011 UK unemployment increases to 2.64m
http://www.bbc.co.uk/news/business-16175309

[Hazir]

Came accross an article in The Telegraph today which I thought was quite interesting; Mr Haldane, BoE executive director for financial stability stated in a speech that the Occupy movement was right in its critique of the financial sector. As such that's of course no news to me but it was support out of a totally unexpected corner.

source

[wiggin]

I don't feel a need to reduce financial services per se but away from an over-reliance on any single industry. Regarding financial services I would be concerned that many (especially lower level) jobs in London could always be lost anyway but not to Frankfurt, New York, Tokyo etc but to somewhere like Mumbai. We do need to reduce our reliance on public sector employment too which has been shrinking, so to have both public and financial jobs going yet net employment increasing overall isn't such a bad thing.

I think that one of the UK's unique strength is their financial services industry, due to a number of historical, geographical, and political realities. It's silly to discard natural advantages in an industry just because it's better to have a more 'balanced' economy. Losing nearly a third of the jobs in an industry is not healthy, and is suggestive of a broader long-term issue rather than a short term cyclical hiccup.

Steely raises a worthwhile question about whether financial services jobs are crowding out other sectors. I would argue that in an appropriately regulated environment that would not be the case. Firstly, 'outsized' gains from financial services jobs compared to other skilled work only would happen if there was an explicit or implicit subsidy to the industry. A reasonable argument can be made that there was (and possibly still is), but that's an issue for regulation, not an opportunity for the government to subsidize other industries even more. Secondly, if there is a shortage of skilled workers but plenty of skilled jobs, I would point you to my second critique on immigration. There is a global competition for talent going on, and countries like the UK are losing it.

I do agree with the dislike of attempting to reduce (especially skilled) net migration. OTOH it seems to be all talk and not actually happening too much at least.

http://www.guardian.co.uk/education/...?newsfeed=true

It's stuff like this that concerns me. I honestly can't tell how much of the allegations re: London Metropolitan are true, but the tenor of the crackdown does not bode well for the UK being friendly towards skilled immigrants. On a broader level, the tone of the immigrant debate in the UK is fairly poisonous. (BTW, I'm not saying the US is better, just that it's a real concern.)

Regarding the banks, the UK banks have been recapitalized (though I do agree more exposed than the US). One irony of the UK ensuring its banks aren't covered by the new eurozone banking supervisor is that despite the French etc going on about the evils of Anglo Saxon banking, we want to ensure are banks (like the US is) are more capitalised and secure than the new system will require.

Agreed they are on better ground than their eurozone counterparts, though they still have significant exposure and somewhat shaky balance sheets. I think regulatory uncertainty here is the bigger issue, and it's not going to get sorted out any time soon. Given that reality, it's no wonder that many areas that had been seeing significant growth in the UK (e.g. investment banking) have been quietly closed or moved elsewhere.

[Hazir]

To be honest, I am quite happy that ABN-AMRO was bought up and chopped up before the crisis broke loose. As things were the Dutch taks-payer was already on the hook for tens of billions, but with ABN-AMRO pre-breakup running into the ground would have cost us a bloody lot more. I still feel that European banks (all of them) could still cause a lot of pain to the fiscality of their home lands. Three countries that are having a lot more exposure than I would be comfortable with are Switzerland, the UK and The Netherlands. That also explains (I think) why people overhere are in favour of austerity even though the fiscal figures seem to be relatively good.

P.S. I don't see an intrinsic difference between The Netherlands and the other candidates for trouble; many people would say that the latter have the possibility of jacking up the presses and print money to recapitalize their banks. But that lunch would be paid for still by the tax-payers with high inflation in the short run and erosion of their pensions in the long run.

[RandBlade]

Look at the chart in this link...

14 December 2011 UK unemployment increases to 2.64m
http://www.bbc.co.uk/news/business-16175309

Why are you linking to an article from 11 months ago?

[Aimless]

The financial sector aren't losers. They've contributed far more to the economy (and exchequer) than the government has ever supported them with.

Hang on isn't the financial sector the sector that has over time in terms of $$$ lost more wealth than it has (directly) generated? Probably thinking mostly of banks and the like though. I'm not saying ditch all of it, just saying that at some point there may be diminishing returns for society as a whole.

[RandBlade]

Hang on isn't the financial sector the sector that has over time in terms of $$$ lost more wealth than it has (directly) generated?

No. I see absolutely no evidence of that.

[Hazir]

Hang on isn't the financial sector the sector that has over time in terms of $$$ lost more wealth than it has (directly) generated? Probably thinking mostly of banks and the like though. I'm not saying ditch all of it, just saying that at some point there may be diminishing returns for society as a whole.

Hard to tell really, as the figure on the downside is by and large unknown. Two examples I could think of that give some indication are Iceland and Ireland. Iceland came off relatively well as it turned out their banks were investing relatively effective. For Iceland it may turn out that the damage actually is not bigger than the benefit. In the case of Ireland I would not be so certain; the Irish may never be able to recover whatever they had to sink into their banks, in which case the damage is significantly bigger than whatever Ireland recieved in benefits. Other countries; a toss up really, we don't know and nobody knows. And actually, we don't really want to find out.

[RandBlade]

Alternative Ireland could (and should) have let their banks go bust like Iceland did. No bank is too big to fail, just politicians want to take the easy way out and keep the zombies alive rather than admitting they're broke.

[GGT]

Reminds me of the old days, when we debated if the Financial Center of The World would be the UK or the US.

After all, financial services became an important sector in overall GDP for the last few decades, as the bubbles were building, but even more important to cities like London or NYC.

[RandBlade]

I don't remember us ever debating that

[Steely Glint]

A reasonable argument can be made that there was (and possibly still is), but that's an issue for regulation, not an opportunity for the government to subsidize other industries even more.

I don't hold that direct subsidization is a good idea - the whole solar power debacle shows the problems inherent in just outright giving businesses in certain industries money. However, there are things that can be done, by the government, that would make the UK more attractive to firms of a nerdly bent to set up shop here: improving, for example, IT education would be a good start: the current state of it is dire, and basically teaches kids to be office drones using word and excel. Improving the internet infrastructure, another good place to start. I don't have a problem with tax breaks, either, so long as they don't get too out of hand.

Cards on the table: my position here is also largely informed by my bias against the financial services sector, I basically regard them as amoral parasites that produce nothing and hoover up wealth whilst being called things like Tarquin and Ollie.

However, I do also think that, just as the economy and society in general have been changed massively by technology, there are equally massive and potentially more profound changes to come in the future, and it would be a good idea if we were riding the crest of that particular wave and that in such a changing world an economy based on fucking around with... shares or whatever it is they do is a house built on shifting sand.

[Steely Glint]

AFAIK all that's left of New York is the torch of the Statue of Liberty just poking above the waves, so I think London won that one by default.