Beyond Austerity?

 
First page of the Marshall Plan

Image via Wikipedia

A. INTRODUCTION

In case, you cannot read it, the photo on the right is of the first page of the Marshall Plan (officially the European Recovery Program (ERP)).

As 2011 draws to an end and the new year of 2012 gets closer, it is time for reflection and hope for the future.

As I tried to marshal my own views for this blog, and looked for some common threads I came across the three excellent videos this week: two from the Guardian on UK politics and the economy, and one from the Financial Times on financial markets in 2012

Here are my views.

Throughout the year, I have argued that austerity at all costs is the wrong policy. The total convergence of political leaders towards austerity for me is reminiscent of the thirties. The right-wing politicians in both the US and Germany have in effect held the World to ransom and have probably precipitated recessions in many Western countries in 2012.

I have consistently argued in favour of stimulating capital investment at the expense of short-term austerity at all costs. I support Keynesian interventions as well as good monetarist practice – a belt and braces approach. Germany benefited from the Marshall Plan after World War Two and now probably has a moral responsibility to stimulate a Marshall type plan in Europe. In the UK, I have continued to be disappointed by Chancellor George Osborne‘s financial policies – for me, there has been too much short-term austerity and not enough focus on growth.

Let us look at some of the key players:

B. BANKS

2011 has been a disastrous year for many banks, especially in Europe. Credit rating agencies have highlighted bad management and financial riskiness. Broadly banks have not supported small businesses and charged consumers usurious rates on credit cards. Meanwhile, many banks are vastly inefficient, with armies of bureaucracies, contractors and senior management operating in the clouds – all benefiting from vast bonuses because the industry seems to operate like a cartel or oligopoly, without adequate competition in favour of consumers’ best interests.

C. BIG BUSINESS

Big business has been sitting on vast piles of cash and not investing for the future. Big business in the US argues that the work force does not have the right skills, so it turns to outsourcing and off-shoring. For sure, big business is unlikely to provide the much-needed growth in jobs to stimulate economic growth. In many countries big business has a powerful lobby and is influencing  the political outcome, probably favouring greater austerity.

D. SMALL BUSINESSES

Small businesses have had a disastrous time, spurned by their banks – unable to fund working capital – yet alone funding for growth. Many right-wing governments have continued to favour the big business lobbies at the expense of small business. It is widely recognized that job growth will come from small businesses not big businesses but politicians are not providing enough of a helping hand.

Over the holidays, I have been visiting Cyprus and heard of a tragic story of a restaurateur (whom I knew quite well) who committed suicide because his business failed. Mediterranean countries have different challenges to North Europe, and a common diet of austerity for all is simplistic. Proprietors of small businesses carry higher risks but they are not receiving corresponding reward, nor political patronage nor favour from unelected bureaucratic institutions like the ECB and the IMF.  

E. ORGANIZED LABOUR

Organized labour (the unions) have been having a bad time too. Despite strikes, unions are finding that the “cupboard is bear” and there is no cash, thanks to austerity, so individual union members are getting increasingly angry and depressed at their prospects.

F. PUBLIC SECTOR BUREAUCRACIES

Austerity is aggressively targeting both national and local government bureaucracies. Simplistic policies are bacon-slicing public services, rather than stimulating genuine cost reduction. In the UK, the Cabinet Office continues to call in the same cronies from major consulting houses, rather than search for more cost-effective and independent advice from the wider market.  Again, in the UK, policies on streamlining and rationalizing the Public Sector have been hotchpotch, rather than strategic. The UK Coalition Government came to power with a reforming mandate but political differences between the Conservatives and the Liberals, plus differences with the EU have kept the UK Government looking weak and ineffective.

Meanwhile, the unelected vast bureaucracies in Europe and at the IMF continue to prosper, gain influence, doling out recipes of greater austerity and greater EU/IMF bureaucracy.

G. GOVERNMENTS

It has been a pretty difficult time for governments too, with political leaders in the lime light of the media for their indecision and absence of effective leadership. Matters have been aggravated by elections looming in the US, France and Germany. President Obama has had monumental challenges and has been blocked by the Republicans. President Sarkozy has been bitterly unpopular in France, and has resorted to shabby tactics to gain a political point or two. Similarly, Chancellor Merkel has been struggling with her own popularity and power base, rendering her decisions slow, ponderous, lacking in grand vision and inspiration. Sadly in Greece and Italy, democratic governments have been ousted in favour of bureaucratic puppets manipulated from Berlin.

H. OUTLOOK FOR 2012  

As an optimist, I prefer to see the upside opportunities for 2012, rather than the downside. Like 2011, much of the outcome will be influenced by the politicians. If politicians behave responsibly, I envision confidence and optimism returning. Politicians must now stimulate growth at the expense of short-term austerity. I agree with the Financial Times video, that 2012 may well be the year that focus turns to big business and why they are not doing more to stimulate growth and counter austerity.

 It is time for big business and governments to start investing aggressively in properly costed capital programmes provided there is a sound business case. Small business should be encouraged to invest as well but they will need help with financing. At the individual level, Governments should also  be encouraging responsible personal investment decisions too, like in homes, energy-efficient cars and consumer durables. It is time to think beyond austerity. 

What do you think?

Happy New Year

Dr Alf

8 responses

  1. Though I’ve not the economic grey cells you do, one of Jack Welch’s premises was: “the best time to invest IS in the down turned economy.” And I certainly agree with that. Here’s to a better 2012 for all! God bless the UK and America.

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  6. The job creators of the future are not and never have been SME’s and Big Business is interested in reducing its tax bill and sitting on cash mountains.

    Growth in employment comes from medium sized service industry companies and knowledge based enterprises employing 11 people or more.

    95% of businesses smaller than that are lifestyle businesses which the business owner does not wish to grow even if the banks were lending as they did in the past.

    The Coalition is too focused on deficit reduction but it is also wasting money on things like:
    –An unaffordable public sector
    –Global posturing
    –The Monarchy
    –Membership of the EC
    –Bailing out the Euro via the IMF
    –Too many civil servants, MP’s, local authorities, constabularies, fire commands and quangos
    –Overseas aid
    –Military adventurism
    –The Barnett Formula
    –An unaffordable care bill and an obesity crisis which will bankrupt the NHS

    The country would do much better as a tax haven minus Wales, Scotland and Northern Ireland.

    The model of Governance we should follow is a cross between Switzerland and Singapore and our education system should borrow from Finland, Singapore and South Korea.

    To achieve economic growth we should:
    –Quadruple the size of the export salesforce across key sectors where the UK has leadership
    –Have a crash programme of language training funded out of not translating things into Welsh or funding the Celtic fringe via the Barnett formula
    –Grant citizenship to inward investors willing to invest £10 million gbp in a new business and employ 50 indigenous workers or more
    –Invest in Boris Island and build a new airport there
    –Invest in road infrastructure and bullet trains
    These to be funded by not wasting money on wind farms and unnecessary green taxes

    • John,

      Many thanks for your response and agreeing with me that we urgently need investment rather than more austerity.

      I am not sure that I agree with all your details proposals but respect the general direction of your argument.

      It’s interesting that Paul Krugman has similar views to me in his blog in today’s NYT. You will see that I’ve reblogged his article with my personal endorsement. Here’s the link:

      http://wp.me/p1m0kg-U5

      Happy New Year

      Alf

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