As this column comes to a close, I thought I would take a look back and then forward.
Eleven years of this column: from austerity to Trump
The first Thought of the Day column for The Share Centre was published in the Autumn of 2009 — there have been over 2,000 articles since.
I thought I would look back and forward.
In 2009 the crash of the year before was still dominating our thoughts. The economy appeared to be on the mend, but lurched back a year or so later, and apparently fell back into recession and talk focused on the possibility of a triple-dip recession. In fact, when the Office of National Statistics subsequently revised data on the UK economy, it turned out there had been no second recession at all. It is odd, when the data appeared to show recession, the headlines were full of woe. When the data later showed recession was avoided, hardly anyone noticed. And don’t only blame the media. I have noticed that articles I have written on revisions in data were among my most unpopular.
I think three things stand out concerning the last eleven years or so — a very weak economy in the West, the rise of China and the rise of techs.
In the West, we reacted to the 2008 crash with the wrong medicine. I don’t want to say told you so (too often) but a theme of this column was how dangerous austerity was in its early days.
The problem wasn’t so much with a single country trying to balance its books; the problem was that all the major economies were trying to do that.
A book published during this period that became something of a gospel for austerity was called This Time Is Different: Eight Centuries of Financial Foll.The authors, Carmen M. Reinhart and Kenneth S. Rogoff presented data which appeared to show that once government debt rose above 100 per cent of GDP, the economy slowed markedly.
For a few years no one argued against the book’s central thesis. It seemed like common sense. In 2012, Nobel laureate Paul Krugman appeared on BBC2’s Newsnight against austerity. He was opposed by venture capitalist Jon Moulton and Conservative MP Andrea Leadsom. It is worth a watch.
There was a problem with austerity, however.
At that time, there was a chronic shortage of demand caused by excess savings — globally. When planned savings exceed investment, the economy suffers. Globally, savings can't exceed investment, so when people try to save more, the economy shrinks accordingly without a corresponding rise in investment.
By borrowing, the government can solve the problem of excess savings. This idea of excess savings is central to the concept of Keynesian economics. It’s the point critics don’t get. It is not always a problem. If you apply Keynesian economics during a period of excess demand, as happened in the 1970s, the policy backfires. That is a subtlety that misses many people — they see that Keynesian economics didn’t work in the 1970s and conclude that it never works.
The practical lesson of the austerity years is that government debt increased. That is what happens when governments try to cut debt during a time of weak aggregate demand.
The UK was hit especially hard by the 2008 crash, but a few years later, the euro area suffered a delayed consequence.
The acronym PIGS was born — Portugal, Ireland, Spain and Greece. I was not a fan of how the eurozone authorities handled this crisis. And although I disagree with Brexit, the shameful way Greece was treated, later leant support to the Brexit campaign.
Another characteristic of the years following 2008 is that it took years before median wages rose above the pre-2008 level. Part of the problem of weak wage growth was weak productivity growth.
The policy of the Cameron government was a combination of austerity tampered by boosting jobs by creating an ultra-flexible labour market.
I think this policy contributed to weak productivity growth — partly because employers chose to hire cheap labour rather than invest.
These issues help sow discontent which I think sowed the seeds of Brexit and in the US-led to the victory of Trump.
But the Cameron government also tried to encourage entrepreneurship, and I think it succeeded to a large extent. I am not sure whether the positive side of creating a more entrepreneurial Britain would have cancelled out the adverse effects I referred to above, but I think that Brexit has made things a lot more difficult.
At the end of 2009, China’s GDP stood at just over US$5 billion. By the end of 2018 it was over US$13 billion. To put that in context, in 2006 the Chinese and UK economy were roughly the same size. Today, China’s economy is approximately four times bigger.
China has changed, too. It has moved up the value chain. It has shifted slightly to be less reliant on exports. It is no longer afforded the economic luxury of a rapidly growing working-age population.
Look towards South-East Asia; I believe the economy’s in this region will become ever more critical.
The other important theme of the last eleven years has been tech.
Apple’s market cap has grown from around $60 billion to $2.3 trillion. Amazon’s market cap has grown at a similar pace. In 2009, the two companies had similar valuations today; Amazon is worth $1.65 trillion. But that’s nothing. At IPO in 2010, Tesla was worth around $3billion. Today it is worth $800 billion.
I find it extraordinary that Warren Buffett has been so successful as an investor while simultaneously failing to spot the tech revolution's significance.
But there are dangers as well as opportunities from tech.
I think the way tech created monopolies, changed working practices, disrupted traditional industries and led to growing inequality has been a bigger factor than austerity, creating so much political divide and extremism.
The Covid virus probably represents the biggest economic shock in — well, I don’t know how long, certainly in my lifetime. Maybe the biggest shock since World War 2.
It has accelerated the adoption of tech — which is a good thing with a sting.
Covid has also exacerbated inequality.
Some think that as a result of Covid, indebted governments will impose austerity and tax hikes crippling the economy.
Others think that instead, government policy will lead to inflation which will also have a crippling effect on the economy.
I don’t think either are inevitable.
But I do worry about the combination of accelerated tech and the fallout from Covid leading to even greater inequality and social dissatisfaction. I think that this combination is a bigger threat than either inflation or government debt. It is more important than ever that governments don’t hit the austerity button next year or the year after, because if they do, the results will be social problems that dwarf what we have seen in recent years.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.