We might not be officially in a recession if the entire economy is added up, but the figure of 0.5% growth for the last quarter is rather unspectacular, and we hear that the recovery might be rather slow and might even head into a second dip. Personally, I think a Loch Ness Monster recovery is more likely, where we have several dips over the next decade. But in any case I think these overall growth figures actually miss the point and miss the very different effects experienced by different parts of the economy. In spite of what we keep hearing, it is simply not the case that ‘we are all in the together’. The recession affects different parts of the population in very different ways. And the consequence is that society is being polarised along the axis of suffering. A divided society cannot prosper. Even as I write this blog entry, we are already seeing demonstrations in the US as a result of the enormous polarisation and now they have spread globally under the banner of anti corporate greed. But corporate greed is only one factor here and not even the most important. We need to fix the economy, but we also need to do it with sensitivity to polarisation.
Let’s look at the different parts. On one extreme we have those made redundant with little hope of finding another job, those already struggling who have had to take big pay cuts, those whose businesses depended on bank loans they were unable to get, and those whose businesses depend on optional expenditure. On the other we have those in secure jobs with annual increments and even pay rises, those working in businesses in sectors that people have little or no choice to buy from (food, energy, public services, finance, transport etc), and those who manage or own businesses in those sectors. Those at one end face severe difficulty, while those at the other end have secure income during times of often reduced prices , so may actually benefit from the recession, especially for those for whom increases in fuel and food prices affect a small amount of their overall spend. There are large numbers of people at both ends. The middle ground is occupied by those in jobs that may be threatened, on zero or low pay rises, who have some money but don’t feel confident and consequently are paying off debts or putting money aside in case of bad times ahead instead of spending.
These three parts are feeling the recession very differently, but there is little recognition of this by government, which behaves as if everyone is suffering equally. Tools that government typically uses to affect inflation such as interest rate rises affect those already suffering most far more than those not suffering at all. Instead of spreading the pain across the population, government prefers to kick those on the ground and leave those standing alone. Those affected most form an important part of the economy but are usually the ones to suffer first and most.
Polarisation of a society is dangerous. Resentment builds, and tensions may build until they become violent. The current demonstrations are unlikely to be a one-off. If one part of a population always takes most of the pain, they can reasonable be expected to object. The seemingly united 99% taking part in today’s demos is very likely to fragment as the realisation spreads that they are far from similar to each other, and one part of the 99% is taking a great deal more pain than another. They will soon split into rival groups.
Even within wealth groups, the effects have been diverse. During the recession, many rich people have lost fortunes, but others have made them. Owners of some excellent companies in optional spend sectors will have seen their profits slump, and the value of the business plummet, or even gone out of business. Meanwhile, others have thrived. If this were due to business acumen, (and sometimes it is) no-one would mind. But actually, it is sometimes far from the case. Some businesses are cash rich, but are sitting on the cash, reluctant to spend. Perhaps this is because of fears of increased risk, or perhaps it is so that the senior executives can take larger salaries and bonuses.
The evidence is that some companies at least are behaving very badly, using recession as a means to beat down prices from suppliers, reduce external spend by their employees, reduce training, and keep down salaries, not because of genuine thrift or concern about risks, but through simple exploitation of the opportunities that recession provides to take advantage of the weak. If a company spends less on supplies and staff-related costs, but can keep its own prices and income high because it is in a sector where people have to spend, then obviously their profits can rise significantly. This is not business acumen, it is exploitation and even in some cases profiteering and such behaviour should be condemned, not rewarded. It is these exploitation factors more than anything that the demonstrators globally are protesting about.
I think polarisation issues should be kept in view during recovery. We certainly need to rebuild the economy, but kicking those that are suffering most won’t help. The middle ground wants to spend but dare not, afraid rightly for their futures, and are concentrating on building reserves or paying off debts to limit risks. Persuading those in secure employment or with thriving businesses to spend will help, and is the only approach that can reasonably expected to help instead of making things worse. Only that part of the economy has genuinely fluid cash and they must be encouraged or forced to put it back into circulation. So far they have been spared the pain, not primarily because of their own efforts, but mainly because they are in sectors that have been relatively immune. When we look at the overall nature of a capitalist economy, a relatively free market is important, but the market ultimately is the property of the society that permits it to run. It is one of the selections of democracy, not a universal right. The reasonable exploitation of markets has to happen with the consent of the democracy so has to be treated with respect for those who allow it. Because of exploitation going beyond what the electorates consider reasonable, and the fact that respect appears to have evolved into contempt, this consent is being challenged right now.
Modern life depends on a solid foundation of essential services, upon which are built layers of added value. Both are needed for a proper quality of life, and foundation layers should not be immune to economic stresses that affect the country as a whole. We need them, but we also need the other sectors if we are to have a quality of life worth living, and those who add the value are ultimately as important as those who make up the foundation.
Other axes of polarisation
There is also a large and growing divide between the private and public sectors. Private sector people who are struggling themselves are increasingly resentful of having to pay heavily for what are far better terms and conditions for people in the public sector who often seem to do irrelevant jobs and often perform poorly. If the public sector continues to refuse to recognise this and tries to defend their differential with strikes, it will increase this divide still further.
Still another polarisation dimension is age. Intergenerational conflict is inevitable because of the huge debts accrued by government during the years till now. Tomorrow’s adults will not easily forgive the enormous pain they will suffer paying those debts off, especially while being forced to watch comfortable retirements that they are funding, but will have no access to.
The recession is not a cause of these other polarisations but it certainly helps amplify the stresses. So we need to build a recovery to help reduce the polarisation, but polarisation needs to stay in sharp focus while we do so.
Need for proper leadership
The economic crisis is really one of confidence. Things were working fairly well before the banking crisis (even if massive debts were building up), and the decline has mostly been caused by reduced confidence. It needs a strong injection of confidence before things can improve. As I blogged at the start of the crisis, the economy was fundamentally strong and there was no need to enter decline, but lack of confidence has caused it to fall apart. Confidence that the rest of the economy will improve will be self fulfilling, but can only really be created by the government. We don’t have anything like strong enough leadership currently. The lack of effective leadership is now a major and potentially persistent problem for the economy. People have to be able to believe their leaders and want to follow them before we can get moving again. That doesn’t look terribly likely at the moment.
Another ingredient in a rapid recovery would be a sound tax base that encourages entrepreneurs but is conspicuously fair to all. There are probably a number of ways this can be done. I’ll introduce my own suggestions in another blog. A key factor is that all must pay and according to their total income, regardless of how they get it. Also, a central issue for the protesters is that the rich are becoming ever richer, even during the recession. Some rich people pay their dues properly, but some avoid paying taxes by roaming around the world, never staying anywhere long enough to incur local tax demands. It may be too hard to introduce global taxes, or to stop tax havens from operating, but we must find a tax system that is simple, fair and watertight within the UK.
The most obvious solution is to getting money flowing instead of piling up is to introduce a tax on capital. Some other countries have one, so it is not without precedent. Taxing money left in the bank encourages people or companies to spend it, whether individuals or companies, helping to get the economy moving again.
Dealing with public-private polarity
At the moment, people in the public sector (on average, though their are many exceptions) are paid more and also get far better pensions than their private sector counterparts, in spite of working less efficiently for fewer hours on fewer days, with more sickness absence. This is clearly unsustainable. Public sector terms and conditions need to be brought into line with the private sector, taking account fully of actual productive hours worked and quality of work. If like can be compared with like, then public sector conditions could reasonable be levelled to the 50th percentile of private sector equivalents. Taking job security and other perks into account may even justify levelling to a lower level.
Part of the reason polarity is such an issue is that those made redundant often have to survive on what welfare provides. Most of us would agree that welfare should provide a dignified but basic standard of living as a safety net. At the moment, it is something of a lottery, where those who know how to work the system get much more than those who don’t, and it could reasonable assumed that the latter are those who are most in need, since the former group have demonstrable skills that should be put to more productive uses. With the current system, means testing and sudden jumps or falls at thresholds makes it very unfair and often deters people from seeking work. The costs of administering such a bad system are around one third of the total costs to the taxpayer. If admin could be simplified, then up to 50% more generous payments could be made. One way of doing this would be to give everyone a basic living allowance. A well designed tax system will still ensure that everyone contributes according to their ability, and if everyone receives the benefit, it could still all be perfectly fair.
If the degree of polarisation is reduced and everyone can feel that the system works fairly and that all contribute and all get a fair reward, then society can prosper, the economy grows, and everyone is better off.It is in no-ones interests to keep a system where large groups in the population are treated differently. When some badly treated, they won’t contribute, their resentment grows into demonstrations and then violence, the economy doesn’t thrive,and everyone suffers.