Cable’s Storm

Vince Cable The Storm: the world economic crisis & what it means Atlantic Books 2009.

A good summary of the various views of the causes the crisis, the reactions, possible remedial policies, and the (then) possible future developments. Vince emphasises various imbalances as creating instability. Rather than seeing too little or too much overall regulation as being a factor, Cable sees financial regulation as having been inadequate while more regulation of the ‘real’ economy would be a ‘bad thing’. He thus sees finance as primarily infrastructure supporting the economy, rather than as something that is itself a part of the ‘real’ economy.

The postscript has some of the more tangible recommendations.

[This] confidence rested … on ..the success of the global financial services industry, centred on London … ; an openness to oversees investors … ; and … appreciating property prices and consumption, financed by borrowing.

[But] the British economic miracle … has been exposed as structurally unsound … . [The] great housing bubble has been proved an illusion of wealth and fed a lie: that housing equity is a safe form of saving, a pension, a one-way bet. … The … challenge is to demystify property ownership and owner-occupation … and … to aim for a much better mix of social, privately rented and owner-occupied property … .

[The] longer-term need will be to boost savings for pensions, long-term care and the financing of mortgage deposits.

But he gives no suggestions as how to wean us off our owner-occupiers habits. Cable questions:

[Expensive] commitments such as generous public sector pensions … .

The paucity of British students … with mathematical literacy, specialized sciences and modern languages [which] means there is an inadequate base for ‘blue-skies’ science, for applied science and engineering, and for global business negotiations.

He suggests that if the Eurozone should stabilise adequately, we might do best to join it! He ends by addressing inequality:

through the generous but efficient provision of public goods, genuinely redistributive taxation and strong, solid safety nets for working families and pensioners, to remove extreme inequalities of wealth, income and opportunity … .

In the main body we learn of his opposition: to demutualization; to the corruption of numerate graduates by finance houses; to novel financial instruments; to the exploitation of (mainly) Chinese labour; of the flow of savings from poor to rich; to rewarding the reckless and incompetent while punishing the prudent and socially responsible; to mortgage or business interest tax reliefs, which encourage excessive leverage; to the combination of retail and ‘investment’ banking; and (implicitly) to borrow-to-buy-to-let. He advocates better global mechanisms to regulate imbalances and more measures to tackle global issues such as food insecurity.

[The] ‘paradox of thrift’ [is] that prudent savings behaviour by individuals may be collectively damaging. Keynes may have persuaded his contemporaries of the need to confront the paradox through reflationary monetary and fiscal policies; it is the difficult job of politicians to win that argument in a democracy.

Comments

It seems to me that national life does best, including economically, when there is some sense of progress. Under Labour there was a ‘green’ agenda, with the possibility of progress towards environmental sustainability. This was replaced by the coalition’s focus on austerity under Osborne, at least until 2012 when a more Cable-esque approach was adopted, with more infrastructure spending. Yet the economy in general, and particularly productivity growth, still seems flat (2016). There is no ‘story’ of improvement for politicians to tell.

An emerging gap is for reducing inequality. Cable discusses this, yet his approach seems too simplistic. I do not see how a safety net with redistribution can address the core issue. Innovations such as mandatory worker representation on boards may also be needed (as in Germany). There is also a need to ‘tell a tale’ around house prices.

If there were retail inflation of about 3% and an increase in the incomes of the poorer workers above retail by another 2% and flat nominal house prices then over time the prices of houses relative to pay would fall markedly, making them a poorer investment, perhaps with the outcomes that Cable is looking for. Such a relative fall could be achieved by building adequate residential accommodation (flats and houses). There would also need to be improvements in provision for retired folk and other non-workers. Much of the current policies are the opposite of this.

This is not to say that the UK should adopt the approach above: simply that whatever it does it should be able to ‘paint a picture’, if only so that consumers, savers and producers can get on with their lives without the current malaise.

Dave Marsay

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