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Josh Ryan-Collins is a researcher in the Connected Economies team at nef.
If anyone is wondering what people mean when they talk about a credit/banking bubble, this wonderful graphic produced by JP Morgan last week sums it up quite nicely. The blue bubbles show the major bank’s market valuation in Spring of 2007 when everything was still fairly hunky dory. The considerably smaller green bubbles (one might even call them dots in the case of Citi-group and a couple of others) show their market value now.
One wonders if there is a hint of irony in JP Morgan’s footnote: ‘while JP Morgan considers this data to be reliable, we cannot gaurantee its accurancy or completeness’.
Thanks for that JP.
Veronika Thiel is a researcher and project manager on nef’s Access to Finance team.
Western countries have long been accused of being glib about economic matters, and now we’re facing the consequences of our hubris. Our ceaseless insistence that our our economic system is stable and that everyone should aspire to copy us makes us look really stupid now in the eyes of the many other countries which did not or could not do what we did – live on credit.
Many transition economies and developing countries will suffer as a consequence of the credit crunch. In a globalised world in recession, globalised trade will suffer, and export-dependent countries will feel the pinch acutely.
So, in a way, I can’t blame the leaders of China and Russia for scolding the West. The greed and blind faith in funny money have caused most of the trouble. But there is another side of the story, namely that of the balance of trade. A balance of trade is the difference between the value of goods exported to one country, and the value of goods imported from the same country. So, if country A exports goods worth $100bn to country B, but only imports goods worth $40bn, then the balance of trade is positive for country A, as it exports more. For country B, on the other hand, the balance is negative. So, country B depends strongly on country A to provide it with the goods and services that country B cannot or does not produce. If country A stops producing these goods, then things don’t look good for country B. It will either have to go without, find another country where it can buy these goods from, possibly at a much higher price, or start producing the goods themselves – but that can’t be done overnight. Country A on the other hand is also interested in country B continuing to buy its goods. If they suddenly stop buying, then it has to find another market – but there might not be one, so its economy can also be hit by a sudden drop in exports.
So, overly skewed balances of trade are not good for either party. And this is where China’s remarks on America’s greed become interesting.
For the US, the balance of trade with China has long been negative, i.e. the US imported far more goods from there than it exported to China, as these figures on the balance of trade between the two countries show. In 2008, the US imported nearly 4 times more from China than it exported there. And we’re not talking peanuts. We’re talking goods imported from China to the tune of US$312bn, while the US only exported goods worth US$66bn. The US trade deficit: $246bn in 2008 alone. There is something ironic in the biggest capitalist economy on the globe relying so much on the last major surviving communist power player (both politically and economic) in the world.
In the olden days, this dependency was considered dangerous for the US. What if there was a revolution in China, or their economy collapsed, or their goods became more expensive? The US would suddenly be unable to rely on the cheap imports that helped sustain their economy over the last decade.
But as it turns out, it was the US economy that collapsed, leaving China exposed to massively reduced demand for its goods and services, resulting in a slow-down in production and economic growth (note that this of course also applies for all the goods and services China exports to the EU).
This is bad news for China, and their premier is right to be demanding more of a say in the world economy. On the other hand, I’m assuming that China realised that its dependency on exports may come to haunt it at some point, and that its growth was partially fuelled by the Western greed that Premier Wen Jiabao rightly blames for the mess we’re in.
But we all, including China, have to realise that we all massively benefitted from the cheap credit that allowed us to buy houses, holidays, and other stuff. Never mind it was always clear it would not last. Never mind it was always clear it was unsustainable. But most of us have profited one way or another from it. I’m all for finger-pointing and blaming myself, but only as long as we remember that our credit bubble also was responsible for much of the economic boom we saw in many countries – growth that is now leaking out of the cracked bubble like gas from a leaky balloon. I don’t think that a player the size of China can pretend not to have realised that this is a bubble and will end sooner or later. Otherwise, they were just as blind to it as our Western economic soothsayers. And that would be really scary.
P.S.: The same argument goes for Russia, by the way- but there is only so much space in a blog.
Juliet Michaelson is a researcher at nef’s centre for well-being.
Today’s Financial Times includes a full page of analysis discussing the growing movement among economists and others towards producing alternative measures of economic performance and social progress. If you’ve already read our National Accounts of Well-being report , published last weekend, or looked at the accompanying website, much of the content will be familiar: the strong caution issued by Simon Kuznets, the designer of the original GDP measure, that it should not be used to infer the welfare of a nation; the perverse nature of the way GDP is calculated by mechanically counting productivity, so that spending on things like divorce proceedings is counted as a benefit; and the current work of the commission headed by Nobel-laureate economists Joseph Stiglitz and Amartya Sen to develop new measures to enable us to change “our political priorities and build happier, greener, societies”.
The article concludes by highlighting what it describes as “perhaps the most controversial issue” being examined by the commission, namely “whether to create some kind of ‘happiness index’ based on surveys of people’s attitudes”. What it doesn’t mention is that this is precisely what we have done in our work on National Accounts of Well-being. While we don’t claim that our indicators are the final word on how governments should measure people’s experiences of their lives, they certainly show how, by using high-quality survey data, robust and detailed measures of well-being are not only possible, but now a reality.
It remains to be seen what the Stiglitz-Sen commission will conclude when it reports in April. But crucially, to enable policy-makers to truly understand the impact of their actions on the reality of people’s lives, societies must start paying attention to the ways in which subjective well-being can be carefully and seriously measured. We think that our National Accounts of Well-being represent a substantial step forward along this path and our growing band of expert supporters suggests that many others are beginning to think so too.
Dr Victoria Johnson is a researcher on the climate and energy team at nef.
“There’s nothing more demoralizing than a leader who can’t clearly articulate why we’re doing what we’re doing”
- James Kouzes and Barry Posner, The Leadership Challenge
With parliament set for a symbolically important opposition day debate on proposals for a third runway today, a question that I have been asking myself is ‘how will the Government’s decision to expand Heathrow airport impact on the public’s response to climate change?’ A colleague was asked a simple question by a cab driver that cuts to the heart of the issue that’s been troubling me: ‘How can Gordon Brown expect me to recycle when they’ve decided to build another bloody runway?’ I can imagine he is not the only person asking that question. If that’s the case, the Government’s decision on Heathrow spells disaster for the climate in whole range of ways.
Over the past four or five years, climate change has passed a critical threshold in public awareness and political discourse. But the growing profile of the issue has not translated into an adequate, proactive response. Research by AccountAbility and Consumers International found that while at least 90 per cent of the public believes that climate change is caused by humans, statistics from a survey of UK consumers showed that only 7 per cent felt they could do something about it. Of that 7 per cent, only 3 per cent tried to live sustainably. The evidence is that the increase in awareness of the seriousness of climate change and increased sophistication in the scientific understanding of future physical, social cultural and economic impacts has not been reflected in policy or public action. While there are many reasons for this, the key factors are diminishing trust in government and the fact that consumers are locked-in to unsustainable consumption patterns.
Defra has spent millions on research trying to understand what really motivates pro-environmental behaviour. And it turns out it is not as simple as just telling people about climate change. There are many factors that determine whether someone will change their behaviour or not. An extensive review carried out by Professor Tim Jackson in 2005, identified two key themes that determine behaviour change:
The first relates to the symbolic role of consumer goods, which goes beyond their functional use. The symbolic role facilitates a range of complex, deeply engrained ‘social conversations’ about status, identity, social cohesion, group norms and the pursuit of personal and cultural meaning. The second theme relates to the locking-in of consumers into unsustainable consumption patterns, which makes it difficult for consumers to make real choices about their consumption. Consumer ‘lock-in’ occurs in part through economic constraints (how much people have to spend), institutional barriers, inequalities in access, and restricted choice. But it also flows from habits, routines, social norms and expectations and dominant cultural values.
The research then goes on to suggest four key policy responses to combat these problems. One of which is leadership. For example, people assess the perceived priorities of government policy not only by what government says, but critically by what it does. The consistency or inconsistency of government actions can have a significant impact on the success of government initiatives designed to encourage people to take action that will reduce their environmental impact.
I am still doubtful that Heathrow’s third runway will ever be built. There are still a number of planning hoops that have to be jumped through and I doubt oil prices will stay as low as they are now for very long. It is worthing remembering that 24 airlines went bust when oil prices rose above $100 a barrel. But it is clear from Defra’s own research that the decision to press ahead with Heathrow has the potential to undo or at the very least stymie the public’s response to climate change. Whatever the outcome of the Commons vote today, it is clear that until the Government shows the vision and leadership to match the climate challenge they themselves admit we face, we are all less likely to change. And it shouldn’t take millions to work that out.
Eilís Lawlor is the acting head of the Valuing What Matters team at nef.
Hardly a week passes without news of looming cuts and fresh evidence of the implications of the recession for public services.
In a recession the temptation to cut back is strong. We have already had some worrying signals from Treasury – the hole in the government’s budget is to be clawed back in part through another £5bn in ‘efficiency savings’. So far these have amounted to stealthy cuts in frontline services under the guise of a leaner state. There is no reason to believe future rounds will be any different.
Yet government’s thin interpretation of efficiency is a false economy. Failing to invest now, when unemployment, crime and poverty are set to rise and an impending environmental crisis requires urgent investment, will only lead to costs of greater magnitude later.
Now more than ever we need to think about public spending less as a ‘carve up’ between competing ends and more as an investment in a better future. This cannot be achieved by penny pinching in the short term but by using the State’s resources to maximise the creation of public value – long-term social, economic and environmental outcomes.
A new approach to investment is needed that puts measuring and valuing what matters most to individuals, communities and societies at the heart of public sector decision-making. Such an approach, targeting positive social, economic and environmental outcomes, will lead to more informed policymaking, help build effective public services and have significant positive implications for the public purse.
nef research across three very different policy areas – economic development, children in care and criminal justice – shows the benefits of this approach. Valuing the improved well-being of children in care – rather than focusing on the unit cost of delivering that care – could help ensure that more appropriate placement decisions are made, improving the life chances of those children and offering a long term social return of £6 for every £1 invested. Savings over 20 years could pay for the entire annual care bill each year.
Women offenders are likely to fare better in life if custodial sentences are eschewed in favour of community penalties that enable mothers to maintain contact with their children. In the short-term money is saved on services for these children. Longer-term there is reduced risk of children becoming offenders and a better chance of the kind of educational attainment and social adjustment that will translate into lower societal costs through the welfare and criminal justice systems. Using Social Return on Investment we found that for every £1 spent on alternatives to prison that reduce reoffending, an additional £14 worth of social value is generated.
Measurement matters because it both reflects and reproduces the priorities of government and institutionalises behaviours. We are about to publish a set of principles for policymakers, that are a distillation of our research findings and can guide policy-makers who want to create better services. The first of these is about measuring outcomes: the positive and negative change in people’s lives, communities or the environment as a result of policy.
Despite rhetoric emphasising the importance of outcomes government still does not adequately measure the effects of its policies on long-term social, economic and environment well-being. Focusing solely on what is timely, tangible and easily quantifiable has not served us well: investment in public services has increased since the foundation of the welfare state, yet the place and circumstances of our birth predict our future health, educational and economic prospects now more than they did then.
Public services face the twin challenge of rising needs and increasingly constrained resources. Experience suggests that direct financial considerations on their own are not very helpful to meeting these challenges. As we lurch from one weak economic indicator to the next, it is easy to miss the opportunities this presents the State. There is too much at stake to get this wrong, not just in terms of social outcomes but also in financial implications for the public purse: ineffective public services cost us all more in the long run. To paraphrase Alistair Darling on banks, the response to the question, can we afford to invest in public services must be can we afford not to?
A version of this article was published in Public Servant Magazine.
Dr Stephen Spratt is Director of nef’s Centre for the Future Economy.
Before our eyes the financial crisis is accelerating into a downward spiral of nightmarish proportions. Today it was confirmed for the first time that the UK is officially in recession, as the effects begin to hit the real economy in earnest. Nobody expects things to get better before they get a lot, lot worse.
‘Decisive action’, we are told, is being taken to deal with the banks. The latest £50 billion guarantee package comes hard on the heels of the untold billions to ‘recapitalize’, or to provide ‘liquidity’, or just to keep the lights on a little longer in the hope that something turns up.
The government resembles a grimly optimistic hot air balloonist, spat out of a storm and crashing to earth while frantically pumping more and more hot air into the balloon, only to see it flow out of huge holes rent in the fabric of his craft. The pilot, lets call him Darling, will certainly delay the crash a little bit, but only at the cost of using up all of his gas. Once the basket hits the ground – in whatever battered shape – it will surely stay there.
Juliet Michaelson is a researcher at nef’s centre for well-being.
What is the best way to measure whether a country is successful? For most of the last 100 years, we have tended to assume that the answer lies in observing the growth of headline economic indicators, such as GDP. Plenty of criticisms have been levelled at GDP – it is far too narrow a measure, takes no account of the distribution of resources or environmental costs, and so on. And recent events hammer home the point that chasing ever-increasing economic growth is a fool’s errand. Even Gordon Brown, since 1997 the de-facto Chief Financial Officer of UK PLC, has had to admit that there’s no such thing as boom without the bust.
Our new report, National Accounts of Well-being: bringing real wealth onto the balance sheet, published on Saturday, provides a different response to the question. It argues that the success of nations is best measured in terms of the things that really matter to the people who live in them: their experiences, feelings and perceptions of how their lives are going. In other words, their subjective well-being. After all, as British economist Andrew Oswald noted almost 30 years ago:
“Economic performance is not intrinsically interesting…People have no innate interest in the money supply, inflation, growth, inequality, unemployment…Economic things matter only in so far as they make people happier.”
What does matter to us, and is arguably the ultimate goal of all human endeavour, is that we feel good about ourselves and the people around us, and do things in our lives which give us a sense of meaning and value.
Of course, the current economic situation is going to seriously hurt a lot of people. But in the post-crash world, we need to ask ourselves whether we want to rebuild the system according to the same flawed blueprint, or find a better compass to guide us.
The first set of National Accounts of Well-being, which nef has produced for 22 countries across Europe, are a tangible means by which governments can monitor their progress in promoting the well-being of their citizens. Using the most comprehensive international survey data on subjective well-being ever collected, we have designed a framework of measures which describe a nuanced picture of people’s experiences. For example, as well as measuring whether people have good feelings, we also look at whether they undertake activities which are meaningful, engaging and which make them feel competent and autonomous. And alongside our first headline measure of personal well-being we also measure people’s social well-being – whether they have supportive relationships and a sense of connection with others.
The results – which can be explored interactively on the website accompanying the report – show how far we still have to go when measuring success in these terms. While Denmark retains its oft-cited position with the highest well-being levels in Europe, Sweden, so often singled out to be praised for its policy success, does not feature among the top five countries on personal well-being. The UK’s performance according to the headline indicators is distinctly middling, and on the trust and belonging component of social well-being it comes a very poor 20th out of the 22 countries.
By redefining success in terms of how people actually experience their lives, National Accounts of Well-being set out a challenge for anyone interested in shaping the future of their society. But they also provide a crucial tool in efforts towards creating brighter tomorrows, in a classic illustration of one of nef’s key principles: that measuring the things which matter is a crucial step in getting them to change.
So how quick will governments be to adopt these new measures of success? Given the growing political interest in well-being we’re optimistic that it won’t take too long. In the meantime, we’ll be keeping a close eye on the reaction to our proposal, and carrying on making the case that we should be measuring what matters most…
Andy Wimbush is nef’s Communications Assistant and blogmaster.
Today is the release of our major new report National Accounts of Well-being: bringing real wealth onto the balance sheet, which comes with a brand new website: www.nationalaccountsofwellbeing.org.
If you haven’t already, I really recommend having a look. There are interactive, animated maps and charts which you can use do delve into the data. You can also measure your own personal and social well-being by answering the same survey questions which nef used for the report. There’s lots more to play with, and an opportunity to join our campaign to get National Accounts of Well-being accepted as a regular, government-led measures of well-being in the UK and beyond.
Andy Wimbush is nef’s Communications Assistant and blogmaster.
Comedian Mark Thomas has decided that he’s had enough of not understanding the financial crisis and has embarked on a quest to discover the truth of our collective woe in a new show called “It’s the Economy, Stupid”. According to his website:
It’s The Economy Stupid” features satire and interviews with guests – thinkers, movers and shakers, academics, economists and even the odd banker. All line up to try and explain what happened and what we can do. From culling bankers to invading Jersey, it’s all up for grabs!
The first episode features nef’s community finance expert and ex-equity trader Sargon Nissan. Listen to Mark and Sargon discuss everything from explosive mortgages to cristal champagne here. Surprisingly educational!
Andy Wimbush is nef’s Communications Assistant and blogmaster.
As promised, here’s the second half of this week’s Green New Deal round-up, featuring none other than the 44th President of the United States, Barack Hussein Obama.
Yesterday afternoon, the relentless pace of thinking and doing that usually characterises life at nef headquarters was momentarily put on hold as we gathered to watch the inauguration speech. Murmours rippled around the office whenever Obama mentioned a topic which strayed into new economics territory. Early on, Obama spoke of the “greed and irresponsibility” which has brought the economy to its knees. Cue nods from those researching ethics in the new economy. Obama later described how “all deserve a chance to pursue their full measure of happiness”. Some whispers from our well-being team. But the new President received the most oohs and aahs from us whenever he touched on climate change and the environment. The issue wasn’t centre stage, but after eight years of denial and ignorance, we finally have an American government which is ready to make progress on these issues.
Which is just as well really: James Hansen – NASA climate scientist extraordinaire – has already warned Obama that he has only four years in which to act if we are have any chance at all of stopping extreme climate change. Hansen’s admonition is even starker than nef’s One Hundred Months campaign, which gives us less than 95 months – or just under eight years – to make the necessary changes. But whether it happens in his first term, or his second, it’s clear that Obama is going to be the most pivotal figure in the fight to stop global warming.
Although the phrase has been repeatedly associated with his economic and energy policies, Obama has been blowing hot and cold on the subject of a Green New Deal. Shortly after being elected, he seemed to rule out a New Deal-style programme by saying that “to simply recreate what existed back in the 30s in the 21st century… would be missing the boat”. But many of his promises to create jobs by rebuilding American infrastructure have certainly echoed Roosevelt’s earlier programme. And his address yesterday leaned further towards the Green New Deal, describing how the new America would “harness the sun and the winds and the soil to fuel our cars and run our factories”. Let’s just hope that ’soil’ translates as geothermal energy rather than biofuels. Check out BBC environment correspondent Richard Black’s very thorough dissection of the green content of the address at his blog.
Perhaps the most moving moments in the speech came towards the end, as Obama compared our situation today with that of America’s founders: “a small band of patriots huddled by dying campfires on the shores of an icy river” in 1776. He then quoted the words of Thomas Paine:
“Let it be told to the future world…that in the depth of winter, when nothing but hope and virtue could survive…that the city and the country, alarmed at one common danger, came forth to meet [it].”
Our ‘common danger’ today is not so singular: it is a triple crunch of climate change, energy depletion and economic meltdown, with all the associated conflict, famine and social upheaval which those crises fuel. But the broad point remains: the existence of a ‘future world’ very much depends on the decisions we make right now. Let’s make them good ones.
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