Growth as usual won’t fix the crisis

Josh Ryan-Collins is a researcher in the Business, Finance and Economics team at nef.

After the storm: what will replace the neoliberal consensus?

The financial crisis which erupted almost two years ago has led to the biggest shake up in economic policy since the Oil Crisis of the 1970s.  Neoliberal economics lies in tatters, with the UK Conservative party dismissing the notion of the ‘utility-maximising rational actor’ as a fantasy and Martin Wolf of the FT pronouncing the end of the dream of global free market capitalism.  The question is what will come next.

Sadly, there are few signs of a new approach which takes seriously the ‘triple crunch’ of the financial, environmental and energy crises.  Rather, governments are turning back to tried and tested state-led growth strategies to reflate national economies, pumping liquidity into credit markets and creating new or bringing forward existing public spending plans.  In other words, there has been a return to post-war Keynesianism – the doctrine that the state could and should regulate the market and step in to boost demand whenever required.   This thinking lies at the heart of Obama’s $787 billion fiscal stimulus package, as well of those of Europe and China.   China is embarking on what is possibly the biggest Keynesian experiment in history, with the government attempting to create a welfare state virtually overnight so as to maintain demand as well as pumping billions of yuan into mainly state owned industries, as Newsnight’s Paul Mason recently revealed.

Aside from the fact that the proportion of this new funding that will be spent upon green investment is rather small (very small in the case of the UK), there are bigger questions about whether this whole approach will prevent another, bigger financial crisis and  help us move towards to the low carbon, low throughput ’steady-state’ economy required to prevent catastrophic climate change.

As Walden Bellow, the Phillipino intellectual and activist, points out in a recent article, today’s crisis requires us to move beyond Keynesian demand management at the national level to address global problems of inequality, overproduction and over-consumption.  For Bellow:

“The challenge to economics at this point is raising the consumption levels of the global poor with minimal disruption of the environment, while radically cutting back on environmentally damaging consumption or overconsumption in the North.  All the talk of replcaing the bankrupt American consumer with a Chinese peasant engaged in American-style consumption as the engine of global demand is both foolish and irresponsible.”

These are issues nef has addressed in our interdependence reports but currently they are not even on the ‘any other business’ agendas of the  finance ministries of the world’s great powers.  Rather, we are seeing a return to a ‘Growth as Usual’ policy which flies in the face of global inequalities and serious attempts at a transformation to a low carbon economy.   It is about time that economists began to look at some of Keynes’ less well known policies, such as that economies should be primarily concerned to consume only what they are able to produce, outlined in his essay on  “National Self-Sufficiency“.    Globalisation, in particular the globalisation of capital flows, is a major part of the reason we are in this mess – a bit of de-globalisation  will be required to get us out of it.

Is there a pot of ‘economic gold’ at the end of the rainbow?

Josh Ryan-Collins is a researcher in the Connected Economies team at nef.

Olympics Minister Tessa Jowell has been out and about recently trying to explain exactly how the 2012 London Olympics are going to be delivered in the worst economic conditions since the War.

Like many Labour ministers of late, she has turned to J.M. Keynes for inspiration, arguing that the government will “turn the great spending power of the Olympics in to economic gold at a time of economic need”.

In terms of investment, I suspect the government might rather get its hands on real gold – which has shot up in value in the past couple of years as investors lose faith in money – than ‘economic gold’, but that’s another story.  The important question is whether the Keynesian multiplier – an increase in government spending leading to increased demand which in turn creates jobs and stimulates consumption – will work its magic in East London and further afield as the £6bn Olympic injection, made up 75,000 odd contracts, takes effect.

Jowell claims it will as, unlike previous games, 2012 has regeneration at the heart of its bid.  75 pence of every pound spent on the Games is regeneration-related apparently.  Most of this will be spent on East London, one of the most disadvantaged areas in the UK.  But as nef has long argued, it is not so much the amount of money invested in an area as how it is spent that determines the regeneration impact.   If the big contracts go to foreign companies – as has happened with the Olympic village which went to an Australian developer for example – there is no reason to expect them to subcontract to locally based businesses or hire local people.

This ‘trickle down’ economics failed in Canary Wharf and it will fail again if money is allowed to leak out of the local economy to consultants, developers and the large companies that are best able to exploit new commercial and sponsorship opportunities.

nef’s report, Fool’s Gold, suggests there are ways to prevent this from happening.  Community benefit and regeneration could still be made core criteria for all new contracts and larger contracts could be broken down in to smaller lots.  This will level the playing field for smaller, local businesses and social enterprises many of whom are currently struggling to gain access to credit.  Targets for the involvement of local firms and the employment of local people should be also be drawn up.  The report also recommends that the Olympics organisers utilise nef’s Local Multiplier 3 tool which measures the local impact of spend over three rounds.  LM3 has been used successfully across 23 local authorities in the North East to see how public money can maximise public benefit.

Without these steps, it remains doubtful that the 2012 Games will deliver on their promise to regenerate the heart of East London, recession or no recession.

Green New Deal Round-Up

Andy Wimbush is nef’s Communications Assistant and blogmaster.

This week, The Independent’s Archie Bland reassesses the legacy of New Deal economist John Maynard Keynes and wonders whether his ideas might be resusitated to tackle the financial crisis with green investment.

Meanwhile, Duncan Green, head of research at Oxfam, has joined the Green New Deal chorus:

“The only historical precedent is the kind of mass industrial shift to arms production that takes place during wartime. The challenge is for us to do it through choice rather than in response to actual climate chaos, because by the time climate disasters really start hitting the US and Europe, it may be too late for many of the poorest parts of the world. We need a global version of the New Deal, but we cannot afford to wait for the shocks of war and catastrophe that delivered that change… “

Finally, Newsweek weighs up the chances of a global Green New Deal, looking at what governments around the world are doing to cut carbon, create jobs and promote renewables. Again, however, these writers keep avoiding the elephant in the room: growth.

Mercifully, John Naish bucks the trend with a comment piece in today’s Times explaining how Keynes wasn’t ’some dry old number-shuffler’ but rather a man dedicated to pursuing the good life – to art, culture, beauty and friendship. And this Keynes would have scorned our obsession with growth and ever-increasing consumption. Naish explains:

He predicted that only a sizeably ignorant minority would pursue constant, selfish consumption: “When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals,” Keynes wrote.