Pedal faster, not slower


LONDON — Memo to Naoto Kan, David Cameron, Nicolas Sarkozy, Angela Merkel, Barack Obama, and Hu Jintao and Manmohan Singh: Running an economy is like riding a bicycle — if you maintain a good speed, you can make progress; but if you reduce your speed, there is always the danger of losing your balance, stumbling and falling off.

There, unfortunately, the analogy breaks down. If you tumble from a bicycle, you can dust yourself off, remount and ride again. But with a stalling of a modern economy, people’s lives and livelihoods are at stake, and it is not easy for many of the casualties to dust themselves off and get on their bikes again.

Indeed, after three recent trips to the United States and several European countries, it seems to me that many Western countries are about to fall off their economic bicycles without any ideas of how to get on them again. From trivial things to large issues involving the socio-political economy, country after country is failing to tackle the real issues. There have been some debates about when and where to apply the sticking plasters to staunch government deficits, but there has been little discussion about how to tackle not one but several cancers that are eating the hearts and souls of the West and of Japan.

These include governments living beyond their means, and failing to comprehend the increasing challenge from developing Asia, and potentially next from Africa. Many countries also suffer from crumbling infrastructures, failing educational standards, manifold problems associated with rapidly aging populations, and the debilitating encouragement that governments have given to the idea that being rich is glorious without considering how and where wealth is achieved or at whose expense.

It should have come as a salutary shock that in the United Kingdom, 70 fresh university graduates are chasing every available job. Some employment counselors are advising that if graduates can find a job flipping burgers or filling supermarket shelves, they should rush to take it.

Britain is almost a case study in how not to manage a political economy, since for more than 30 years and arguably for more than 65 years, governments have pursued policies that made electoral sense but whose long-term consequences were insufficiently thought out.

It is easy to feel sorry for new British Prime Minister David Cameron, who decided to control a heavily indebted government living beyond its means by slashing spending and jobs. Given the protection promised to some ministries, like economic aid and education plus heavy defense obligations, some ministries may face savage cuts of up to 40 percent. Cameron of course claims that the cuts are essential to get on top of an unsustainable deficit and debts and to build better foundations for future growth.

That is a laudable hope, but past experience suggests that brave government dreams turn so easily into terrible nightmares. Margaret Thatcher became prime minister dedicated to small government, curbing the deadly powers of trade unions and releasing the energies of the private sector. She certainly smashed the unions, but she unleashed the robber barons of private enterprise. Public utilities, such as transport, education, health and welfare, suffered and prepared the way for a new burst of government spending under prime ministers Tony Blair and Gordon Brown to repair the damage of the Thatcher’s locust years.

The British experience of the Blair-Brown years is that government spending increased faster than could be efficiently managed. I remember attending international financial meetings in the early 2000s when Brown, then chairman of the key IMF committee, brazenly ignored the International Monetary Fund’s own stern warnings about the unsustainable speed and size of government spending. Will the cutbacks be any more efficient, given that entrenched vested bureaucratic interests know how to protect themselves? The worry must be that cutbacks will kill or damage vital organs from the body socio-economic.

At the same time, Blair and Brown presided over the continuing hollowing out of manufacturing industry, unblinking as trademark British names migrated abroad or were bought. The City of London was their pride and joy, even as highly paid bankers and financiers sheltered their salaries from tax and some admitted paying less in tax than the women who came to clean their homes.

The U.K. is not the only country cutting spending savagely. It is a pan-European effort, worrying U.S. President Barack Obama and even some respected European economists. Unemployment among young people in Spain is almost 40 percent, and most other European economies are fragile. If all governments simultaneously try to cut spending and increase exports, it will be a disaster for most of them and for the world.

Reports from the Organization for Economic Cooperation and Development, the club of rich industrial nations, indicate that savings by the private sector, households and corporations, will total $3 trillion this year ($1 trillion each in the U.S. and eurozone, $500 billion in Japan, and $200 billion in the U.K.).

Figures of this magnitude, which mean an excess of income over spending of 7 percent of total gross domestic product (GDP), suggest that it is the worst time for governments to bring about further contraction through their own spending cuts. If households and the corporate sector are net savers, then growth and employment can only be maintained either by government spending or by running a trade surplus. As Yves Smith, founder of the Web site Naked Capitalism, noted, “When both domestic households and the corporate sector are saving at the same time, then you need to have a VERY large trade surplus, a very large government deficit, or some combination of the two. There is no other way to square this circle — anyone who tries to tell you otherwise does not understand double entry book keeping, which the West has used for at least the last five centuries with some success.”

Smith argues forcibly that the growing habit of the corporate sector to save, rather than to invest in growth, is tantamount to capitalists abandoning their key role as promoters of capitalism. This remorseless quest for quarterly profits sits badly with investing for future growth because investment tends to gobble profits, especially where bold initiatives like developing new products are concerned.

Added to this of course has been the dangerous growth of so-called financial engineering, whereby big corporations have become more interested in the financial casino than in making profits by turning out quality products and investing to make superior goods.

The most striking thing for any visitor from Asia to Europe or the U.S. is that standards of service are poor and no one cares (of course with the inevitable surprising exceptions). From the moment of entry, especially at London’s appalling construction site called Heathrow Airport to taxis, hotels, shops, post offices, service is slow and sloppy. It would be unfair to single out the U.K., since service on continental Europe, France, Italy and Spain seems even slower and more couldn’t care less than in the U.K. Getting a taxi on a Sunday in medium-size French towns is a work of expensive resentment. Joan Robinson, the distinguished Cambridge economist, wrote that leisure is also an economic good: So it is, but those who enjoy it should recognize that it should also be priced.

Those who have jobs seem to have no fear of losing them, and no intention of worrying about courtesy or letting customers intrude upon their pleasant lifestyles. Stroppy trade unions in France and other European countries have made it plain that they won’t tolerate having their cozy 35-hour working weeks, long holidays or early retirements at 55 spoiled by having to deliver a good performance.

It means that there is a dangerously split society, between the haves, who have jobs and income, and the have-nots, who have lost their jobs. There is also the danger of a split between today’s generation that works 35 hours and enjoys cradle to grave state care in health, education, job security and retirement benefits at 55 or 60, and tomorrow’s, which won’t be able to afford most of these because the government kitty has run out.

Japan sits uncomfortably in this company. No one would accuse Japanese — at least of the older generation — of skimping on service. Companies in Japan have also tried hard to keep as much manufacturing onshore as possible and tried to resist the lure of lower-wage China as far as higher-tech production is concerned. Pay of top financial executives is almost modestly lower than that in the U.S. or U.K.

But Japan is under pressure from years of slow growth and the world’s heaviest burden of an aging population, along with massive government debts. Changes perforce are occurring, not necessarily for the better. The fabled lifetime employment system is fading and more and more workers are employed on contracts. Some Japanese companies are contracting work to Japanese abroad in Thailand or Indonesia at lower rates of pay and without the benefits they would enjoy in Japan.

Cracks are also appearing in the famed Japanese social fabric and people are becoming more selfish and less bound to the community. Schoolchildren are not as meek and obedient as those I knew 30 years ago and go their own rip-roaring way. Watch drivers and see how many of them obey the sensible rules against using mobile telephones while driving: On a recent highway trip between Kobe and Osaka about 10 percent of drivers were either talking or texting on their mobiles and one person was smoking with one hand and texting with the other; and as we came to suburban Suita, a motorcyclist was texting as he rode followed by a police car, but the police were too busy chatting to notice.

Chinese President Hu and Indian Prime Minister Singh might be laughing at the disarray in Europe and the U.S. as it marks an end to a mere few centuries of Western economic domination. But cutbacks in Europe will diminish China’s and India’s economic and trade opportunities, and slow their economic bicycles too. It is time for Beijing and New Delhi to play a more active role in world affairs and to remind the West that it is one global world where we ignore what is happening 10,000 km away at the peril of all of us. Sadly, too, New Delhi and, especially, Beijing are preoccupied with their own national economies.

Kevin Rafferty is editor in chief of PlainWords Media, a consortium of journalists studying the politico-economics of developing countries.