How Osborne's Budget can increase confidence

The state must have more faith in its own power to tame recession.

The state must have more faith in its own power to tame recession.

This week's Budget will reflect whether George Osborne's team has learned some economics over the last few months. If not, here is a last minute crash course, focusing on the need to increase "confidence" (the government's buzz word). But whose confidence?

1. Market confidence

Low interest rates in the UK aren't a reflection of "market" confidence, but of the fact that the economy is not growing. As in most stagnant economies, interest rates remain low - as does also inflation, which is only rising due to international commodity prices. The fact that the UK has its own currency, with an active central bank, partly explains why the bond markets are not fearful of a default and why Britain's AAA credit rating has not been downgraded, yet.

But the increasingly low growth forecasts for the UK, and the recent warnings by ratings agencies (including Fitch last week), show that the markets know that one of the world's most "austere" nations is in trouble because austerity does not generate growth.

Lesson: In your speech, don't use the "market'"and low interest rates as the reason that you need to continue austerity. Remember that savers are punished by low interest rates and life insurers - an important UK industry and a source of finance for recovery - could be seriously undermined by them. And if you think that the fixed rate on 100 year bonds is the solution, this will only make markets less confident. It demonstrates that you think rates of return will remain very low for an extended period. If not, it's unclear why anyone would invest in these.

2. Business confidence

Private business investment is not driven by tweaks in taxes, but by expectations about future technological and market opportunities. This is what Keynes meant by investment being driven by "animal spirits" and is the reason why there is too little investment in downturns and too much in booms.. It is also the reason why even in booms, there is little investment in countries, or particular regions, with low future growth opportunities. Weak private business investment in the UK and the fact that various companies are picking up and leaving (Pfizer, GSK, Sanofi) , is not due to their high taxes, but the lack of positive expectations about future growth in the UK.

Lesson: Don't try to increase investment by decreasing corporate taxes. Evidence is that these "savings" will not be reinvested back into production. Likewise reduction of the 50p rate will not "trickle down" to the rest of the economy, it will only increase inequality as all such measures, especially in the USA and the UK, have in the last decades. To increase investment, government must invest in those areas that create high expectations about technological and market growth: education, research in emerging technologies, modern infrastructure, and constructing a financial system that can nurture long-run, innovative investments.

3. Confidence in competition

When competition is strong, businesses feel the need to differentiate themselves to increase market share, whether via advertising or innovation. This is why there is rarely dynamism in sectors where competition is lacking. Competition policy should nurture those types of businesses that are most interested in growing via new products, processes, or new markets for existing products -- and in so doing create jobs. One way to invest in such opportunities is to properly fund the whole 'eco-system' of innovation, promoting broad technological areas rather than trying to pick winners within them.

In doing so it is important not to mythologise some of the actors, especially those with strong lobbies (e.g. small/medium enterprises, venture capital). It is not true, for example, that the SME sector as a whole is being starved of funds. Indeed UK SMEs get somewhere between £7-8 billion pounds a year in direct and indirect government support - more than either universities or the police. It is the high-growth, innovative SMEs (about 6 per cent of the total) that need support, which must be tailored towards their precise needs. And it is not true that the problem in the UK is commercialisation, the target of the new Catapult Centres. The lower amount of market relevant research is the UK's the problem; so setting up Catapult Centres, without investing in public R&D and stimulating business to do the same, is like pushing on a string. The UK's R&D/GDP ratio is 1.3 per cent, compared to 2.6 per cent in Germany and the USA. Unlike Britain, the former has increased its spending since the crisis.

Lesson: Invest in measures that can help generate the company strategies and structures that enable UK companies to produce products and services that the world wants to buy. Only in this way will UK companies win procurement contracts in their own country (it is hardly surprising that Siemens' won the Thameslink train deal, with its very high R&D spending, and investment in green technology). And don't focus so much on new vehicles like Catapult Centres, which will have all the force of a pea-shooter if the research base remains underfunded.

4. Bank confidence

Quantitative easing (QE) by the Bank of England has not resulted in higher growth because this injection of money has simply ended up in the coffers and bonus pools of banks, which are not lending. They are scared because they, like business, do not believe there are growth opportunities in a country that has problems with both demand (consumer spending) and supply (new business output). Banks' complaint that they are not receiving enough demand for new loans highlights the slump in demand afflicting the economy. Thus ironically, post-crisis QE has benefited only the actors that have been most responsible for the crisis, letting them recapitalise on the cheap without reducing business finance costs.

Lesson: To increase lending, the government should create a National Investment Bank that could offer the kind of "patient capital" needed by businesses investing for the long run. As private investment banking will not be viable on the past scale after banking reforms, this could be constructed from the skeleton of RBS. At present there is £500 billion of net financial surplus hoarded in the UK (and $1.1. trillion in the USA), mainly in pension funds; government can play a greater role in releasing these funds, which also have a public dimension, in particular directions like "green" investments with high future returns (see Nick Stern's recommendations).

5. Consumer confidence

Four types of demand drive GDP. Demand by government, by private business investment, by consumers and by what other nations demand from us (exports) minus what we demand from them (imports). Of these, consumer demand is the largest, and the most stable component, about 65 per cent of our GDP. It is much more predictable than private investment, as it is largely a function of disposable income. Thus even if you get all the policies above right, if you cut down on disposable income during a recession, you'll turn it into a depression. This is indeed the real current risk. And falling household incomes (from the rise in VAT, freeze in public sector pay, cuts to fundamental social services, and general downturn of the economy) will be made only worse with the further cuts that will be needed as a consequence of the 50p rate reduction.

Lesson: Consider reducing VAT, and releasing the public sector pay freeze, both of which are damaging to demand. While marginal rates have little effect on top earners they do deter effort and initiative at very low rates of pay (see Mirrlees Report). So what is needed is to decrease the marginal rate on very low earners - sometimes 100 per cent or more - not worrying about a 50 per cent rate at the top. Do whatever you can to steer councils away from spending cuts in areas that sustain the social fabric, including after-school clubs that allow women to work more and youth clubs that allow young people to feel valued members of society.

Perhaps the biggest lesson around confidence is that government must be more confident of its own powers. It should use the ability to tame recessions through monetary and fiscal policy, and invest in the future by funding the knowledge base that is the source of new waves of growth. The new green revolution is just beginning and, like all technological revolutions, will not happen without government playing a lead role, absorbing most of the uncertainty before the private sector dares to enter. This entrepreneurial role must lead the vision in next week's Budget if the UK is to play a meaningful role in the world economy.

Mariana Mazzucato is Professor of Economics and RM Phillips Chair in Science and Technology Policy at the University of Sussex. She is the author of The Entrepreneurial State.

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How Donald Trump is slouching towards the Republican nomination

There was supposed to be a ceiling above which Trump’s popular support could not climb.

In America, you can judge a crowd by its merchandise. Outside the Connecticut Convention Centre in Hartford, frail old men and brawny moms are selling “your Trump 45 football jerseys”, “your hats”, “your campaign buttons”. But the hottest item is a T-shirt bearing the slogan “Hillary sucks . . . but not like Monica!” and, on the back: “Trump that bitch!” Inside, beyond the checkpoint manned by the Transportation Security Administration and the secret service (“Good!” the man next to me says, when he sees the agents), is a family whose three kids, two of them girls, are wearing the Monica shirt.

Other people are content with the shirts they arrived in (“Waterboarding – baptising terrorists with freedom” and “If you don’t BLEED red, white and blue, take your bitch ass home!”). There are 80 chairs penned off for the elderly but everyone else is standing: guys in motorcycle and military gear, their arms folded; aspiring deal-makers, suited, on cellphones; giggling high-school fatsos, dressed fresh from the couch, grabbing M&M’s and Doritos from the movie-theatre-style concession stands. So many baseball hats; deep, bellicose chants of “Build the wall!” and “USA!”. (And, to the same rhythm, “Don-ald J!”)

A grizzled man in camouflage pants and combat boots, whose T-shirt – “Connecticut Militia III%” – confirms him as a member of the “patriot” movement, is talking to a zealous young girl in a short skirt, who came in dancing to “Uptown Girl”.

“Yeah, we were there for Operation American Spring,” he says. “Louis Farrakhan’s rally of hate . . .”

“And you’re a veteran?” she asks. “Thank you so much!”

Three hours will pass. A retired US marine will take the rostrum to growl, “God bless America – hoo-rah!”; “Uptown Girl” will play many more times (much like his speeches, Donald J’s playlist consists of a few items, repeated endlessly), before Trump finally looms in and asks the crowd: “Is this the greatest place on Earth?”

There was supposed to be a ceiling above which Trump’s popular support could not climb. Only a minority within a minority of Americans, it was assumed, could possibly be stupid enough to think a Trump presidency was a good idea. He won New Hampshire and South Carolina with over 30 per cent of the Republican vote, then took almost 46 per cent in Nevada. When he cleaned up on Super Tuesday in March, he was just shy of 50 per cent in Massachusetts; a week later, he took 47 per cent of the votes in Mississippi.

His rivals, who are useless individually, were meant to co-operate with each other and the national party to deny him the nomination. But Trump won four out of the five key states being contested on “Super-Duper Tuesday” on 15 March. Then, as talk turned to persuading and co-opting his delegates behind the scenes, Trump won New York with 60 per cent.

Now, the campaign is trying to present Trump as more “presidential”. According to his new manager, Paul Manafort, this requires him to appear in “more formal settings” – without, of course, diluting “the unique magic of Trump”. But whether or not he can resist denouncing the GOP and the “corrupt” primary system, and alluding to violence if he is baulked at at the convention, the new Trump will be much the same as the old.

Back in Hartford: “The Republicans wanna play cute with us, right? If I don’t make it, you’re gonna have millions of people that don’t vote for a Republican. They’re not gonna vote at all,” says Trump. “Hopefully that’s all, OK? Hopefully that’s all, but they’re very, very angry.”

This anger, which can supposedly be turned on anyone who gets in the way, has mainly been vented, so far, on the protesters who disrupt Trump’s rallies. “We’re not gonna be the dummies that lose all of our jobs now. We’re gonna be the smart ones. Oh, do you have one over there? There’s one of the dummies . . .”

There is a frenzied fluttering of Trump placards, off to his right. “Get ’em out! . . . Don’t hurt ’em – see how nice I am? . . . They really impede freedom of speech and it’s a disgrace. But the good news is, folks, it won’t be long. We’re just not taking it and it won’t be long.”

It is their removal by police, at Trump’s ostentatious behest, that causes the disruption, rather than the scarcely audible protesters. He seems to realise this, suddenly: “We should just let ’em . . . I’ll talk right over them, there’s no problem!” But it’s impossible to leave the protesters where they are, because it would not be safe. His crowd is too vicious.

Exit Trump, after exactly half an hour, inclusive of the many interruptions. His people seem uplifted but, out on the street, they are ambushed by a large counter-demonstration, with a booming drum and warlike banners and standards (“Black Lives Matter”; an image of the Virgin of Guadalupe, holding aloft Trump’s severed head). Here is the rest of the world, the real American world: young people, beautiful people, more female than male, every shade of skin colour. “F*** Donald Trump!” they chant.

After a horrified split-second, the Trump crowd, massively more numerous, rallies with “USA!” and – perplexingly, since one of the main themes of the speech it has just heard was the lack of jobs in Connecticut – “Get a job!” The two sides then mingle, unobstructed by police. Slanging matches break out that seem in every instance to humiliate the Trump supporter. “Go to college!” one demands. “Man, I am in college, I’m doin’ lovely!”

There is no violence, only this: some black boys are dancing, with liquid moves, to the sound of the drum. Four young Trump guys counter by stripping to their waists and jouncing around madly, their skin greenish-yellow under the street lights, screaming about the building of the wall. There was no alcohol inside; they’re drunk on whatever it is – the elixir of fascism, the unique magic of Trump. It’s a hyper but not at all happy drunk.

As with every other moment of the Trump campaign so far, it would have been merely some grade of the cringeworthy – the embarrassing, the revolting, the pitiful – were Trump not slouching closer and closer, with each of these moments, to his nomination. 

This article first appeared in the 28 April 2016 issue of the New Statesman, The new fascism