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''We've had to let six staff go this Christmas . . . people with families and mortgages''

Families all over Britain are bracing themselves for hard times. For some, they have already started

On first impressions, Rayne Precision Engineering is a neat little company. Tucked into the hills of the southern fringe of the Peak District, it consists of four solid modern sheds, built of a fake stone material that blends in with the local housing. These are arranged around a tidy yard next to a mobile hut that serves as office accommodation. The atmosphere in the yard is pleasantly quiet. There's a faint hum in the air, but none of the clashing or screeching of metal on metal that you might expect.

It quickly becomes apparent that there is a reason for this. The company's founder and managing director, Andrew Simmill, leads me into first one shed and then another to show me an array of laser-cutting and welding machinery, all of it standing idle. The signs of recent activity are all around - a scattering of little metal shavings; a neat pile of ring-shaped components bound for the automotive industry. Today the firm is having a shutdown, Simmill explains.

In the summer of 1997, Rayne Engineering, which is a few miles outside the market town of Leek, had 47 full-time staff, working five days and sometimes nights or Saturday mornings as well, making parts for JCB, GKN and a range of other engineering companies. Simmill bought a people-carrier so that his welders could drive in from Stoke-on-Trent, 20 minutes or so down the road. He had diversified, too, into making shopfitting parts for Waterstone's.

The crash, when it came, came fast. In April this year Simmill took on a salesman to try to boost a flagging order book, but to no avail. Now Rayne Precision is down to 26 staff working four days a week. There have been 12 compulsory redundancies. The remaining staff agreed to their hours being cut from 39 to 31 last week.

"Last week was my worst week," Simmill says. "We had to let six people go. You're looking people in the eye just before Christmas . . . these are people with families and mortgages. And there's nothing I can do - I've got to protect the business."

Simmill is a big, weather-beaten man in blue overalls and a sweatshirt. He looks out of place in the firm's meeting room, under the glossy banners he ordered so they could push for scarce orders at trade fairs. He looks as if he could shoulder quite a burden - and that is exactly what he is having to do now.

"Carol, who does the stores and the planning, came to me last week and said, 'I'll take redundancy, Andrew.' She's over 60. She didn't want a younger person with a family to lose their job. But she's a key part of the business. I don't mind admitting I've had sleepless nights about finding enough work for my men."

This little local heartache is solid evidence of the tectonic shift that has affected businesses across the world in recent months. The plummeting housing market, the struggling construction industry, banks cracking under the weight of bad mortgage debts and overextended credit, all lead here to this little office.

For Simmill it trickled down in part from JCB, which dominates the heavy industry in this area, previously employing 5,000 at its plants in Rocester, Uttoxeter and Cheadle. The digger manufacturer - for whom Simmill has nothing but praise - was forced to cut production by a third and to make nearly 600 staff redundant this autumn as orders, even from previously buoyant markets such as Russia, began to dry up.

In the nearby Potteries, there have been 350 job losses at Wedgwood and Spode has gone into administration, putting a further 150 at risk. The misery goes on, the figures stacking up in tens here, twenties there. On the day of my visit the front page of the Sentinel, Stoke's local paper, carried the news that Hinks Fine China, the UK's last china flower manufacturer, was to close with the loss of another 16 jobs. At Uttoxeter, Dairy Farmers of Britain announced it was closing its Fole Dairy with 250 to go. At Phones4u, another major Staffordshire company, 240 IT jobs were reported to be at risk. Simmill ("I'm 47 but I feel 67," he says, then laughs) has been here before. Twenty years ago he started an engineering business with his father during the tail end of the 1980s boom.

"Nineteen eighty-nine was an extremely good year, but 1990 . . ." he pauses for a moment. "I was financed up to the hilt. I had £70,000 debt on one machine. Then I had 12 months where my father died of cancer and my brother was killed in a road accident at 23.

People are buying cheaper cuts of meat rather than the high-end products on sale

"Everything came at once. I got married, my daughter Carly was born, and two weeks later the company went into receivership. I had finance people chasing me; my house was on the line. I was on the verge of being made bankrupt."

But Simmill doesn't give up easily. For a year he worked for the man who bought his business, then rented his machines. "It was just 12 months after I went down," he says. "The banks and accountants hadn't had any faith in me, and it was almost to prove them wrong. I'm a determined sort of fellow."

He and his wife Clare now have three daughters - Carly, 17, Sheri, 16, and Kate, 13 - and they never stop hearing about the evils of credit. "I was out shopping one time with Sheri when she was only four or five," recalls Simmill. "I ran out of cash and so I thought, 'I'll wait until next week.' She turned to me and said, 'Put it on your card, Dad.' I was really taken aback by that, and I thought about it a lot. What I'm fearful of is my children going through what I went through. There are too many credit cards, too much easily available credit. That's put us in this mess."

About 18 months ago this niggling worry turned into a family crusade. Sitting around the table outside their house one summer evening over a meal, they began drawing out a game on sheets of A4 paper. Then the girls got busy with clip art and a boardgame, Credit 4 Life, was born. Players start with £1,500 and on a throw of the dice they pay bills - mortgage £600; night out £50; credit card 30 per cent debit interest - and, if they are lucky, draw wages. The game, now in a smart box with a laminated board, has been sold to about 20 schools and is being supported by Caudwell Children, a charity funded by John Caudwell, the local Phones4u tycoon.

Simmill says he talks to his children about the problems his business is facing, and after school they often come to see him at work instead of going home. But he has no plans to bring them into the family firm. "I'm not being sexist, but I think manufacturing is a hard game," he says. "If the government doesn't believe in it there won't be any manufacturing here in ten years."

As you drive into Leek along the Ashbourne Road, the signs of economic gloom are easy to spot. A 19th-century mill stands with its glass grimed and a board outside advertises a small business within. Further into town the White Lion and Talbot pubs are both boarded up. The Leek Post and Times has a picture of Gary Clewlow of GJ's Greengrocers holding a sign saying "Closing Down (sorry)", over the headline: "Shoppers urged to stay local as credit crunch bites hard". Clewlow tells the paper he cannot compete with Aldi.

To be fair, the former textile town, which weathered the decline of the silk industry in the late 19th century and the globalisation of synthetic fabrics in the 20th, is not completely down at heel. Its market square is wide and cobbled, and a queue of shoppers is keeping its well-stocked fruit and veg stall busy. There's a half-timbered Marston's pub, the Bird in Hand, flanked by Cancer Research and Oxfam shops.

Businesses such as Simmill's are at the sharp end of the recession, and others in the area are less gloomy about the future. Off the A523 between Simmill's works at Ipstones and the town of Leek, signs point to enterprises with a more rural flavour: Beaver Hall Equestrian Centre, Middle Farm Bed and Breakfast. Down a long track, Janet Phillips runs the Threshing Barn, a small shop selling craft supplies and meat reared on the farm she runs with her husband, Dave.

Phillips says she always has a pot of coffee on the go in her shop, which is packed to the rafters with skeins of brightly coloured wool, Christmas wreaths and knitwear; it helps to make the place feel welcoming, she says. The craft workshops she runs - a launching pad for sales of equipment and materials - had their best October ever, she says. But the meat is doing less well. People are buying cheaper cuts rather than the high-end products they sell here.

"I think long-established businesses will survive, but January and February are going to be grim," says Phillips. "From December, we would usually expect big orders, and they're not coming in. I don't think people are going to go for the big items this year."

On Derby Street, a Butters John Bee estate agent stands with property details in its windows and a To Let sign above its door. At first glance the business seems to be occupied, but a closer look reveals too-neat desks with phones and notepads and nothing else, and a notice on the door confirms, "Please note: This office is now closed. We will continue to provide our services from our Hanley and Congleton offices." Just a few doors along, the Ponden Mill shop also bears a To Let sign and big banners announcing, "Twenty Per Cent Off - Everything Must Go", though an assistant says she doesn't know whether they're going to close.

Round the corner, near the now-defunct GJ's Greengrocers, is Photoprint, founded nearly 30 years ago by Brian Johnson, now the town's mayor and president of its chamber of trade and commerce. His assessment of the situation is relatively upbeat, and he attributes several of the town's business failures to a lack of initiative or staying power. Despite having spent half a million pounds on opening a horse livery last year and carrying a lot of debt ("You don't want to know," he says when I ask how much), he is investing £20,000 in a digital colour printing machine, which would have cost him £34,000 in normal times.

"You'll often hear people saying, 'Leek's always in recession - what difference does it make?'" he says. "People round here have been used to tightening their belts.

"But the new businesses have never had to face this before. They don't make allowances, they don't think ahead far enough. People will have to promote their businesses - they'll have to think positive."

Others in the town are struggling to follow his advice. Looking for the Diva shoe shop which, according to the local paper, is to close after Christmas, I stop to ask directions from a couple huddled against the cold and carrying a plastic bag of meat bones. They cheerfully offer to show me the place and as we walk along together the man, David, tells me he has been out of work for the past six months, after being laid off by a firm that makes parts for car exhausts.

"My old boss closed the doors," he says. "I'd take anything, but if you put on your CV that you were in engineering, they think you don't want a menial job. They think you'll take off as soon as something better comes - and I would as well.

"JCB has a massive effect on this area. Last year employees had a £1,000 Christmas bonus, but this year they'll be lucky if they get anything. I've given up."

He asks if I'm going for a job interview. I tell him no, I'm writing an article about the credit crunch for a magazine. "Well," he says without a trace of rancour, "at least someone's making money out of it."

Fran Abrams is the author of "Below the Breadline: Living on the Minimum Wage", published by Profile Books (£6.99)

This article first appeared in the 22 December 2008 issue of the New Statesman, Christmas and New Year special

MILES COLE
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The new Brexit economics

George Osborne’s austerity plan – now abandoned by the Tories – was the most costly macroeconomic policy mistake since the 1930s.

George Osborne is no longer chancellor, sacked by the post-Brexit Prime Minister, Theresa May. Philip Hammond, the new Chancellor, has yet to announce detailed plans but he has indicated that the real economy rather than the deficit is his priority. The senior Conservatives Sajid Javid and Stephen Crabb have advocated substantial increases in public-sector infrastructure investment, noting how cheap it is for the government to borrow. The argument that Osborne and the Conservatives had been making since 2010 – that the priority for macroeconomic policy had to be to reduce the government’s budget deficit – seems to have been brushed aside.

Is there a good economic reason why Brexit in particular should require abandoning austerity economics? I would argue that the Tory obsession with the budget deficit has had very little to do with economics for the past four or five years. Instead, it has been a political ruse with two intentions: to help win elections and to reduce the size of the state. That Britain’s macroeconomic policy was dictated by politics rather than economics was a precursor for the Brexit vote. However, austerity had already begun to reach its political sell-by date, and Brexit marks its end.

To understand why austerity today is opposed by nearly all economists, and to grasp the partial nature of any Conservative rethink, it is important to know why it began and how it evolved. By 2010 the biggest recession since the Second World War had led to rapid increases in government budget deficits around the world. It is inevitable that deficits (the difference between government spending and tax receipts) increase in a recession, because taxes fall as incomes fall, but government spending rises further because benefit payments increase with rising unemployment. We experienced record deficits in 2010 simply because the recession was unusually severe.

In 2009 governments had raised spending and cut taxes in an effort to moderate the recession. This was done because the macroeconomic stabilisation tool of choice, nominal short-term interest rates, had become impotent once these rates hit their lower bound near zero. Keynes described the same situation in the 1930s as a liquidity trap, but most economists today use a more straightforward description: the problem of the zero lower bound (ZLB). Cutting rates below this lower bound might not stimulate demand because people could avoid them by holding cash. The textbook response to the problem is to use fiscal policy to stimulate the economy, which involves raising spending and cutting taxes. Most studies suggest that the recession would have been even worse without this expansionary fiscal policy in 2009.

Fiscal stimulus changed to fiscal contraction, more popularly known as austerity, in most of the major economies in 2010, but the reasons for this change varied from country to country. George Osborne used three different arguments to justify substantial spending cuts and tax increases before and after the coalition government was formed. The first was that unconventional monetary policy (quantitative easing, or QE) could replace the role of lower interest rates in stimulating the economy. As QE was completely untested, this was wishful thinking: the Bank of England was bound to act cautiously, because it had no idea what impact QE would have. The second was that a fiscal policy contraction would in fact expand the economy because it would inspire consumer and business confidence. This idea, disputed by most economists at the time, has now lost all credibility.

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The third reason for trying to cut the deficit was that the financial markets would not buy government debt without it. At first, this rationale seemed to be confirmed by events as the eurozone crisis developed, and so it became the main justification for the policy. However, by 2012 it was becoming clear to many economists that the debt crisis in Ireland, Portugal and Spain was peculiar to the eurozone, and in particular to the failure of the European Central Bank (ECB) to act as a lender of last resort, buying government debt when the market failed to.

In September 2012 the ECB changed its policy and the eurozone crisis beyond Greece came to an end. This was the main reason why renewed problems in Greece last year did not lead to any contagion in the markets. Yet it is not something that the ECB will admit, because it places responsibility for the crisis at its door.

By 2012 two other things had also become clear to economists. First, governments outside the eurozone were having no problems selling their debt, as interest rates on this reached record lows. There was an obvious reason why this should be so: with central banks buying large quantities of government debt as a result of QE, there was absolutely no chance that governments would default. Nor have I ever seen any evidence that there was any likelihood of a UK debt funding crisis in 2010, beyond the irrelevant warnings of those “close to the markets”. Second, the austerity policy had done considerable harm. In macroeconomic terms the recovery from recession had been derailed. With the help of analysis from the Office for Budget Responsibility, I calculated that the GDP lost as a result of austerity implied an average cost for each UK household of at least £4,000.

Following these events, the number of academic economists who supported austerity became very small (they had always been a minority). How much of the UK deficit was cyclical or structural was irrelevant: at the ZLB, fiscal policy should stimulate, and the deficit should be dealt with once the recession was over.

Yet you would not know this from the public debate. Osborne continued to insist that deficit reduction be a priority, and his belief seemed to have become hard-wired into nearly all media discussion. So perverse was this for standard macroeconomics that I christened it “mediamacro”: the reduction of macroeconomics to the logic of household finance. Even parts of the Labour Party seemed to be succumbing to a mediamacro view, until the fiscal credibility rule introduced in March by the shadow chancellor, John McDonnell. (This included an explicit knockout from the deficit target if interest rates hit the ZLB, allowing fiscal policy to focus on recovering from recession.)

It is obvious why a focus on the deficit was politically attractive for Osborne. After 2010 the coalition government adopted the mantra that the deficit had been caused by the previous Labour government’s profligacy, even though it was almost entirely a consequence of the recession. The Tories were “clearing up the mess Labour left”, and so austerity could be blamed on their predecessors. Labour foolishly decided not to challenge this myth, and so it became what could be termed a “politicised truth”. It allowed the media to say that Osborne was more competent at running the economy than his predecessors. Much of the public, hearing only mediamacro, agreed.

An obsession with cutting the deficit was attractive to the Tories, as it helped them to appear competent. It also enabled them to achieve their ideological goal of shrinking the state. I have described this elsewhere as “deficit deceit”: using manufactured fear about the deficit to achieve otherwise unpopular reductions in public spending.

The UK recovery from the 2008/2009 recession was the weakest on record. Although employment showed strong growth from 2013, this may have owed much to an unprecedented decline in real wages and stagnant productivity growth. By the main metrics by which economists judge the success of an economy, the period of the coalition government looked very poor. Many economists tried to point this out during the 2015 election but they were largely ignored. When a survey of macroeconomists showed that most thought austerity had been harmful, the broadcast media found letters from business leaders supporting the Conservative position more newsworthy.

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In my view, mediamacro and its focus on the deficit played an important role in winning the Conservatives the 2015 general election. I believe Osborne thought so, too, and so he ­decided to try to repeat his success. Although the level of government debt was close to being stabilised, he decided to embark on a further period of fiscal consolidation so that he could achieve a budget surplus.

Osborne’s austerity plans after 2015 were different from what happened in 2010 for a number of reasons. First, while 2010 austerity also occurred in the US and the eurozone, 2015 austerity was largely a UK affair. Second, by 2015 the Bank of England had decided that interest rates could go lower than their current level if need be. We are therefore no longer at the ZLB and, in theory, the impact of fiscal consolidation on demand could be offset by reducing interest rates, as long as no adverse shocks hit the economy. The argument against fiscal consolidation was rather that it increased the vulnerability of the economy if a negative shock occurred. As we have seen, Brexit is just this kind of shock.

In this respect, abandoning Osborne’s surplus target makes sense. However, there were many other strong arguments against going for surplus. The strongest of these was the case for additional public-sector investment at a time when interest rates were extremely low. Osborne loved appearing in the media wearing a hard hat and talked the talk on investment, but in reality his fiscal plans involved a steadily decreasing share of public investment in GDP. Labour’s fiscal rules, like those of the coalition government, have targeted the deficit excluding public investment, precisely so that investment could increase when the circumstances were right. In 2015 the circumstances were as right as they can be. The Organisation for Economic Co-operation and Development, the International Monetary Fund and pretty well every economist agreed.

Brexit only reinforces this argument. Yet Brexit will also almost certainly worsen the deficit. This is why the recent acceptance by the Tories that public-sector investment should rise is significant. They may have ­decided that they have got all they could hope to achieve from deficit deceit, and that now is the time to focus on the real needs of the economy, given the short- and medium-term drag on growth caused by Brexit.

It is also worth noting that although the Conservatives have, in effect, disowned Osborne’s 2015 austerity, they still insist their 2010 policy was correct. This partial change of heart is little comfort to those of us who have been arguing against austerity for the past six years. In 2015 the Conservatives persuaded voters that electing Ed Miliband as prime minister and Ed Balls as chancellor was taking a big risk with the economy. What it would have meant, in fact, is that we would already be getting the public investment the Conservatives are now calling for, and we would have avoided both the uncertainty before the EU referendum and Brexit itself.

Many economists before the 2015 election said the same thing, but they made no impact on mediamacro. The number of economists who supported Osborne’s new fiscal charter was vanishingly small but it seemed to matter not one bit. This suggests that if a leading political party wants to ignore mainstream economics and academic economists in favour of simplistic ideas, it can get away with doing so.

As I wrote in March, the failure of debate made me very concerned about the outcome of the EU referendum. Economists were as united as they ever are that Brexit would involve significant economic costs, and the scale of these costs is probably greater than the average loss due to austerity, simply because they are repeated year after year. Yet our warnings were easily deflected with the slogan “Project Fear”, borrowed from the SNP’s nickname for the No campaign in the 2014 Scottish referendum.

It remains unclear whether economists’ warnings were ignored because they were never heard fully or because they were not trusted, but in either case economics as a profession needs to think seriously about what it can do to make itself more relevant. We do not want economics in the UK to change from being called the dismal science to becoming the “I told you so” science.

Some things will not change following the Brexit vote. Mediamacro will go on obsessing about the deficit, and the Conservatives will go on wanting to cut many parts of government expenditure so that they can cut taxes. But the signs are that deficit deceit, creating an imperative that budget deficits must be cut as a pretext for reducing the size of the state, has come to an end in the UK. It will go down in history as probably the most costly macroeconomic policy mistake since the 1930s, causing a great deal of misery to many people’s lives.

Simon Wren-Lewis is a professor of economic policy at the Blavatnik School of Government, University of Oxford. He blogs at: mainlymacro.blogspot.com

 Simon Wren-Lewis is is Professor of Economic Policy in the Blavatnik School of Government at Oxford University, and a fellow of Merton College. He blogs at mainlymacro.

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt