UK economy

By Professor Simon Deakin

Under the government’s current proposals for employment law reform, employees will be able to give up rights concerning unfair dismissal, redundancy pay, flexible working and time off for training in return for receiving shares in the company that employs them, gains on which will be exempt from capital gains tax.

It is right for the government to be encouraging worker ownership in companies; there is abundant evidence suggesting this improves labour productivity. What is completely unnecessary and counterproductive is to link this to the loss of employment protection rights. Read more

By Heleen Mees

There is a fierce debate over the origins of the disappointing economic growth seen in advanced economies. On one side there is former world chess champion and political activist Garry Kasparov and internet entrepreneur Peter Thiel, while on the other, there is Kenneth Rogoff, a Harvard economist.

Mr Rogoff, who authored This Time is Different: Eight Centuries of Financial Folly (2009) with Carmen Reinhart, argues that the systemic financial crisis is the root cause of the prolonged economic slump in the western world. In their research, Mr Rogoff and Ms Reinhart found economic growth following a systemic financial crisis to be about a full percentage point below trend growth.

Mr Kasparov and Mr Thiel, on the other side, disavow Mr Rogoff’s claim that the collapse of advanced-country growth is the result of the financial crisis. In their view, the flailing western economies reflect stagnating technological development and innovation, and without radical changes in innovation policy, advanced economies are unlikely to see any prolonged pickup in productivity growth. Read more

Alasdair Smith

There’s a developing consensus on the need to expand public investment in theUK. Private sector expenditure is depressed in the aftermath of the financial crisis of 2008. The prospects of export growth were never strong, and have been damaged by the problems in the eurozone. The  UK prime minister  and the CBI have joined Paul Krugman, Jonathan Portes, Martin Wolf and others in seeking a good old-fashioned stimulus from public investment to fill the gap.

However, the PM seems keen that the public investment should be privately financed (“the upfront investment in infrastructure should be ripe for a non-governmental approach” was one of the less ringing phrases in his March speech), and the CBI is reported to be lobbying ministers to underwrite the private funding of public infrastructure projects. Read more

By Eric Lonergan

Despite running a large budget deficit in each of the past three years, the net debt of the UK government has barely risen.

The distinction between gross and net debt is central to any consideration of a government’s solvency. Gross debt usually refers to the total stock of current non-contingent financial liabilities of government, principally bonds outstanding, and net debt subtracts liquid financial assets held by government departments, such as foreign exchange reserves or holdings of government bonds.

Net debt is the basis for any calculation of fiscal solvency, as long as the assets held by government are highly liquid. If departments within the government hold gilts, it makes sense to net them off the stock of debt, because the government is making interest and principal payments to itself. Read more

By Eswar Prasad and Karim Foda

The world economy is showing scattered signs of vigor but remains on life support, mostly provided by accommodative central banks. Concerns about spillover from a worsening of the European debt crisis and slowing growth in key emerging markets are putting a damper on consumer and business confidence. Equity markets are pulling back from a robust performance in the first quarter of this year as the sobering reality of a continued anemic recovery weakens investors’ optimism.

There are some positive signs in the latest update of the Brookings Institution-FT Tracking Indices for the Global Economic Recovery (TIGER), but also much to worry about as the world economy continues to meander with no clear sense of direction. Read more

By Professor Simon Deakin, Director, Corporate Governance Research Programme, ESRC funded Centre for Business Research, University of Cambridge.

Long-term investment in infrastructure needs a better policy mix

George Osborne’s attempts to encourage British pension funds to invest more in infrastructure projects are to be applauded. Canadian and Australian pension funds have already invested heavily in infrastructure, but UK funds are still reluctant investors. Why?

British prime minister David Cameron tours Newton Heath rail depot. Getty images

British prime minister David Cameron tours Newton Heath rail depot. Getty images

Pension fund trustees have a fiduciary duty to get the best return for scheme members after taking due account of risk.  Government cannot and should not dictate how or where and how these funds invest their assets. If government wants pension funds to engage with the long term needs of the UK economy, it must first understand the particular pressures they face as investors. Read more

By Bill Martin

Has the UK’s economy been structurally weakened by the banking crisis? Policy makers think so – in spades. Despite the depth of recession and limp recovery, they believe that the gap between output and some notion of the economy’s productive potential is not that far from zero. The Office for Budget Responsibility concludes that most of the budget deficit is structural rather than cyclical and, until very recently, some members of the Bank of England’s Monetary Policy Committee were pressing for higher interest rates. Supply pessimists like former MPC member Andrew Sentance believe demand stimulus would serve only to push up inflation. Read more

By Eswar Prasad and Karim Foda

The world economy has hit a rough patch on the road to recovery and is in danger of skidding off course.

The latest update of the Brookings Institution-FT Tracking Indices for the Global Economic Recovery (TIGER) reveals abundant cause for gloom. The general picture among G20 economies is one of slowing growth, swooning financial markets, and declining consumer and business confidence.

A series of adverse shocks, coupled with political wrangling that has stymied effective policymaking and added to uncertainty, has crippled growth in advanced economies. Emerging markets have maintained strong growth so far, but the battle against domestic inflation and weaknesses in major export markets are beginning to affect their growth as well.

Debt crises, weak employment growth and policy dithering in the major advanced economies have exacerbated global economic uncertainty. The perception of rising risk and inadequate policy responses has shaken financial markets and dented confidence around the world. Reflecting widespread anxiety and fear about global economic prospects and the lack of obvious policy solutions, stock markets around the world have taken a beating over the past summer. Read more

By Eswar Prasad and Mengjie Ding

Our analysis paints a sobering picture of worsening public debt dynamics and a sharply rising debt burden in advanced economies. These rising debt levels combined with heightened concerns about fiscal solvency now constitute a major threat to global financial stability.

Recent events in Greece, Ireland, Portugal and other economies on the periphery of the eurozone show the risks of debt buildups that are not tackled. Bond investors can quickly turn against a vulnerable country with high debt levels, leaving the country little breathing room to balance its fiscal books and precipitating a crisis.

Overall, the worldwide picture of government debt is not pretty. Read more

By Anat Admati and Martin Hellwig

Bankers on both sides of the Atlantic are lobbying furiously against stronger regulation. Authorities in different countries are reluctant to strengthen banking regulation as if the crisis never happened. The European Commission even hesitates to fully implement Basel III.

In this debate, many argue that global competition requires a “level playing field.” Following this argument, and concerned about the City’s competitiveness, the Interim Report of the UK’s Independent Commission on Banking avoids proposing tougher regulation for investment banks.

These “level playing field” arguments are invalid. Read more

In August of 2010, I argued on this forum that the Fed should expand its policy of Quantitative Easing. By now the US is well into a programme that, by the end of June 2011, will have added $600bn to the Fed’s balance sheet. There is widespread discussion of what to do next. Read more

By Eswar Prasad and Karim Foda

Despite a number of recent shocks, the global economic recovery is getting on to a firmer footing.

The latest update of the Brookings Institution-FT Tracking Indices for the Global Economic Recovery (TIGER) indicates that resurgent job growth and rising business and consumer confidence are solidifying the recoveries in many advanced economies. Emerging markets are still doing well but some of the shine is coming off these economies as they tighten policies to cope with inflationary pressures.

The Overall Growth Index for the G20 economies shows a slight uptick in recent months, led by a gradual rebound in real activity. After the initial post-recession surge, financial markets have pulled back a bit, at least in terms of growth in stock market indexes and valuations. One bright spot is the resurgent business and consumer confidence in both advanced and emerging economies. Read more

My Lords, it is a sign of the jittery state we are in that a slower-than-expected slowdown in the rate of growth is hailed as strong evidence of recovery. Of course it is nothing of the sort. It marks the end of a period in which the economy has been supported by fiscal policy, with some help from the depreciation of sterling.  Read more

The recent report of the committee chaired by Lord Browne, former BP chief executive, on UK higher education funding and student finance raises concerns about policy being driven by accountancy rules, rather than by rational argument. Read more

There is a widespread perception that quantitative easing is synonymous with increasing the money supply. But it is more than that. Read more

Prime minister David Cameron on Monday warned that public sector pay, pensions and state benefits would face a squeeze as he prepared the UK for the “painful times ahead” as the government deals with the £156bn deficit. Martin Wolf, the FT’s chief economics commentator, says the government must set out its plan to eliminate the economy’s structural deficit, but there is a serious risk that if the cuts are too brutal the country could return to recession.

Since the election of May 1979, just under 31 years ago, the UK has had one change of power, in 1997, and two dominant politicians: Margaret Thatcher, prime minister from 1979 to 1990, and Tony Blair, prime minister from 1997 to 2007. The era that these charismatic politicians defined is now over. That is the biggest lesson to draw from the Budget delivered by Alistair Darling, chancellor of the exchequer.

Continue reading “‘Back to the future’ imperils Britain”.  Please leave your comments in the box at the end of Martin Wolf’s column.

If all the economists in the world were laid end to end, they would not reach a conclusion. The “battle of the letters” – two letters in the FT, from Lord Skidelsky and others and Lord Layard and others, replying to a letter in the Sunday Times from Professor Tim Besley and others – brings this hoary joke to mind.

The remainder of this column can be read here. Please post comments below.

In Friday’s FT, more than 60 leading economists back the decision of Alistair Darling, UK finance minister, to delay spending cuts until 2011. In two letters, they argue that (1) a sharp shock now would be dangerous; and (2) the first priority must be to restore robust growth.

Rachel Lomax, Lord Skidelsky, Brad DeLong and Joseph Stiglitz are among those to have co-signed the letters. Read more