Evan Davis: Reflections on the British Economy
An overview of the British economy - and the risks and opportunities...
You need the Flash Player (version 9 or higher) to view this clip - download Flash. Copyright The Open University
Evan Davis was talking at The Open University, Milton Keynes, on November 1st, 2011. He was introduced by the University's Vice Chancellor, Martin Bean.
Martin Bean: Lord Reith famously said that the BBC’s mission should be to educate, to inform and to entertain. In Evan Davis, the BBC has found someone who can do all three with remarkable ease and wonderful effectiveness. The mission to education is what binds the OU and the BBC together, and it is also what links us with Evan Davis. Evan has been associated with a number of OU BBC productions in recent times. Currently, he is hosting another series of The Bottom Line, a weekly discussion programme in which three business leaders talk about topical business issues. The filmed version of the series for BBC World reaches a huge international audience of many millions. And he also recently completed two documentary series for the OU and BBC. Business Nightmares examined how ostensibly sound business plans can turn into commercial disasters – one of those programmes that keeps me awake at night – and Made in Britain looked at the foundations of the British economy and examined how it might compete in an international marketplace. The series is accompanied by an excellent book written by Evan and of course by OpenLearn resources.
Evan fulfils the BBC’s mission to inform as a presenter on BBC Radio 4’s Today programme, bringing news, interviews and analysis to more than seven million listeners each day, a really staggering statistic. And of course its influence goes beyond mere numbers. As Tim Luckhurst, professor of journalism at Kent University says, “It is the only news outlet that Britain’s opinion formers wake up to”. And then there is the mission to entertain, which Evan does admirably as presenter of the hugely popular Dragon’s Den. The programme has done much to communicate the excitement of business startups, and also the rigours of good business planning, as Evan demonstrates in the interviews he holds with contestants as they emerge from the Den.
In all these programmes and in all these different roles Evan combines expert knowledge of business and economics with expertise as a journalist and communicator. Evan trained as an economist. He studied Philosophy, Politics and Economics at Oxford and took a Masters degree in Public Administration at Harvard. He worked for a number of years as an economist at the Institute for Fiscal Studies and at the London Business School before joining the BBC in 1993 as an economics correspondent for radio and television. In 1997, he became Economist Editor on BBC2’s Newsnight programme, and four years after that he was appointed BBC Economics Editor where he was a great success.
He won the Work Foundation’s Broadcast Journalist of the Year Award on three occasions and the prestigious Harold Wincott Business Broadcaster of the Year Award in 2002 and again in 2005. And of course he has gone on to receive further accolades and awards, including an Honorary Doctorate of the Open University. Like all great broadcasters and all great educationalists, Evan’s outstanding gift is to make complex and technical issues clear and easily understood. And like all great communicators, he does it with infectious enthusiasm, a ready wit and a clear love of his subject. As one journalist put it, Evan stands at the crossroads where brains meets charm. Ladies and gentleman, please welcome the charming Evan Davis, economist, broadcaster and friend of the Open University.
Evan Davis: Wow! I’m afraid it can only be downhill after a build up like that, because the summary of everything Martin said is that I normally am used to speaking for about two minutes and you’re going to get about forty. I should also say that I’m very grateful to the OU for making me a visiting professor. I feel more like a visitor than a professor, but I couldn’t resist taking the title when it was on offer. It comes at a very interesting time, and interesting time for two reasons.
One is an interesting time for the OU. As many of you will know the higher education sector in the UK, in England is going through quite a lot of change, and we’re going to see how it all beds down, and that is going to be fascinating. But I think more to the point we’re in a very interesting juncture in a whole lot of areas. It just feels like a sort of 1989 doesn’t it, in which we’re having a bonfire of all sorts of beliefs and institutions and I suppose myths one might say, and vanities, bonfire of the vanities, as we kind of reassess all sorts of things that have perhaps not gone quite as planned.
MPs and our politics have seen it, our newspaper industry, the wonderful free press we have is going through its own traumas, and there’s a lot of economic reassessing going on at the moment too. And Martin was kind enough to mention all the awards I had for saying all sorts of things that have turned out to be completely wrong over the last ten years. My own money incidentally is on listen to the people who’ve changed their mind or who are thinking aloud about things, rather than the ones who say everything that’s happened in the world in the last three years proves what I have always thought, because if it proves what you’ve always thought you’re probably not very open minded.
What I want to do actually is talk today, building a little bit actually on my Made in Britain series and the Made in Britain book which the OU was kindly very much involved with. What I really want to do is talk about the great debate in the UK economy at the moment. Some of you will know there is only one issue that is exercising the UK, apart from the little local difficulties on the Continent, there is a debate going on in UK economic policy between those who think austerity has been pursued too far and too fast, and those who think we need austerity in order to get growth. And it’s not often that economic opinion divides quite so clearly and in quite such a polarised way, in which you can read people on one side of the debate who think it is plainly obvious that the Government needs to spend more. And indeed one or two academics from the OU contributed to a letter by a hundred leading economists in the papers the other day.
It was actually ninety-eight leading economists, which makes you wonder about the maths very slightly, very slightly. And the other side who think it’s absolutely plainly obvious that the Government would be mad to let go of the austerity. And what I actually want to do over the course of the next half hour to forty minutes is just set out why, I’m not going to give you an opinion, I promise I’m not going to give you an opinion on that debate. I work for the BBC, I have no opinions. If you hear one you’ve obviously misunderstood me. So don’t, I’m not going to give you an opinion on that debate, but what I do want to do is provoke a discussion about whether that debate is just the wrong debate for us to be having. Of course we need to know whether we’re going to have more or less government spending and tax, I’m not saying we don’t have to make decisions on that, but I think I would rather a fifth of the effort that has been expended on that argument was expended on a different more important argument, and I’m going to set out why I think and what that argument is.
The summary is that, and this is not very interesting for a lecturer in economics, is it’s demand and supply, so that’s really where I’m going. And where I think one should start is in the observation that for economies to function well and for people to be employed and for there to be output and production and wealth creation, there has to be demand underpinning that. For every pound that someone produces, there needs to be a pound that someone is spending in order to induce and encourage that production. If we have people just producing and no one buying, the production just runs out and it’s all over. And that insight, which is an insight, and it seems very obvious now, has really been the basis of Keynesian economics. And Keynesian economics has had a fantastic pedigree of simply pointing out that there can be occasions when we’ve got the people who want to supply, but if we don’t have the customers, if everyone’s just being very cautious and saving, you get into a right pickle and the best thing to do is just to employ people to spend any money on anyone just to get money circulating in the economy. There’s a metaphor which I’m going to give you. It’s not mine; it’s actually Paul Krugman who first exposed me to it in a book called Peddling Prosperity. There’s a metaphor that captures the power of Keynesian economics. It’s the metaphor of the babysitting club.
Some of you may know it, but I want you to imagine we’re all together in a lovely babysitting club, and I keep the accounts, and you’re all members of the club. And we have a little sort of billboard thing, and we’ve got a computerised billboard, and you can do an hour of babysitting for somebody else, and you get a credit of an hour, or you can receive an hour of babysitting from someone else and you get a kind of debit of an hour. And I’m going to keep the accounts and we’ve got a wonderful babysitting club. And the problem with this babysitting club might be the Keynesian problem. It might be that we all want to do the babysitting and none of us actually want babysitters. Maybe we all think oh I want to have lots of babysitting credits in my account for when Christmas comes and I can go out and drink.
So during the Autumn we’re all desperately trying to be babysitters and none of us actually want to employ babysitters - that is the classic Keynesian problem of insufficient demand. We’ve got too many babysitters and we haven’t got enough people wanting babysitting, and the Keynesian solution is the kind of spend money, create, lift this babysitting club up by the bootstraps, just say to everybody you’ve got five credits in your bank account, and then people will start to think oh actually I've got enough in my bank account for Christmas so I can actually get some babysitting now as well. So you can release people. There’s pent up supply that is undemanded. You can release it by just conjuring up some demand.
So I as the account holder solved the imbalance between supply and demand in the babysitting club by simply giving away credit and creating demand out of nothing. I just give you all five credits, five hours of free babysitting and then you’ll start spending stuff. If I give you too many you might see what happens. Then we don’t have enough babysitters, we’ve got too many credits. That’s the sort of inflation. That would actually be the babysitting club equivalent of inflation.
Now that metaphor is a very interesting and a very powerful one, and I think if you understand it you can see that Keynesian economics really does have a solution to a problem in which for free you can create and get an economy working very well, and that insight is very powerful. My point today is going to be that our economy and the economic predicament we find ourselves in is very slightly more complicated. Because our predicament isn’t just we’re a babysitting club, we’ve got unemployed people who want to be babysitters but the babysitting clients are not demanding enough; it’s a more complicated thing where we’ve got an economy that has two dimensions.
So let me extend the babysitting metaphor behind now the Paul Krugman example. It’s a babysitting and gardening club. Okay, we’re all in a babysitting and gardening club. I can do an hour of gardening and get an hour of babysitting. I can receive an hour of babysitting and I can get an hour of gardening. But now imagine that everybody’s gardeners and we have no babysitters. Now in that situation simply pumping up demand or reducing supply, reducing demand is not going to control the babysitting gardening club very well. Because you can pump up demand and you’ll get more demand for the thing which you have nobody supplying. So you just increase the inflation in babysitting and you increase the supply in gardeners who are already unemployed because no one wants gardeners.
So my point is that the UK economy is more, the predicament of the UK economy is a bit more complicated and unsatisfactory than the classic Keynesian we don’t have enough demand. It’s that we have a supply problem as well, that the economy is not just underemployed, we’re pointing in the wrong direction, and giving it a push through extra demand management may help us to some extent but it won’t solve the fact that we’ve got too many people in some bits of the economy where we don’t them and not enough in other bits of the economy where we do need them. So in babysitting/gardening terms we’ll have a huge surplus of gardeners, even if we manage to create extra demand for babysitting, and we’ll still have a shortage of babysitters. So it’s a supply problem as well as a demand side problem - that is I think where we are. Which is why I don’t think it’s all about simply the argument between austerity versus growth. The argument we need to be having is one, not just about what the appropriate level of demand is, the argument is also about whether and how we reorient the economy.
Right, so let me talk a little bit about then the orientation of our economy and where we are. Well we did reorient our economy over the last thirty years, forty years. In fact since 1870, but let’s just take the last thirty or forty years. And we’ve made a giant leap away from certain sectors towards other sectors. Now the move that I would depict, the way I put it, is that we moved towards upmarket goods and services rather than bog standard ones. We tried to be clever in everything we do, and I’ll talk you through what we do and how we earn a living as a country, but my basic point is it went too far and it’s left us in this wrong place with too many people in the wrong sectors, and we need to move some back.
So the move we took was a move towards upmarket services, the City of London etc, upmarket manufacturing, defence aerospace etc, and particular sectors that were built around intellectual property, pharmaceuticals, creative industries, and in the making of Made in Britain, the television series and the book, and the lecture and the musical, which will be following next year, in the making of that I was just so struck by how bloody clever we Brits are at earning a living. So we do earn a living and we have reoriented. We’ve closed down, let’s take manufacturing, we’ve closed down a lot of what one might call bog standard manufacturing, and we’ve opened more sophisticated manufacturers, and interestingly and people don’t believe this but the value of UK manufacturing reached its peak. The peak point at which the maximum value we produced was in the second quarter of 2008. It’s been a bad few years since then, but we were actually getting more and more valuable in the production we were generating. Obviously it didn’t weigh as much and we didn’t have as many big sprawling factories as we used to, and it wasn’t ships, but all the little things we were making actually got quite a good price, so we were actually manufacturing smaller but more perfectly formed and more valuable things than we were say thirty or forty years ago.
So that’s an example, I always use the Brompton bike example. We featured them in the television series. The Brompton bike is our biggest bike manufacturer. Doesn’t make as many bikes, you know, we were making a million or two, Brompton’s down at 30,000 or thereabouts. But the Brompton bike costs getting on for a thousand quid. I don’t know if you know the Brompton, it’s a sort of elegantly engineered perfectly formed fold up bike. Much harder, it doesn’t make as much sense for China to specialise in the making of Brompton bikes than it does the UK, so that’s an example of our move upmarket.
The services that we’ve specialised in, we’ve gone upmarket by focusing on services like financial services and legal services and accounting services. We are the second biggest exporting nation in the world when it comes to services. A lot of it’s built around London. London is a hub city. The global elite pass through London and use it to manage their affairs, and there are a lot of people who are catching little crumbs from the work that’s generated by everybody, you know, from Arab billionaires to Russian oligarchs. In the series, the TV series, I focused on the example of the Shard, which is new tallest building in London that is financed by Arab money, built by virtually every different nationality on the planet.
I went around there, the sort of safety messages are in nine different languages. It’s going to be occupied by a large Hong Kong hotel chain. It was designed by an Italian. The residential properties on the top of it will not be bought by British passport holders, I don’t think; I think it will be Russians who will buy those. And you ask yourself well how do we make money out of that, and the answer is well we just have a lot of people who are catching little contracts out of all this stuff. We make a bit of tax out of it. We have estate agents who are selling the properties and transacting the business. We have project managers involved. When the Russians get divorced living in a flat they’ll use British lawyers to service their needs in that, and so there’s a sort of economy built around that.
That’s the British service economy. So that’s another example of this kind of move upmarket. And the third of course are those intellectual property type industries, like pharmaceuticals. Creative industries, which remain globally strong relative to most other countries. Our universities which are a great service export, intellectual property led are a huge export industry for the UK, and if you want to feel proud of an export, you know, we export more foreign doctors than the Germans do. They export cars, we do foreign doctors in larger numbers, and we can be proud of that, we make a lot of money out of it. They pay us £22,000 a year to be here, and we get them to work in the NHS and tell them it’s part of their training.
So these are all things that Britain has done. Upmarket services, intellectual property based industries, like universities and pharmaceuticals and creative industries, upmarket manufacturing, that is the reorientation we’ve made over the last few decades. I don’t think, if I’m honest, I don’t think it was mad to reorient that way. That wasn’t stupid, that was just a reaction to the changing nature of the world. And to the very basic fact that the world has discovered, very basic fact indeed, that if you are a relatively poor country with few resources, and you’re ambitious and want to get rich quickly, the way you get rich quickly is not to try and run great universities, or to have the best lawyers in the world, or the best banks, or even to go into jet engines or aerospace. The way if you’re a China or a Taiwan before, or a Japan before that, the way you make yourself rich quickly is you do bog standard manufacturing. Probably start with textiles, move onto cheap electronics, and bog manufacturing is the path that nation after nation has discovered is a route to riches.
Why, because it turns out that really quite poor countries can actually manufacture about as well as rich countries. So they’d be mad not to do that. They can’t run universities as well as rich countries, they can’t do all these other things as well as rich countries, so it made absolute sense for them to do what they can do which is manufacture. The fact that China is a strong manufacturing nation is a reflection of its lack of choices at doing other things. We can manufacture as well as China, but we aspire to be richer than China, so we moved on and we reoriented our economy away from those things and we’ve abdicated a lot of the manufacturing to the poorer countries.
So that is the reorientation that we’ve made. And my contention is it wasn’t bad. But here’s where I sort of go into my real theme. We overestimated how much money we could make out of this new model. And the paradigm shift, the kind of great turn that has occurred with the crash, is that we landed ourselves with a lot of these industries, pharmaceuticals, upmarket manufacturing, defence and aerospace, intellectual property things, we’ve landed ourselves with a lot of great industries, but they’re just not worth as much as we thought. We thought we were going to be rich, we thought we could pay our way in the world with these things, and we got it wrong.
We didn’t get it a million miles wrong, we’re not like mad. We’re as rich as the Germans remember. We’re not poorer than Germany, we’re about the same as Germany, so we’ve made a pretty good stab at earning a good living with these industries, but we’ve ended up with slightly the wrong economy. It was a good thing to try, I mean this is my view, it was right to make the broad shift that we did, but we have ended up with too much of all that upmarket service based intellectual property stuff and we actually need to move back.
So we overestimated the wealth that we were going to generate from those industries, because over the course of the last decade there was a phoney price signal that underpinned the shift we made, that led us too far down that path. And that phoney price signal was an elevated exchange rate that made us think for a little bit of intellectual property you can buy a container load of clothes. And at the exchange rate we had maybe that was true, but as soon as the exchange rate changed, as soon as borrowed money stopped coming into the country pushing up the exchange rate, the reality hit, the business model we had was not as valuable as it seemed.
So we’ve ended up with an economy that’s just a little bit short. We’ve ended up with problems, and we’ve ended up having to ask ourselves what do we do now? So what I’d like to do is just enunciate what I think three of the key failures have been of this business model that we ended up with, the upmarket business model, where did it turn out to be short, what turned out to be wrong with it?
Well one thing is that we borrowed too much money; we didn’t save enough. We were tempted to do that by the availability of cheap credit. That wasn’t just banks; that was a feature of the global economy. Because China was generating lots of savings, it was a very easy time for nations to borrow, so China was out lending and countries like us and others chose to borrow a lot. That sucked in money, as I've hinted, pushed up the exchange rate and closed down a lot more of our manufacturing industry than we really wanted to lose.
The second flaw, and I think a very intellectually interesting one and a very timely one to talk about, is that it turns out that one of the key industries we relied on to pay our way in the world wasn’t as good as we thought, was actually dramatically less good than we thought, and that of course is the financial services industry. Now it has actually generated a great number of exports, has been hugely profitable, so profitable that no one, including myself, felt it necessary to kind of lift the bonnet and look inside and see what was going on there in the good years. Certainly not the Government, it always seemed like wow it just keeps producing money, why would you want to question what it’s doing?
Since of course things turned around and it’s had a few less good years, people have lifted the bonnet and have started to look into the engine, and have found quite a lot of dysfunctionality, and have found it doesn’t seem to be generating as much wealth as it looked. Part of what it was generating, part of what looked like wealth generation was actually just money it was sucking out from the rest of the economy, subsidy of one kind, implicit kind or another. So that industry got too big. It got too big on the back of subsidies rather than on the back of wealth creation.
So that’s a second I think very big part of what went wrong in our economy. The third part is that I think what we never solved when we made this move upmarket were the regional imbalances. So we had lots of new industries, these new upmarket industries. They tended to cluster in parts of the country where the traditional industries hadn’t been. So we closed down shipbuilding in Sunderland, we closed down mines in Welsh valleys and Steel in Welsh valleys, and we built new industries around Cambridge or in London. And it’s left us with a slightly regionally imbalanced and difficult struggling economy.
So you have slightly underemployed resources in parts of the country, and you have overcrowding and overemployed resources in other parts of the country. And I think that is a problem that we haven’t resolved in the UK with this move upmarket. That not everybody is going to be in the creative industries, pharmaceutical laboratory worker, a university teacher or a skilled engineer, you’ve just got a whole lot more to your economy than that, and there was a huge regional mismatch between where the new jobs were and where the old jobs had been.
So let me summarise where I've got to. I've said that I think our problem is not just one about lack of demand; it’s about mismatch of supply. I've said that I don’t think we were mad to make the economic evolution we did, upmarket, but that that move did not bring us the wealth we thought it would. So the supply shift we now have to make, the supply shift we now have to make, the real economic change we have to make is we now need I’m afraid, this is the difficult bit, to take some of the stuff that’s done very well over the last few years and convert it back into stuff that is now, we can export and is more valuable.
The tradable sector of the UK economy, the bit that exports, we closed a lot of it down to open new export industries, and the new ones weren’t quite up to the job. So the absolute impeccable logic is we now need to transfer resources in our economy away from industries like financial services towards factories. And because we borrowed a lot of money and have been slightly overconsuming, we need to transfer resources away from industries that are focused on our domestic consumption. Things like restaurants and haircuts, industries that are not about exports at all but are just serving local whims, local industries selling local whims, we need to close some of them down and convert them to export industries as well. That is the supply shift we need to make.
We need the tradable sector to grow, and we need the non tradable sector therefore to shrink. We need the rebalancing of our economy to occur. We need to reorient away from imports to domestic consumption, we need to reorient away from imports towards exports, away from domestic consumption towards exports and investment. And the bad news is, ladies and gentlemen, is that that kind of supply shift is actually quite difficult. It’s miles harder than pulling a lever and spending money here or cutting money there; it’s just a completely different order of magnitude in the kind of task we face. Or to put it another way, I've described the reorientation and I've explained why it was perfectly understandable why we’d do it, but it took decades. And it is going to take quite a while to rebuild supply chains of manufacturing companies to kick start and increase exports. It would take us quite a while incidentally even if the export markets were all booming and buying like crazy and were all flourishing, but as you know they’re having little problems of their own, our big export markets. So it is a real challenge, which brings me to where the public debate is on macro, and the economists’ debate on macroeconomic policy. For my money the debate is in slightly the wrong place.
Two sides really in that debate, each thinking that there’s one thing that can get us out of our problems; one side thinks debt reduction is the answer, the other side thinks that, you know, underpinning a recovery with spending is an answer. One thinks you have to sort out the balance sheets, you know, get the Government’s balance sheet and household balance sheets, sort out everybody’s balance sheets and recovery comes. The other side thinks you need to get a recovery and then we can sort out our balance sheets. That’s where the public debate is. Which do you sort out first? The debt problems and the balance sheets, or do you get the recovery?
Well I fear ladies and gentlemen that it’s worse than either side appreciates. The recovery and the repair of the balance sheets are one and the same thing. You’re not going to get a recovery without balance sheets repaired, and you’re not going to get a repair of balance sheets without a recovery. So instead of it being a dilemma between two choices, do we go for the deficit or do we go for growth, it’s a hideous catch 22 in which plainly we can’t get the growth sustainably without extra, without sorting out the debts, and we plainly can’t sort out the debts if there’s no income for people to earn to pay down, to save and pay off their debts.
So rather than seeing it as a choice of theories or a choice of risks, I see it as a catch 22. It’s a very uncomfortable place to be that we need both these things to operate. Both sides, if you like, have a valid point; there is a lack of spending, we do need more spending and we do need spending to underpin activity. It’s just I worry if we only have the spending with nothing else, it’ll just underpin activity until you stop spending, and then the activity will stop and we’ll be back where we would be now.
So for example Simon Wren-Lewis, the economist, wrote a very good piece on the case against George Osborne’s austerity. And I think he made the case plainly, and I don’t disagree with much of it, but he used the phrase, we need to borrow more until the recovery takes hold. Well my worry is that if you borrow more the recovery won’t take hold, which is the weakness if you like in that side of the argument. You’ll borrow more, there’ll be a recovery, you’ll stop borrowing, the recovery will peter out, because everyone will see that we’re saddled with debt and they’ll want to sort of get that debt right. So that side of the argument seems one dimensional to me.
The other side of the argument, George Osborne has spoken of how if you just tell people to sort out the, if you just tell people you’re going to sort out the deficit that will build confidence and the economy will miraculously grow. That hasn’t happened. It turns out to be more complicated. The economy doesn’t miraculously grow if there’s no one spending any money. Keynes had a point. So Keynes did have a point and I think it remains compelling. But Keynes is not the only point, there’s a supply side problem as well, it’s not just about demand, and that’s where I think each of these sides with this argument are essentially arguing over second best options. And the simple fact is we need spending in our economy, but we need it to be spending that is going to build a sustainable recovery.
That means we need spending, but it must be spending that improves people’s balance sheets, rather than worsens the balance sheets. Rather than just borrowing extra to carry on spending on things that we’re going to have to cut in two years’ time, we now need to work out how we can spend and use the spending to affect the rebalancing that I’m describing. The supply side, changing the industries, reducing the size of some industries and increasing the size of others, how do we do that? The goal is to try and build up the tradable sector of our economy at the expense of the non-tradable, the famous rebalancing. And I’m afraid neither the solution of austerity or the solution of spending and tax cuts or borrowing extra are going to achieve it.
What kind of policies I think would be a very valid question for you to ask at this point, might you do that. Now I meant to say right at the very beginning, and I’m just chiding myself for forgetting to do so, that I’m not going to answer that question. It’s a very difficult question, because actually supply side policies are as I say much harder than demand side ones. Let me give you an example though of the kinds of policies that might be useful. They might be thinking harder about the role of universities in regional policy. The role of universities as an export sector in their own right, just offer that as one suggestion. It might be when we think about reforming the cities, we’re inevitably doing at the moment, it might be we need to think about finance for British industry.
One of the interesting things about the City is not only did it become much bigger and apparently more profitable in the golden years, it became a global industry that turned its eye away to some very large extent to the kind of day-to-day needs of medium sized British companies. And medium sized British companies aren’t going to be going to, you know, they struggle in a way to get the finance they need because the City’s just too cosmopolitan by far to be thinking very much about medium sized companies in Walsall.
So maybe we have to think about a supply side policy that addresses the issue of finance for UK firms. There is a plan for credit easing which will be thinking about some of those issues. These though, I don’t purport to have answers to the question I pose. I just think that the solutions are going to lie in that kind of direction. Solutions that involve spending money, that get the economy, inject cash into the economy, but at the same time do it in a way that aids the rebalancing rather than just simply prolongs the pain of the imbalances we’ve already got. That what we do is effectively, back to my babysitting club, we say we’re going to subsidise all those people who want to be gardeners and we’re going to find a way of teaching you how to be babysitters. And then when we’ve got a lot of babysitters we can pump up demand and we won’t just find we’ve increased the supply of gardeners and we’ve still got too few babysitters. So that’s the key, I’m not going to really give you an answer, but that’s the key.
The extreme Keynesian position that it can even benefit an economy to have people digging holes and filling them in again is absolutely relevant where the economy is more or less pointing in the right direction, because it gives the economy some push. It works less successfully in my view where the economy is actually pointing in the wrong direction, and when all the Keynesian push does is push it further down the wrong direction, a little further along. Now a valid criticism of some on the Left is that they think everything is just a Keynesian problem, and a valid criticism at this time on the Right is that they think there’s no such thing as a Keynesian problem. The truth is we do have to resolve the argument between austerity and growth. We do have to work out what the appropriate path for government borrowing is. Not in any way taking the view on that particular debate, but my goodness I’d like to see a debate.
Maybe I should help promote it on the Today programme, I’d like to see a debate that goes much further towards how we, and ideas please on a postcard how we take some industries and open new industries without simply having a great hole in the economy in the middle where the industries ought to go. I’d like to see a debate on that far more than the debate I think we’re currently having which is really a debate between two second best and highly imperfect options. Thank you very much.
Questions and Answers
About this lecture
In his new role as Visiting Professor of the Public Understanding of Business, Evan Davis delivered his first public lecture, Reflections on the British Economy, in front of an audience at The Open University campus. Hosted in association with the Economic and Social Research Council’s Festival of Social Science, the lecture explores the challenge faced by the UK economy and its international performance, in the context of competition from emerging economies.
Drawing on his experiences as presenter of the recent BBC/Open University co-production Made In Britain, Evan considered three elements as part of his survey:
- the continuing contribution of manufacturing
- the UK’s comparative advantage in intellectual property and,
- the threats from emerging economies as they develop tradable services.
Professor James Fleck, Dean of The Open University Business School and Professor of Innovation Dynamics, said "The wealth of knowledge and experience that Evan will bring to the University will enrich the experience of both students and staff. Evan’s appointment is important as part of The Open University’s mission of widening participation in education and he will, I am sure, help us to excite interest in issues of major importance in the modern globalised world."