Tom Streithorst
Bernanke: the sputtering recovery means interest rates will remain low for “an extended period”
The economy was supposed to bound out of a deep recession like a tiger: hungry, with spring in its step, full of pent up demand. But this one looks more like a sickly kitten, its weakness palpable to the men in charge of fixing it. On Wednesday Ben Bernanke told Congress that the sputtering recovery requires interest rates to remain low for “an extended period.” And on Tuesday, Mervyn King told MPs that “the health of the global economy” might require a return to the £200bn emergency quantitative easing programme.
It’s a tough time to be a central banker. Right now, as Bernanke and King admit, the only thing holding up a sputtering world economy is the laxest monetary policy in human memory combined with wartime levels of government deficit. Without these policies, the economy would collapse back into recession, if not depression. Imagine if interest rates were at normal levels. House prices wouldn’t be stabilising, they would be going through the floor. Lower interest payments are invaluable in stoking demand by providing households and business more disposable income. If rates went up, spending would inevitably go down. Also, low interest rates force asset prices higher. Market participants know any rate hike would crush share prices. We are lucky Bernanke plans to keep rates low.
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Fran Abrams
Above: trainee chefs—but will the recession permanently damage young people’s prospects?
The class of 1979 at Marple Hall County High School in Stockport, in my recollection at least, divided neatly into two groups. By and large, those of us whose parents owned their own homes went on into the sixth form; the ones who lived in council housing mostly left to start work. Jobs seemed easy to come by. Nicky, the most academic of the latter bunch, did an electrical apprenticeship. Colin, bright and personable, trained as a chef; Danno as a painter and decorator. As the rest of us took A-levels and went off to college and university, news of our old friends seeped through. Every time I went home another former classmate had hit the dole queue. The last time I saw Nicky, in the mid-1980s, he was sitting in the corner of our local pub, overweight, out of work and, I was told, filling his days with drugs.
I’ve thought about my schoolmates recently as youth unemployment has hit the headlines once more, and the clichéd phrase “a lost generation”—used in the 1980s and briefly in the early 1990s—has been pressed into service again. Nearly 1m 16-24 year olds are now “Neets”: not in education, employment or training. The figure has risen 14 per cent on the same quarter in 2008, leading to concern that a whole cohort of young people will suffer. But the real picture is a complicated one, in which some groups will be hit less hard than others and some may even prosper despite difficult circumstances.
Unemployment is rarely a good thing. Long periods out of work decrease attachment to the labour market; skills go rusty and the jobless are treated with suspicion by employers. But the case for a “lost generation” rests on a theory that unemployment, especially at the start of a working life, has effects that can last for years or even decades—even for those who do find jobs. This “scarring” theory (see box, p58) was first promoted in the early 1980s by American academic David Ellwood. One of its leading proponents is economist David Blanchflower, a former member of the Bank of England’s monetary policy committee, and one of the few experts who predicted this recession. He feels no need to pull his punches: “It does seem like a national crisis and a lost generation… it’s a big problem for society because young unmarried men who are unemployed commit crime. The public’s not going to be really happy with rising property crime; rising street crime. The cost of doing nothing looks very serious.”
Blanchflower published an academic paper in February 2009 using data from the National Child Development Study, which followed a large sample of children born in one week in 1958. His research suggested that while some people who lost jobs as factories and mines closed during the late 1970s and early 1980s recovered, the scars from early spells of being out of work persisted for many, even at the age of 46. Those who had been permanently in employment were more likely to be happy, healthy and satisfied with their work, while those who had spells of unemployment were still earning less than those who hadn’t. Blanchflower says that we could well see the same thing this time, especially given the depth of this recession.
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Tim Leunig
Lines at the job centre are lengthening. No surprise in a recession. But this one has been different, so far at least. For a start, the rise in unemployment has been less than economists would expect, given that the economy contracted by a record 5.6 per cent in the last year. One might predict that Britain’s much-vaunted flexible labour market would shed jobs quickly in a downturn. But the growth of employment protection under Labour makes it harder to fire people than in the slump of the early 1990s.
More important is a second trend: management and workers are trying to preserve jobs. Our economy is now more reliant on human capital for success, so that businesses have greater incentives to retain workers (and their skills) in place. Employees, whose skills are often specific to their company, have a similar reason to stay put. Both are more willing than in the past to agree to wage freezes, pay cuts, unpaid holiday or sabbaticals to make this happen. In its co-operation between management and workers, Britain is looking ever more like continental Europe from 1945-1973.
Youth unemployment is more refractory; 835,000 18-24-year-olds are not in work or training. Jobless graduates steal media attention, but the biggest rises are among those with no skills. Again, this is partly because of new employment rules. In a recession firms reduce costs. Employment legislation makes it hard to sack existing workers, so companies decided not replace those who retire or leave for other reasons. Since young people entering the labour market often rely on replacing such people, this inevitably means higher youth unemployment. Put simply: employment protection benefits existing workers at the expense of those out of work. This helps to explain the huge youth unemployment in France and Spain. Britain has taken some steps in their direction and young people are paying the price. The real danger here is that young people who do not get into the labour market at first will find it difficult to work in the future. Employers traditionally have been reluctant to hire those who have been unemployed immediately after leaving school. If that is the case, the cost of employment protection after this recession will be very high indeed.
The figures contain one further surprise: unemployment actually began to rise before the start of the recession. This is unusual. Joblessness is famously a “lagging indicator” that rises only after a recession begins. That it began earlier implies something has gone wrong with our labour market. It may be that employment legislation was already a deterrent, or that the minimum wage was costing jobs even in the boom; we don’t yet know. But, if either of these is true, the effect will become greater as the recession moves forward. As ever, the price of a well-functioning labour market and high employment is eternal vigilance.
Brian Semple
Hundreds of Dubliners queue for jobs in April
In 2008 Dubliners enjoyed the fourth largest net salaries in the world, behind only New York, Geneva and Zurich according to a recent report by Swiss bank UBS. The Irish capital also came fourth in the report’s Big Mac index of purchasing power, its residents only having to work for 15 minutes to earn enough for said McDonalds product.
Of course the flipside to this is that Dublin is among the top ten most expensive cities to live in (coming 12 places ahead of London), food prices are cripplingly high, and workers endure longer working hours than the Western European average. And set against Ireland’s brutal recession of the past 12 months, with painful public spending cuts, extortionate costs of services and and the Irish Central Bank’s former chief economists saying that the poor are subsidising the rich, the UBS findings on Dublin wages seem to hearken back to some very distant, happier time.
To understand what’s really happening in the fair city, read Mary Fitzgerald’s Letter from Dublin from the June issue of Prospect. On a visit back to where she lived during the Celtic Tiger boom years, Fitzgerald found on an eerily subdued atmosphere in the capital:
Driving into Dublin from the west you pass countless new housing estates, some half-built and abandoned, others fully finished. At night just a few small lights peek out of these vast building complexes. In the city centre you recognise new office blocks by their “to let” signs, particularly around the redeveloped docks, while at 6pm riverside bars and restaurants seem empty in the evening sunshine. On George’s Street, Dublin’s equivalent of Tottenham Court Road, a boarded-up shop sign reads: “Going to hell.” A note in the window says it will be redeveloped by “Gluttony Ltd.”
Comment and discuss this piece below.
James Crabtree
The new August issue of Prospect
Against a backdrop of grim economic news, rising government debt, dreadful public spending projections and general hand ringing over fiscal probity, Prospect’s August cover story asks a simple question: is Britain bust? James Buchan begins his journey to find the answer in the office of Robert Stheeman, the head of Britain’s debt management office, the previously unknown body which sells the UK’s IOUs.
Stheeman is a busy man, having been asked to sell in this year more than three times as much debt than the year before, all to fund a huge gab in the Government’s finances. But, as Buchan explains, the cause of all this recent borrowing is not the banking crisis itself:
The bonds required to fund the banks taken into state administration, a mere £37bn, were issued last autumn. No, Stheeman’s headache comes from spending by government departments (without accompanying tax rises) over the last nine years and is to be traced in the policies and misfortune of a single man, Prime Minister Gordon Brown.
Buchan notes that “there have been anxious moments in recent months” especially as “Stheeman also suffered a bad quarter of an hour on 21st May when the rating agency Standard & Poor’s lowered its assessment on British sovereign debt from ’stable’ to ‘negative. But, as he goes on to argue, the culpability of the political class for over spending is actually nothing new. Leading figures of the Scottish enlightenment like Smith and Hume worried (without good reason) that their country was soon to sink below the budget line, as did many other leading intellectual lights during the 19th and 20th century. Are the concerns in this crunch any more likely to turn out badly? Read the piece here, and find out.
Mary Fitzgerald
A dream holiday? Only if you play by the rules
Google the word “Homad” and you could be forgiven for thinking it was the name of a Greek furniture company, or a Beijing-based International Aptitude Technology outfit. But apparently it’s also the new craze among recession-hit young professionals: a Holiday on Mum and Dad.
In a survey conducted in June by HolidayRentals.co.uk, 64 per cent of the respondents admitted they would happily go away with family who offered to pay, even, apparently, if they couldn’t bear 10 minutes over the phone with them on a Sunday morning—testimony, perhaps, to just how cash-strapped many people are feeling.
Always one to be ahead of trends, I’m proud to say I’ve been savvy (and broke) enough to have Homaded all my adult life. This has, for the most part, been a delightful experience. But as I’ve discovered through many years of trial and error, there are some crucial do’s and don’ts. Observing them enables a cheap and rewarding getaway, ignoring them portends disaster. So for those less practised in the art of Homad, here are my top rules of engagement. For anyone considering a Homad (or indeed wondering where previous attempts went wrong), this might just be essential summer reading.
(Of course this guide is by no means exhaustive, so do add you own tips to the comments below. And to any Mums and Dads with advice on how to survive a holiday with their cherished progeny.. we’d love to hear from you too.)
Leo Hornak
Is it too late for thrift?
In this month’s Prospect podcast (also available on the right of this page), our resident philosopher Nigel Warburton examines the ambiguous role of thrift in defining the good life. As Warburton argues, the idea of thrift “hangs awkwardly between profligacy and miserliness,” making it one of the few virtues best practiced in moderation.
Distinguishing an appropriate levels of thrift is something our society still struggles with. In our handling of the environment and use of natural resources, we have surely been guilty of profligacy. At the same time, our treatment of the most vulnerable is often miserly in the extreme.
As we attempt to recover from an era of economic extravagance, is an instinct for thrift something we now need to cultivate? Or is it already too late: is our only hope now to spend our way out of recession?
You can subscribe to the podcast by clicking on the RSS link on the right of this page, or via itunes. As ever, let us know your thoughts in the comments below.
Tom Chatfield
The worst kind of stimulus: Foreign Policy magazine’s Travis Sharp on why military spending is not the way out of a recession.
James Crabtree
To discover what comes next, says Geoff Mulgan in this month’s cover story, “After Capitalism”, maybe we should look upwards? Mulgan explains how skylines have long provided a simple test of what a society values: “a few centuries ago the greatest buildings in the world’s cities were forts, churches and temples; then for a time they became palaces. Briefly in the 19th century civic buildings, railway stations and museums overshadowed them. And then in the late 20th century everywhere they were banks.”
In what is one of the most fascinating big picture commentaries on the current crisis published in the UK, Mulgan then goes through the causes of the current moment. More importantly, he shows how the seemingly permanent edificie of contemporary market capitalism in its longer context, and asks what might come beyond it. Only a few decades ago this quesion, he points out, was common—with everything from managerialism and communism both mooted as realistic successors. Now we’ve got out of the habit of predicting such big changes; something Mulgan wants us to re-learn. And in an eclectic range of indicators—from worker cooperatives to urban greening projects—he thinks some of that future, in which markets will be tamed. might already be with us. And looking up to the skyline? As Mulgan concludes: it might be “great leisure palaces and sports stadiums; universities and art galleries; water towers and hanging gardens; or perhaps biotech empires?” As ever, let us know your own opinions below.
James Crabtree
Oh, right, so this is how it happened
The clever people at Flowing Data give us 27 visualisations of the financial crisis. This is oddly reminiscent of the post I put up here just a few weeks back from the great, and extremely clever, Jeff Frankel. Thing is, while a real mind on matters of international macroeconomics—and, it must be said, an entertainingly caustic critic of Bush-era fiscal profligacy—Frankel can’t draw for toffee. These guys, on the other hand, can.
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