Thursday, December 16, 2010

All About Industrial Policy: Part 1 - Why?

I'm very glad that Labour has supposedly "lurched to the left" and decided to embrace industrial intervention. It's something I've been in favour of for a long time. thought I'd devote a series of posts to the subject detailing exactly why I think this is a good idea and how it should be done.

For my first post, I'm going to deal with why I think we need to embark upon a policy of industrial intervention, this is for two reasons, balance of trade and unemployment.

Trade Imbalances
The need to address the balance of trade has been discussed at length since the crash, usually with reference to "global imbalances". Essentially China has been making exporting like crazy and has built up excessive savings,meanwhile in the UK, the US and Europe we've been spending like crazy. This has meant that the UK has had to "import capital".

Importing capital is a worrying prospect because those providing this capital will want to see their a return on their investment. The result is that we are essentially building up a stock of IOU's that we will eventually have to pay back. Some people like Warren Mosler don't think this is a problem that if we can't pay these IOU's than that's our creditor's tough luck, maybe, but to me it seems problematic. First, doesn't seem morally right to let a situation build up where a country goes on a debt binge and then tells it's creditors to go hang, second, there are still implications for economic coordination and economic stability from doing this (I'll try to cover this in a future post).

I don't think the UK needs to switch from being a net importer to a net exported but I do think that we need to aim to keep the trade deficit below around 2% as part of a contribution to a more stable, balanced world economy.

To demonstrate my point here, I'm going to take us back to 2007 before things started to go wrong. The conventional view of 2007 is that it was a prosperous year for the economy, the height of the (what turned out to be unsustainable) boom. We now know that this prosperity was largely an illusion but even ignoring future events there were still serious problems with the British economy.

Firstly, it's worth pointing out that when broken down by region the pricture looked less rosy. Firstly, while the overall unemployment statistics looked good, some regions did a lot worse than than others, these regions were also quite dependent on the public sector for jobs. Second, unemployment was far worse among the males than females, the reasonably low level of female unemployment masks a higher level of of male unemployment. Worst of all was youth unemployment rate of 14.4%.

A youth unemployment rate of 14.4% is unacceptable at any time. The fact that this rate occured at the height of a boom strikes me as a sign that something was quite seriously wrong with the economy, a sign that the status quo wasn't, and indeed isn't working.

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