Friday, 23 January 2009

Getting poorer isn't fun

Today's confirmation of two consecutive quarters of shrinkage tells us what we have known for a while, the UK economy is "officially" in recession. A peculiar quirk of this recession is that it comes at a time when we are being called upon to scale-down our industrial activity in order to be nice to the Great Barrier Reef. When the greenies call for a halt to industrialisation they are portrayed by our friends at the BBC as warm and cuddly people who have the best interests of polar bears at heart. With any luck the effects of recession will illustrate that they about as warm and cuddly as seals find polar bears to be.

You see, what we are witnessing is the way a modest fall in national wealth operates in practice. The fall so far has been around two percent, the equivalent of someone taking a pay cut from £500 a week to £490. Looked at in that way it doesn't seem a big deal. Of course no one wants to lose £10 a week, but it's only a couple of packets of cigarettes. Except that it isn't, because it does not apply equally to everyone. Some businesses always do very well during a recession, most suffer a little and some fold. Those employed in the first category find it difficult to see what all the fuss is about, those in the second grumble and those in the third face great problems. Losers outnumber winner by a very substantial margin. So it will undoubtedly be if the eco-fanatics get their way.

All the figures ever promulgated about the effect of cutting-back carbon dioxide emissions are little more than wild guesses, but they are relied upon by those calling for reductions so I will humour them and assume they might be right. The most modest effect a substantial cut in CO2 emissions is claimed to have on UK economic activity is about two percent of GDP. By happy or, perhaps more accurately, miserable coincidence that is roughly the fall in GDP over the last few months. You can't just take current soaring unemployment figures and say that is what every cut of two percent in GDP will cause because the particular circumstances of each downturn are different. Some hit labour-intensive businesses hard while others primarily affect areas in which relatively few people are employed.

That is what is so worrying about calls to scale-back industrial activity. Generally speaking the industries concerned are quite labour-intensive and, therefore, we can expect any reduction in scale to cost large numbers of jobs currently held by people earning below national average wages and living in areas where those particular industries employ a significant proportion of the population. This was one of the difficulties with the closure of loss-making nationalised industries in the 1980s. I have no doubt there was no other practical option because it was necessary both to staunch the financial losses and to break the power of the trade union barons. As always, it is the little man who suffers and even now, almost thirty years later, some towns built on established heavy industry have not been able to attract alternative employers in sufficient number to provide widespread employment to those at the lower end of skill and academic achievement.

Where there is a major problem it often takes harsh measures to solve it and without exception the weakest members of society (in this context those with the least marketable skills) suffer most from those measures. That is why it is so important to be clear that there is a major problem and that the harsh measures proposed are the best solution. This reasoning should lie behind all major structural changes proposed to a developed economy. Just how serious is the problem? Is the proposed cure going to have a downside? If so, can we be sure the cure will in fact be a cure? If so, is the downside a price worth paying or will it create another problem larger than the one it seeks to solve?

The economic problem causing the current recession is that the amount of credit in the economy is unsustainable and must be reduced. Necessarily the cure must involve reducing day-to-day spending in order to repay that part of total credit that cannot be afforded. That is not to say that credit has no part to play in a successful economy, it is just that the amount of credit that is healthy has a natural ceiling for a whole national economy as for a household. If you will benefit from having a car you must balance the benefit you will receive against the cost. You might go without until you have saved enough or you might choose to buy a car now with the help of a three, four or five-year loan. If you choose to have a vehicle now you must look at how much you can afford to spend each month in repaying the loan. It is the same for businesses seeking to buy new plant and equipment. What is their likely income and what return will the new stuff provide? How does that compare to not having a car until you have saved the money or not buying the new plant?

Once there is systemic overborrowing the only solution is to cut back on other expenditure and repay loans faster so that ongoing interest charges are again affordable. The problem is identifiable because it hits you in the pocket and the solution is not only painful for you but has a knock-on effect as you repay an extra £50 a month to reduce the outstanding capital on the loan rather than paying that £50 to the local pub and curry house. The publican and restaurant owner then suffer a loss of income requiring them to cut back which causes a reduction in income for the businesses they no longer frequent and so it goes on until your expenditure is once again affordable. Once you have reduced the capital outstanding by a sufficient sum you might reduce further additional payments to £20 a month and return to the Dog and Duck or the Bulimia Balti Shack with £30 to spend. Then things start to pick up for those businesses and their owners and employees are, in turn, able to increase their spending towards previous levels and before you know it everything is back on track. But it is only back on track because there was a serious proven problem and a solution that was guaranteed to work.

If we look at that same situation from a different angle, we could pop into the Dog and Duck during the good times and ask Mr Ordinary what would cause him to forgo his £50 a month spending on Old Git Ale and chicken vindaloo. No doubt his answer would be "if I can't afford it anymore" and he would be absolutely correct. That expenditure has become part of his normal lifestyle and something to which he feels entitled because he believes he can afford it. It would take strong evidence to persuade him he cannot afford it. Such evidence might come in the form of losing his job or a substantial increase in interest charges on his credit card debts or mortgage. On the happening of those events he would reduce his expenditure because he would have to but in the absence of clear evidence we could expect to see him carrying on as before. And one thing that is undeniably true about cutting back on the quality of life in order to match the thickness of your wallet is that you never forget how much fun it was in the old days at the Dog and Duck. You walk past an Indian restaurant and smell the aroma wafting from the kitchen, your brain does not say "that smells interesting, I wonder what it tastes like" it says "I could murder a rogan josh". Once you have tasted the good things in life you never forget them and you long for their return.

Claims that we must cut back on industrial activity mean nothing unless people have a way of measuring what that will actually mean to them. We can all agree a plan to cut back the consumption of braised kangaroo testicles because very few of us are likely to suffer from that measure. We can all agree to cutting carbon dioxide emissions if we think it will not affect us. Once it is shown that it will affect us and will lead to a reduction of so-many percent of GDP (emissions I mean, not kangaroo testicles), we can still agree to it if we have no comprehension of what a contraction of GDP means in practice. Now that contracting GDP (at the very lowest level called for by the greenies) is upon us we can see the real effect of it. It takes away what people have experienced and what became their settled way of life. It causes real pain for a great many. For some that pain will remain for the rest of their lives because they will not find another job and will live far below the level they once enjoyed.

Perhaps I hope for too much, but I hope the current recession will cause people to ask questions across the whole range of the global warming / climate change issue. As my regular reader will know, I find it utterly incredible that a man-made increase in a gas that forms a tiny proportion of the atmosphere might become the overwhelming driving force of the world's climate. I am not a scientist, I am just a moderately well educated observer with (though I say so myself) an astute sense of smell, particularly when the prevailing aroma is bovine faeces. Others do not share my view of the quasi-science behind the great global warming scam and might never accept it, yet they will be in the line of fire as and when de-industrialisation cuts into GDP. Few under the age of about forty will have experience of the effect of falling GDP until now. We old farts have seen it a number of times, we know it is to be avoided if at all possible. Two generations are experiencing it for the first time and, no doubt, will be horrified by the experience whether they are among the most unlucky victims or just observers.

To volunteer for a reduction of GDP of a minimum of two percent and no maximum is a bold step. I hope some will now question the need for that step by questioning the quasi-science. I hope some will question whether that step need be taken even if the quasi-science is accepted. You see, there is a major difference between an economic recession (with an identifiable cause and an identifiable solution) and a voluntary reduction of GDP to achieve a physical result on the climate. We know that eliminating the cause of the economic recession will put an end to that recession. There is no guesswork or projection involved, it has been seen time and time again around the world and amounts to proof. We can never know that a voluntary recession in the cause of climate control will bring about a change in the climate. No one can say what effect de-industralisation to the extent of a two percent reduction in GDP will have on the climate, if any. No one can say that a further purge resulting in a further drop of GDP will have a certain effect nor whether any effect will be beneficial nor whether any benefit will outweigh the supposed detriment of not volunteering for the recession in the first place. And then there is the most important question - will the potential benefit justify the pain? People around the world will be better placed to value that pain over the next year or so. They will also be better placed to see that the pain will not be spread evenly but will affect those at the bottom of the pile far more than those in the middle and those at the top.

Hard times teach hard truths.

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