Country ... UK
Economic dysfunction

James Meadway, NEF ... The worsening recession reveals chronic weakness

Burgess COMMENTARY
This is the comment I posted on this article:

I liked the article, but when I went to this article I expected something fairly profound, but in this was disappointed.

I agree with the conclusion that 'austerity isn't working' but there is far more than this that is not working. For some reason sensible people seem to expect government to do a lot more than it can to solve the chronic dysfunction of the modern economy ... the culprit, in my view is more the leadership in the business economy than it is with government, though government is complicit to a great degree.

There are fatal flaws in modern corporate law ... including that executives are expected in law to maximize the return to the shareholders, but the law does not say much about what the company should or should not do with respect to other stakeholders. Yes, there are laws to protect the environment, to have workplace safety, etc. but these are local and not global ... hence there is a race to the bottom to places where these things do not exist. Some executives argue that to do anything but 'race to the bottom' would be unlawful and a breach of their fiduciary duty.

I argue it is time for all major economic actors to do meaningful value accounting. There should be accounting that not only informs shareholders of the money profit performance of the organization, but also the social valuadd of the organization. Every place that is impacted by the activities of the organization should know what valuadd the organization has created in the place ... or more likely the value destruction.

Every economic activity has a purpose. Where the purpose results in money profit and value destruction, this should be 'on the record'. Organizations that do good valuadd work but don't make much money profit should be on the record as well. Investors should be able to choose what they want their investment money to be doing ... not only making money profit, but also creating valuadd.

Accountants and auditors need to rethink their purpose and place in the economic ecosystem. They should reform themselves so that their work embraces not only what is needed for a business organization to comply with money profit reporting requirements but also what is needed by communities and by society at large.

Is this easy? No ... but it is important, and it can be done.

If we can build a mobile telephone system that works almost everywhere on the planet, surely we should be able to do some basic upgraded accountancy that works everywhere on the planet!

Peter Burgess @truevaluemetric

The worsening recession reveals chronic weakness

Underlying problems with the UK economy are to blame for the ongoing downturn, regardless of what George Osborne might claim otherwise.

Figures for economic output, published today by National Statistics, show the UK contracting at a far faster rate than anticipated. Between April and June, the government statisticians think the whole economy shrunk by 0.7%. Compared to this time last year, it is 0.8% smaller than it was.

This double-dip recession is the worst for fifty years. The economy is recovering more slowly after the 2008 crash than it did from the Great Depression of the 1930s.

George Osborne is already attempting to pin the blame on the eurozone. There’s no doubt that continuing turmoil in the UK’s biggest trading partner will have an impact, and the eurozone economy as a whole is contracting. That’s before the possible effects of a Greek (or other) exit from the currency block, and the financial bedlam it would bring – not least into the UK’s bloated, over-exposed financial sector, of which more later.

But his familiar excuses don't add up. Exports in general have grown in the last two years, helped along by an approximately 30% decline in the value of the pound. Exports to the eurozone in particular have, it’s true, declined in the last few months, but they remain higher than they were in 2010.

In the first instance, causes of the depression – since that is what we are in – are domestic. Consumer spending has fallen by more than in any previous post-war recession. Investment spending – never high – has fallen by some £40bn since 2008. If households and firms aren’t spending, it means others aren’t earning. The economy starts to slide.

Both of these factors can be traced back to underlying weaknesses in the economy, which in the UK’s case have taken the form of a peculiar dependence on credit and debt: first to drive the apparent “boom”, and second to drive the bust. But public spending is directly under the Coalition’s command. George Osborne’s austerity programme is driving the economy backwards, just as surely as it is across Europe. Take construction: the sector is in freefall, orders collapsing – including those from the government, which has cancelled its own building programmes and sharply pulled back on capital spending.

Assuming they still write economics textbooks in the future – if the whole profession hasn’t fallen into such disgrace that they still bother printing the things – he deserves his own special entry, as a warning to others. When you’re in a recession, the worst possible policy to follow is the one Osborne and the Coalition have now clung to for two years, in defiance of history, economics, and even, in the end, simple common sense. Austerity is counterproductive.

Reversing course would immediately help. But the UK’s problems lie deeper. Dig into the figures, and beneath headline number you find that only two parts of the private sector were growing over the last quarter: utilities, fuelled by rising prices, and “business services and finance”. In other words, as the recession worsens – aided by austerity – the chronic weaknesses of the economy are worsening with it. We are becoming more, not less, dependent on finance and spending more, not less, on energy. Osborne’s “march of the makers” is a joke in poor taste, with manufacturing output declining 1.4% over the quarter.

Breaking the decline starts with ending austerity. But it has also to include a fundamental effort to improve energy efficiency, and the provision of sustainable, decent work. That would mean a plan to transform the economy – shrinking finance, investing in green infrastructure, creating jobs.

Reboot for a new economy

Austerity isn't working.

It's time for a new economic response that:

• - Radically transforms the financial sector
• - Restarts productive economic activity
• - Refocuses and rebalances our economy
• - Overhauls the tax system