Friday, 22 May 2009

Are We Seeing Green Shoots?

Life has kept me busy over the past couple of months, but I have still been watching for news that gives an idea of how the economy is doing. In March, we were concerned that unemployment may actually reach 3 million by the end of the year (see post). It now appears that our worst fears might have been misgiven.

After a rise in unemployment of 138,400 in February, unemployment has increased by 62,900 in March (see report) and by 57,100 in April (see report). This would indicate that the pace of the increase in unemployment is slowing. If the pace continues at an increase of 60,000 per month, then unemployment will reach 2.75 million by December. Each one of these statistics is a tragedy in itself, but not quite as bad as the doomsters have been forecasting.

There is a possibility, however, that we shall witness a 'double dip' recession. If so, then we may be currently experiencing that false recovery after the first recessionary impact. If this is the case, then the pace of the increase in unemployment may accelerate over the summer. Let us hope that this is not so.

We also ought not to assume that recovery, when it comes, will entail an uptick in employment. It is entirely possible that we could experience a 'jobless recovery', where business improves, but fewer new staff are taken on. To a certain extent, we ought to porepare for this if there presently is a great deal of slack in the economy - 'hidden unemployment' within organisations.

Let us hope that we are witnessing the start of the full recovery. That is certainly what the financial markets seem to be saying.

Monday, 18 May 2009

Expanding The Public Sector

All across the world Governments are rapidly expanding their Public Sectors in the name of ‘Fiscal Stimulus’. Some of this expansion is through ‘automatic stabilisers’ (falling tax receipts and rising welfare payments as the economy shrinks), and some of this expansion is through ‘discretionary measures’ (roads, infrastructure, selective tax cuts, and so on). The key difference between the North American economies and the European economies is that the North American economies have a predisposition for discretionary measures whilst the European economies have a predisposition for automatic stabilisers.

Some figures might help to show the case. The IMF estimates the discretionary measures of the following nations - as a percentage of GDP - to be: USA 1.6%, Germany 1.1%, France 0.4%, UK 0.5%. On this basis, Germany is the only European nation that seems to be making an attempt at stimulating demand. However, when we add in the value of the automatic stabilisers to the discretionary measures – again, according to the IMF and as a percentage of GDP – the situation takes on a different colour: USA 3.2%, Germany 2.7%, France 2.8%. UK 3.0%. It would appear that there has been a more balanced approach to the fiscal stimulus when the automatic stabilisers are included with the discretionary measures.

Generally speaking, the fiscal stimulus has been financed by debt. The PSBR, right across the global economy, is set to expand well into the next decade. It is this expansion that brings to our attention, as futurists, the long term impact of an expanded Public Sector. Automatic stabilisers are just that – automatic. As trading conditions improve, so tax receipts will increase and welfare payments fall, thus easing the pressure on the PSBR. The discretionary measures are a different case all together.

The experience of Post War economies suggests that discretionary measures are quite asymmetrical. The political process finds it easy to vote them in, but very difficult to vote them out. This is, in part, because the nature of the expenditures changes. They normally start out as a single, discrete, expense item; but generally turn into a recurring continuous expense item. Roads and bridges invariably need upkeep, maintenance, and replacement. Hospitals need staff and equipment, and so on. Scaling back discretionary measures has proven to be very difficult in the past, and there is no reason to suggest that it would be any less so in the future, which implies that an expanded Public Sector should be with us well into the next decade.

If we think in terms of institutional degenerates, then it seems quite obvious that the Private Sector degenerates into greed and excess. The Public Sector usually degenerates into waste and inefficiency. Waste and inefficiency can be quite well hidden. For example, a recent case of a school tackling counterfeit £1 coins came to our attention. A letter was sent to the school parents (see letter) informing them of the situation and outlining the remedial action to be taken. On the face of it, this is a good example of a public agency acting to protect the public purse. However, a different picture emerges on closer inspection. We estimate the staff time to implement the policy, including on-costs, to be just over £6,000 in a two week period.

Spending over £6,000 to save £100 is exactly the type of hidden inefficiencies that are likely to arise as the Public Sector expands. These will expand both in terms of amount and scope across all of the economies in the G20. If the Public Sector does continue to expand well into the next decade, and if it is difficult to scale back the discretionary measures, then a relatively large amount of waste and inefficiency will have accumulated by the year 2020. This being so, the political conditions would be right for the next Thatcher to attempt to eliminate that waste and to prune back the Public Sector. The pendulum will swing back again with the contraction of the Public Sector and the deregulation of the economy.

Much of long term futuring is looking to find those swings in the pendulum. Sometimes they appear just plain obvious.

© The European Futures Observatory 2009