Thursday, May 07, 2009

Growth and trade

When I was first getting interested in politics, one of the most frequently referred to statistics used as a measure of Britain's economic health was the Balance Of Trade. I don't know when this stopped being important to commentators - or why - but it is something you rarely hear of these days. I suspect the main reason for that is because it long ceased to be a surplus and we've been running a trade deficit for years.

Similarly, one of the least referred to figures was the level of the FTSE. It was heavily covered in the FT, but outside of that there was little reference to it unless something critical happened - a big gain or substantial fall. The reason was simple - few people actually owned shares, so few people actually cared one way or the other. The stock market is not a measure of economic health - just a barometer of economic confidence which, most of the time, ticks along at cautious optimism.

The third measure I want to refer to is GDP and growth. Again, this didn't really get a lot of coverage when I first started showing an interest in politics and it still doesn't today. What does get a lot of coverage, though is growth relative to GDP.

The assumption is that as long as we have growth we are doing alright - but I don't think it is as simple as that. The reason why is the first measure I talked about - balance of trade.

A trade deficit is hidden inflation. Over the past 15 years or so we have managed to disguise that thanks to rising house prices and easy availability of credit. Our GDP (income) managed to grow at 1 or 1.5% per year, but every year that was wiped out and more by a trade deficit of 3, 4 or 5% of GDP.

Think of it this way. Imagine that GDP is your income and the balance of trade is inflation. Each year you get a pay rise - say 2% - but the inflation rate is 5%. Are you better off? Of course you're not - your wealth has fallen 3% relative to inflation.

The misguided belief of this government was that we could compensate for this through "services" - financial services in particular - but even then our trade deficit continued to grow. It was this desperate need of the government to grow these services that led to the banking crisis. Services are also what they say they are - a service - which, as the name suggests, means that they are a support structure to the principle economy - manufacturing and production.

Another fallacy was that we could become a "knowledge based" economy - but with sharply declining education standards and an equally fast rise in education in developing countries this was never going to be enough. Sure, more people went to work in the service economy - but not at the high end. There is roughly the same proportion of people working as servants today as there were in 1860 and the fastest growing job in the nineties was hairdressing!

There is only one way to redress this and that is to improve our balance of trade so that it is either in surplus or running a deficit which is lower than growth. Only then will we really see a sustainable economy and real improvements in living standards (not based on debt).

And the only way I can see us doing that is through protectionism.


TheFatBigot said...

I wouldn't dismiss services so readily, Mr Stan. Many of them are nett benefits in the balance of trade.

As with manufacturing, whether any service remains a nett benefit in the long run depends on competition from overseas. Insurance, accountancy and law have been long-term nett benefits and show every sign of remaining so.

Whether it be services or manufacturing, the balance of trade is all about us having something to sell that people overseas are prepared to buy. Therein lies the curse of our pitiful state education system. Dumbing down the bright and giving false hope to the not bright gives us the worst of all possible worlds.

Stan said...

I'm not being dismissive of services. FB - just trying to point out that the belief that we can rely on them is misguided.

This over reliance on services - particularly financial services - is one reason why the banks became so ...... creative and why the government allowed them to be.

Services are a vital part of a modern economy, but they are still supplemental to industry and manufacturing.