New Civil Engineer: 23 October 2008
Chancellor Alistair Darling has vowed to boost the UK economy with increased spending on the public realm. At last he seems to understand the value of decent modern infrastructure, says NCE editor Antony Oliver.
As I wrote in this column just after the banking crisis started to emerge at the end of September "investment in quality, tangible infrastructure can and must be the driver for economic recovery".
One month, several bank collapses and a £37bn public cash injection later, I am pleased to see that Chancellor Alistair Darling at last agrees and has vowed to use public investment in public infrastructure to drive the UK's economic recovery.
"You will see us switching our spending priorities to areas that make a difference," he said, highlighting that areas he thought would make that difference included Crossrail, the 2012 Olympics, power stations and transport projects.
His list was not in fact dissimilar from that published by NCE last week.
This is all, without question, very good news for the industry. We must now wait of course for the flesh to be put on the bones. But by all accounts, now Gordon Brown's 40% of GDP public debt barrier has been passed and parked, the forthcoming pre-Budget report should demonstrate that the government has finally twigged the long term value of decent modern infrastructure.
Darling's reference to and belief in Keynesian economic theory is crucial. When economist John Maynard Keynes proposed the theory of budget deficit-backed state spending as a solution to the economic downturn of the 1930s we did, there was indeed a raft of railway legislation and construction that followed – witness the huge expansion in the London Underground at the time as one example.
Darling's comment must surely therefore once again reinforce civil engineering's place as a fundamental part of the UK's future growth plans. Fundamental, as new business secretary Lord Mandelson described it this week, to the "new approach to business growth".
We have to believe it. We have to champion it. Decent modern transport, energy and water infrastructure are the backbone of the nation's economic prosperity.
And while banking and financial services are vitally important of course, they have been shown as simply a mechanism - not a substitute - for allowing the so-called "real" economy to grow.
As a profession we have to use this difficult moment in economic history to our advantage. We have to absolutely hammer home to politicians that civil engineers must now be at the heart of policy making. We have to reinforce ourselves as the solution and work with the new willing listeners in Whitehall to build the nation out of recession.
As I said last week, the future will be all about relationships and using them to deliver more for less. So when handed the keys to Crossrail, rail investment, renewable and nuclear power supply investment we must make absolutely sure we can deliver ahead of time and under-budget.
But with this firmly in mind, now is the time for us to grab the ball thrown to us by Darling and run as hard as we can. For as long as we can.
Man in the News: John Maynard Keynes
Financial Times: October 17 2008
By Ed Crooks
Man in the News: JM Keynes
“We have reached a critical point,” John Maynard Keynes wrote in March 1933. “We can ... see clearly the gulf to which our present path is leading.” If governments did not take action, “we must expect the progressive breakdown of the existing structure of contract and instruments of indebtedness, accompanied by the utter discredit of orthodox leadership in finance and government, with what ultimate outcome we cannot predict.”
As the world reels from a 1929-style stock market plunge and a 1931-style banking crisis, his words are a fair assessment of the dangers we face once again. Keynes, whose life’s mission was to save capitalism from itself, is more relevant than at any time since his death in 1946.
His renewed influence can be seen everywhere: in Barack Obama’s planned stimulus package, for example. When George W. Bush said his administration’s plan to take equity in banks was “not intended to take over the free market, but to preserve it”, he could have been quoting Keynes directly.
The key to Keynes was his commitment to preserving the market economy by making it work. He was dismissive of Marxism but believed the market economy could survive only if it earned the support of the public by raising living standards.
The role of the economist, he believed, was to be the guardian of “the possibility of civilisation”, and no economist has ever been more suited for that role.
Lionel Robbins, later head of the London School of Economics, described Keynes as “one of the most remarkable men that have ever lived,” surpassed in his time only by Winston Churchill. Even Friedrich Hayek, Keynes’ staunchest adversary, described him as “the one really great man I ever knew, and for whom I had unbounded admiration”.
His optimistic, positive thought reflected his comfortable and happy upbringing and career. An academic’s son, he won scholarships to Eton and Cambridge and fell in with the Bloomsbury Group, the circle of writers and artists such as Virginia Woolf and Lytton Strachey who embodied an ideal of cultured living.
He was an imposing figure, six feet, six inches tall and full of jokes, gossip and sharp observations. Alongside economics, he had an array of other interests as mathematician, administrator, academic, investor, journalist, art collector, politician, impresario and diplomat. He was even an exemplary husband, devoted to his wife, Lydia Lopokova, a ballerina. In his language he could be carelessly provocative. But, as he said: “Words ought to be a little wild, for they are the assaults of thoughts on the unthinking.”
When bad policies were making economic problems worse, he felt a moral obligation to change them. He worked with distinction at the Treasury during the first world war and at the war’s end argued presciently against the imposition of excessively harsh conditions on Germany. When his advice was ignored, he left and published his views in his first great polemic, The Economic Consequences of the Peace .
Returning to Cambridge, Keynes kept up a flow of books and articles, including The Economic Consequences of Mr Churchill, savaging Britain’s return to the gold standard in 1925. It was not until the Great Depression, however, that his ideas reached their full flowering, published as The General Theory of Employment, Interest and Money in 1936.
The heart of the book is the idea that economic downturns are not necessarily self-correcting. Classical economics held that business cycles were unavoidable and that peaks and troughs would pass. Keynes contended that in certain circumstances economies could get stuck. If individuals and businesses try to save more, they will cut the incomes of other individuals and businesses, which will in turn cut their spending. The result can be a downward spiral that will not turn up again without outside intervention.
That is where government comes in: to pump money back into the economy by some means, such as spending on public works, to persuade individuals and businesses to save less and spend more themselves.
Keynes wrote to George Bernard Shaw that he expected the General Theory to “largely revolutionise ... the way the world thinks about economic problems”, and so it proved. Economists such as Paul Samuelson and James Tobin systematised Keynes’ ideas, using them as the foundations of what became orthodox thought and economic policy for more than two decades after the second world war.
The cover of Time magazine in December 1965 quoted Milton Friedman saying: “We are all Keynesians now.” Friedman later said he had been misrepresented by selective quotation, but the point held good. Charles L. Schultze, then US budget director, felt able to tell Time: “We can’t prevent every little wiggle in the economic cycle, but we now can prevent a major slide.”
By the time Richard Nixon borrowed Friedman’s line in 1971, however, the tide was already beginning to turn. Like a share tip from a lift boy, Nixon’s endorsement was a sign that Keynes’ intellectual stock was about to fall. Keynesian economics seemed as inadequate in the 1970s stagflation as classical economics had been for the 1930s depression, and Friedman’s monetarism eclipsed it among policy-makers in the US and Britain.
After crude applications of monetarism also foundered in the 1980s, modern macroeconomic orthodoxy blended ideas from both, reflecting a belief in the ability of monetary and fiscal policy to affect employment and growth, but also concern for inflation and budget deficits.
As the financial crisis has deepened, that orthodoxy has been shaken. The problems Keynes faced in the 1930s, such as the ineffectiveness of monetary policy and banking failures triggered by falling asset prices, again seem the most pressing. Keynes’ solutions, including greater public spending funded by borrowing, are becoming popular. The criticisms that this will fuel inflation and raise budget deficits are still heard but are increasingly seen as irrelevant.
Robert Skidelsky writes at the end of his definitive three-volume biography that Keynes’ ideas “will live so long as the world has need of them”. It certainly seems to need them now. Keynes was scathing about the view that the Great Depression was a return to normality, a necessary correction after the unsustainable excesses of the 1920s. On the contrary, he argued, the economic expansion should be seen as the normal state of affairs and the downturn was an “extraordinary imbecility”.
With the right policies, he said, the good times could be brought back. He was right then; we must hope he will be right again.
Brown's triumph over Brown
Guardian Comment is Free: October 22 2008
Scotland will not thank the prime minister for his efforts to 'save' its banking system
In 1975 two books came from the Scottish universities. The Red Paper on Scotland would establish the radical reputation of the student rector of Edinburgh, Gordon Brown; The Crime Industry by the Glasgow sociologist John Mack and his German co-author, Hans Juergen Kerner, would remain for specialists, with its argument that computers, tax havens and globalisation would blur the line between tough business practice and outright crime.
Thirty years later, little remained of Brown's radicalism, but the Mack-Kerner thesis bobbed, iceberg-like, ahead of his economy, powered not by industry but by the speculation of the United Kingdom of London.
"Light-touch regulation" stemmed from the Big Bang of 1986, codified by Brown's "liberation" of the Bank of England in 1997. From it followed the noughties boom in the City. This was driven by American investment bankers, "Sarbanes-Oxley refugees" on the loose from a Wall Street increasingly regulated after the Enron fraud. They were able to operate unchecked by competing British regulators who rarely got their acts together.
Investment banking shifted from handling the financing of industrial concerns to trading in "derivatives" and "instruments". Translated, this meant bundles of capital, some legitimate, some which had been inflated by loans to people who could never pay them off. Much of the last sort of finance had murky origins in the $1.3 trillion (and counting) returns of international crime. Bernard Shaw in Mrs Warren's Profession talked of the Church of England living on the profits of Mrs Warren's brothels. Brown was roughly in the same position, and for years he did little to remedy matters.
In his study of money-laundering, The Washing Machine, Nick Kochan wrote:
"London increasingly looks like an offshore centre serving many dubious financiers while at the same time claiming to have regulations which put it among the world's top onshore jurisdictions …"
Government has failed to invest in sufficient skilled law enforcement officers or regulators to curb its sprawling financial system. But this is no accident. The UK's economy cannot afford to curb its income from the "invisible" financial sector while its industrial sector becomes anorexic.
The Tories haven't dissented, much of their funding coming from treasurer Michael Ashcroft's Belize ventures and various spread-betting wheezes. Nice Mr Cameron has been the PR front man of fringe finance, no more than that. The winners have long cleared off to their tax havens. Look at the City matadors of the late Thatcher or Major age. Where are they now? Nowhere near the place.
This was a culture in which fortunes were made selling packets of securities that only one or two nerds in a big bank could actually analyse. While the boom continued, happiness; when it failed – when actual houses in Phoenix or Greater Chicago couldn't be afforded and ground their 'owners' down – the derivative merchants clawed at one another in "shorting" the stocks of troubled firms.
In September 2006 the Observer's Bill Keegan, last of the Keynesians, wrote:
"All I can say is that at the World Bank/IMF annual meetings in Singapore last month, one needed several hands to count the number of people who were concerned about the possibility/probability of a great Regulatory Failure!"
A year later, Northern Rock broke. The remedy: state intervention. In autumn 2007 Chancellor Alistair Darling threw a sum of money at the Rock that would have bought over the entire British railway system. He and Brown were therefore relatively practised when Wall Street hit its own iceberg and first Bear Stearns and then Lehman went down. The anticipation of slump spread from property to the entire economy and "cut and run" pervaded the dealers, to whom property had become a burden. So Halifax, the UK got hit.
Brown thought he could do a deal with Lloyds TSB as Eric Daniels, its CEO (whose connections to Pinochet's Chile were as well-hidden as Brown's brother Andrew's position as chief PRO to Electricité de France, now owners of British Energy). But the City now tasted blood in the waters, like millions of potential house buyers in the suburbs who waited for their neighbour to drop the price of his place.
Result: UK investment banking followed its American counterpart into palliative care. Brown intervened with some aplomb, having nothing to lose. Further, by smashing the Scottish banking system, he might turn humiliation at the hands of the Scottish nationalists into a personal triumph. Alex Salmond needed his old employer, the Royal Bank, as an ersatz foreign office, powering his Economic Advisory Council under Sir George Mathewson.
So here we are in mid-October. Brown still fronts an economy in which only 14% comes from manufacturing, much lower than in Europe. Contributing little or nothing to renewable energy or sustainable transport, it is henceforth likely to contribute even less. Germany or France, with more invested in industry, and watching their market for Porsches, watches and cruise liners shrivel up, are still in the wings.
The whole thing might look – and the London press will make it look – like Scotland's second Darien disaster. But London's flawed financial elite stays in place – Stephen Hester, the new boss of RBS, is an iconic Tory Bourbon – and the condition of England has not improved. Industrial capital, however, remains powerful in Europe: the Norwegian oil fund, the manufacturing interests of the German regional banks. They must be appraising the offshore islands, matching decrepit infrastructure and disgraced management to energy potential.
Brown didn't take the Scots with him in his City commitments, and their banks were done down by a capitalism all too close to the Mack-Kerner model. His solution, "I value the Scottish banking tradition. I believe we can rebuild these banks' is shown up by Magnus Linklater's Times article as a lie: "They are now British, not Scottish, banks and their future strategy will be determined from the City of London, not Edinburgh." And the City whose credulity, greed and incompetence got us into this? After Brown's intervention, and in the light of his past policies, the Scots owe neither him nor the UK any loyalty – and the bank layoffs and surrounding depression haven't even begun.