DABERIAM LXXII

November 2012

Yesterday I listened to a fascinating presentation by John Kay to the Economic Research Council, outlining his recommendations on reform of the City of London. John’s analytical mind and indeed his articles in the Financial times are always a “must read”. One despairs, however, as it is unlikely that much attention will be paid to Kay or the earlier Vickers Report. Both pointed out the problem that when regulators get involved in markets, they inevitably cause distortion and change behaviour. This also leads to a reliance on the detail of regulation to control behaviour rather than a reliance on personal integrity and trust. I mentioned last month the worry that the UK and European governments are failing to roll back state intervention, which is creating enormously expensive and inefficient bureaucracies that beset commercial activity. Some of my friends chastised me for being gloomy last month and indeed it is a gloomy prospect. The Old World with its over-taxing governments is going to take a long time to recover.

Sadly, Britain is in an even worse state than many of our northern European neighbours. John Kay reminds us in an excellent article this morning in the Financial Times that the Roskill Commission in 1968 made recommendations for a new airport and estimated air traffic through London would be one hundred million by the end of the century; a remarkably good estimate when the outcome was 115 million. Technology and modern aircraft have enabled this increase in numbers to take place without the building of proper facilities. We are now Third World compared with Singapore, Korea and China etc. To quote Kay’s summary of Roskill’s observation - the hundred thousand people aversely affected by a rational policy are encouraged to shout far louder than the hundred million who would benefit, not to mention the economy as a whole – and there is still no resolution to this problem in sight.

Leaving aside Europe, the good news is that we are through the American elections and leaving politics aside, it is probably a good thing to have a President who has had four years of experience in the Oval Office and is ready to address the economic problems in the US. The election uncertainty has been an enormous drag on the decision making of US business. There is likely to be two months of hiatus while the over-hyped fiscal cliff is discovered to be a molehill. The US recovery in the housing sector added to the expenditure required to rebuild the devastation of Hurricane Sandy will now be followed by the release of pending capital expenditure decisions and employment plans of US industry.

A similar release of economic energy is also highly likely to take place in China following the formal announcements very soon of the new Premier and, as importantly, the list of names that will make up the Central Committee. If there are no surprises, then there will be a release of all the decisions that have been made that are on hold. This will have a dramatic effect on the economic outlook and people will get back to business.

Pacific Rim countries, that went through their own economic crisis at the end of the ‘90s and taken the medicine dished out by the IMF governments, avoid debt and basically balance their books. There is now steady economic growth and over the last 10 to 15 years governments have learned to keep their budgets under control.

Next year should prove to be one of considerable growth in the Pacific and the US. It is only hoped that Europe will hold together politically for long enough to benefit. The greatest worry is that the huge percentage of unemployed in the population of southern Europe will precipitate a major political crisis and will stall any economic resolution of the EU muddle.