Sunday, August 30, 2015
The world struggles when the trade winds don't blow
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

It has been a nasty scare, and it is not yet over. Though I think they are overstated, the doubts about China will persist. Though the sell-off appears to have reduced the ardour among central banks in America and Britain to raise rates – as was suggested in these pages last weekend – that bridge will still have to be crossed at some stage, and Mark Carney said at Jackson Hole yesterday that the rate decision will come into sharper focus around the turn of the year, an unchanged message.

Inevitably, there were fears that we were going back into a huge financial crisis. Larry Summers, the former US treasury secretary, helpfully tweeted that there were echoes of August 1997 (the start of the Asian financial crisis), August 2007 (the start of the global financial crisis) and August 2008 (just before the Lehman collapse).

If that was the equivalent of shouting fire in a crowded theatre, I thought a more sensible parallel was with August 2011. That was the month when the eurozone crisis escalated, America was downgraded following fraught debt ceiling negotiations in Washington and, by the by, riots broke out across England.

That sell-off did not presage a new global crisis and recession – most do not – but it ushered in a period of uncertainty and weaker growth, including a second recession in the space of four years in the eurozone, albeit one that was milder than the first.

It has been a while since markets have been quite so panicked as in recent days. Underpinning the uncertainty among investors, over and above Chinese growth worries, Greek exit fears and rate hike concerns, is the fear that something is not right about the global economy. The world was knocked off balance by the financial crisis and it is yet to recover its stability.

Sunday, August 23, 2015
QE or not QE? A slippery slope to breaking the Bank
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

It is more than six years since the Bank of England launched quantitative easing (QE) and more than three years since it last actively did any. But QE opened up a Pandora’s box, and it may be only now that we are seeing the consequences of that.

The Labour leadership candidate Jeremy Corbyn has talked of a “QE for the people”, in which the Bank would print money to pay for infrastructure and other projects. Some economists have picked up on an idea, “helicopter money”, originally attributed to Milton Friedman but floated again by Lord (Adair) Turner a couple of years ago, in which in the event of a downturn – or even in the absence of a downturn – the Bank would print money in an open-ended way to finance the budget defciit, and perhaps to hand out to households.

It was perhaps inevitable that a policy which appears to magically conjure up money out of thin air, which can then be used to boost the economy, risked being the first step on a slippery slope. The Bank, in my view, could and should have done more to prevent that from happening.

Let me elaborate, starting with a brief account of what the QE undertaken by the Bank QE is and what it was meant to achieve.

QE was launched in March 2009, the moment the MPC reduced official interest rates to an all-time low of 0.5%. That was when it launched its asset purchase programme (its name for QE); buying assets, overwhelmingly British government bonds – gilts – using newly created “money”. “Money” in this case means, not cash, but central bank reserves. The new “money” is not costless. Interest has to be paid, at Bank rate, on the reserves created.

Over a 10-month period in 2009-10, the Bank created £200bn of such reserves and used it to purchase £200bn of assets. This was not, as is often wrongly thought, part of the bank bailout programme. The assets were largely bought from pension funds and insurance companies, as well as foreign investors in gilts.

QE in 2009 was hard not to support. I certainly did. This was an emergency “all hands to the pumps” period, when the economy needed rescuing. The institutions which sold assets to the Bank used the proceeds to buy corporate bonds, equities (shares) and other assets. This ensured that businesses, particularly larger ones, could access capital markets to keep going, and fund growth.

Sunday, August 16, 2015
Productivity lift-off will keep pushing up pay
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

I did wonder if this was the week when, in the light of Corbynmania, and what appears to be the Labour party’s longest suicide vote in history, I should tackle Corbynomics. But, though a victory for Jeremy Corbyn in the Labour leadership contest is confidently predicted, I note that some of those making the predictions also assured us that Ed Miliband would now be prime minister. So I’ll hold off for now.

Fortunately, there’s plenty of other things going on. Greece is not yet out of the woods and China, as I discuss below, has grabbed the markets’ attention. We have also had some interesting job market numbers which, on the face of it, suggest the election came not a moment too soon for the Tories. Before it, employment growth in jobs was powering ahead and unemployment falling.

Since it, the figures show employment falling and, as every new bulletin told us, unemployment rising for two months in a row, something that has been as rare as hen’s teeth in recent years.

Worse, for a government committed to reducing immigration, most of the reporting of the figures suggested that the lion’s share of the new jobs is going to foreigners, particularly foreigners from the rest of the European Union.

A bit of clarification is in order. The labour market numbers can be confusing and as a result are prone to misreporting. The Office for National Statistics (ONS) takes three-month periods as its basis for the employment and unemployment numbers. The latest three-month period is April-June. The three-month period reported in July was March-May. The unemployment number for April-June, 1.852m was slightly lower than the 1.853m for March-May, not higher. Employment, 31.035m, was just over 50,000 up on the 30.982m figure reported for March-May; higher not lower.

Sunday, August 02, 2015
Another milestone on the road to normality
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

An economic recovery is all about barriers and milestones. It is a story of getting over the barriers and counting off the milestones as you pass them. Britain has just passed an important milestone. It is one which suggests that at the very least talk of a lost decade for the economy, which was once very common, was misplaced.

It is two years since gross domestic product (GDP), adjusted for inflation, surpassed the pre-crisis level achieved in early 2008 but is only now - or more accurately in the April-June quarter - that GDP per head has regained its earlier peak.

These milestones do move around. As GDP figures get revised, it is quite likely that both will be seen to have occurred earlier than the current numbers suggest. We should not expect miracles, however. The economy was left weak and groggy by the crisis and was always going to take time to get back on its feet.

The barriers to recovery in recent years – from outside Britain – have been several. High global oil and commodity prices gave us high inflation in 2011, intensifying the squeeze on real incomes, a factor that did not dissipate until about 18 months ago.

Sunday, July 26, 2015
Cuts: the big bad wolf's howl is worse than his bite
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

Sometimes I think that when George Osborne looks in the mirror each morning, he thinks: “Now how can I put the wind up the Labour party today?” Then, while holding that thought, he goes on to: “And how can I put the fear of God into people working in the public sector?”

A few days ago, the Treasury produced a 24-page document called ‘A country that lives within its means: Spending Review 2015’. Signed by the chancellor and his Treasury chief secretary, Greg Hands, this was not the spending review itself; that will not be published until November 25.

No, it was the Treasury’s opening gambit in the coming negotiations between it and the spending departments. Unlike in 2010, when the coalition’s first and most important spending review was a bit of the back of the envelope affair, the chancellor does not want to be accused this time of not following proper procedure.

Actually procedure has become a lot more formal during the time I have been following these things. There was a time when to extract from the Treasury, or more likely from disgruntled Whitehall departments, what the mandarins were demanding was gold dust. Now it is set out in black and white in an official document.

Osborne and Hands have asked “unprotected” departments to model two scenarios, of 25% and 40%, for real-terms reductions in their so-called resource budgets. Even in an official document, that is big news. The BBC led on it all day.

Does it mean, as some have suggested, that the Treasury is setting a target for cuts that can never be achieved? Does it mean an ideologically driven plan to shrink the state beyond recognition, so people have no choice but to use the private sector?

Sunday, July 19, 2015
Bank ponders a rate rise as job market changes gear
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

Things are getting rather interesting. In the past few days we have had what looks like a concerted attempt by the Bank of England to prepare people for an interest rate rise in the coming months, coupled with an equally explicit effort by Janet Yellen, chairwoman of the Federal Reserve Board, to say America’s rates will also soon be rising.

Mark Carney, the Bank of England governor, travelled up to Lincoln to tell the world that the decision on interest rates would move into sharper focus around the turn of the year, which most people interpreted as signalling the first rate rise since 2007 and the first move in any direction since 2009.

And yet, on the face of it, the numbers have been going against the idea of a rate rise, certainly in Britain. Inflation, having popped up to a heady 0.1% in May, subsided to zero in June. “Core” inflation dipped slightly and British Gas has announced the start of what might be a new round of energy price reductions with a 5% cut in gas prices. Though inflation will rise as we get towards the end of the year, it is not about to race away.

Even more tellingly, the latest job market figures were a lot softer - at least as far as employment and unemployment were concerned – than expected. Could the Bank, having held off from raising rates when jobs were booming possibly do so when employment is slipping and unemployment going up?

The answer is that it depends, and it depends on two things: whether the latest figures were a temporary blip and whether, if they were not, they signal a change of direction we should celebrate, or be worried about.

Saturday, July 18, 2015
Something Will Turn Up
Posted by David Smith at 03:45 PM
Category: Thoughts and responses

My new book, Something Will Turn Up, is about Britain's economy over recent decades, and into the future. This excerpt gives a flavour of where it and I started, in the industrial heartlands of the West Midlands.


I was born at 24 Coronation Avenue, County Bridge, Staffordshire. The address sounds almost rural. It was, however, part of a small estate just off the busy Walsall Road, which then carried most of the traffic between Walsall and Wolverhampton. It was in the heart of the industrial West Midlands, the Black Country, the towns neighbouring Birmingham whose prosperity was built on coal, iron and every type of metalworking and manufacturing. Our back garden sloped upwards to a small rockery and fence, beyond which the land sloped down again to a canal, the Bentley Canal, built to carry coal barges to feed furnaces.

The Black Country, described by Samuel Sidney in the 19th century as a place where no birds are seen, and “furnaces continually smoke, steam engines thud and hiss, and long chains clank” had changed by my childhood but not by that much. The throb, hum and thud of industry were all around. The Clean Air Act had passed into law but its effects were yet to show through. The autumn and winter smogs were choking. You could get stranded a few miles from home. My school, Walsall Road, had two sources of distraction. One was that it was a spot where passing trolley buses regularly lost contact with the power supply, their poles becoming detached from the overhead wires. The other was the noise from the factory across the road. I never found out exactly what it did but its sound will stay with me forever. Think of a giant drum kit, a slow bass beat interspersed with a high-hat, at maximum volume, and you have something like it. Black dust and iron filings blew into the corners of the playground, from any number of nearby factories.

None of this is meant to suggest it was a grim existence, far from it. An industrial landscape was and is fascinating, from the smoke billowing out of giant chimneys to the fire and steam glimpsed through foundry gates. Industry was all around us, and we expected it to be. It was the source of prosperity. Manufacturing kept food on the table, and more.

In the 1950s Britain was a world leader in manufacturing; 40% of workers, 9m, were employed in manufacturing. A further 900,000 were coal-miners. Manufacturing contributed at least a third directly to Britain’s gross domestic product (GDP) and much more if its indirect contribution was taken into account. In 1950 Britain had a 25% share of world manufactured exports, more than war-ravaged Germany. France and Italy put together.

Britain’s manufacturers sold to the world, and mainly the world beyond Europe. Since the industrial revolution the country had run a manufacturing trade surplus. In the 1950s the manufacturing trade surplus was often as much as 10% of GDP. Britain was no longer the biggest economy in the world but it was still a manufacturing powerhouse. ‘Made in Britain’, or ‘Made in England’, were badges of quality. Britain’s manufacturers did not just dominate the economy, in many ways they were the economy. The big manufacturers, Guest Keen and Nettlefolds (GKN), ICI (Imperial Chemical Industries) and GEC (the General Electric Company) were household names.

Individual ambition serves the common good
Posted by David Smith at 03:30 PM
Category: Thoughts and responses

My remarks on being awarded an honorary doctorate by the University of Nottingham, at a ceremony on Friday July 17.


Vice Chancellor, distinguished guests, ladies and gentlemen, parents, family members, academic staff and fellow graduands. If I’ve missed anybody out, I apologise. It is a great pleasure and honour for me to be here. My sincere thanks to Professor Kevin Lee for his magnificent oration. It is a strange and rather wonderful experience to have such an oration, at least when you’re still around to hear it. My great thanks too to the university for conferring on me the enormous privilege of this honorary doctorate. I don’t have words to describe what an honour this is for me.

Listening to Professor David Greenaway, your vice-chancellor, on the importance of attending your graduation ceremony, for yourself and for your family, struck a chord. Like him, I didn’t, and have regretted it ever since. A second degree a little later partly filled the gap. But it wasn’t the same. So well done all of you for attending this ceremony. And most of all congratulations of your degrees, and the hard work you put in to receive them.

Fellow graduands, you have, I think, all studied economics, so let me say how I think a particular version of the law of comparative advantage applies to you.

Firstly, you have studied at one of the greatest universities in the world. Nottingham isn’t the oldest but it is one of the very best, and carries that excellence to its campuses in Malaysia and China, both of which I have visited.

Secondly, as befits a great university, you’ve benefited from a superb teaching staff, some of whom are here today.

And thirdly, you have studied economics, which of course is the best subject you could have chosen. Some of you will work as economists, or teach the subject yourself. Many of you will move away from pure economics in your careers and other endeavours. But I can assure you the economics you have learned will stand you in good stead. Economics makes you think in a particular way, a logical way, a problem-solving way and an imaginative way. You have the comparative advantage of having studied economics.