Yesterday Vince Cable gave a sweeping speech about the current state of the economy, lessons from the 1930s and the way forward.
The parallels with the 1930s are in some ways obvious, but as Cable pointed out there are important differences. In particular, in the 1930s there was no similar financial crash in Britain to mirror what happened this time. However, in another major respect this time round looks somewhat better than the 1930s as unemployment has not soared in a similar way, helped by the double-edged flexibility of wages. This time round, real wages have suffered, spreading the pain more widely but keeping more people in work.
Turning to policies for the future, Cable signalled strong support for a weak pound, talking of the benefits that devaluation had brought Britain in the last few years:
The 25% devaluation in the recent economic crisis stems from a very different cause [from the 1930s devaluation]: it was a consequence of the perceived weakness of the economy and the UK’s acute vulnerability to a growing financial crisis. But as in the early 1930s, devaluation prevented the UK economy deteriorating ever further, and from 2009 started a tentative rebalancing towards manufacturing and exports.
It is important that this incentive remains. Any prolonged appreciation of the currency will undermine the hope of recovery. This is one, but not the only, reason we need to retain a loose monetary policy.
The path to recovery is one paved with more lending and more houses according to Vince Cable:
The destruction of the British building society movement – or much of it – in the two decades after the late 1980s … was one of the great acts of economic vandalism in modern times. And the commercial banks largely abandoned locally based relationship banking in the decade before the recent financial crisis. There is now no institutional structure in place to offer countercyclical lending, particularly small and medium sized businesses, in place of the banks. A major and urgent task of government today is to ensure that we have banks that meet that requirement, alongside counter cyclical regulations and liquidity measures of the kind set out at last Thursday’s Mansion House speeches. We now look enviously at Germany where the Sparkasse and KFW underpin a business and mortgage lending system which works…
One sector where progress could be made rapidly is in housing. The main vehicle for social housing for rent (as well as shared ownership) is housing associations. These are independent, not for profit, institutions which can – and do – borrow in capital markets. There is large unmet demand for social housing which may be self-financing if built, in conjunction with private housing. Indeed, some major UK contractors are doing just that with access to long term – 10 years plus finance – with access to guarantees. This activity could be multiplied.
There are now some interesting ideas out there for government guarantees could trigger a significant volume of housing investment, replicating the recovery model of the 1930s and leading hopefully to a virtuous circle of new building lending to increased affordability and also increased private demand. Construction products account for 20% of manufacturing. Insofar as these ideas reduce uncertainty, they can encourage significant investment from the private sector. Recovery requires a big expansion in social and private house building.
That emphasis on housing echoes comments Nick Clegg has made, including laying great stress on building more homes when he spoke to the party’s Federal Executive in the wake of May’s elections. The level of importance that senior figures such as Clegg and Cable are giving to housing is unprecedented in the party’s history. The real test, however, comes from counting the number of homes that get built.