Andrew Sentence is a former member of the Bank of England Monetary Policy Committee, the body responsible for setting UK interest rates. He is now Senior Economic Adviser at PwC and his latest book Rediscovering Growth, is part of the Perspectives series.
He spoke to the Prospector on a range of economic subjects, ranging from domestic concerns to macroeconomic policy. The interview will be published here in full over the coming days
Jay Elwes: What did you make of Larry Summers’s warning that secular stagnation was a risk?
Andrew Sentance: I think secular stagnation is too pessimistic, because it seems to imply that the days of Western growth are over, and I have more confidence in the abilities of western economies to regenerate themselves and to come up with new sources of growth. We actually saw this happen in the 1980s. Many people focus on the financial sector and the role it played in the 80s and 90s, but there were other very significant developments round that time, for example the growth of information communications technology, which brought us mobile telephones, the internet and the development of personal computers.
Now if you had sat here in 1982, you would have found it hard to envisage that massive growth in IT and communications. We had the ZX Spectrum computer—some very primitive computers. At that time in the early 80s Apple and Microsoft had only been going for five to six years as businesses—and were relatively small businesses in terms of the giants of the computer industry. And yet the way in which markets and business developed through the 80s and 90s our economies benefited greatly from that technology.
So we have actually seen before how economies can regenerate themselves, including mature economies like the UK and US. But we can’t predetermine how it is going to happen. What we have got to do is focus on creating the right business conditions. I see us going through a prolonged period of structural adjustment. I wouldn’t call it secular stagnation. We’re in a prolonged period where—as a result of big shocks, big changes on the global, economic stage—the sources of growth that we’ve tapped into in the 90s and the noughties as we would call it, have been undermined and economies need to find new sources of growth. That can be partly achieved by producing more goods and services that we can sell into the more dynamic parts of the world economy, such as the Asia Pacific region and emerging markets. It is also a matter of reforming our own markets, making sure that our economy is flexible, and investing in capabilities the skills and education of our people.
The main themes of that reform agenda don’t change greatly over time, but the policies you need to pursue do change. For example, in the 80s when I started studying economics at the LSE and starting my professional career, the big challenge in the labour market was finding new opportunities for older workers who had been displaced from traditional manufacturing industry and found themselves in long-term unemployment. We developed policies and approaches to try and help them reintegrate or reskill to find their way back into the labour market.
We now have a different type of challenge in the labour market: of making sure young workers get their first foot on the jobs ladder. So the types of policies that you need change as the challenges change. But the need for a labour market structure that helps people to reengage back into the labour market if they are made unemployed, which is sufficiently flexible to enable them to do so, is a more constant theme
JE: Another problem often identified in the labour market is of the squeezed middle—that central section of the wage scale that has been diminished as the numbers of jobs available in mid-level employment have declined.
AS: In the Western economies in general, employment patterns and labour markets have been affected by the forces of globalisation in various ways. I’m not sure what people called the “squeezed middle” is a unique phenomenon. Companies have tried outsourcing jobs in various ways, and some of them are reconsidering and bringing jobs back. Information technology has affected certain jobs, white collar type services jobs, but it has also created others. In terms of labour market policy—there is always going to be a certain churn of that sort. The challenge is to make sure that we are as well equipped as we can be to take advantage of the new positive trends, and ensure we’re not losing out to some of the more negative trends too badly.
This is not a new phenomenon in a sense. People were talking about these globalised trends in the labour market in the 1990s. It was perhaps masked by the long expansion we had, when other activities like the financial sector were favourable. We had a favourable period when a lot of stuff we were buying from global markets—manufactured goods, clothes and so on—was getting cheaper and cheaper. Now we’ve got to deal with different kind of shocks. So it’s got more difficult across the board for western economies.
JE: Yes, but isn’t the loss of these jobs depressing domestic demand, which is feeding back into the problems of low levels of economic activity and productivity? So if the demand is not there domestic businesses are suffering. And the divided nature of the employment structure into an hour-glass shape, with a top and a bottom part, is exerting a drag on a more sustainable economic recovery.
AS: One of the big challenges in terms of consumer demand across the western economies has been the change in the trend for energy, commodity and food prices, which actually started in the mid-2000s, and we’ve seen various surges of it. This has then come at a time when wage growth has been moderated by the impact of recession, and the financial crisis, so it’s being felt more acutely now. But that is something that we’re going to have to manage and live with. There will be a limit to how high energy and commodity and food prices may ultimately go. And there will be supply side responses, and some of those supply side responses—like investment in low carbon technologies, or in new sources of energy—do lie within our own hands, so we can help the supply response in some areas.
That change in the global price environment has to my mind been a very important factor. Another important factor for the UK which I think we haven’t really addressed properly is that the pound has fallen a long way and is perhaps bouncing back a little bit now. That has meant that all these unfavourable price trends in the rest of the world have been even worse for us, because the weak pound has pushed up import prices even further, and you have seen this in the rate of inflation. The rate of inflation measured by the consumer price index up until about 2005 was about 1-2 per cent. From 2010 until recently, it averaged about 3-4 per cent. That’s a big change. We can’t expect in the current global climate to get higher wage growth to compensate for that. The UK’s income squeeze was intensified by the big fall in the pound.
I think we’ve been too willing to accept the old devaluation argument that somehow the low pound is good for us, I’m not sure there’s been a lot of evidence, since the devaluation of 1967, that this policy has worked well in the UK. I would rather try to embrace a gradual appreciation of the pound now and ease some of the pressure on these imported prices.
He spoke to the Prospector on a range of economic subjects, ranging from domestic concerns to macroeconomic policy. The interview will be published here in full over the coming days
Jay Elwes: What did you make of Larry Summers’s warning that secular stagnation was a risk?
Andrew Sentance: I think secular stagnation is too pessimistic, because it seems to imply that the days of Western growth are over, and I have more confidence in the abilities of western economies to regenerate themselves and to come up with new sources of growth. We actually saw this happen in the 1980s. Many people focus on the financial sector and the role it played in the 80s and 90s, but there were other very significant developments round that time, for example the growth of information communications technology, which brought us mobile telephones, the internet and the development of personal computers.
Now if you had sat here in 1982, you would have found it hard to envisage that massive growth in IT and communications. We had the ZX Spectrum computer—some very primitive computers. At that time in the early 80s Apple and Microsoft had only been going for five to six years as businesses—and were relatively small businesses in terms of the giants of the computer industry. And yet the way in which markets and business developed through the 80s and 90s our economies benefited greatly from that technology.
So we have actually seen before how economies can regenerate themselves, including mature economies like the UK and US. But we can’t predetermine how it is going to happen. What we have got to do is focus on creating the right business conditions. I see us going through a prolonged period of structural adjustment. I wouldn’t call it secular stagnation. We’re in a prolonged period where—as a result of big shocks, big changes on the global, economic stage—the sources of growth that we’ve tapped into in the 90s and the noughties as we would call it, have been undermined and economies need to find new sources of growth. That can be partly achieved by producing more goods and services that we can sell into the more dynamic parts of the world economy, such as the Asia Pacific region and emerging markets. It is also a matter of reforming our own markets, making sure that our economy is flexible, and investing in capabilities the skills and education of our people.
The main themes of that reform agenda don’t change greatly over time, but the policies you need to pursue do change. For example, in the 80s when I started studying economics at the LSE and starting my professional career, the big challenge in the labour market was finding new opportunities for older workers who had been displaced from traditional manufacturing industry and found themselves in long-term unemployment. We developed policies and approaches to try and help them reintegrate or reskill to find their way back into the labour market.
We now have a different type of challenge in the labour market: of making sure young workers get their first foot on the jobs ladder. So the types of policies that you need change as the challenges change. But the need for a labour market structure that helps people to reengage back into the labour market if they are made unemployed, which is sufficiently flexible to enable them to do so, is a more constant theme
JE: Another problem often identified in the labour market is of the squeezed middle—that central section of the wage scale that has been diminished as the numbers of jobs available in mid-level employment have declined.
AS: In the Western economies in general, employment patterns and labour markets have been affected by the forces of globalisation in various ways. I’m not sure what people called the “squeezed middle” is a unique phenomenon. Companies have tried outsourcing jobs in various ways, and some of them are reconsidering and bringing jobs back. Information technology has affected certain jobs, white collar type services jobs, but it has also created others. In terms of labour market policy—there is always going to be a certain churn of that sort. The challenge is to make sure that we are as well equipped as we can be to take advantage of the new positive trends, and ensure we’re not losing out to some of the more negative trends too badly.
This is not a new phenomenon in a sense. People were talking about these globalised trends in the labour market in the 1990s. It was perhaps masked by the long expansion we had, when other activities like the financial sector were favourable. We had a favourable period when a lot of stuff we were buying from global markets—manufactured goods, clothes and so on—was getting cheaper and cheaper. Now we’ve got to deal with different kind of shocks. So it’s got more difficult across the board for western economies.
JE: Yes, but isn’t the loss of these jobs depressing domestic demand, which is feeding back into the problems of low levels of economic activity and productivity? So if the demand is not there domestic businesses are suffering. And the divided nature of the employment structure into an hour-glass shape, with a top and a bottom part, is exerting a drag on a more sustainable economic recovery.
AS: One of the big challenges in terms of consumer demand across the western economies has been the change in the trend for energy, commodity and food prices, which actually started in the mid-2000s, and we’ve seen various surges of it. This has then come at a time when wage growth has been moderated by the impact of recession, and the financial crisis, so it’s being felt more acutely now. But that is something that we’re going to have to manage and live with. There will be a limit to how high energy and commodity and food prices may ultimately go. And there will be supply side responses, and some of those supply side responses—like investment in low carbon technologies, or in new sources of energy—do lie within our own hands, so we can help the supply response in some areas.
That change in the global price environment has to my mind been a very important factor. Another important factor for the UK which I think we haven’t really addressed properly is that the pound has fallen a long way and is perhaps bouncing back a little bit now. That has meant that all these unfavourable price trends in the rest of the world have been even worse for us, because the weak pound has pushed up import prices even further, and you have seen this in the rate of inflation. The rate of inflation measured by the consumer price index up until about 2005 was about 1-2 per cent. From 2010 until recently, it averaged about 3-4 per cent. That’s a big change. We can’t expect in the current global climate to get higher wage growth to compensate for that. The UK’s income squeeze was intensified by the big fall in the pound.
I think we’ve been too willing to accept the old devaluation argument that somehow the low pound is good for us, I’m not sure there’s been a lot of evidence, since the devaluation of 1967, that this policy has worked well in the UK. I would rather try to embrace a gradual appreciation of the pound now and ease some of the pressure on these imported prices.
