What if Cameron’s austerity had been “harder and faster”?

Dr Sue Konzelmann from the Department of Management assesses the potential impact deeper cuts would have had on the UK in the wake of the Recession.

David Cameron’s recent description of the government’s management of the Brexit process could equally well have been applied to his government’s programme of austerity, which started in 2010 – and for most of us, is still rumbling on.

After almost a decade of austerity, during which growth has sputtered, poverty has risen and reliance on food banks has ballooned, the fiscal deficit is now almost gone. Something to celebrate? Well, it might have been, had public debt not continued to increase significantly. This is because the only way to reduce public debt is to run a significant and sustained fiscal surplus. And there is still no sign of that.

But Cameron has form when it comes to confusing a fiscal deficit with national debt. Back in 2013, Andrew Dilnot, then head of the UK Statistics Authority, found it necessary to publicly rebuke him for claiming that his government was “paying down Britain’s debts”. At the time of course, national debt was still rising strongly.

Nonetheless, Cameron now claims that things might have gone better, had he implemented his austerity plan “faster and harder”, during the “window of permission” following the 2010 election. Is he right?

“Cameron’s programme of austerity was misguided in the first place.”

In my new book, Austerity, the case study of the UK following the 2008 financial crisis strongly suggests otherwise. The period following that crisis is now often referred to as the “Great Recession” – the definition of recession being two or more successive quarters of zero or negative GDP growth. We all know that recessions usually result in higher unemployment-related social costs, as well as reduced government tax receipts. This double whammy means that an increased fiscal deficit – and therefore public debt – is pretty much inevitable during a recession. Especially if you’ve also just spent billions bailing out the banks.

Cameron’s programme of austerity was therefore misguided in the first place. Since it only targeted government spending, it simply reduced the size of the economy further. The idea that a contraction in public spending could be more than replaced by private investment and enterprise – so-called “expansionary fiscal contraction” – is at best highly controversial. In our new book, Rethinking Britain: Policy Ideas for the Many, we describe is as “the economic equivalent of Big Foot; some economists claim to have seen it, but none have been able to prove that it actually exists”. A forlorn hope then.

Cameron’s austerity was implemented when the economy was slowly beginning to grow; but the recovery was not yet strong enough to withstand its dampening effects. Policy should instead have focused on encouraging growth, which would, in turn, have reduced social costs and increased tax revenues – both of which help to reduce the fiscal deficit and – if a sustained surplus is created – public debt as well. But with a fragile economy, like the UK’s in 2010, austerity inhibited growth, with predictable results; and growth has never been stellar since. But even so, make no mistake: It isn’t austerity that reduced the deficit; it’s what little growth we’ve had. Imagine where we could have been by now had policy priorities in 2010 focused on encouraging growth, rather than killing it off.

“In economic terms, the results of “harder and faster” austerity would probably have been even more unhelpful than what actually happened.”

And what are the likely effects of “harder and faster” austerity? Deeper and more abrupt cuts in government spending would have shrunk the economy more drastically and immediately – producing a deeper recession in the process. This, in turn, would have increased social costs and reduced tax receipts “harder and faster” as well. The knock-on effect would have been a sharp rise in both the government’s deficit and debt. And it is very hard to see where the growth to lift the economy out of such a deep recession would have come from, without some kind of stimulus. In other words, in economic terms, the result of “harder and faster” austerity would probably have been even more unhelpful than what actually happened.

In social terms, the probable effect of deeper and more immediate cuts is harder to assess. Cameron’s austerity programme has – in spite of claims to the contrary – resulted in growing poverty and inequality, increased homelessness, worsening crime and reduced public services. And this has contributed to a sharp increase in the number of people who have had enough of austerity. Since many of these people were looking for some means of getting back at Cameron’s government, offering them the vote on EU membership in the middle of his austerity programme, was clearly a high-risk strategy as well. All of this has resulted in a radically changed political configuration in Britain.

It’s hard to see what’s so great about eliminating the fiscal deficit, if in the process public debt has vastly increased and social outcomes for most have sharply deteriorated. Not only has austerity not worked, it’s done immense damage to Britain. We’ve had nearly ten years of austerity, and over three years of Brexit wrangling, with apparently no end in sight for either. Surely, developing policies to fix the all too obvious problems in our economy and society, would be far more productive that crowing about a reduced deficit?

The only crumb of comfort in all this is that given Cameron’s recent comments about wishing he’d imposed austerity “harder and faster” in 2010, things might have turned out much worse.

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Rethinking Britain – How to build a better future

Sue Konzelmann, Reader in Management at Birkbeck, and her colleagues John Weeks and Marc Fovargue-Davies introduce their new book, Rethinking Britain: Policy Ideas for the Many. 

Mind The Gap, London, Underground, Transportation, Uk

Of the nineteen UK governments since the Second World War, only two have torn up the rule book and tried to build a better future, instead of simply recycling the tired slogans and policies of the past. The two governments that did try radical change – not always successfully – were those of Clement Attlee in 1945 and Margaret Thatcher in 1979.  We are therefore well overdue for another major policy rethink, aimed at solving the problems we have now – largely as a consequence of Thatcher’s legacy – rather than endlessly trying to reignite the ideological battles of the past. That’s why we concluded it was high time for Rethinking Britain: Policy Ideas for the Many.

Rethinking Britain is not only for the many – it’s also written by the many. As a result, it doesn’t set out the vision of one or two people, but instead offers the assessment of a wide range of experts, who are working in or studying the areas we cover. We not only set out the problems and suggest policy solutions to address them.  Our aim is to help improve life for people living in today’s Britain.

Between each set of policy ideas, you’ll also find interludes.  These draw upon real-life stories of people in Britain who are experiencing unresolved difficulties that should be considered unacceptable in any developed economy or civilised society – and we suggest how these problems could be solved, too.

“We strongly believe that a society that produces healthy, well educated, strongly motivated people – who have, or can realistically hope for, a good standard of living – will also help to generate a powerful and dynamic economy.”

Although some depressing situations are described, our overall approach is extremely positive. Instead of denying that there are problems – or ignoring them, as many politicians have done – we take a much more “can do” approach to building the society that most of us would want to live in.  That leads to another significant point: Whilst Attlee’s 1945 government put people and society at the centre of its policy ideas, less than forty years later, Thatcher’s administration reversed this, focusing on the individual, privatization and the wealthy. This raises the question: “In whose interests should the economy be run”?

The shift to individualism, private profit maximization and an obsession with “free” markets resulted in serious wealth for the few – and runaway inequality and poverty for the many.  It’s therefore not hard to guess where those contributing to Rethinking Britain are coming from!  We strongly believe that a society that produces healthy, well educated, strongly motivated people – who have, or can realistically hope for, a good standard of living – will also help to generate a powerful and dynamic economy.

The post-1979 dogma – that the British government should play as small a part in the economy as possible – is also misguided. Far too much capital is being used for short-term, speculative purposes, whilst not enough is finding its way into the development of sustainable businesses that provide long term employment and pay decent wages – not the hand to mouth existence of a zero hours contract. In other words, the economy should work for the many, not just the few.

Another theme that runs through Rethinking Britain is the concept of citizenship – where sets of rights and obligations mean that you are indeed part of something bigger than yourself.  This is the polar opposite of Thatcher’s point of view, that there is “no such thing as society”.  Many of her policy ideas were developed in the context of the Cold War – which came to an end thirty years ago; and it’s time for her policy ideas to do the same.

By investing in Britain’s people, we can build a stronger, more cohesive society – which will underpin a more vibrant economy.  Rethinking Britain shows how.

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Should taxpayers fund university education at a time of crisis?

This post has been contributed by Dr Federica Rossi, lecturer in Birkbeck’s Department of Management, and Aldo Geuna, professor of Economics at the University of Torino, Italy. Their new book The University and the Economy: Pathways to Growth and Economic Development is published by Edward Elgar.

Higher-education-fundingWith the recent financial and debt crisis, the extent to which the public can afford to fund universities has become increasingly controversial: in the context of tight public budgets and widespread cuts to public spending, even in areas perceived as basic services to support the more vulnerable members of society, what reasons could there possibly be for continuing to fund a “luxury” like higher education?  Dr Federica Rossiand Professor Aldo Geuna consider the viability of publicly funded universities and their alternatives.

Some convincing reasons must exist if, as it emerges from data reported by the European University Association’s Public Funding Observatory a majority of 14 European countries, out of 24 for which data are available, have increased public funding for universities in the period 2008 -2012, right through the latest recession. Investment has increased in, among others, Austria, Germany, Poland, Belgium, the Netherlands and the Scandinavian countries. Ireland and the United Kingdom are the only countries in Northern Europe to have decreased investment, together with debt stricken countries in Southern Europe and some Eastern European ones.

The argument against: higher education generates mainly private benefits

The main argument against the public funding of higher education builds on the view that the benefits of higher education are enjoyed mainly by university graduates, in terms of potentially higher future earnings and lower probability of unemployment, rather than being shared across society. If the benefits of higher education are strictly private, then why should the general public pay for it? The cost of higher education instead should be met by the students who will directly benefit from it.

This argument is reinforced by the fact that information and communication technology makes it easy to disseminate and access knowledge: when students anywhere can access the knowledge produced by the best academics in the world at the click of a button, why should governments fund them to physically attend lectures at a local campus? Using openly disseminated materials provided by prestigious universities could provide a way for poorer students, who would not have the upfront resources to pay for university fees, to access the same or even better knowledge at a fraction of the price.

In reality, however, things are rarely this simple. And indeed several theoretical and practical arguments have been made to support the view that there are still good reasons for providing substantial public funding for higher education even (or maybe especially) at a time of crisis.

But: the private benefits of higher education are risky and with a delayed pay back

The opportunity cost of studying is high over the short term while its private benefits are risky and with a delayed pay-back. Given that young people often have no resources of their own, or are either unwilling to undertake the risk, or they have no access to private credit (as financial markets are imperfect), then without incentives, investment in education would be lower than optimal.

The only students who would invest in undertaking higher education would be those who are rich enough to pay upfront, ramping up social and economic inequality. This is even more undesirable when we consider that the private benefits of university education tend to be higher for those individuals who come from less well-off families who generally do not enrol at university.

So there is a general consensus that some form of government intervention is necessary in order to increase the number of students undertaking higher education, and to do so while preserving some form of equal opportunity of access.

One way to do this is to provide full public funding of higher education in order to make it completely free at the point of delivery. However, this is not the only possible approach, and indeed it is becoming less frequent: it has even been shown that blanket funding irrespective of an individual’s income could have regressive effects on the incomes distribution. In most countries, systems are in place according to which students contribute at least in part to the funding of their education, but grants and loans exist to support those students who lack resources of their own.

Recently, for example, the United Kingdom has introduced a loan-based system where students receive a loan from the government in order to fund their education, and pay the loan back once they benefit from higher salaries in the job market. Here, the government is prepared to sustain the risk of students not paying back their loans if their future income does not meet a minimum threshold or if students are impossible to track down – a risk which has an important systemic component (for example, both types of risk would be systematically increased by a recession, where graduates are less likely to reach the minimum income thresholds and also more likely to emigrate in search of better job opportunities).

If such systemic problems were to occur, the cost to the public purse could actually turn out to be quite high. Moreover, even if we accept that students should in part contribute to the cost of their university education, issues like how much they should contribute and whether this contribution should be linked to their ability to pay it, remain open to debate.

The social benefits of higher education are anything but negligible

It has been shown that both an increase in the share of graduate population and an increase in the growth rate of graduates generate a more than proportional increase in economic growth. This suggests that the broader public who have not attended university also benefit from having colleagues and fellow citizens with a higher level of education, thanks to the latter’s contribution to economic growth, which goes beyond their own individual productivity.

In particular, research has suggested that a more educated workforce:

  • has a positive effect on the productivity of colleagues with a lower level of education
  • facilitates and accelerates the adoption of existing technologies not yet implemented
  • is more likely to introduce product and process innovation and therefore to economically exploit radically new technologies – a particularly important process in economies which already operate on the technological frontier.

There are also important indirect effects. Education can improve citizens’ health, stimulate political participation and encourage a sense of civic duty and interpersonal trust, factors that are important for the competent functioning of economic institutions and their performance.

The presence of these external effects provides arguments in support of the general taxpaying public contributing to the funding of higher education, whose benefits are felt across society at all levels. This is one reason why public university fees are, and should be, quite low when compared to the average cost of a student’s university education.

What education, rather than just how much education, matters

If universities’ sources of funds are entirely private, this introduces incentives for universities to maximize enrolments in the short term by focusing on those disciplines for which demand is greater, in order to swell the number of enrolled students and thus increase revenues. Research has shown that privately funded institutions tend, overall, to focus on the most popular subjects. From the perspective of maximizing the contribution of higher education to economic growth, this is likely to lead to dynamic inefficiencies.

First, there is no linear correspondence between students’ demand for higher education and the actual labour market’s needs for specific competences, since student demand for courses is based upon subjective evaluations and incomplete information. This is the reason why, for example, the United Kingdom continues to pour public funds into the teaching of STEM disciplines which are perceived to have high economic importance even though student demand for STEM courses is low.

Second, there is a real difficulty of foreseeing what academic disciplines will turn out to be important in the future. How to anticipate, for example, which subjects will best support the educational needs of individuals and companies in 15 to 20 years’ time? The skills required by an economic system are the result of events that cannot easily be predicted, such as geopolitical changes or the emergence of new technologies. It is important to allow universities to continue to educate students in a broad variety of fields, keeping the system sufficiently flexible and open and allowing for possible adjustment in the event of unexpected changes – something that can be accomplished only if universities are at least in part free from the compelling need to passively respond to market demand.

9781782549482_4_1And finally…can technology be the answer?

While ICT is certainly helpful in broadening access to knowledge, there are numerous arguments that suggest that simply having access to knowledge does not equate gaining an education into a particular field or topic. Being able to access free university courses online does not substitute for the ability to attend a physical institution, for a number of reasons:

  • A certain level of previous education is often required in order to understand advanced knowledge. University institutions can provide the tailored training that weaker students (especially those from disadvantaged backgrounds, who may have the needed qualifications to enter university, but whose quality may not be as good) might need in order to bridge the knowledge gap that separates them from stronger students and allow them to complete their studies
  • The transmission of knowledge is enhanced by direct interactions with teachers
  • It has been shown that being part of a community of practice, though meeting and interacting with other students, enhances learning and motivation
  • Some of the benefits of higher education come from being part of a social community of students and from developing connections that continue after university

While some of these benefits could be re-created virtually (for example virtual communities of practice can be set up), overall it is unlikely that students can derive the same benefits from accessing materials that are openly available online as from attending university courses that are tailor-made for a specific and small group of students. The weaker students in particular are the least likely to have the ability to benefit from this, which invalidates to a large extent the argument that freely available online courses can provide an effective way for school leavers priced out of university to gain the same education as fee paying university students.

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How does academic research really benefit business?

This post has been contributed by Dr Federica Rossi, lecturer in Birkbeck’s Department of Management, and Aldo Geuna, professor of Economics at the University of Torino, Italy. Their new book The University and the Economy: Pathways to Growth and Economic Development is published by Edward Elgar.

The University and the EconomyIn an international economic environment where innovation processes are increasingly open and decentralised, companies’ ability to innovate often depends on acquiring knowledge from external sources: in particular, it depends on companies quickly identifying the knowledge they need and integrating it with their internal research, development and production processes. Interactions with universities allow companies to embed scientific knowledge in their internal innovation processes, an accomplishment which is particularly important in high technology sectors, but increasingly across the board.

While in recent years university-industry interactions have become the focus of a growing academic literature, much remains to be learned about the factors that promote such interactions and about how they really unfold. Our knowledge of how companies engage in technology transfer – how they access, exploit and build upon academic research – is particularly lacking.

Thanks to two original and in-depth surveys of companies and company-based inventors in North-West Italy, we have been able to shed some light on the dynamics of university-industry technology transfer from the companies’ perspective (Geuna and Rossi, 2015). While some of our findings support arguments already made by previous research – among others, that companies value science which is openly disseminated through scientific publications and conferences rather than through proprietary means such as licenses, that the more educated the workforce the better able companies are to exploit academic knowledge and, relatedly, that larger and more research intensive companies are more likely to interact with universities – they also shed light on some as yet unexplored issues, which challenge commonly held ideas about how knowledge transfer occurs.

Not all university-industry knowledge transfer involves universities

A lot of technology transfer occurs under the radar of university institutions, through personal contacts (and contracts) between businesses and academics. Direct interactions between industry-based inventors and academic researchers are an established channel through which companies access academic knowledge, and they are particularly important because they contribute to the production of valuable inventions. The share of companies that interact with universities exclusively through direct personal interactions with academics, without any involvement of university structures, is almost as large as the share of companies that formalise their interactions with the university institutions (alongside, possibly, direct interactions with academics).

Companies that do not collaborate with universities are over-represented among small companies and under-represented among large ones, and are less likely to invest in internal R&D. This suggests that company staff need an adequate level of education and competence in order to collaborate with academic staff. Among the companies that do not interact with universities, however, it is possible to identify different groups: those that do not interact because they find it unnecessary or too difficult and/or expensive, and those that do not interact with university institutions but instead they interact with individual academics outside of these institutional channels.

The latter companies are an interesting group because they are smaller and they are more likely to adopt open innovation strategies than the companies that interact with universities through institutional channels. Direct interactions with individual academics are, therefore, particularly appealing to dynamic small and medium size enterprises which probably find institutional channels too cumbersome.

The social sciences have a key role to play in regional knowledge transfer

Much university-industry technology transfer does not involve technology at all. Rather, a lot of interactions between companies and universities focus on providing solutions to legal, logistic, marketing, management and organisational problems. This is particularly so for interactions that occur between companies and universities based in the same region, while interactions between more distant universities (outside the company’s own region and sometimes even internationally) are more likely to concern technological issues.

Why do companies prefer to interact with regional universities, as opposed to distant ones, in order to solve business problems? The reason may depend on the fact that business problem-solving (for example, problems that have to do with human resource management, marketing, legal compliance, and so on) builds upon detailed knowledge of the socioeconomic and legal-institutional context in which the firm operates.

This requires direct interactions that allow the transfer of tacit knowledge. Instead, collaborations with distant universities involve more often codified and abstract forms of knowledge, the transmission of which does not require direct communications. Companies may also look at distant universities when they are seeking very specific knowledge that does not exist in the region.

Companies that collaborate with distant universities are often larger and tend to invest more, since technology-focused projects are usually more expensive than those focused on the solution of business problems. Nonetheless, collaborations with universities in the same region are very frequent and have important roles to play for the competitiveness of businesses and of the region overall.

Theoretical academic knowledge is particularly valuable to business

Our survey of company inventors has allowed us to investigate what modes of interaction between industrial inventors and academic researchers led to the realisation of more valuable inventions.

We have found that collaboration setups that involve direct interactions between industry researchers and academics tend to lead to more valuable inventions. Also, interactions where universities transfer theoretical knowledge and scientific principles (instead of more applied knowledge) lead to more valuable inventions. This is an unexpected result, since it is commonly believed that the theoretical knowledge developed by academics is quite far from having an impact on industrial innovation processes. Instead the companies and the industry inventors that we interviewed find that theoretical academic knowledge directly supported their innovation processes.

What does this mean for universities?

In short, these results suggest three immediate implications for universities. First, universities should focus on enabling academics to interact with industry whatever the governance of the collaborations, instead of insisting on regulating all interactions between academics and companies – in fact, direct personal interactions often fit companies’ needs better and are more productive than those that are formalised through the involvement of the university institutions.

Second, universities should exploit their business problem-solving competences (residing particularly in social science departments) to support the needs of local businesses and to strengthen intra-regional collaborations. Third, universities should not forget that their key source of competitive advantage resides in the development of advanced, cutting edge theories and methods rather than in the pursuit of very applied knowledge, which could also be provided by other actors in the economy.

Rather than focusing on providing solutions to immediate day-to-day problems, universities should continue to put their resources into producing the high level knowledge that very few other organizations in the economy are capable of generating.

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References

Geuna, A., F. Rossi (2015) The University and the Economy Pathways to Growth and Economic Development Cheltenham: Edward Elgar.

See also:

Bodas Freitas, I., Geuna, A., Lawson, C. and F. Rossi (2014) How do industry inventors collaborate with academic researchers? The choice between shared and unilateral governance forms, in Patrucco, P. (ed.) The economics of knowledge generation and distribution. The role of interactions in the system dynamics of innovation and growth, London: Routledge.

Bodas Freitas, I., Geuna, A. and F. Rossi (2013) Finding the right partners: Institutional and personal modes of governance of university–industry interactions, Research Policy, 42(1): 50-62.

Bodas Freitas, I., Rossi, F. and A. Geuna (2014) Collaboration objectives and the location of the university partner: evidence from the Piedmont region in Italy, Papers in Regional Science, 93(S1): S203-S226.

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