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Getting 2008 and 2016 wrong

while it is true that at the moment it is possible to buy cheaper steel elsewhere, this will not always be the case.

Most commentators have already drawn the link between the manner in which government responded to the banking crisis and the way they are now responding to the collapse of the UK steel industry.  But the way they draw the link is telling.  Even Caroline Lucas – one of the most effective left of centre MPs ever to sit in the UK parliament – makes the fundamental error of claiming that:

“In 2008, the then Labour government quite rightly spent £1.2trillion propping up the banks, the equivalent of £20,000 for every man, woman and child in the country. At the time, David Cameron and George Osborne said they would have done exactly the same.” (My emphasis)

There is a danger that this “no alternative” narrative is as embedded as the one that says the Labour government was responsible for the 2008 crisis. It leads to the same woolly thinking that says that the only thing a government can do is bail out private companies to keep them running.

In fact, opinion was far from united in 2008. Mervyn King, then Governor of the Bank of England made a strong defence of “moral hazard” – that capitalism can only work if good investments are rewarded and bad investments punished.  The bankers had made serious mistakes, and should have been left to reap the consequences. There were many on the left and the right of politics who shared this sentiment.

There is nothing strategically important about individual banks.  The only critical infrastructure is the interbank payments system.  It would have been entirely viable for governments to allow banks to fail, and then step in to nationalise them and take over the essential payments system together with the rest of their physical assets.  Had they done this, for the first time, the payments system could have been opened up to new “challenger banks”.  At the same time, government could have used its ability to print money in order to recapitalise one or two large banks to keep the cashpoints working and to use as a conduit for infrastructure investment.  Ordinary depositors would have been protected in the same way as they are now.  Shareholders and commercial investors would have lost their shirts – as they would do in any speculative investment that goes wrong.  Many bankers would also be out of a job… but if they were any good, they would soon get new positions.  This could all have been done in a matter of days.  Yes, there would have been disruption – but no more than the carnage that has been wreaked on the economy through the austerity programmes that were the inevitable consequence of bailing out the banks.

The point is that there were alternatives in 2008; and the alternative we had then is available to us now.  Unlike banks, the steelworks at Port Talbot really is essential because the steel it produces is the base material for the other, smaller steel plants around the UK.  And while it is true that at the moment it is possible to buy cheaper steel elsewhere, this will not always be the case.

China’s current steel glut is largely the result of a severe imbalance in the Chinese economy caused by a dangerous misallocation of capital to manufacturing and housing.  The myth of 7 percent annual growth, coupled to the Western myth that China would become the engine of the global economy – lifting us all out of recession – led to the construction of a swathe of empty cities and factories.  Understandably, Chinese steelworks were happy to go full tilt producing the steel to keep building.  But in a classic crisis of overproduction, caused by a slump in demand in the West, China has ended up with a lot of steel (and much else besides) that it does not want and cannot sell.  So it is engaging in a classic fire sale – selling everything off cheap in order to maintain cash-flow.

For the moment, China also has the advantage of cheap oil.  With prices below $40 per barrel, transport costs are low; further lowering the price of steel.  According to the IMF, the price of oil will be back above $100 per barrel by 2017.  By 2020, the price is expected to go above $200 per barrel as many of the Middle East oil fields pass their production peaks.  That means that China will no longer enjoy the advantages that it has today.  The cost of transporting the coal and iron required to make steel will increase; as will the cost of shipping it halfway around the planet.  If, by then, Britain has allowed its steelworks to close, we will find ourselves bearing that additional cost.

I am reminded of the story of the old gold investor who, looking at low gold prices, tells a friend that:

“Now would be a really good time to buy a gold mine”

“Why on earth would you do that?” asks his friend.  “Nobody wants to buy gold.”

“I would buy the mine and immediately shut it,” says the old investor.  “Then two years from now, when everyone wants to buy gold, I would open it up again and make a fortune.”

As with the banks in 2008, it would be in Britain’s interest to nationalise the steel plant in Port Talbot.  Keep as many of the skilled workforce as are needed to maintain it and will be needed to restart it a year or so from now.  If necessary, pay them to sit around playing cards and drinking tea.  After all, if you close the plant you are not just going to be paying benefits to the redundant workforce; you are going to have to pay benefits to 15 or 20 thousand people whose livelihoods depend upon the steel works or the spending power of the steelworkers.  Nor – if we are being honest about the Welsh economy for a moment – will many of those 15 or 20 thousand men and women ever find comparable employment again.

If the Port Talbot plant is not nationalised, one way or another when the price of Chinese steel goes up once more – as we all know it will – all of us will be the losers.

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