Hamish McRae: What's wrong with weak governments if they're forced to make the right decisions?

The only G7 government where there is real authority is in Japan
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The Independent Online

Join the club. The US has a weakened president for a host of reasons, including the indictment of the Vice-President's chief of staff. France, too, has a weak president, with two rivals, Nicolas Sarkozy and Dominique de Villepin, scrapping for the crown. Germany has virtually no government at all. Ditto Italy. The Canadian government has been weakened by a kickback scandal. Indeed the only G7 government where there is real authority is in Japan.

So for the next two to three years, Western governments will not be able to adopt radical policies because they will not have the clout to get these through. They will, in general, find themselves reacting to events rather than shaping them. But will this be good or bad for the world economy?

The conventional view is that weak government is bad. Such governments can't get through difficult legislation, and they run excessive budget deficits, prop up unsustainable industries, cave into public sector workers etc.

There are certainly plenty of examples in the past where such a pattern has proved the case. These include the Callaghan government in Britain in the late 1970s, Jimmy Carter's administration in the US, and more recently Gerhard Schröder's period as Chancellor in Germany - though he did make a start on reforms. You could, more generally, add successive French governments with their policies on public sector retirement and farm subsidies; Italian governments' fiscal ill-discipline and Japanese public works programmes - all policies designed to win votes in the short term at some economic cost in the future.

This short-term/long-term clash of interest is a well-known one, and where there is a clear need for reform, as in Germany at the moment, there has to be a general presumption that weak is bad. But there is a counter case to be made that in the present context of a highly competitive global economy, weak might actually be better. Looking forward over the next three years, I think this may prove the case.

There are two broad strands to the "weak is better" argument. The first is simply that strong, or at least strong-ish, governments have made serious errors, while weak ones are sometimes forced by events to get things right.

Thus the first George W Bush administration was elected by the narrowest of margins but actually was very disciplined and orderly and had a supportive Congress. But from a fiscal point of view it has been a catastrophe, which the now-weakened President is having to try to reverse. On the other hand, it was a mortally wounded Conservative government that, once sterling had been kicked out of the ERM, had to set in place the discipline of inflation targets that helped Britain sustain its longest-ever period of uninterrupted, low-inflationary growth.

The other strand starts from the presumption that globalisation has greatly weakened governments' power over their own economies, and the weaker a government is politically, the more likely it is to accept this and follow sensible policies.

The best way to see this, perhaps, is to look at labour markets. A generation ago, one of the things governments tried to do was to hold down wage increases. Strong governments succeeded; weak ones caved in. There is still some truth in this as far as public sector workers are concerned. Thus our own present, weakened Government, rather than have a fight with the unions, recently agreed not to increase the retirement age for the public sector from 60 to 65.

But in the private sector, wages are held down, not by government, but by foreign competition. In Germany, the main force containing wage demand is the movement of jobs to the new European Union member states to the east. In the US, it is outsourcing to China.

Or take relations with the corporate sector. All governments now court foreign investment. The weaker the government, the more it needs to show that it can attract it and the less likely it is to risk anti-company policies. Here in Britain, when the first Labour government was elected, Gordon Brown felt strong enough to hit company pension funds by increasing taxation on them. Companies accepted that with hardly a murmur. Now any policy that is against their interests is attacked vigorously.

Companies used to be quite frightened of offending the Government because they feared that the Treasury would be vindictive. Now that the Government is weaker, they feel they can be more assertive, and more likely on the key issues to get their way.

The key difference between now and a decade ago is that the economic players are more mobile. Companies can shift production around the world, even shift their headquarters. One of the effects of the communications revolution is that services are now going global in the same way as manufacturing did some years earlier.

Looking ahead to next year, the prospect is for somewhat slower growth in the G7 countries - as the graph suggests. (Not a recession, just slower growth.) Still, out of the G7, on these HSBC forecasts, only Italy will do better next year than this, and that from a very low base. This will make these weakened governments even more anxious. Living standards will rise more slowly; pressures on fiscal deficits will increase. So the political pressure on government will be mirrored by economic pressure. Result: not just weak government but meek government.

That surely is more appropriate for our inter-dependent world. You don't want governments that are too over-confident, too assertive. You want ones that are responsive to the signals of an extraordinarily complex world economy - one where power is shifting away from elites to ordinary consumers and from the G7 itself to the twin giants of China and India. As you can see in the graph, their growth rates remain much higher than those of the developed world.

The sudden weakening of the Blair government has yet to show through in any policy changes. But last week, we did see a result of the weakening of the Bush administration in the announcement by the US Treasury Secretary, John Snow, of plans to make a serious attack on the budget deficit.

The Republican-dominated Congress has been very relaxed up to now about the big-spending President. As his authority has been weakened, Congress has started to assert itself. So a tighter fiscal stance is the sign of a weaker president, not a stronger one.

The UK fiscal position is not as serious as the US one but it is clearly not sustainable. Expect our own high-spending Govern- ment to find itself under increasing pressure to take action and Gordon Brown - as well as Tony Blair - to become weaker as a result.

Forget GDP, let's hear it for GPH - Greatest Possible Happiness

On a happier note... happiness is preoccupying the economics profession. Work by people such as Professor Andrew Oswald at Warwick and Professor Lord Layard at the LSE, plus a lot of stuff in the US, has been pushing economics away from the focus on such measures as GDP per head, and towards GPH per head (Greatest Possible Happiness).

Up to now, however, this research has been largely confined to universities, so I was intrigued to see an investment bank putting out a paper on the subject last week. James Montier, at Dresdner Kleinwort Wasserstein, has this message:

"Materialistic pursuits are not a path to sustainable happiness. A mass of evidence shows people who have more materialistic goals are less happy than those who focus on intrinsic aims such as relationships or personal growth. Spending on experiences rather than possessions seems to make people happier."

He quotes a mass of academic evidence supporting this, and the general proposition is sufficiently self-evident as to be beyond reasonable dispute.

The question is, of course, what can be done about this? For the revealed preference of most people in the developed world is a desire to acquire more material goods. It may well be that people would not be so anxious to buy a new BMW if the Joneses did not have one. But information is so good in the developed world (and increasingly in the developing world) that we do know what other people have.

Besides, if people want to spend their resources on "personal growth", they are free to enrol at a university and learn something, instead of shelling out on a car. Indeed, the shift of spending away from things towards services to some extent reflects our general response to this, though arguably a skiing holiday in Klosters or a safari in Botswana, while clearly "experiences", would still count as pretty materialistic.

Also, a country has to reach a certain level of wealth before the "spend on experiences rather than possessions" mantra kicks in. Walking round a Shanghai shopping mall last year convinced me that Chinese people were happier shopping, like the rest of us, than they would have been plodding around in Mao suits.

But the general point that excessive materialism does not bring happiness is surely right. The key question is whether it is in the ambit of governments to do anything about this. I doubt that many of us would warm to a lecture by a politician on how we should or should not behave.

Or maybe the commercial and academic communities can do more to wean people off buying stuff and on to more lasting and satisfying activities. Put at its lowest, there is clearly a business opportunity for anyone who can really make people happier. Maybe that is why investment banks are getting on the case.