It’s been a busy day for policy wonks those interested in the economic debate with, not one, but two major reports to read and digest.
The long awaited report of the Resolution Foundation’s Commission on Living Standards ‘Gaining from Growth’ weighs in at 139 pages , whilst Lord Heseltine’s, equally anticipated, report into boosting growth, ‘No Stone Unturned’ comes in at 233 pages (and has possibly the best front cover ever for a government report).
For those who have the time and inclination, both reports look like essential reading – for those who can’t quite face 372 pages of analysis I’d thoroughly recommend the TUC’s Tim Page on Heseltine and the BBC’s Stephanie Flanders, plus the Guardian’s Tom Clark’s take on the Resolution report.
Heseltine makes a compelling argument for a new industrial strategy to boost growth complete with recommendation; whilst the Resolution Foundation warn that the long squeeze on living standards for those in the middle and below is set to continue.
The fact that the two reports have come out the same day, whilst making life difficult for those of us who try to read such things, is actually a very good thing. The two reports actually work well together. Heseltine points towards how to boost growth, but the Resolution Foundation reminds us that growth alone is not enough – we need growth that is better shared and leads to rising prosperity for those in the middle and below. We need to take account of both approaches.
There even seems to be a good deal of overlap between the reports. Resolution write that:
…the UK has an institutional setup that encourages employers, particularly in some sectors, to seek low-paid, low-skilled routes to business success. Employers are pulled in this direction by three characteristics of the UK labour market in particular: a chronic lack of skills in the bottom half of the UK workforce; a lack of structure in the jobs market, both for employers trying to make long-term plans about skills and for young people making the transition from education into work; and a lack of counterveiling pressure for employers to pay above the bare minimum, even when they can afford to.
Whilst Tim has written:
Lord Heseltine calls on much of industry to raise its game. He is right to say that the UK is home to some of the best companies in the world and trade unions are proud to represent workers in many of those companies. However, Lord Heseltine speaks an uncomfortable truth when he says that “[w]e cannot afford, though, to be dazzled by their success and ignore the performance of the average. To put it bluntly, the performance of the best needs to be extended more widely.”
No Stone Unturned has much to say on improving skills and productivity.
Both reports have a great deal to say about institutional design. Resolution argue that:
This is hard, slow work and ultimately comes down to institutional innovation. The end goal is that employers in the UK’s major sectors work together, through powerful sector based institutions, to identify skills gaps and to design structured routes into the sector for young people.
Whilst much of Heseltine’s report is about the need for local and sectoral institutions to drive skills policy, innovation and growth.
I see both the Resolution and Heseltine reports as adding to a debate on what started out as the ‘need to rebalance’ the British economy and is rapidly becoming a, much more interesting debate, on the nature of our capitalism.
The debate about economic policy is finally starting move beyond the tradition levers of monetary and fiscal policy and into the realms of corporate governance, skills, banking, industrial structure and the differing benefits of different firm business models to the wider economy.
This is a hugely welcome development.
To use a diagram I‘ve used before, we are starting to discuss at the national level all the various elements of ‘political economy’.
On that note, the other important contribution this week came from the Bank of England’s Andy Haldane in a speech to a packed meeting of Occupy Economics on Monday evening (to which I had the great honour of responding from the panel – the best write ups I’ve seen of the event are here and here).
Haldane argued that there was a connection between rising inequality, rising household debt and the eventual crisis. Something very much in line with the tone of Resolution’s work.
For the hard-headed facts suggest that, at the heart of the global financial crisis, were and are problems of deep and rising inequality.
We have seen, first, inequality-induced crisis and, latterly, crisis-induced inequality. The 99% have faced double-jeopardy.
He went on to argue that the oversized nature of the banking sector in the UK, before the crash, added to problems in the wider economy:
Recent research by the Bank for International Settlements suggests that, once bank assets exceed annual GDP in size, they begin to act as a drag on growth.
Why? Because human and financial resources are drained from elsewhere in the economy. The sectors hardest-hit by this financial vacuum-cleaner effect are R&D-intensive businesses (who might otherwise have attracted the scarce, skilled labour that flowed into finance) and businesses reliant on external funds (whose financial cake was instead being eaten by the banking system). These are the very businesses that today we are seeking to re-nurture.
This strikes me as very much in agreement Lord Heseltine’s report.
Haldane called for ‘financial reformation’ based around changes in culture, capital, credit, compensation and competition. (The whole speech is well worth a read.) This is again, at heart, a form of institutional reform – in this case to the structure of the banking sector.
If we want the economy to enjoy a stronger recovery, one that is more sustainable, more inclusive and more resilient and that reaches across the UK and into lower income groups rather than just benefitting those at the very top, then that will require serious reform of our national business model. We can’t just return to business as usual. We instead need to build a new economy. Heseltine, Haldane and the Resolution Foundation are all offering helpful sign posts as to how to get there.