From the TUC

Ten Big Questions for Economic Policy

04 Jun 2013, by Guest in Economics

In last couple of days better news from the construction and manufacturing sectors has fanned hopes that the UK economy may be ‘recovering’, but as I’ve argued before a real recovery is a long way off.

Much of the current debate around the economy seems to come back to two simple measures – growth and the deficit, but in reality the UK faces much wider challenges. It is also the case that the nature of any growth and the manner of any successful deficit reduction policy matters. Imagine for example we go through a credit and asset price boom in the next half decade – growth would appear strong and the deficit would fall rapidly, but the apparent success would be based on very flimsy foundations.  It is always worth remembering the reason the UK ended up with such a large deficit in 2009 was due to a collapse in tax revenues and that really sustainable public finances depend upon a rebalanced economy.

So rather than simple concentrating on ‘growth’ and ‘the deficit’, it is worth pausing for a moment and asking the bigger questions of policy makers. I don’t pretend that this list is in anyway complete, but these ten questions would be my starting point.

  1. How can we ensure that the rewards from growth actually benefit most people? The danger here is a repeat of the situation between 2003-2008, when despite decent headline growth, median wages for those in the middle and below barely budged.
  2. How can we reduce our dependence on the financial sector as a driver of growth?
  3. How can we ensure that there is more economic activity throughout the UK rather than too much being concentrated in the South East pocket?
  4. How can we increase investment levels in the UK? In particular, how can we increase private business investment?
  5. What can be done about the UK’s poor balance of payments?
  6. How can we ensure that we have a diverse and resilient tax base?
  7. How can we better manage the credit cycle?
  8. How do we tackle long term unemployment and ensure that more people have access to the labour market? In other words, how do we get back to something reassembling full employment?
  9. Why is youth unemployment so high?
  10. What is a proper balance between fiscal, monetary and macroprudential policy and how should that balance be managed?

I would be very curious to hear different perspectives on these questions, their answers and what I have missed either in the comments or on other blogs.

But what really strikes me about my list is how few of these questions can be answered with reference to monetary or fiscal policy alone, the big challenges will not be answered through the old policy levers, what is really needed is economic reform.

11 Responses to Ten Big Questions for Economic Policy

  1. Dan Garrigan
    Jun 4th 2013, 1:59 pm

    Some other pertinent questions would include:

    How do we encourage corporate growth in ways other than by debt financing?

    At what point do we take away QE and other props used to support the economy and at what speed do we intend to do this?

  2. Dave Holden
    Jun 4th 2013, 2:11 pm

    One question I would like answered is how can we ensure credit is allocated more productively/sensibly while trying to deal with the aftermath of the opposite situation. I’m not sure Osbourne’s approach to this is the correct one – to say the least..

  3. Ian George Thomson
    Jun 4th 2013, 4:22 pm

    Simple
    Tax free England for tourists , since passports are now scan-able as a form of identification use this a making tourists pay no tax to England and advertise it as a discount in advertising. seeing that VAT is 20% England could sell it as a 20% off. The savings are at the point of sale and a passport would be needed and verified by scanner . Look at what reduced taxes did for Ireland

  4. joey
    Jun 4th 2013, 4:36 pm

    Local micro financing banks that are which are government supported and have strong ethical and locally focused guidelines on who they invest in could help support regional growth, especially if we could allow investment banks lend to them with 0% capital controls.

    Much better financial education and general life skills education would help the next generation avoid debt traps and improve quality of life for those on smaller wages, coupled with a shift in focus that promotes more manual work could make manufacturing more competitive.

    local finance helps smaller businesses, who employ more and distribute wealth better. It reduces dependency on the financial sector to lead growth, and refocusses it on producing growth, it distributes growth better regionally, increases investment levels, most of the lending is asset-backed making it more resilient to credit market downturns, and by improving people’s ability to live on lower wages and less debt through better education, we improve the household budget which makes tax receipts more stable.

  5. Nicholas
    Jun 4th 2013, 4:39 pm

    9 – Why is youth unemployment so high?

    The answer to this is depressingly simple – Experience. Our education system does not adequately prepare young people for work. Even those who achieve high grades struggle to find work unless their qualifications are industry/profession specific.

    In an uncertain business environment companies are increasingly looking to their staff as providers of solutions or as a lever to greater value. As a result academic qualifications are becoming secondary to relevent experience. Many companies do not have the time, money or inclination to hire substantial numbers of young inexperienced people and train them up. The situation is even worse for those with neither university qualifications or experience.

    If you dont believe me take your own CV, delete everything you did since university, then change the dates to make out that you are a recent graduate and try to apply for some entry level positions in your own profession.

  6. Uncle Slacky
    Jun 4th 2013, 5:04 pm

    Introduce a basic income, funded through Land Value Taxation.

  7. zerozero
    Jun 4th 2013, 6:09 pm

    1. Rewards from growth usually do not reach the working class; their reward is usually greater and more efficient exploitation, booby prize really.

    2. Within capitalism, the post war restrictions were sensible, but were repealed by capitalism, so capitalism tends to seek the freest relations for itself. In this respect it is not possible to limit it in a sustainable way. Capitalism leads to finance capital as its highest most abstract form.

    3. Capital concentrates in the centres of capital, which are the cities and the biggest cities and financial districts. There are means to limit this by regional planning, but this requires limits on capital (return to question 2).

    4. Private business investment can be increased by having banks that are genuinely interested in this rather than big business and their own profits. This would imply government planning and intervention in the private banking market, but they will be reluctant to do so (as they have been) for class reasons, as their interests are often tied in with the big bankers and corporations. So this would necessitate restrictions on the lobbying powers of the big interests, thus changes to democracy and representation. It is not impossible to prevent this lobbying though.

    The UK’s balance of payments can be partly rescued by some of the above, but genuine socialism is the longer term answer.

    A diverse and resilient tax base can be made, among other lesser things, by reducing unemployment. So how is unemployment reduced?

    We can manage the credit cycle by periodically going to war. Sorry to be facetious, but this is a fundamental part of capitalism and without abolishing exploitation we are stuck with it, but it is not a ‘cycle’.

    Full employment can only be achieved in a planned socialist economy; capitalism is predicated on competition for work, with labour power as a commodity.

    Youth unemployment is so high because they enter a market in which the falling rate of profit rules, and people are being sacked. Why the market favours the older worker is because they have been able to defend their interests by the traditional means, while the youth have not or hardly started on this course yet. The young are the easiest to sack, the first out and the last in. Yet of course they are the future.

    The idea of a ‘balance’ in fiscal, monetary and macroprudential policy is rather assuming that ‘balance’ has existed, and been necessary and/or beneficial, but what is this ‘balance’ and when has it ever existed? First I would like a convincing description of what point in the history of capitalism there has ever been ‘balance’. It is my suspicion that capitalism proceeds by vicious competition from one crisis to another and in this process no balance, in the sense of socio economic harmony, ever asserts itself. If we mean the Rousseau social contract by an ideal balance, then we can see that boom times might correspond to this – however the boom is usually for the rich alone, and leads to the slump.

    A sustainable balanced economy in harmony with ecology, again, requires socialism.

  8. Chris White
    Jun 4th 2013, 7:03 pm

    Having finally arrived at a point of Swiftian lunacy where taxpayer owned but insolvent banks are refusing to lend our money to our solvent businesses because we’re too risky, we finally ask the question: How do we rid ourselves of a parasitic financial community with no interest in anything beyond its own security and personal advantage?

    Once possible answer is simple, but truly radical. Competition for the banks as a class. They’ve had it their own way for 500 years, time for an alternative?

    May I therefore propose a massive corporation tax break for businesses investing retained profit in constitutionally non-demutualizable business credit unions – and a change in legislation to let these new, large scale, credit funds get as big as they like within reason.

    Their remit limited to project based business lending only, with tough strings on the money to prevent speculative ‘creative reinvestment’ of lent funds, credit union activity will begin to deny business capital to financial casinos.

    The unions will only be of useful recourse to enterprises interested in growing in the true sense, They will have no part to play in M&A, IPO or other fee-generating turbodebt scams.

    As they move into profit along with sustainable growth they foster, the unions can then pay a decent tax on the profit they make from the balance of successful business investments, none of which will be speculative in nature being limited to long to medium term investments by their strict constitutions.

    Investors too will pay moderate tax on the profits they draw back out from their union membership, but as long as capital remains within the unions, it remains untaxed, ready to be used for real capital investment – not gambling.

    Sliding scale liability can defray taxation on long term investment in the union, further stimulating non-financial business to invest in their own kind, rather than allowing banks to gamble with their debts.

    Businesses then no longer need to approach the stock markets for funding unless they want risky volatile traded capital. Eventually, established businesses can work their way into a CREDIT based financial model that is still financially and fiscally efficient while providing stable credit for growing businesses on their way up.

    Then we can cheerfully let our carefree wheeler dealer friends try to make money out of each others’ dwindling piles of stolen and borrowed cash until they disappear up their own financial fundamentals.

    Just an idea.

  9. Pawel Morski
    Jun 4th 2013, 8:23 pm

    1. start by recognising that something fundamental has changed in the world economy and how capitalism functions. Paying people according to their marginal productivity isn’t going to hack it, so a conscious effort to channel money from the rich down the chain. Subsidise employment aggressively. Ensure social provision of services such as education or health so that income matters less.
    2. You mean “Banking” rather than Finance I hope. Insurance, factoring, asset Management and a legal sector that makes the UK a central jurisdiction strike me as activities with a future globally, where the UK has a competitive advantage and an establish “moat”. Stopping the UK’s role as a global tax haven.
    Don’t underestimate how much banking shrinkage is already in the pipeline. Of course the best way of reducing the scope of “bad banking” would have been to not bail out the banks.
    In terms of domestic banking, reduce the importance of housing as an asset to the economy as a whole. CGT on all housing, including primary residence. Build on the Green belt. Land value tax would also make sense; the government appropriating the economic rent that results from a lot of people living in a small area is a great fiscal strategy, but one that does nothing for making the economy work.
    3. Infrastructure. London gets the lion’s share.
    4. No good answers here.
    5. What poor balance of payments? The UK’s International Investment position looks pretty good. We can’t all be Germany – and we don’t have Germany’s power to use EMU to force its debtors to pay.
    6. Tax rich people at a low rate but which they have to pay. A US-style AMT would probably be good idea. Join the EU jihad against tax havens.
    7. Light-touch regulation has had its day. No more too big to fail – there has to be scope for creditors to take their punishment on bad lending. In the UK, the credit cycle is always about housing – and some way of turning housing into just another service that’s paid for distinct from investment would make sense.
    8. Just lift a Scandinavian labour model wholesale.
    9. Doesn’t make huge sense to consider youth unemployment as a separate issue from unemployment generally. Older people with families need at least as much help. Take care of the labour market as a whole and youth unemployment will take care of itself.
    10. More macroprudential regulation, including pro-cyclical bank provisioning.

  10. Heather Wakefield
    Jun 5th 2013, 6:58 am

    Dear Duncan – Infrastructure development is obviously one answer, but will not deal with the high levels of unemployment created among women as a result of public sector cuts – or match their skills/experience in the main. There remains the major question of investment in public services based on need – which is very evident in areas such as childcare and adult social care. I don’t think we can or should duck this. We need a values-based economic revival and gender equality should be one of those values.

  11. Dr Adrian Potts
    Jun 13th 2013, 4:24 pm

    Finally an economist who is asking the right questions. Well done Duncan.

    Economic policy needs more levers than just interest rate policy and government deficit spending. Ultimately, economic policy should be about regulating the flow of money around the economy, and ensuring that no one part grows too fast – i.e. preventing booms. So your questions about regional inequality, investment and current account deficits are important. Other questions should be:
    How do we control property prices?
    How do we limit stock market bubbles?
    How do we ensure that the volume of capital stock in the country increases at the same rate as real GDP?
    How do we reduce our Gini coefficient?
    How do we regulate debt/income ratios?
    How do we maximize long-term sustainable growth rates?
    I believe the answers to many of my additional questions will come from solutions to many of Duncan’s original 10.

    Now for some answers.

    1). How can we ensure that the rewards from growth actually benefit most people?

    This is about wages. I would advocate two policy changes.

    a) Raise the minimum wage by 50p per hour each year until it starts to have adverse effects on employment or inflation. Then stop at that point. If it’s not hurting then it is not working. Countries like Australia and Switzerland remain competitive with much higher minimum wages than the UK. The price they pay is higher prices, but all prices are relative. As most minimum wage jobs are based in service sectors with no international competition, there will be no great loss of jobs as a result, but there will be greater income equality. Governments need to be less timid in the setting of the minimum wage rate. In addition, inflation measures should be changed to remove the effects of one-off tax and minimum wage changes from the calculation so that there is less likelihood of long-term inflationary pressure persisting due to rational expectations. Replace CPI with CPI-CT.

    b) Change the way corporation tax is levied. Link it to the fraction of each company’s earnings that go in profits compared to wages.

    A recent paper I published on the Cumbria and North Lancashire Fabian Society website advocates doing this with a tax rate that is linked to each company’s Gini coefficient rather than being a simple flat rate tax as at present. The consequence of this new tax rate is that it would prevent firms from squeezing wages indefinitely in search of ever higher profits as a tipping point would eventually be reached where their tax bill started rising faster than the gain in profits. Once past this point net profits would fall, and so firms would actually be forced to RAISE wages in order to reduce their tax and thereby increase their net profits.

    The paper is entitled: How Taxing Companies According to their Gini Coefficients Could Reduce National Income Inequalities. A Case Study in Pre‐distribution.

    A PDF (size 2MB) of the paper is available here:
    http://www.cnlfabiansociety.org.uk/CNL%20Publications.html

    2). How can we reduce our dependence on the financial sector as a driver of growth?

    This can only be done through increased investment in R&D. The State must take the lead by funding a large network of research centres in pure and applied sciences similar in size to CNRS in France or the Max Planck/Fraunhofer/Helmholtz Institutes in Germany. Economists must abandon the notion that the free market and the private sector will or should determine levels and directions of investment and research. One reason is that R&D is not about picking winners. A good research base needs diversity and government can fund that better than firms with their short-term outlook. For example, I’m not sure that Big Pharma is really interested in funding research into new antibiotics, diseases that afflict the poor, or vaccines for pandemics that may never happen. Society is. Big Pharma wants drugs with large predictable revenue streams such as those for managing chronic illnesses.
    Evidence shows that if governments invest heavily in research, multinationals will move to those countries in order to share in the benefits. It is about creating critical mass, and that is one thing that government can do well because of its enormous size.
    As for the question of funding, personally I favour a new tax on all royalty income from intellectual property. IP is monopolistic, and I believe that the owners of all monopolies should pay higher taxes for the privilege, even if they are domiciled abroad. Such a tax should be applied at source on all UK revenues, not on the income of the end beneficiary who is often overseas, and could also be used to fund the Arts, not just science.

    3). How can we ensure that there is more economic activity throughout the UK rather than too much being concentrated in the South East pocket?

    We should have two policies, one carrot the other stick.

    The carrot: lower business rates and employers’ NICs the further a company is from London. Link each to the average house price in that county.
    Also set up regional research centres that act as magnets for new start-up companies and therefore jobs and investment. These should be based on the French CNRS or the German Max Planck Institute model as outlined in point 2.
    Finally, we need regional investment banks that are funded centrally, and which offer lower interest rates in poorer regions.

    The stick: raise the cost of business in the South East by raising business rates and employers’ NICs in line with average house prices.

    It is only by introducing a sufficiently large economic gradient of tax benefits and business costs that you will encourage companies to spread northwards and reduce clustering. At the centre of the policy must be a commitment to the argument that the UK will function more efficiently if its population and economic activity are spread out evenly rather than concentrated in one corner of the country. The resulting higher costs on business in the South East should be defended by arguing that they are merely the result of transferring costs previously borne by the State (externalities) to the companies and individuals that created those costs. These costs include higher congestion which leads to increasing infrastructure spending, and higher housing costs which drive higher wages, inequality and welfare costs.

    4). How can we increase investment levels in the UK? In particular, how can we increase private business investment?

    The answer to this is the same as the answer to Q1. The same model I outlined for raising wages vis-a-vis profits could be applied to the balance between investment and profits.
    So we should split corporation tax into two components. Set the tax rate for one based on wage rates as outlined here:
    http://www.cnlfabiansociety.org.uk/Adrian%20Potts%20Gini%20Coeficients.pdf
    Then set the tax rate for the other component based on investment using a similar method. See Eq. (30) in Section 6 of the above paper. This way government can set aggregate investment levels over the entire economy. The government should then adjust the position of the tipping point in the tax rate (using the variable alpha in the model) until aggregate investment reaches a required target relative to GDP (say 2.5%).