Changing the National Business Model
I was especially struck by his eighth point – that on social security, the media and others largely see what they want to see. As Mark writes:
Whilst the press viewed the speeches as Labour’s conversion to the austerity myth, Labour supporters on the whole welcomed the renewed focus on housing, and calls for investment in jobs and growth. That’s because both we, and the media, were seeing what we wanted to see. The truth is somewhere in between.
As Richard wrote last week on Touchstone, despite some of the “tough” rhetoric there was much in Ed Miliband’s speech to welcome – the commitment to tackling low pay, the problem of bad jobs, the shortage of affordable housing and the language of “social security” as opposed to “welfare”. (Although Nicola also warned last week of some of the potential pit falls of attempting to cap structural social security spending).
Mark writes that:
The media don’t realise that Ed Miliband is serious about wanting to completely reshape the British economy
I think he is right.
To take one example, Miliband argued on Thursday that:
Today in Britain almost three million men and women and almost one and half million children live in families that are going to work and are still not able to escape poverty.
People doing the right thing, trying to support themselves and their children.
The last Labour government took action on this, and was right to provide tax credits for those in work.
But we didn’t do enough to tackle Britain’s low wage economy, a low wage economy that just leaves the taxpayer facing greater and greater costs subsidising employers.
To tackle the problem of poverty at work and to control costs we need to create an economy that genuinely works for working people.
Faced with a situation where millions one people are in work but still below the poverty line, there are three possible solutions: either increase benefit levels to ease these people’s plight but increase the social security bill, cut social security spending to ease the bill on the taxpayer but blight these people’s lives further or tackle the problem of low wages at source. Miliband is arguing for the third.
The debate around ‘reforming capitalism’ sometimes feels rather academic, the stuff of university seminar rooms and think tank roundtables rather than practical politics. But to dismiss it so slightly is a mistake.
Take Ed Miliband’s speech at Bedford on a ‘One Nation Economy’ made back in February. This was a nuanced argument. As I wrote at the time the media headlines around the restoration of the 10p rate of income tax and an accompanying mansion tax were, in many ways, the least interesting aspects of that speech.
The Bedford speech was perhaps the clearest indication yet that Labour recognises that the UK’s problems are not entirely down to a lack of demand. That the UK faces a demand shortage – caused by fiscal austerity, a squeeze on living standards, a banking system that is not lending and the impact of the Eurozone crisis – is undeniable. Acknowledging that we face a demand shortage does not mean that we don’t also face problems on the supply side of the economy.
This is an important point – a fiscal stimulus aimed at raising demand would give a significant boost to the economy and is a necessary step on the road to recovery but a stimulus alone is not enough. We don’t just need growth but the right kind of growth – growth that is jobs rich, that flows down to those in the middle and below and that is both more balanced and more sustainable.
In terms of political rhetoric this could be termed ‘responsible capitalism’, in more boring economic parlance this is simply ‘supply side policy’. Since the 1980’s, in the UK at least, ‘supply side’ policy has often be taken to consist of little more than deregulation and tax cuts, something the current government is certainly pushing ahead with. In reality though, if the UK is to avoid going down the low productivity, lower wage path then we need a very different supply side agenda of changes to the banking system, reforms to corporate governance to combat short-termism and a modern industrial policy to aid rebalancing.
Thursday’s speech was very much in line with these existing arguments. Call it ‘responsible capitalism’, call it a ‘supply side revolution from the left’ (to use Stewart Wood’s phrase), or call it ‘economic reform’, it is important not to get too hung up on the language. Ed Miliband has been consistently arguing the UK faces bigger economic problems than straight forward lack of demand.
The economy is unbalanced both sectorally and regionally, the rewards from growth have not found their way into the pockets of those in the middle and below and all too often the taxpayer has been left to pick up the bill. Rather than solve these problems with some fiscal elastoplasts, Miliband is arguing for something much more ambitious. Something so ambitious that the media often simply miss it entirely, so a major speech on the structure of our economy in February is reduced to some fiscal tinkering.
Last week, I outlined ten challenges for economic policy makers – from wages, to economic geography, to employment, to exports. I also noted though that:
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.
This is something of a long running theme of mine, I wrote the day after the first ‘One Nation’ speech that:
A simple return to growth is not enough – we need growth that is more balanced across industries and regions, more rewarding to those in the middle and below and accompanied by more long term investment.
This kind of growth will never be achieved simply using the traditional tools of fiscal and monetary policy. Both obviously have a role to play (and Ed rightly attacked the Government’s disastrous fiscal policy choices yesterday) but there is more to economic policy than pulling levers in Threadneedle Street and Horse Guards Road.
In their first for ‘policy announcements’ the media often seem more interested tax rates, schemes and initiatives than in taking a moment to step back and address the bigger questions.
Fundamentally, the big challenges the UK faces in the next decade are not ones than will answered in this manner. As I wrote back in October last year:
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.
Since I wrote that post (responding to the Heseltine Report, the Commission on Living Standards and a fascinating speech from the BOE’s Andy Haldane), the case for a change in national business model has only become stronger.
For much of 2012 economists debated the so-called ‘productivity puzzle’ of falling GDP coupled with rising employment. Recent labour market data is providing clues as to the answer to this paradox. The TUC’s Economic Report in February warned that the UK risked becoming a ‘lower wage, low productivity economy’. There is evidence that this may now be becoming the case.
Over the past three years we have now experienced large falls in real wages, weak economic growth, better than expected employment growth and a collapse in productivity…
The worry now is that this ‘economic malaise’ is becoming entrenched. The ‘recovery’ in the wider economy is not being matched by rising real wages or rising living standards, instead the demand-constrained UK economy might be stumbling into a lower wage, lower productivity growth model with serious implications for living standards in the future.
Avoiding this outcome will require not just an immediate boost to demand but also the ‘right kind’ of supply-side reforms – a modern industrial policy, banking reform, corporate governance reform, reforms to wage setting – to ensure that we get growth which is sustainable, equitable and that generates decent, well paid jobs.
Reforming our national business model offers a way to deal with the rising social security bill, to tackle the living standards crisis, to generate more sustainable growth and to achieve the much-needed economic rebalancing. The debate on ‘reforming capitalism’ deserves to be taken a lot more seriously.