Building a better economy
Yesterday the Bank of England told us that the ‘recovery had finally arrived’. It caveated this with important warnings about the lack real wage growth, the elevated level of unemployment and the current pattern of growth but the headlines have chosen, in most cases, to put aside these concerns.
The ignoring of these caveats and concerns is, for want of a better term, concerning.
Growth currently is being driven by consumer spending and that consumer spending is associated with rising consumer borrowing and a strengthening housing market. Living standards remain under pressure and are likely to for some time. The labour market is polarising and whilst some people are doing very well, for the majority are seeing their incomes squeezed.
…today is the 21st anniversary of Black Wednesday and the UK’s exit from the Exchange Rate Mechanism (ERM). After the ERM debacle the UK enjoyed 15 long years of continuous, low inflationary growth – the Great Moderation or Lord King’s NICE decade. During this long boom the need for a more balanced economy was downplayed, as long as the economy grew then the attitude of many policymakers was ‘if it ain’t broke, don’t fix it’.
Yet, by 2008 the UK economy was seriously unbalanced – business investment and exports were too low, economic activity was too concentrated in certain geographies and certain sectors, the public finances too dependent on a narrow tax base and wages for the majority had stopped rising in line with the wider economy.
From 2008 until earlier this year this was widespread political commitment to rebalancing…
However, as I’ve written before, the Budget of 2013 represents (on the most generous interpretation) the suspension of rebalancing in favour of consumer and housing market led growth. The worry now is that after 5 years of abysmal economic performance, any sort of growth will be seized on as ‘good enough’. Policy makers will be tempted to put on hold the difficult job of rebalancing the UK economy and instead aim to encourage a ‘feel good’ factor through higher consumption and higher property price.
I think this remains a genuine worry. As long as the economy (as measured by GDP anyway) and property prices are heading upwards, the debate around rebalancing risks being ignored.
I want to see a high productivity, high skill, high wage economy in the UK. One where growth is balanced across sectors and regions, where the rewards from growth are widely shared, where that growth is sustainable (in terms of both environmentally factors and in the sense of ‘not likely to suddenly implode ‘) and where we have sound public finances based on diverse and dependable tax revenues.
I’m tempted to add to that list ‘I’d also like a pony’, because who could possibly disagree with the need for a well balanced, high productivity, high wage economy? Well, leaving aside the one MP who recently described something like as a ‘nightmare vision’, I think the question isn’t so much, ‘who wants such an economy?’ and is more, ‘who is prepared to take the steps to get us there?’.
This really goes back to the debate between those who think the UK’s economic model pre-2008 was fundamentally sound and those who raise wider questions. I’m firmly in the later camp and think that getting to the high wage, high productivity economy requires structural reform and is the project of more than Parliament.
So, I was delighted to read ‘Transforming the Market’ from former Number Ten advisor Patrick Diamond. Whilst I don’t agree with all of his recommendations, I’m firmly with him on the direction of travel.
Pulling together a wide range of strands in current centre-left thought about the future of the economy, he sets out a “market-transforming” strategy to encourage new institutions that would inculcate long-term commitment and trust. His central recommendations include:
• Greater diversity in the economy, using public procurement to promote SMEs and giving councils more powers to build local economies from the bottom-up.
• More regional economic autonomy, including regional banking, and the development of infrastructure such as the expansion of regional airports.
• Better quality of apprenticeships and a renewed emphasis on traditional craft skills, adoption of the living wage and a more equitable distribution of wealth through pay packets (“predistribution”).
• Reform of corporate governance, including making predatory takeovers more difficult, and extending employee ownership with partial remuneration through shares.
This is a programme focussed on creating the institutions necessary to get better economic outcomes. I think this is the key agenda facing those who want a better economy.
The UK faces a choice – either continue down the path of the ‘old growth model’ with all of its inherent problems, inequalities and instability or try to build something better. Building something better requires an active and inventive state, one that takes institutions seriously and which isn’t content to take market outcomes as a given.
We don’t need a recovery, we need economic renewal.