The State: more power or less?

The Duncan Weldon Economics Matters Column

In the comments of last weekÒ’’s post I promised to address the issue of the GovernmentÒ’’s record on employment. IÒ’’m afraid IÒ’’m going to disappoint those who were looking forward to that. The issue is a complex one (and a data intense one) that I want to do justice to, which sadly means it is taking longer than I hoped. Equally though I feel there is a need to address a more pressing issue this week.

The response of all three major parties to the ongoing expenses has been to offer some form of constitutional reform. The exact details vary from party to party, but all seem intent on pressing ahead with the vague notion of Ò‘passing power from government to the peopleÒ’. I donÒ’t have a particular problem with this agenda, depending upon the exact formula used, but I do wonder how this ties in with the current economic agenda.

I have been arguing, here and at my own blog, that post-recession Britain will face two immediate challenges: sorting out the public finances and rebalancing the economy.

On the second on those challenges there are currently two schools of thought. Those on the right argue that we should Ò‘let the market sought it outÒ’, if Britain has become too dependent on finance, property and debt-financed consumer spending then, given time, the market will clear at a new equilibrium and the structure of the British economy will change.

As regular readers will know, I disagree. I think we need a more active industrial policy to help the rebalancing process. I believe that economic systems display, what economists dub Ò‘hysteresisÒ’. That is to say that short term effects can have long run consequences, if unemployment is higher in the short term it might lead to longer term high unemployment as the workforce becomes deskilled and demotivated. Equally there are many problems with the standard Ò‘production functionÒ’ used in economics, especially when an economy is undergoing radical change. Many Ò‘classicalÒ’ economists would argue that there are simply two primary inputs in production Ò‘capitalÒ’ and Ò‘labourÒ’, if Ò‘labourÒ’ is freed up in one sector in it simply go where it is needed. But of course this is vast over simplification. If I lose my job tomorrow, I can hardly go and work as an engineer next week.

What would an industrial policy look like? It would not be a rerun of the 1970s, I am not advocating Ò‘picking winnersÒ’ and backing individual companies. Nor would it be about subsidising specific firms that have no future. Whilst I donÒ’t want any more British Leylands, I wouldnÒ’t mind the odd Chrysler. Equally it should not be an excuse for a return to protectionism.

I am certainly not arguing that we need to draw up a Ò‘National PlanÒ’ as detailed as the WilsonÒ’ GovernmentÒ’’s document of 1965 that asked each industry how much timber it would need in coming year. Instead we need more of a Ò‘National BlueprintÒ’, some outline of where we want the economy to be. I’Ò’d suggest concentrate on our strengths and industries where there is a long-term future Ò— pharmaceuticals, advanced manufacturing, green technology, telecoms & communications, biotechnology, renewables, green engineering. In each case we could then support the industry through large R&D tax credits, direct tax breaks, government funded venture capital schemes, government backed lending schemes, extensive training grants, direct support of university and FE courses to train future workers. This would involve working hand in hand with business (and ideally trade unions) in a way we havenÒ’t really since the 1970s.

The need for an active industrial policy is not a New Labour/Old Labour issue, Lord Mandelson has been well ahead of the curve on this agenda. Nor is a Government versus business question Ò— the CBI seems keen on more support here.

So what does any of this have to do with Ò‘devolving power to the peopleÒ’? Quite a lot actually, on the one hand we need, in my view, to be prepared for far more government involvement in the economy that we have had since Thatcher and on the other hand we are talking about giving up power from the centre. There is presumably a way to square these two opposing trends, but I have yet to hear how.

In all the talk of constitutional reform and power sharing, we must not lose sight of the challenges of post-recession Britain.