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Will Hutton and Irwin Stelzer ask what role the government should play in stimulating UK economic growth
WILL HUTTON
Will Hutton is author of Them and Us and is leading the government Review of Fair Pay in the Public Sector. He is also Executive Vice-Chair of The Work Foundation
The aftermath of the credit crunch, if past experience is anything to go by, is a protracted period of poor growth. What is new about the next few years is that, for the first time since the early 1930s, the credit crunch has been experienced internationally. Countries are in the same boat, so their capacity to export to each other as a way out of their problems is profoundly limited.
Nobody knows whether world trade will hold up, whether a second financial crisis will hit or whether China can continue its role pump priming Asia and thus underwriting world growth. My own view is that, on balance, the recovery will continue, but falteringly, and could be blown off course at any moment by a major crisis. The 1930s were plagued by beggar-my-neighbour economic policies and trade protection. Nobody should exclude the possibility of that happening again.
But the 1930s also saw industrial creativity. Britain, behind the tariff wall offered by Imperial Preference, succeeded in launching a wave of new industries. Automobiles, television and radio, aerospace and chemicals were just a few of the sectors in which companies such as Austin Morris, Thorn, de Havilland and ICI began to grow and prosper. By the time war arrived in 1939, Britain had invented a new industrial structure, and the old reliance on cotton, rail, iron and steel, and coal was fast retreating.
The question is whether something similar will happen in the 2010s. The industries that flourished during the decade-long credit boom up to 2008 – construction, retailing, property, estate agency – can no longer flourish in the next decade. There will not be the rise in credit and property prices; the squeeze in the real incomes of those above, on and below the median salary is going to be intense; and there will be no relief from rising house prices. Consumption will be static. If the economy is to grow, it will be driven by exports and investment – and what will drive those is innovation. Britain has got to get smarter at offering real goods and services that people want, and rely less on making money from money in the City of London and wheeler-dealing in property.
This is quite an ask, but not impossible. The first big point is the trend is towards ‘manuservices’. Nowadays, neither businesses nor consumers want to buy a simple product – they want to buy a solution. Half the turnover of the great US manufacturing multinationals GE and IBM now comes from the services they provide, and 60% of American manufacturing companies define themselves as ‘manuservice’ companies. Rolls-Royce is one example in Britain, with companies as disparate as Unilever and Tesco moving the same way.
Embedded in the ‘manuservice’ concept is the notion of innovation. What both businesses and consumers are saying to suppliers is not “offer me a product or a service that I can readily consume or use because I know what I want,” but rather, “offer me a solution to my problem, because I am very uncertain what the answer is.” Companies are getting alongside each other and their consumers more because solutions arise from two-way, iterative conversation.
So what are the great business and consumer needs that will drive the growth of innovative manuservice companies? My hunch is that they will include education, health, entertainment, food and the environment. The 2010s will be a decade of rising energy and commodity prices. Everybody will be in the quest for greater efficiency and greater agricultural yields. Similarly, the rise of this knowledge economy means that acquiring skills is going to become big business. Meanwhile, people are going to become preoccupied with living well. Whether it’s drugs, exercise or preventative medicine, there will be growing demand for healthy-living solutions. And there is no reason to be bored. The rise in the internet and ICT has spawned not just social networking sites but whole new industries, from games to ever smarter tools to mine and aggregate information.
The role of government
How can the government support this wave of new company formation and growth? Traditionally, it has either got out of the way and let the market work its magic or used tax breaks, grants or loans to favoured companies or sectors. I think a new approach is required. The government has to be the architect of the matrix of institutions and processes that support innovation and investment – the innovation ecosystem – and then let the pattern of demand and supply work as it will.
Britain does not start with a blank sheet of paper. Our leading universities have all been doing better at creating licences and company spin-offs from their academic work, even if they still fall short of what happens in the US. The last government’s Regional Development Agencies, shamefully abolished without a fleshed-out view of what would replace them, did some excellent work in creating centres to support new technologies. And the legacy lives on: the Technology Strategy Board is increasingly effective at establishing knowledge-transfer networks.
But much more has to be done. There is the question of Britain’s financial system – risk-averse, short term and notoriously reluctant to commit and invest rather than buy and sell. There has to be root-and branch reform, and the coalition’s establishment of a banking commission, along with its taking much more seriously than any predecessor the issue of excess take-over, are hopeful auguries. Given the importance of new intellectual property and knowledge, the government has to sustain its investment in the science base and universities. It can also regulate and procure to help along the innovation cause. Britain’s class of technicians is appallingly small and poorly trained; there needs to be mobilisation here, too.
In the absence of Imperial Preference and an empire, Britain has to be attentive to keeping its key markets open in Europe and the Commonwealth. These are not times for know-nothing euroscepticism; they are times to hold one’s geographic neighbours close. Last but not least, the government must use every tool of monetary and fiscal policy to maintain some predictability and buoyancy of demand – there is no innovation or growth against a background of stagnating or falling demand. It is a long list of actions, but if we want jobs and growth, nothing less will suffice.
IRWIN STELZER
Irwin Stelzer is a Senior Fellow and Director of Hudson Institute and a columnist for The Sunday Times
Growth. The new buzzword. With governments desperate for new revenue sources, with taxes already so high that more than modest increases in rates will not generate a great deal of revenue, with populations ageing and pension and healthcare costs therefore rising, rapid economic growth is now seen as an absolute necessity if national bankruptcy is to be avoided, or if benefits are not to be cut to riot-inducing levels. But governments are uncertain what to do, if anything, to stimulate growth. Most economists know that ‘industrial policy’, which involves some government bureaucrat ‘picking winners’, is a sure path to breeding inefficient enterprises that cannot survive in a globalised competitive market. We know, too, that subsidising loss-making enterprises involves trying to enable lumbering dinosaurs to survive in a world in which the race goes to the nimble.
We also know that corporate taxes can reach a point at which they drive businesses out of Britain, as the tax on overseas earnings seems to be doing. And that personal income taxes can reach a level at which they discourage work and risk-taking. That failure to protect intellectual property can remove incentives to innovate, and that too draconian a protective regime can prevent the spread of knowledge. That words matter – anti-business rhetoric from high government officials can cause businesses to sit on their cash rather than invest it and expose it to whatever nasty policy comes to the mind of the incumbent government. That governments on all levels sometimes erect barriers to the creation of new enterprises, and that it is new enterprises that drive job creation and improve productivity. All of which tells us what the British government – any government, really – can do to stimulate growth.
Start with two things. First, pro-business rhetoric that assures businessmen that their long-lived investments will not be subject to ex post rules and taxes that will make them wish they had stayed in bed. Words from people in authority matter. John Maynard Keynes was right to point out that economic growth depends on unleashing investors’ ‘animal spirits’. And Joseph Schumpeter was right to point out that it takes bold entrepreneurs, unimpressed by the status quo, to unleash the gale of creative destruction that drives economies forward. Government can’t do much to unleash those animal spirits or to create an entrepreneurial attitude, but it can do a great deal to stifle them by equating success with some form of anti-social behaviour, rather than celebrating it.
Second, as a general principle of taxation and regulation, adopt President Ronald Reagan’s famous dictum, “Don’t just do something, stand there.” Yes, for a market economy to function properly it needs rules, it needs a government that acts as referee, especially to prevent incumbent firms from adopting anti-competitive business practices designed to make it difficult for newcomers to enter an industry. But government should not become a player in the game except in a crisis. The recent past, in which its role expanded in order to prevent an implosion of the financial system, should not be taken as a prologue.
Those broad precepts in hand, government can adopt a series of measures to stimulate growth. Repeal regulations that are obsolete or do not pass a cost-benefits test, and eschew any new ones that do not promise to add more to national wealth than the costs they create. This is no easy chore, more difficult in the implementation than in the formulation. But it must be done, even imperfectly, to cut down the profusion of dos and don’ts that rain down upon businesses from well-meaning bureaucrats in Whitehall.
Review the level of corporate tax, as well as the structure of taxation, to reduce compliance costs. Add certainty by eliminating the adversarial relationship between the tax collector and the sheep he must shear, and remove invitations to flee to more benign climates, as several major businesses and hedge funds have already done.
Then become more imaginative. Small business start-ups in Britain suffer mightily from the lack of a vigorous venture capital industry, and the presence of a banking system populated by lenders who only want to lend to those in no need of loans. They are also confronted by a mountain of regulations that can easily be scaled by large businesses with their armies of accountants, lawyers and lobbyists, but are insurmountable for the small entrepreneur. So exempt all new businesses from all regulations and all taxes for, say, five years. Note that this is not industrial policy. No government official is saying which new enterprises will benefit. Rather, all will, whether a whelk stall or the creator of a new computer programme.
There is more, of course. Government can improve all public services by maximising competition and consumer choice: the dead hand of producer-led public services creates a society unattractive to thrusting entrepreneurs. It can make sure that its immigration policies do not exclude the skilled and talented.
None of these things is easy. Government naturally tends to be active where it shouldn’t – in the affairs of business, and inactive where it should be active – reducing crime and protecting the realm. So it has come to pass that the successful ‘Silicon Roundabout’ congregation of small, high-tech start-ups in the Shoreditch area of east London has attracted the attention of the British government. Rather than heed Reagan’s interdiction, the Prime Minister has decided to lavish his skills and attention on this successful exercise in individual, creative entrepreneurship, by arranging for the big beasts of the technology industries to lend their support to these start-ups. Start-ups that, if successful, will threaten the dominance of the big beasts.
Such is the wisdom of government officials ever ready to interfere in areas they do not and cannot understand – the risk-taking entrepreneurial world of men and women prepared to face the consequences of their actions.
