We need jobs – but Osborne abandons his white paper on growth

Absolutely key to the Coalition’s economic strategy is the idea that a rapidly growing private sector will employ those made redundant by the public sector.   If this doesn’t happen we are in for soaring unemployment and for far more cuts than currently announced.   

So, one might suppose that well before the general election all the political parties would have analysed the issues and worked up some pretty detailed plans to boost growth; after all, Britain’s anaemic growth record is hardly a new problem that’s blown up only since May – it’s been part of the economic landscape for as long as I can remember.   Indeed, one might suppose that the Coalition would have the luxury of taking the best thinking from each party.

Unfortunately, it seems that while in opposition neither party saw fit to address one of the most important issues it would face if elected.  

Which is why George Osborne has just had to abandon plans to publish a white paper on growth, originally scheduled to be published last month.  In a little-reported move it has been quietly dropped and downgraded to a discussion document according to the FT of 22 November (print edition) because, as aides admit, the “government did not have enough serious content to warrant a white paper.”   What we are to get instead is a series of  more modest documents analysing barriers to growth in a handful of industries including the creative industries, retail and advanced manufacturing.  

I’m not holding my breath for anything other than a quick reheating of the usual nostrums; the same ones that didn’t work too well or didn’t work as expected on previous occasions.

For successive governments have had solutions – of a sort – to the problem of how to create growth.

For Thatcher it was to deregulate everything, promote competition and privatize state industries like British gas and British Telecom.  It was also (although this would be vigorously denied) the plan to rely on the fortunate happenstance of North Sea Oil; although this started flowing in the late 70s, the tax regime meant that tax revenues didn’t start flowing until 1980 – but then they were a flood.  As Prime Minister James Callaghan had observed, whoever won the next general election (the 1979 election won by Thatcher) would govern for a generation because of the North Sea oil windfall.

As time went by, the low-hanging fruit had already been picked and early pragmatism was driven out by ideological conviction unsupported by evidence or even much competence.   Hence the travesty of the electricity industry privatisation where the market promptly rearranged the pieces to suit itself and the disastrous mess of the British Rail privatisation.   Hence also the invention of PFIs – unsustainable debt financing combined with cooking the books to disguise the deed.   After 1997, with the easy assets already sold off and oil production past its peak, expanding private debt, ‘secured’ (as the banks fondly believed) by ever-rising property prices, became the main engine of growth. 

There was sense in some (not all) of what Thatcher did in the early 80s but by the mid 90s the flaws were beginning to show with the Thatcherite world-view.   Its key memes – the ‘markets are always right’, ‘government is the problem, not the answer’, ‘there is no such thing as society’ and ‘there is no alternative’ – are internally inconsistent intellectual drivel which have only one advantage – and that not a good one.   As long as they stand unchallenged they enable a remarkably self-serving economic programme to be pushed through; one that suits a connected and wealthy elite but impoverishes the majority, one that inevitably morphs into crony capitalism as the checks and balances that should exist are sidelined in favour of  ‘market discipline’ while what is really happening is that markets are being hollowed out to leave the form but not the substance.

Progressives could have pointed out (but mostly didn’t) that the whole edifice was deeply flawed.  New Labour was deeply traumatized by the collapse of its democratic socialist world view along with the less democratic Soviet Empire.  Blair tried to spin his approach as somehow different but all we actually got was reheated Thatcherism with more public spending.   For Blair personally this delivered, for the country as a whole it didn’t.   The Lib Dems could have seized the high ground and offered a credible alternative but the party High Command seemed quite incapable of imagining that there was any alternative to (awful) Thatcherism on the one hand or (differently awful) socialism on the other hand.

I believe that the key to creating virtuous growth (by which I mean economically and environmentally sustainable growth that benefits the nation as a whole) is to understand how the economy really works, not the self-serving interpretation put about by a narrow elite.  This means understanding how power and money flow through the economy and intertwine with each other.  Surely, seeking to understanding this is about as liberal a project as one could wish for! 

What all the faux economics of the last 30 years has actually delivered is an economy that has become more and more dominated by rent-seeking behaviour starting from an already high base.   This is the exact antithesis of a liberal approach; for rent-seeking is about carving up the existing cake to suit the carver; it is not about growth.  Persuade someone to take out a loan on ‘easy’ terms and quite soon he is paying you in perpetuity – his quick burst of spending then his long-term loss and your long-term gain.  And if you can secure the loan, either initially or when it’s consolidated, then you even avoid the risk of default.   Both Labour and Conservative mistook this for a proper and sustainable business model and gave the City everything it wanted.

For virtuous growth we need investment in new technology because it’s start-up companies with new products that create most new jobs and also the best jobs.  They generate the highest value added because they have novel products and so they set the pace for the whole economy.  Firms that aren’t innovating rarely add jobs and will find their product range becoming increasingly dated, increasingly subject to commodity pricing (as in your customers buy only because you offer the lowest possible prices, ultimately made possible only by the lowest possible wages).  

Politicians have always sort-of known this from Wilson’s “white heat of technology” speech onwards, but they’ve never worked out how to actually achieve it.  They routinely exhort students to go into science and engineering but ignore the fact that there are too few good jobs in these disciplines and that the City is a far better payer.

Financing new technology may be important but there is absolutely no incentive for any bank to do so.   Technology start-ups may have a stunningly high return but many fail and in any case even as a financier you need highly experienced (meaning expensive) employees to sort the sheep from the goats.  So why bother?   It’s cheaper and easier to stick with consumer finance which you can do by numbers (“computer says…”).   Entirely uncoincidentally, this is exactly what the banks have been doing in recent years. 

As we have seen, the system works well for the banksters until it fails and it fails when a rising tide of consumer debt meets the falling productivity of the real economy at which point the debt becomes unsustainable and boom! – the financial system blows up.

So, my preliminary conclusion is that the problem goes way beyond simply getting the banks lending again (this simply isn’t going to happen with the existing banks; they are broke but in public denial aided and abetted by the government).   Policies which amount to rearranging the deck chairs are simply not going to work.  We need to start over with the banking system, we need to make consumer finance a very unattractive business and to make the banking sector actually serve the wider economy.  

This amounts to taking away the City’s favourite and most profitable toy and they will HATE it and proclaim it to be the end of the world, which in a way –  a good way – it would be.

And that is why one of the most alarming things I’ve heard in the last week is that the City is revising its opinion of George Osborne upwards; they think he is beginning to ‘get it’. 

Meaning in reality that his regulatory capture is going according to plan.

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