Move fast and break things? What’s missing from the UK’s ‘growth plan’

The UK has a new Prime Minister and cabinet, from a party that has been in power for twelve years. The Conservatives have presided over austerity and Brexit, as well as a pandemic and now war in Europe. Many economists argue that the first two have sapped economic growth since the Great Recession of 2008-09, even before the disruption of the latter two factors. Productivity growth has been feeble during those years, breaking sharply with the previous long run trend. Other countries have experienced productivity slowdowns, but the UK’s has been particularly poor. The ‘new’ government and its leader Liz Truss have promised to ‘grow the economy’ faster via a mix of tax cuts and deregulation. Rather than acknowledging the Conservatives’ role in holding the country back, she has blamed some made-up enemies: the ‘anti-growth coalition’, which in practice seems to mean anyone who opposes her policies, and a focus of previous governments on redistribution rather than growth itself. As a self-styled controversialist, she has claimed that disruptive change is needed in order to restore the country’s economic fortunes.

All this seems to imply a future of regressive growth at all costs, whether socially, environmentally or even, paradoxically, economically. The government may not see it this way, and the full extent of its plan has yet to be laid out. But as an antidote to what is likely to prove to be a fantasy, more or less libertarian, set of economic policies, I thought I would lay out some areas of progressive concern over the ‘growth plan’, by taking a constructive approach rather than a purely critical one. The following sections are not meant to be in order of importance. In fact I think that all these areas are important to securing a more widely-shared prosperity, not least for the UK, as well as elsewhere. Continue reading

The productiveness of the welfare state

While the modern welfare state is generally supported by the political left, it is sometimes merely tolerated by the right. Simplistic critiques which decry “workshy” benefit recipients funded by the tax revenues drawn from “hard-working families” can be typical. A variety of schools of economic thought have historically deployed arguments that social spending is unproductive, a drain on the public purse, and a burden on the private, market-based sectors of the economy. But there are alternatives to this line of thinking, which argue that a well designed welfare state can not only reduce poverty, but also enhance the productivity of the economy and society as a whole. There is thus a potential win-win for progressive social policy and public spending more broadly. I consider these ideas below. Continue reading

Quote of the week: why progressive and interventionist policies prospered following World War Two

Here is another extract from the same chapter as last week’s, by Fabio Petri. These weekly quotes are not necessarily meant to be ‘classic’, nor even penned by the greatest economists in the history of the subject, though sometimes this may be the case. Rather, they make a point that I could not put better myself, and are thus worth posting.

Here the author accounts for the rise of forms of Keynesian interventionism, an effective welfare state in Western Europe, and full employment policies in the US following World War Two.

“One must wait for the Great Depression of the 1930s coupled with the danger of communism to see the hold of marginal theory and policy partly shaken: Keynes candidly admitted he wanted to save capitalism from itself in order to save it from communism, and here we have a strong reason for the general acceptance of his theory in spite of the immediate wave of criticisms, not entirely unjustified, moved against it by Henderson, Hicks, Meade and others. And the beautiful book by Armstrong, Glyn and Harrison, Capitalism since 1945, convincingly shows how at the end of WW2 the fear that the working class would turn communist was the reason for the concession of the welfare state in Western Europe and for a general acceptance, in the USA too, of the interventionist Keynesian state with a duty to maintain unemployment low.”

Fabio Petri (2023), Class struggle and hired prize-fighters, in J. Eatwell, P. Commendatore and N. Salvadori (eds.), Classical Economics, Keynes and Money, Abingdon: Routledge, p.57-8.

Is it time to hike the minimum wage?

Contando_Dinheiro_(8228640)The Progressive Economy Forum (PEF) recently published a report recommending that the UK’s minimum wage, now called the National Living Wage, should be substantially raised in order to help tackle inequality and poverty. They argue that this should form part of a broad package of policies to encourage a more egalitarian and dynamic economy and society, with higher wages and productivity. The report, by James Meadway and Howard Reed, can be downloaded here. It focuses on the UK case, but has lessons for progressive policymaking in any capitalist economy.

The background

As elsewhere, the UK currently faces a serious cost of living crisis in which real wages are now falling, and in fact have on average barely risen for more than ten years, creating a ‘lost decade’ for millions. Calls for wages to keep up with inflation have been criticised by the government and the Bank of England as threatening a ‘wage-price spiral’, in which wages and prices follow each other upwards, embedding high rates of inflation and ultimately creating little real terms wage gains for workers. That has not happened yet. At the moment, average wage rises are falling well behind price rises. This is in stark contrast to the 1970s, when many firms faced a profit squeeze as wages at times rose faster than prices. Today many large firms are experiencing soaring profits. The PEF report therefore argues that there is a need for policy to shift the balance of power in the labour market away from capital and back towards labour, by increasing trade union membership and the coverage of collective bargaining. Continue reading

Quote of the week: Warren Buffett on how we all benefit from the past actions of others

WarrenBuffettThis week’s quote is particularly short, and comes from the financial investor Warren Buffett. Rather than simply let it speak for itself, I thought I would briefly consider its implications for economics and political economy.

“Someone is sitting in the shade today because someone planted a tree a long time ago.”

Buffett is saying that it is important to take the long view in any venture worth pursuing. It can be seen to be intended for investors but for me it speaks to a far broader set of issues, particularly the notion that we all benefit from the past actions of others and so should be humble and socially and historically aware when it comes to individual success, not least in the field of wealth. Continue reading

Robert Reich on big oil profits, inflation and imposing a windfall tax

The latest video from Robert Reich’s Inequality Media on the soaring profits of the big oil companies and how they should be taxed to ease the cost of living crisis in the US. As he notes, the UK government has recently enacted such a policy to help households with their energy bills, and may have to go further as the price of energy continues to rise.

Big government, small government, and the fallacy of the growth dividend

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Faster growth is not a precondition of improved funding for public goods and services alongside a smaller state. In fact, it will tend to increase the costs of public provision. There are political debates to be had and choices to be made regarding the size and role of the state under capitalism. Shrinking the state by cutting taxes and squeezing public services can easily become socially damaging, without any economic benefit to show for it. In fact, big government can enable a degree of economic dynamism.

In recent decades, particularly since the advent of Thatcher and Reagan, the political right in many countries has made the case for tax cuts and shrinking the state a totem of policy. This has been justified in various ways. Politically and philosophically, it is claimed that allowing people to keep more of their own money supports personal freedom and choice. Economically, it is argued that tax cuts will spur private enterprise and economic growth through providing greater incentives for money-making, and that everyone will thereby be better off if the economy is larger, even if inequality is greater. Those at the top will gain more, but those lower down the scale will gain too, even if by much less. This is the professed nature of ‘trickle-down economics’.

It is also sometimes argued, in defence of policies which aim to reduce public expenditure, that the higher taxes needed to fund that spending cannot be afforded as they will stifle growth. Faster growth must come first, and increased spending on public goods and services like health, education, welfare and infrastructure can only come later, when they can be ‘afforded’, and in such a way that the ‘burden’ of taxation and public spending is kept to a minimum. This can be termed the ‘growth dividend’, in which only faster growth will allow greater public spending.

For rich countries like the US and UK, this is mostly nonsense. Comparing the share of tax and public spending in overall GDP across rich countries suggests that the size of government measured in this way is mostly a political choice. Of course it does have economic effects, but blanket arguments for shrinking the state, or indeed growing it, without a proper discussion of the role of the state in the economy and society, are highly misleading. Continue reading

Robert Reich destroys minimum wage myths

In this video, Robert Reich, former labour secretary under Bill Clinton, and founder of Inequality Media, destroys a number of the myths surrounding the minimum wage, which in the US has not risen since 2009. In particular, he challenges the notions that raising it will kill jobs, damage business, raise inflation and even benefit the wrong people. In fact, it is likely to raise productivity, reduce worker turnover and training costs, boost demand by increasing consumer spending and have a negligible impact on the inflation rate. It will also reduce both racial inequality and the need for welfare spending to support those on the lowest incomes. As he says, if business owners rely on paying workers ‘starvation wages’ in order to survive, they should not be in business!

Misleading the public on tax: burdens, incentives, well-being and society

taxThis post was inspired by the platitudes on tax currently making the headlines in the UK during the current leadership contest for the Conservative party, the winner of which will become Prime Minister. But the issues apply far more widely, to any country with a functioning economy and tax system!

Following the resignation of the UK’s Conservative Prime Minister, Boris Johnson, around a dozen candidates are expected to declare themselves in the running for leadership of the party and the next premier. Many have already stated their intention to do so. They have started by setting out some policy pledges. They have all promised to cut taxes, within varied time frames, from day one to when circumstances allow, though the majority seem to want to go ahead swiftly.

In the midst of global economic, social, and geopolitical crises, perhaps circumstances will not allow for some time. But whatever happens, the competition to be the next UK Prime Minister looks to be stimulating an unhealthy mix among the candidates of fantasy and lies with regards to prospective policymaking.

Announcing the wish to cut taxes may make some headlines (and that is probably the point), but so far such statements are disappointingly devoid of economic, social or fiscal context. The pressure for politicians to overpromise, ultimately leading them to underdeliver, may be difficult to avoid, but it keeps pouring fuel on the fire of cynicism with regards to the political class. It is helpful in this kind of situation to soberly contend with some of the misleading rhetoric and analysis regarding taxation, and the public spending which it funds, lest we forget amidst all the excitement regarding future cuts to the former. Continue reading

Quote of the week: the goals of equity and efficiency

TheEconomicsAntiTextbook“Textbooks emphasize the importance of efficiency and downplay the importance of equity. In textbook treatments, the equity goal is always subservient to the efficiency goal. For example, textbooks implicitly use the compensation principle in cost-benefit analysis to justify efficiency-enhancing policies; as long as winners could compensate losers and still be better off, society as a whole is supposedly better off, although no one can explain why in any convincing way.

Furthermore, textbooks claim that there is a trade-off between equity and efficiency: transferring income between people is like transferring water in a leaky bucket. They emphasize that taxation causes inefficiencies, while conveniently forgetting that taxing things we want less of (such as pollution) can improve efficiency. Similarly, the transfers that make up the social safety net are allegedly costly because they reduce incentives to work. Yet at the same time, the texts ignore the arguments and evidence that equity is good for growth. In reality, it seems that, within limits, people in many countries have opportunities to attain both more equity and more efficiency.

Recent research has emphasized that equity promotes social cohesion and trust, whereas inequality weakens people’s sense of reciprocity, and increases the sense of ‘us’ versus ‘them’. By ignoring this subject, textbooks seem to imply that there is no role for virtues like loyalty and trust. Joseph Stiglitz argues that Adam Smith didn’t make this mistake: he was aware of the limitations of markets, and knew this was not so. Indeed, modern economics explains why economic systems in which such virtues are prevalent actually work better than those in which they are absent.”

Rod Hill and Tony Myatt (2010), The Economics Anti-Textbook, London: Zed Books, p.245.