Excellent, clear article that sets out the current nonsense that pervades our political classes. I dont just blame the current administration for being blind to the situation we face, but also the previous Conservative administration. That is what makes things so really depressing. The UK urgently needs a proper debate on the causes of our low growth and also labour productivity.
John - I agree entirely that the delusions about economic growth are a Uniparty phenomenon. They are all equally lost. This reflects the almost total absence of both reflection and quantitative skills among the political and bureaucratic elite. Further we shouldn't regard this as being an exclusively UK issue as most of the EU is similarly affected.
One of things that I want to find time to examine is the distribution of productivity growth rates across countries in different time periods. We know that productivity growth fell dramatically after (roughly) 2006 in all OECD countries but there are important differences between the UK (at the low end) and the US (at the top end) that need to be understood better.
Thanks for a very interesting article. I'm not at all an economist and I wondered if you had any views regarding defense spending as a way of boosting economic growth. I watched a video of Yanis Varoufarkis who argued that it would be short term because once you've set up these factories producing explosives, shells and bullets and once all the warehouses are full of the stuff what are you going to do with those factories if there isn't a war. In any case it seems a bit fake to claim growth by the government buying arms which we have pay with our taxes.
I have read that two other ways of generating growth are increasing immigration and inflation. I even read in one place that central banks might try to increase inflation deliberately which also has the effect of reducing national debt or so I'm told.
Varoufarkis is largely right. Economists have often written about defense spending as an alternative to digging holes in the ground and refilling them. It is a form of public consumption. In an economy with high unemployment it is a classic Keynesian boost. But we don't have large amounts of underemployed resources - unless the government plans to conscript those on disability benefits and employ them manufacturing defense equipment. So a boost to defense spending must bid resources away from other consumptions, which means more inflation and/or higher imports financed by debt.
That is not an argument for neglecting national security but simply a recognition that - as with climate policies - everything has a cost in terms of diverting resources from other forms of public or private consumption. The old "guns and butter" story in economics.
I have long been skeptical of many economic arguments especially about infra structure enhancements. This article crystalises this into the benefits of making something that did not exist which is of substantial economic benefit, a good economic cycle of infrastructure renewal with marginal technical improvements and new projects to enhance infrastructure already there but producing little benefit to national output. We have seen time and time again projects where simple spreadsheets do not add up and the analysis is so full of holes it more like a fishing net.
There is a generic problem here. Many infrastructure projects are promoted for very mixed motives - some believe (mistakenly) that there will be large public benefits, others have more self-interested reasons. But there is no accountability for making exaggerated claims. If every civil servant and politician who had endorsed projections of the costs and benefits of HS2 were joint and severally liable for all cost overruns we would have been presented with a very different picture.
I have no magic recipe for ensuring accountability but it is clear that we get the worst of all worlds with expensive infrastructure projects that take a long time to build. The Treasury has (had) rules of thumb that attempted to correct such biases but those don't work in the face of relentless lobbying by groups who bear none of the costs of failure but hope to gain hugely out the central government paying for projects. If we had true decentralisation, let the business communities of Birmingham and Manchester pay for HS2 as was the case in the 1800s.
I totally agree again, accountability is a major issue we have people running these projects who skip through the door start a project and then skip out through a different door a short time later leaving the mess behind them. As you say its really difficult to come up with a workable solution other than they should use their own money. Being bared from public office is a remedy but currently the bar for this is way too high to be effective. Another problem we face is that as things become more technologically and economically complex we need people with a higher educational attainment in these areas yet the opposite seems to be true we have few of these people in politics and apparently the civil service.
Some form of skin in the game is essential but very difficult to enforce. Because of the complexity you mention, responsibility is transferred to consultants who don't accept any liability but are often willing to be "guided" by the interests of those who pay them. Even professional indemnity is difficult because a consultant will say that the client didn't follow their advice in all respects.
Often the public is concerned about the wrong things. You shouldn't jail bankers but you should penalise them very heavily - it is easier to do and doesn't require the same level of proof. But regulatory procedures are absurdly complex.
Thank you Gordon for another masterful article. I'd be grateful if you could resolve a puzzle for me. Prior to the last few years we went through an extended period of unprecedentedly low interest rates. This seems to me to have been a period inviting investment in productive industry, yet I wasn't aware of much of this happening. Please can you explain?
1. Analysts talk as though interest rates are the cost of capital. That is not true unless you have suitable assets, usually property, as security for loans. The risk-adjusted cost of capital is much higher and only marginally linked to interest rates for investments with no or very low asset backing. So low interest rates lead to a property boom but not necessarily a lot of investment in other sectors of the economy.
2. Note the term "risk-adjusted". With low economic growth, erratic tax & regulatory rules, and incoherent economic policy my suspicion is that the risks of many types of investment have increased. Certainly they have not fallen. Again, precious little incentive to invest other than in property.
Thank you for a very interesting article and I would offer three comments:
1) Many (possibly most) of the country's assets in the form of companies and utilities are now in foreign ownership. A UK company will pay taxes to the government and dividends to its investors who will in turn pay taxes to the government and spend the remainder within the UK economy. A foreign owned company wil pay taxes to the UK government but the dividends go the the foreign investors who will pay taxes to their government and spend in their economy. This seems to represent a drain on the UK economy relative to when all these assets were UK owned.
2) The fact that the UK now seems to import so many manufactured goods seems to preclude the opportunity to invest in productive assets which would be used to make them.
3) I have read Ref [1], Jonathan Lesser's paper on the social cost of carbon (SCC). Clearly he is correct about the futility of economic models which look at the cost of the effect of CO2 on timescale of hundreds of years into the future. On this timescale the levels of CO2 are uncertain as are their effect (which might be beneficial). But he seems to be missing something which will almost certainly occur on this timescale. This is the fact that at some point we will run-out of fossil fuel. For our civilisation, which currently depends upon fossil fuels, it will be the end; which seems a pity. Prehaps the SCC pricing provides a mechanism to moved away from fossil fuel to mitigate this event ?
Point 3: Physically we will run out of fossil fuels at some point, but we will move away from reliance on them well before physical exhaustion. Market signals really work when natural resources become scarce - we know that from experience with many metals. But they have nothing to do with carbon emissions. There are vast resources of coal around the world so the scarcity price would not start to rise for many decades. The adjustments required are not well approximated by relying upon a carbon price.
I may need more than one reply to respond properly, but by point:
Point 1: Yes, but you should remember that collectively we received a once-off payment when the assets were sold to a foreign buyer. If (!!) that payment had been reinvested in building new assets or acquiring foreign assets there would be a compensating flow of income and tax payments that would offset the outflow for foreign-owned assets. The real problem is that in most cases the proceeds of the sale are used to finance consumption rather than reinvestment. It is just a variant on foreign borrowing.
Point 2: Again more complicated. I think that the real loss is in terms of the full range of skills, experience, etc that is required to ensure that physical assets (which can be bought) can be deployed effectively. As the example of Boeing showed, you cannot simply outsource production of complicated components without being very careful about the overall framework and expertise that determines the efficiency and competence necessary for production. One of the lessons that Western managers have never understood about Toyota is how effective the company is as a manager of internal expertise - achieving Japanese or better levels of efficiency in the US, the UK and elsewhere.
Politico recently did a post called "7 ways the US is beating Europe". Also you can see that the US has grown much faster than the EU between 2008 and 2023. I've noticed that companies moving their listing from the London Stock Exchange have been moving to the US rather than Europe. A few years ago Shell went to New York and came back saying how the US was much more business friendly than the UK or Europe. They haven't moved yet but I understand are still looking at the possibility.
There are two different things here. Yes, recent productivity growth in the US has outstripped Europe. We can speculate about the reasons but there is limited evidence on why. Second, companies move to NY because the same businesses are valued more highly, partly because London investors are more risk averse and partly because NY investors are less influenced by box ticking exercises.
Your thoughts on what is needed in terms of policy to make “the necessary shifts (a) from consumption to savings, and (b) from investment in property to investment in innovation and associated productive assets”?
Gordon,
Excellent, clear article that sets out the current nonsense that pervades our political classes. I dont just blame the current administration for being blind to the situation we face, but also the previous Conservative administration. That is what makes things so really depressing. The UK urgently needs a proper debate on the causes of our low growth and also labour productivity.
John - I agree entirely that the delusions about economic growth are a Uniparty phenomenon. They are all equally lost. This reflects the almost total absence of both reflection and quantitative skills among the political and bureaucratic elite. Further we shouldn't regard this as being an exclusively UK issue as most of the EU is similarly affected.
One of things that I want to find time to examine is the distribution of productivity growth rates across countries in different time periods. We know that productivity growth fell dramatically after (roughly) 2006 in all OECD countries but there are important differences between the UK (at the low end) and the US (at the top end) that need to be understood better.
Thanks for a very interesting article. I'm not at all an economist and I wondered if you had any views regarding defense spending as a way of boosting economic growth. I watched a video of Yanis Varoufarkis who argued that it would be short term because once you've set up these factories producing explosives, shells and bullets and once all the warehouses are full of the stuff what are you going to do with those factories if there isn't a war. In any case it seems a bit fake to claim growth by the government buying arms which we have pay with our taxes.
I have read that two other ways of generating growth are increasing immigration and inflation. I even read in one place that central banks might try to increase inflation deliberately which also has the effect of reducing national debt or so I'm told.
Varoufarkis is largely right. Economists have often written about defense spending as an alternative to digging holes in the ground and refilling them. It is a form of public consumption. In an economy with high unemployment it is a classic Keynesian boost. But we don't have large amounts of underemployed resources - unless the government plans to conscript those on disability benefits and employ them manufacturing defense equipment. So a boost to defense spending must bid resources away from other consumptions, which means more inflation and/or higher imports financed by debt.
That is not an argument for neglecting national security but simply a recognition that - as with climate policies - everything has a cost in terms of diverting resources from other forms of public or private consumption. The old "guns and butter" story in economics.
I have long been skeptical of many economic arguments especially about infra structure enhancements. This article crystalises this into the benefits of making something that did not exist which is of substantial economic benefit, a good economic cycle of infrastructure renewal with marginal technical improvements and new projects to enhance infrastructure already there but producing little benefit to national output. We have seen time and time again projects where simple spreadsheets do not add up and the analysis is so full of holes it more like a fishing net.
There is a generic problem here. Many infrastructure projects are promoted for very mixed motives - some believe (mistakenly) that there will be large public benefits, others have more self-interested reasons. But there is no accountability for making exaggerated claims. If every civil servant and politician who had endorsed projections of the costs and benefits of HS2 were joint and severally liable for all cost overruns we would have been presented with a very different picture.
I have no magic recipe for ensuring accountability but it is clear that we get the worst of all worlds with expensive infrastructure projects that take a long time to build. The Treasury has (had) rules of thumb that attempted to correct such biases but those don't work in the face of relentless lobbying by groups who bear none of the costs of failure but hope to gain hugely out the central government paying for projects. If we had true decentralisation, let the business communities of Birmingham and Manchester pay for HS2 as was the case in the 1800s.
I totally agree again, accountability is a major issue we have people running these projects who skip through the door start a project and then skip out through a different door a short time later leaving the mess behind them. As you say its really difficult to come up with a workable solution other than they should use their own money. Being bared from public office is a remedy but currently the bar for this is way too high to be effective. Another problem we face is that as things become more technologically and economically complex we need people with a higher educational attainment in these areas yet the opposite seems to be true we have few of these people in politics and apparently the civil service.
Some form of skin in the game is essential but very difficult to enforce. Because of the complexity you mention, responsibility is transferred to consultants who don't accept any liability but are often willing to be "guided" by the interests of those who pay them. Even professional indemnity is difficult because a consultant will say that the client didn't follow their advice in all respects.
Often the public is concerned about the wrong things. You shouldn't jail bankers but you should penalise them very heavily - it is easier to do and doesn't require the same level of proof. But regulatory procedures are absurdly complex.
Thank you Gordon for another masterful article. I'd be grateful if you could resolve a puzzle for me. Prior to the last few years we went through an extended period of unprecedentedly low interest rates. This seems to me to have been a period inviting investment in productive industry, yet I wasn't aware of much of this happening. Please can you explain?
Two points.
1. Analysts talk as though interest rates are the cost of capital. That is not true unless you have suitable assets, usually property, as security for loans. The risk-adjusted cost of capital is much higher and only marginally linked to interest rates for investments with no or very low asset backing. So low interest rates lead to a property boom but not necessarily a lot of investment in other sectors of the economy.
2. Note the term "risk-adjusted". With low economic growth, erratic tax & regulatory rules, and incoherent economic policy my suspicion is that the risks of many types of investment have increased. Certainly they have not fallen. Again, precious little incentive to invest other than in property.
Many thanks!
Thank you for a very interesting article and I would offer three comments:
1) Many (possibly most) of the country's assets in the form of companies and utilities are now in foreign ownership. A UK company will pay taxes to the government and dividends to its investors who will in turn pay taxes to the government and spend the remainder within the UK economy. A foreign owned company wil pay taxes to the UK government but the dividends go the the foreign investors who will pay taxes to their government and spend in their economy. This seems to represent a drain on the UK economy relative to when all these assets were UK owned.
2) The fact that the UK now seems to import so many manufactured goods seems to preclude the opportunity to invest in productive assets which would be used to make them.
3) I have read Ref [1], Jonathan Lesser's paper on the social cost of carbon (SCC). Clearly he is correct about the futility of economic models which look at the cost of the effect of CO2 on timescale of hundreds of years into the future. On this timescale the levels of CO2 are uncertain as are their effect (which might be beneficial). But he seems to be missing something which will almost certainly occur on this timescale. This is the fact that at some point we will run-out of fossil fuel. For our civilisation, which currently depends upon fossil fuels, it will be the end; which seems a pity. Prehaps the SCC pricing provides a mechanism to moved away from fossil fuel to mitigate this event ?
Point 3: Physically we will run out of fossil fuels at some point, but we will move away from reliance on them well before physical exhaustion. Market signals really work when natural resources become scarce - we know that from experience with many metals. But they have nothing to do with carbon emissions. There are vast resources of coal around the world so the scarcity price would not start to rise for many decades. The adjustments required are not well approximated by relying upon a carbon price.
I may need more than one reply to respond properly, but by point:
Point 1: Yes, but you should remember that collectively we received a once-off payment when the assets were sold to a foreign buyer. If (!!) that payment had been reinvested in building new assets or acquiring foreign assets there would be a compensating flow of income and tax payments that would offset the outflow for foreign-owned assets. The real problem is that in most cases the proceeds of the sale are used to finance consumption rather than reinvestment. It is just a variant on foreign borrowing.
Point 2: Again more complicated. I think that the real loss is in terms of the full range of skills, experience, etc that is required to ensure that physical assets (which can be bought) can be deployed effectively. As the example of Boeing showed, you cannot simply outsource production of complicated components without being very careful about the overall framework and expertise that determines the efficiency and competence necessary for production. One of the lessons that Western managers have never understood about Toyota is how effective the company is as a manager of internal expertise - achieving Japanese or better levels of efficiency in the US, the UK and elsewhere.
Politico recently did a post called "7 ways the US is beating Europe". Also you can see that the US has grown much faster than the EU between 2008 and 2023. I've noticed that companies moving their listing from the London Stock Exchange have been moving to the US rather than Europe. A few years ago Shell went to New York and came back saying how the US was much more business friendly than the UK or Europe. They haven't moved yet but I understand are still looking at the possibility.
There are two different things here. Yes, recent productivity growth in the US has outstripped Europe. We can speculate about the reasons but there is limited evidence on why. Second, companies move to NY because the same businesses are valued more highly, partly because London investors are more risk averse and partly because NY investors are less influenced by box ticking exercises.
Your thoughts on what is needed in terms of policy to make “the necessary shifts (a) from consumption to savings, and (b) from investment in property to investment in innovation and associated productive assets”?
More on than in my next post - though in truth it is easier to say what not to do than what will work.