The Duncan Weldon Economics Matters Column
In the comments of last weekÂ’'s post I promised to address the issue of the GovernmentÂ’'s record on employment. IÂ’'m afraid IÂ’'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 ‘passing power from government to the people’. I don’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 ‘let the market sought it out’, 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 ‘hysteresis’. 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 ‘production function’ used in economics, especially when an economy is undergoing radical change. Many ‘classical’ economists would argue that there are simply two primary inputs in production ‘capital’ and ‘labour’, if ‘labour’ 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 ‘picking winners’ and backing individual companies. Nor would it be about subsidising specific firms that have no future. Whilst I don’t want any more British Leylands, I wouldn’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 ‘National Plan’ as detailed as the Wilson’ Government’'s document of 1965 that asked each industry how much timber it would need in coming year. Instead we need more of a ‘National Blueprint’, some outline of where we want the economy to be. I'’d suggest concentrate on our strengths and industries where there is a long-term future – 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 haven’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 – the CBI seems keen on more support here.
So what does any of this have to do with ‘devolving power to the people’? 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.
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Everytime government tries to interfere in our lives they get it wrong and waste our cash on their cronies in public sector jobs.
Time for the people to have the power, and not politicians and their quangos.
Indeed.
France also did a decent job with Alstom in 2004.
Brazil had a good degree of success with Embraer and Petrobras, Korea did well with POSCO. Singapore also made heavy use of state owned industries and it's goverment still maintains a controlling stake in Singapore Airlines.
The view that the state doesn't know anything about X is not really a valid one, ownership is generally about scrutiny and political decisions not the day to day management of a particular industry. There is also nothing to stop the state from employing individuals with the specific expertise.
Well, at the risk of being a one trick pony again, you can print off the forms on line, send 'em off by post with a £20 payment and you can have an LLP up and running within three or four days. You can do it same day for £50.00.
With an LLP you can do anything a Company can do, and include anyone as a member prepared to sign up to the agreed purpose, including investors.
Accounting requirements are parallel to Companies. As far as the tax-man is concerned, LLPs ARE partnerships, so all you do is fill in partnership pages in your tax return.
And you don't even need written agreement, because simple default provisions based upon partnership principles apply. Not that I would recommend that, other than maybe for micro "people" enterprises with no fixed assets.
Lots of people I know who have set up LLPs like the idea that they participate in LLPs ie it's not a "job" - they are co-owners.
I checked out numbers last Friday and there had been 46,036 of these beasties incorporated since 2001, half in the last couple of years or so.
No one - other than maybe the taxman after a couple of years - has any idea what people are doing with them. All this despite complete silence from BERR - if not downright discouragement - and virtually no support from the professions, who routinely use the LLP form but have no interest in advising their clients to use simple solutions.
I call the LLP the "Corporate That Dare Not Speak Its Name". I used to work at the DTI pre-BERR myself and one thing I learned was that there was only one thing worse than being wrong, and that was being right by accident.
Which is what has happened here: the DTI inadvertently made "For Profit" Companies obsolete in 2001.
Yes and no. Many of the polices that will be needed would make more sense on a national than a local level.
Unless we aim to stimulate different local economies in different manners.
Government involvement in the economy and decentralising power aren't fundamentally opposed. For example, you could use government funds to give local councils the ability to target tax breaks at the areas most in need in the local economy or to retrain people for new jobs.
However, I am hoping that honesty over spin will prevail if there is a change in government including a full drains up and disclosure on all government spending. A "people it's bad" moment provided a much needed cathartic closure to this administration.
I agree that the government should be there to encourage and give a helping hand. Facilitation rather than as a replacement.
Certainly incubator policies have been tried before and were successful, however, government needs to exercise a lighter approach.
Information zips around at a much faster pace than even 5 years ago. Government decision making paralysis is lethal to any new start-up.
It was some time ago, I do remember that you could get a free pack from the DTI and pay the £100 to register the company at Companies House and you were in business. Seeing as SMEs employ 60% of the working population - that kind of simple approach is what to do for.
Government has to get off people's backs.
I don't think there are early 1980s type reforms at all. Indeed they are more about 'planning' than anything attempted since before Thatcher.
But I'm almost glad that's how you describe them. The aim is to show that plannig can be done in a more effective manner than has previously been attempted. It's about recognising that Govt does not have the power to control the economy but companies left to themselves tend not to be great at managing transition.
The Tories have discussed an alternative of 10% in public spending but have ring-fenced NHS funding as safe.
So 7% on 616bn - £43bn a year. Just about enough to cover the interest on the borrowing.
More would have to be found, another 3-5% to cut business taxes.
In terms of your proposal - dare I say they are the kind of supply side laissez-faire policies of the early 1980s? I can hardly disagree.
On a side note though - I'm sensing general agreement on the industrial agenda?
Needless to say, if you make it 3% more expensive for a firm to retain its staff... on a near-zero margin in the current circumstance.
What do you think happens? 3% of the workforce needs up on the dole.
Why waste money taking it from firms, government then wasting time and money working out how to give it back and then only giving back to certain firms. Why take the money in the first place?
Where have I advocated nationalisation or the State managing industry?
Business always calls for government to get off its back when times are good and then often screams for help when times are less good.
I would have thought these proposals would be welcomed by most businesses.
Where is the British IT industry strategically flawed?
It is located along the so called M4 Corridor, Scotland and Cambridge. I find it bizarre to say it is 'isolating' itself from the greater economy and 'distorting the social fabric', it is one of the most meritocratic industries in the world; if not the most.
The last thing IT in this country needs is a government that seeks to interfere with it, the government has been nothing but disastrous in its industrial policy approach to IT.
Lastly, what on earth is a 'by positive byproduct?"
Take less tax from private enterprise but cutting government spending. Also, government borrowing needs to be reduced to stop crowding out the market for companies needing to raise capital. Radical action is needed to lower the GDP take of government, it is a simple opportunity cost curve. Government takes less by spending less passing on savings to the productive economy and an element to start repaying government debt.
This keeps productive money in the economy, encouraging economic growth. There should be no need for guarantee schemes nor targeted support if the tax and regulatory systems were greatly simplified.
We have a good skills base in this country, what we desperately need is pressure taken off employers costs. That would include proposed increases in employer NI and also increases in corporation tax.
I would agree that tax breaks for R&D are a good idea, however, priority must be given in getting all businesses operating costs down. Government regulation and compliance must be radically reduced.
Basically, get big government off business' backs.
(Thanks to Ash Cash for the FT Link.)