Stumbling and Mumbling

Economic growth: who loses?

chris dillow
Publish date: Mon, 06 Mar 2023, 01:12 PM
chris dillow
0 2,773
An extremist, not a fanatic

Labour's promise to "secure the highest sustained growth in the G7" is so far a mere aspiration without a detailed plan to achieve it. It is like a man claiming to want to become a great guitarist without practising or studying - and just as impressive and as likely to succeed.

The party promises to correct this omission in coming months. I would hope that one question it answers is: who is it going to hurt?

I say this simply because even mainstream policies to increase economic growth would undermine many vested interests and ideas. For example:

- Nimbys. Economic growth requires more liberal planning laws - be it to enable universities to build more laboratories, to get us more wind or solar farms, or of course to build more houses (which itself could raise productivity). That's going to hurt nimbys. Westlake and Bowman's idea for street votes on new developments might mitigate a lot of this hurt - by ensuring residents benefit from such developments - but it won't appease all the die-hard nimbys.

- Land-owners. Most economists, I suspect, agree that we need to tax businesses less and land-owners more: Westlake and Bowman, for example, advocate replacing business rates with a land tax. Whilst this would encourage business formation and expansion and help solve the problem of high streets being blighted by closed shops, it would of course hit commercial property owners.

- Financiers. Westlake and Bowman also advocate eliminating the tax deductibility of corporate interest payments to end the bias towards debt financing (and by implication the bias against equity finance). That'll hurt some lenders. So too would a state investment bank aimed at supporting start-ups, simply because it would create more competition. And of course, one effect of higher trend growth would be higher real interest rates - the two are correlated - which would raise the costs and dangers of all leveraged strategies.

- Monopolists. The UK has some of the highest energy costs in Europe, thanks to lax regulation of our privatized industries. This squeezes economic growth in exactly the way David Ricardo described 200 years ago; if we are spending all our money on economic rents, there's less to spend on other things and hence less revenue for genuine entrepreneurs. Pro-growth policies would therefore either cap energy prices or tax away the profits of energy companies.

- Incumbent companies. Economic growth requires fiercer competition, not least because productivity increases come not so much from existing firms upping their game but from new companies starting and efficient ones expanding. This in turn requires tougher competition law to help new start-ups or to break up large inefficent firms such as BT.

- Some workers and employers. We might be close to de facto full employment: the sum of the unemployed and those outside the labour force wanting a job is close to its lowest since records began in 1992*. This means that if Labour really wants to create significant numbers of good jobs in the green economy, care sector, housebuilding or wherever it will have to destroy some others. This of course is what "fiscal responsibility" means: cutting some spending or raising taxes to pay for other spending priorities means cutting jobs and businesses. The question is: which jobs and businesses does Labour wish to destroy? It shows no interest in this question.

- Brexiters. One of the few big, quick ways to raise growth would be to rejoin the single market. Which would of course outrage Brexiters and the right-wing media: liberalizing migration policy would have the same effect. The more intelligent of these might also oppose economic growth because they know that stagnation breeds reaction and illiberalism and so feeds their agenda. Boardedup

Nothing I've said here is terribly left-wing. I'm not talking about radical pro-growth policies such as economic democracy, income redistribution or universal basic income but merely bog-standard orthodox economics. And yet even such mainstream policies would upset a lot of vested interests. Indeed, there's little evidence the voters want economic growth: they voted against it in 2010, 2015, 2016, 2017 and 2019.

Any serious economic policy must be aware of this opposition to growth, and be prepared for the fight.

The challenge here is not an intellectual one. Most economists roughly agree what type of policies we need to raise growth, even though we differ upon the relative importance we'd attach to them or to just how effective they'd be. But politics is not about intellect, and raising growth is not merely a technocratic exercise. Instead, it's about power. Would Labour have the power to face down anti-growth interests? Can it mobilize countervailing forces to them? If stronger growth is to be any more than an idle aspiration, it must be serious about these questions. A purely top-down managerialist ideology cannot be sufficient.

* That phrase de facto is important. Labour isn't wholly fungible, and there'll always be some unemployment simply because of mismatches between labour supply and demand. What matters is whether the unemployed have the skills or health to do the jobs Labour wants; it is improbable that people suffering from long covid will quickly be able to work on building sites, for example.

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