Monday, August 8, 2011

Growth pains

Violence among unemployed north Londoners, panic in the financial markets, teetering public debt – the UK is really missing economic growth. It seems we need a hit of good economic news quickly, before things turn even uglier. 

But before grabbing the economic morphine of QE and tax cuts, shouldn't we check if they will actually improve the way we use our resources, rather than merely expanding credit and inflating asset values?

Vince Cable has called for QE and tax cuts, which could help if they increase the amount of real work going on in the economy, an outcome that could take years to come through.

Let's be optimistic for a moment and assume we are able to wait that long. What policies could be introduced now that would bring real growth, including jobs for the disaffected and tax revenues for the deficit, in the future?

• Instead of printing money to buy gilts, the government could break with tradition and print money to spend on energy and transport infrastructure. This would maintain demand now and, crucially, improve industrial productivity in the future.  It would be more constructive, in every sense, than the Bank's current preference for buying gilts, which merely pumps liquidity into zombie banks.

• If the government wants to limit its money printing, it could make strategic use of existing budgets to subsidise R&D in our pharma, renewable energy and high-tech sectors, just as the US used decades of military spending to build a global semi-conductor industry (see brief and very readable Ha-Joon Chang article, item five)

• Instead of cutting taxes indiscriminately, the government could offer bigger tax breaks for businesses that invest in capital equipment ahead of depreciation, that provide lifelong staff training and that retain apprentices. Similar investments paid off handsomely in Germany but they took 20 years to come through.

• We could fill skill gaps in the workforce by making strategic changes to the national curriculum, for example promoting sciences or skills for the workplace.

• We could make consumer spending less of a rollercoaster for retailers, who employ one in every 10 UK workers, by reducing people’s dependence on cyclical consumer credit and promoting effective savings and current accounts. State controlled banks RBS and Lloyds and the Post Office would be excellent places to start.

• The Bank of England could be smarter about the way it implements Basel bank capital rules so it promotes lending to real businesses instead of “low-risk” financial assets (as argued here before). And financial regulators could rescue commodity markets from hot money flows, which push prices up and down irrespective of real economic demand (the FT's Edward Hadas explains why this is so damaging), and stimulate private investment by doing the same with capital markets.

There is plenty that could be done to promote growth. Sadly, many of the policies above would be either opposed by strong vested interests or would take longer than one election cycle to complete.

Summer riots and market meltdowns make it tempting to look for a quick fix but a problem that has taken years to create needs years to resolve. The question is - have we got the nerve and the patience to see it through?

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