Rachel Reeves economic strategy

 

On 23rd May Labour’s Shadow Chancellor, Rachel Reeves, gave a speech in Washington DC and published a paper entitled “Labour’s plan for a stronger economy”. As Martin Kettle notes, it is something of a myth that political speeches are important. In addition, because speeches about economic policy are highly political and of the moment, they are generally frustrating to read for an academic economist. I understand, for example, why stressing that Labour would deliver economic security (“securonomics”!) makes a lot of political sense, but it has obvious problems as the basis of an economic strategy.

Having said that, I think this speech, and the paper that goes with it, does deserve serious discussion, not least because it may form the basis of the next government’s economic strategy. To what extent is this similar or different, for example, to the economic strategy introduced by Blair and Brown in 1997? What does it take or discard from neoliberalism? The two questions are, of course, interconnected.

The Role of Government

To answer the second question first, it clearly sees a much greater role for the state than neoliberalism ever did. Of course the state is important under neoliberalism. It upholds property rights for example. Some might argue that neoliberalism also allows the state to correct market failures, although in practice there is a tendency to diminish the true extent of those failures. But generally neoliberals want to diminish the role of the state in what they would call ‘interfering’ with markets.

Reeves argues that states always shape markets, and good governments consider how they should do so. To quote:

“As the economist Mariana Mazzucato has long argued, the state’s role is not simply to correct the failures and redress the negative externalities of free markets. It is a myth that the private sector alone can set a country up to take advantage of new opportunities. Success has always rested upon a partnership between the market and the state. The market can see what our current advantages are, but not necessarily what they could be in the future. It is not all that long ago that South Korea’s comparative advantage was in agriculture. Today, with far-sighted government action in partnership with a vibrant market, it is an advanced economy with cutting edge industries.”

Later on, in discussing what Janet Yellen describes as the ‘new supply side economics’, she writes:

“it places the government in partnership with the private sector, with the state creating the foundations on which a dynamic market can build. It means using the power of government to do what only government can do, while allowing business to do what it does best: innovating, competing and generating wealth.”

Such an approach is clearest, and largely unproblematic, in what Mazzucato’s calls missions. Labour’s radical proposals for large scale public investment in green energy, like Biden’s Inflation Reduction Act, can be thought of as a mission to get cheaper and sustainable energy, which involves public investment or government incentives in a wide range of industries, some of which will help achieve this mission and some which may end up failing to do so. An important part of missions is that overall success gives political cover to particular failures, where those failures are only obvious in hindsight.

Missions may also be a means of circumventing inappropriate rules or definitions. A good example is preventative health, which is one case considered in a nice article by Sam Freedman about why some policies that almost everyone agrees are a good idea never happen. Most people agree we should spend more money on preventing people getting ill, so that in future we (probably) need to spend less money on treating those illnesses. (See this interview by the FT’s Sarah O’Connor of Andrew Scott, for example.) Yet, to quote Freedman, “since 2015/16 the public health grant to local authorities – the main budget for preventative health - has fallen by 24% in real terms, even as overall healthcare spending has continued to rise.”

The problem is that governments find it easier to cut spending where those who lose out are diffuse and probably unaware of the cuts because benefits take time to emerge, than to cut spending with very immediate and specific pay-offs. It may require a mission to overcome those political incentives.

Growth

Things get trickier in what Reeves describes as “the mission for growth”. Some ways higher growth can be achieved are not problematic or contested, like improving education and skills. Others raise obvious questions, like how will an industrial strategy prioritise between industry and sectors? She herself criticises

“the idea that the people, businesses and places which contribute to a strong economy are few in number. This misconception suggests that all we need are a few dynamic cities and a few successful businesses to thrive. The usually unspoken implication of this is that the contribution of most people, most places and even most businesses simply does not matter. The result of this has been a paucity of ambition for too many places. The policy implication has been that nations have focused on maximising the national growth rate by growing the already prosperous regions, like London, hoping that economic gains will then trickle out to the rest of the country. As a result, a wide gap has grown between the most dynamic businesses, at the frontier of new technology, and the rest. It has also led to a neglect of what I call the ‘everyday economy’. The parts of the economy which provide the basics for a good life, strong communities and economic security – like childcare, social care, retail, hospitality and supermarkets – have been forgotten.”

This makes a lot of sense, but it elides a likely tension between achieving the maximum return from public money (in terms of higher growth), which will come from backing proven national successes, and spreading that money more widely in terms of regions (‘levelling up’) and supporting the everyday economy.

One way of resolving that tension is to create institutions with specific and well designed remits (like, perhaps, Labour’s proposed “national wealth fund”). Such delegation is unpopular with some because they imagine their favoured politicians as some kind of benign dictator who makes the right calls, and that the democratic process will ensure that those politicians will succeed. But this process is highly imperfect, as the lack of funding for preventative health illustrates, and is open to corruption, as the recent allocation of money for levelling up shows.

The recognition in the paper that market concentration has increased over the last two decades, and this reduces competition which is the “engine of productivity”, is welcome. One way to counteract that is to make it easier to start up new businesses, and there is a commitment in the paper to do that. The paper also talks about stopping the planning system holding back new investment. The importance of devolving power to allow regionally based growth plans is acknowledged, which is important as the department that Reeves hopes to run - the Treasury - is the major obstacle here.

Of course one key factor in reducing competition in the UK right now is Brexit, which also reduces the size of the market for new businesses. The potential size of the market can be a crucial factor in influencing investment and the supply side. As I have noted elsewhere, the paper’s desire to reduce trading frictions with the EU but to stay outside the EU’s customs union and single market is to a considerable (but not complete) extent a contradiction, but a contradiction that time should resolve.

Another area where there will be tensions with the ‘mission for growth’ is globalisation. For decades governments (and the UK in particular) have largely discounted the idea that issues of national security should be allowed to compromise growing globalisation (in trade, investment and ownership), but Reeves argues that this is changing. She writes that it is important that “that the government identifies the industries that are vital to its national interests and which need public backing”. In part this is doing what multinational firms themselves are beginning to do, which is to take more account of the risks of supply chain disruption because of international political disputes. As ever the trick here is to strike the right balance.

The stress of higher public investment, an active industrial policy and much else shows that we are not seeing a repeat of the Blair/Brown programme. To New Labour neoliberalism looked like a success story in boosting the UK’s relative economic performance, so much of what Thatcher did was preserved. Today the opposite appears true.

Fiscal rules and tax

The paper, which contains nearly 20 pages of text, contains just 6 lines on fiscal rules. That is as it should be, because fiscal rules are not nearly as important as improving economic prosperity and ensuring everyone benefits from it. (A detailed statement about fiscal policy, including how it will support the economy in recessions, can wait until Labour are in government, just as Labour did in 97/8.) Yet our media is and always has been obsessed by the idea that meeting fiscal rules is a key indicator of economic competence, and that in turn means that politicians will be as well.

A good example of that is this story, about how some shadow ministers want part of Labour’s £28bn green fund of public investment to be on infrastructure projects that have little to do with greening the economy. This story only makes sense if a future Labour government operates a form of fiscal rule that places an explicit or implicit cap on the amount of public investment. (This government had an explicit cap in the past.) Without such a cap, if an investment project generates a good social rate of return it should be funded in its own right, and there is no need to reduce other forms of public investment to make way for it.

Hopefully the emphasis Reeves puts on public sector net worth rather than debt (see also Andy Haldane here, and the party’s 2019 manifesto) should mean that a Labour government avoids having to ration good public investment of any kind. Better still would be to eschew any targets for stocks (net wealth or debt) and just have targets for flows (the current deficit), but just as Shadow Chancellor John McDonnell found that politically impossible to do, I fear that may also be true for Chancellor Reeves. I have written about what are good and what are bad fiscal rules elsewhere, and will not repeat that discussion here.

However I doubt a future Labour government will have its ambitions seriously compromised by its fiscal rules, in much the same way as the pitiful state of our public services after 13 years of Conservative government is not primarily because they chose bad fiscal rules. What has been more important in causing that damage is the obsession of Conservative governments with cutting taxes. Equally, what is most likely to stifle Labour’s ambitions is a reluctance to raise taxes, and thereby improve public services.

Another difference between the next election and 1997 is that back then Labour thought it needed to stick to Conservative spending plans to demonstrate their economic credibility. In contrast today, outside the shrillness of what Tim Bale calls the Conservative ‘party in the media’, most cannot wait for an economically competent Labour government to return. But whereas in 1997 the state of public services was just very poor, today they are in a critical state, and in at least one area that is having a macroeconomic impact. Labour could take a leaf out of Osborne’s playbook, do the unpopular thing of raising taxes as soon as they gain office, and this will make everything else that much easier.