Labour and Growth

 

Is this Labour government right to make achieving growth so central to its missions? Does making higher growth a central priority require Labour has a theory of growth?

I think the answer to the first question is yes and no! Wanting better economic growth is just the same thing as saying you want better living standards for UK citizens in the future. Of course growth is not everything. It matters what that growth involves and how that growth is distributed, In addition stable growth is better than erratic growth, and the wellbeing of citizens depends on many other things besides their standard of living. But given the importance of living standards, it would be rather odd if the government didn’t prioritise better growth

Indeed Labour’s emphasis on growth is quite normal if you look at nearly all post-war governments. Pre-Thatcher, governments were obsessed by the fact that UK economic growth seemed to be lagging behind other major economies. Thatcher and neoliberalism were all about freeing the private sector from what they saw as the impediments of government and trade union interference in markets, and it was claimed that doing this was the way to boost growth. Gordon Brown’s budgets regularly included measures designed to increase UK productivity and growth.

The only potential exception is the Conservative administration that began in 2010 and ended last year. Initially that government deliberately shifted the goal of macroeconomic policy away from growth and living standrads towards balancing the government’s budget. In truth that was a cover for wanting to reduce the size of the state and have lower taxes, which could be (and under Liz Truss was) justified as a means of boosting overall prosperity and growth. That it didn’t feature more strongly after the Osborne period might have been because his tax cuts (in particular cuts in corporation tax) coincided with historically mediocre UK growth. Indeed, given the relative decline in growth that the UK experienced over the last fifteen years, it would be very surprising if the new Labour government did not put growth centre stage.

As talking about growth is much the same as talking about better living standards, debates involve pretty well all the same issues that are familiar from left versus right economic discourse. For example, does the economy perform better if the government gets out of the way, or do we need an active state to spur the private sector. Any sensible government understands that the state can have an important positive role in influencing the economy, so it will naturally be looking at what it can do to increase growth. That is the yes part of the answer to whether Labour are right to make growth a priority.

Does the government need a ‘theory of growth’ before it can successfully encourage it? In looking at different approaches to increasing growth I think the political economy frame is more helpful than looking at different academic theories of economic growth. Ben Ansell makes a heroic attempt to do the latter, but it’s problematic because economic growth theories are not generally alternatives, but rather building blocks to aid understanding. For example what Brown/Ball called post-neoclassical growth theories build on rather than contradict earlier growth models by modelling (endogenising) technical progress. Encouraging investment or technical progress are not really alternatives, as much technical progress is embodied in new investment, and often technical progress needs better human capital to be successful.

Take for example public investment. Labour rightly sees such investment as a way to boost growth, both in itself and often because it facilitates private investment. This isn’t really a ‘theory of growth’, but just common sense backed up by basic economic theory and empirical evidence. Suspicion or hostility to public investment on the political right is ideological rather than coming from any alternative economic theory. Unfortunately, as I noted here, so far Labour has done little more than end the previous government's plans to cut public investment, so it’s incorrect to say so far that higher public investment is a centre-piece of Labour’s growth strategy.

In other respects elements of Labour’s growth strategy seem to borrow from the political right. In October Starmer said

“We will rip up the bureaucracy that blocks investment. We will march through the institutions and make sure that every regulator in this country, especially our economic and competition regulators, take growth as seriously as this room does.”

Of course what you think of this depends on what regulations and institutions are involved. If it’s political regulations blocking building inland wind turbines, then getting rid of those has to be a good thing, but if its regulations designed to avoid another financial meltdown, not so much. If deregulation is aimed at building more homes by giving less power to NIMBYs, then it could be regarded as a clever political move to do something the political right were generally too scared to do. If it’s building additional airport runways that the Climate Change Commission have said should not take place, that doesn’t sound clever at all.

There is a danger here that the current government is giving undue prominence to achieving growth in areas where the growth benefits are relatively small or where the costs are high, which brings us to the negative answer to the prioritising growth question. More specifically, there is a danger Labour are making a number of mistakes.

1. Asking regulators how they can boost growth is asking the wrong question. The right question is whether regulations get trade-offs correct. While it is pretty clear that in many cases planning regulations have become excessive, it should not be presumed that this is true in other cases. Sometimes a clear regulatory framework can help growth. In the past one of the most successful measures to boost UK growth was adopting the set of regulations embodied in the European Single Market.

2. Politicians are nearly always tempted to prioritise near term growth over longer term growth. Growth that involves speeding climate change is not sustainable, and instead involves the current generation taking resources away from future generations.

3. Equally measures that appear to enhance growth at the cost of increasing economic instability may reduce future wellbeing, and may even be counterproductive in terms of long run growth.

4. There is a danger of equating measures favoured by business with measures that enhance growth. For example business often prefers less competition, but competition often increases the incentives for businesses to invest, as well as directly increasing output by reducing the degree of monopoly.

5. It is even more dangerous to assume that measures that favour the wealthy must help growth. It is not at all clear why we should be worried that some of those who became wealthy during a period of economic decline now want to leave.

We can bring the yes and no answers together, and help answer what really matters for growth, by asking what the key lessons are from the growth disaster of the last fifteen years. Here it is not so much about what helps growth, but what holds it back. In understanding why UK growth declined so dramatically during this period, three episodes stand out: the financial crisis, subsequent austerity and Brexit. In all these cases the root cause of the problems were ideological or political.

It was an ideological view that deregulation was always desirable that allowed the financial crisis to happen. It was an ideological desire to shrink the state that led to growth-sapping austerity. It was political antagonism to the EU that led to Brexit. 

We know that changes made to financial regulations after the financial crisis did not go far enough to prevent another crisis, so the last thing we need is political pressure to water down the inadequate changes that were made. Ruling out tax increases and reacting to fiscal pressures by cutting public spending risks perpetuating the austerity regime which destroyed the economic recovery after 2010. Labour’s ‘red lines’ for EU cooperation just bake in the reductions in UK growth that Brexit is bringing about.

Of course Labour may make new political mistakes that impede growth, but it would be foolish indeed for them to make the same mistakes that led to fifteen years of UK economic decline. Perhaps the most important ‘theory’ of economic growth is to learn from rather than repeat past mistakes.