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Comment reviews:An Alternative Hypothesis
15 February 2018
Running a country according to an economic theory is a distinctly tricky business as no economic theory particularly holds true in practice.
So it is often best to rely on rule of thumb observations drawn from the country's past economic history.
No industrial policy adopted and publicly announced - and there have been a lot announced - in Britain since 1965 has worked. There are only three times I can recall industrial intervention by the government having worked. They are as follows:
- Edward Heath's government's rescuing Rolls-Royce in 1973;
- John Major's government's encouragement of Japanese manufacturers, particulary car manufacturers, to come to Britain;
- Some discreet help to the car industry after the 2007-8 financial collapses, under Peter Mandelson's auspices.
Light, high-tech industry has, however, flourished west of Heathrow and in the Cambridge area quite well in the same period, perhaps because government has stayed at arm's length.
Other areas might have done a little better if industrial funding had been devolved regionally without central control.
Long term 'support', however, just produces flabby, greedy, oligarchical groupings with internationally uncompetitive players within them.
The idea of clusters is that there are many competitive players within a cluster who stimulate one another to do better. Industrially, they do not need directing by government. Government can help by preventing oligarchies developing.
In some cases private monopolies are proving better than private oligarchies because they have an interest in sidelining oligarchies in their quest of monopoly and as they do so the smaller, innovative companies find themselves freed from gatekeeping oligarchs.
Quantitative easing is monetising government deficit spending by another name. This does not mean it is undesirable but it does mean that inflation will come through somehow. It has come through only gently in the price of goods, services and labour but it has found expression in rising global residential land prices in nearly all major cities.
There is no point in blaming the owners of residential property for rising prices. There is no point in taxing them either. It is axiomatic that you cannot really spend the aggregate capital in this case. When a government borrows from its country's population in wartime it is reducing the latter's current consumption. When you tax a home that will not be sold you are reducing the occupants' potential for current consumption. Only when you restrain quantitative easing and other monetary creation and - very important - release more land for building will you readily restrain property price inflation. If you only build higher buildings you must face the probability that you are only raising the cost of all neighbouring residential land because the plots become more valuable.
If you reduce government expenditure to reduce personal tax you usually get increased GDP and the tax take then recovers.
If you increase personal tax to fund increased government expenditure the reverse is likely because of the inefficiencies of government spending - increasingly typical is the feather-bedding of oligarchical companies like Carillion or spending more on initiatives to devise industrial policies that will not work, neither of which does much to increase output.
In Britain currently, though, the option is not going to be a real terms reduction in government spending that permits personal tax reductions yet because some cost overruns are already in the pipeline - on HS2, on defence, on the NHS and, possibly, on exiting the EU.
So what choices are to be made? Deferring reductions in corporation tax to the end of the parliament might be one. However, if it is a choice between personal taxation and deficit financing, the second should be the choice despite the risks. Too little of GDP is staying with the household sector and as a result, though families are the best venture capitalists, business recovery, as opposed to specifically industrial recovery, is not being adequately generated from below, from individuals through to small companies through to medium-sized companies and beyond. Insipid growth in the economy may be more due to this than to Brexit factors.
Of well-known companies that have made it through from medium-sized to international stature in the past decade I can only readily think of a few - ARM, Ineos, Dyson and Virgin.
Los Angeles or San Francisco probably each have more.
Regulatory restrictions in the U.S. in the sixties and seventies led to the growth of the Eurodollar market in London. This was one of the innovations that propelled London into the top two financial centres in the world.
If the EU becomes determined to repatriate regulated business away from the City of London to the Continent after Brexit even a non-financier can conceive of innovations that could take place in London equivalent to the Eurodollar market. Does the EU want the City in its camp or not? The rest of the EU has a large surplus with the U.K. in traded goods. The U.K. has a smaller surplus in services. For both parties the logic is no tariffs, no barriers. Britain's industrial sector has its dynamism but its makeup suggests it is going nowhere hurriedly .... except perhaps behind a temporary tariff barrier that allows small companies to become medium sized with the government restraining oligarchies.