instead annual lecture prof tim besley (lse)/file/... · 2015-10-12 · prof tim besley (lse)...
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InsTEAD Annual Lecture Prof Tim Besley (LSE)
Policy Challenges for the UK Economy
@insteadsheff #insteadAL15
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Policy Challenges for the UK Economy
Tim Besley
October 6th 2015
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Preamble
• I prepared these slides before George Osborne’s Party Conference Speech on October 5th and I have not update them.
• BUT while I was typing them ….
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To My Surprise
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To My Further Surprise
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Preamble
• I prepared these slides before George Osborne’s Party Conference Speech on October 5th 2015 and I have not update them.
• BUT while I was typing them ….
• I have made no attempt to update what I say based on this
– But a few comments on all this later.
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Key Issues
• Recent political and economic events have widened the debate about economic policy in the UK
• Following the financial crisis, there was a near obsession with short term factors – Stabilizing the financial system
– Repairing the damage to the public finances
– Learning to live with and understand the implications of the zero lower bound
• The risk is that this focus crowds out discussion of longer time challenges. – This will be main focus today but in the context of recent events.
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Outline
1. General discussion of the role of government particularly in enhancing prosperity.
2. The economic story of the UK and how it relates to this.
3. Some proposals
- Some of which come from the LSE Growth Commission
4. Speculations
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Prosperity
• Increasing GDP is not an end in itself
– It is valuable only if it enhances human capability.
– But whose capability and how measured?
• In the long-run economic prosperity is driven by:
– Technological advancement
– Moving towards the technological frontier
– Reducing resource misallocation
• Turning it in greater well-being depends on
– How any gains are distributed
– What negative bi-products are created in the process
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The Role of Government
• The role of government is implicit in
– Enforcing property rights (especially intellectual property rights)
– Funding/promoting innovation
– Supplementing market through infrastructure
– Funding collective goods
– Regulating negative externalities
• Traditional focus of economics was on market failure with a benevolent government
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The Role of Government
• Two problems of government failure
– Ignorance
• Does government know which policies to implement?
• Cost-benefit analysis as a tool
– Institutional failure
• Do institutional arrangements create good incentives for identifying and delivering growth enhancing policy?
• Do governments create too much background noise? – Macro-economic uncertainty
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The Role of Government
• Institutions for promoting prosperity
– The role of politics
• Important in a democratic society
• But role for a balance of independence + accountability
– Accepted in areas like
• Central banking
• Regulation
• The Law
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Getting Interventions Right
• Shift in focus to building institutional structures which support policy-making.
– Had created a post-Thatcher policy consensus – which continued under New Labour
• Since 1980s less acceptance of state-led solutions – Suspicious of state ownership
– General move towards de-regulation
• Less focus on inequality
– Peter Mandelson was • “intensely relaxed about people getting filthy rich as long as they pay their taxes"
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The UK and the Post-Thatcherite Consensus
• UK has – long-established rule of law and robust parliamentary institutions
– strong tradition of press freedom
– Openness immigration
• Thatcher reforms (continued by New Labour) included: – Tougher competition through privatization; independent regulators; competition policy
– Flexible labour markets through reforms to employment services, benefits & union law
– Increases in university education (5% had degree in 1980 compared to 31% in 2011)
– Openness to FDI & immigration
• There was a reversal of the UK’s relative decline in the three decades leading up to the financial crisis.
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USA
USAUSA
USA
GerGer
Ger
Ger
Fr
Fr
Fr
Fr
0
20
40
60
80
100
120
140
160
1870 1950 1979 2007
Per
cen
t
UK
DECLINE AND REBOUND:
RELATIVE GDP PER CAPITA FROM 1870
Source: LSE Growth Commission
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UKUSGer
Fr
-40
-20
0
20
40
60
80
100
120
140
160
1950 1960 1970 1980 1990 2000 2010
Per c
en
t
UK US Ger Fr
A REVERSAL OF MISFORTUNE:
GDP PER CAPITA, 1980=100
Source: LSE Growth Commission
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0.4 0.5
0.6 0.5
0.6
0.1
0.1
0.5
0.7
0.3
0.8
0.2 0.4
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1979-1997 1997-2007
An
nu
al a
vera
ge
gro
wth
rat
es i
n p
erce
nta
ge
poin
ts
Financial intermediation
Business services and
renting of m&eq
Distribution services
Personal and social
services
Other goods producing
industries
Manufacturing
excluding electrical
Electrical machinery,
post and communication
Reallocation
PRODUCTIVITY GROWTH (GDP PER HOUR ) :
IT WASN’T ALL FINANCE
Source: LSE Growth Commission
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Deficiencies (Debated to varying degrees)
• Inclusivity: rise in inequality
• Long-term investment problems – Human capital (especially bottom third)
– Infrastructure (especially transport & energy)
– Private investment & Innovation
– Low productivity
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Men
Women
0.85
0.95
1.05
1.15
1.25
1.35
1979 1984 1989 1994 1999 2004 2009
90
-10
Log
FT
Wee
kly
Wag
e D
iffe
ren
tial
s
Men Women
THE INEQUALITY CHALLENGE: GROWING
WAGE DIFFERENCES
Source: LSE Growth Commission
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Investment and Innovation
UKUS
GerFrJp
0
5
10
15
20
25
30
35
40
1970 1975 1980 1985 1990 1995 2000 2005
Per c
en
t
UK US Ger Fr Jp
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Low Productivity
25,000
30,000
35,000
40,000
45,000
50,000
55,000
60,000
65,000
70,0001
97
9
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
GDP per working age adult (2011 $ , PPP)
UK
US
Germany
France
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UK Political Economy
• Core structure based on Parliamentary system – Typically with stable majorities/coalitions
• But Institutional Reforms included significant use of independent bodies: – Competition Commission & OFT
– National Institute for Health and Care Excellent (NICE)
– Bank of England MPC
– Office of Budgetary Responsibility
– Migration Advisory Committee
– Low Pay Commission
– Pay review bodies
• Why? – Allowed politicians to avoid politicizing tough decisions
– Brought in external expertise
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Investment and Policy Challenges
• Policy failures (procrastination, reversals)
– Difficulties of investing for the long-term • Short-term political horizons
– Adversarial politics causes tinkering, rebranding, reversals • Lack of commitment to policy
– Lack of independent expert advice & evaluations • Tradition of secrecy and celebrity reviews which lead to inaction
– Populist pressure • All elections are won and lost by a relatively small number of swing voters
• Outcome is high uncertainty & low investment in long-term assets
– Core to understanding our low productivity
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Human Capital
• Arguably in the end, little else matters for prosperity beyond the skills and motivation of the work force.
• Strong relationship between skills & growth – Quality not just quantity of schooling matters
– Teaching most important input
– “Double Dividend” of increasing human capital of disadvantaged: boosts growth & reduces inequality
• Specific UK problems – Mediocre test scores (e.g. OECD PISA)
– “Long tail” of underachievement
– Stronger link between disadvantage and low academic achievement than in other countries
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BETTER COGNITIVE SKILLS ASSOCIATED
WITH FASTER GROWTH
Source: Hanushek & Woessmann (2012)
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What the UK Needs?
• There has been an emerging consensus across the past two governments:
– Flexible ecology for schools with accountability and autonomy
• But mixed views on whether to focus on disadvantage
• Insufficient attention to improving teacher quality
– Evidence is overwhelming
• Have made progress with all but: – Vested interests
– Too much focus on average
– Adversarial political culture makes consensus difficult
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Infrastructure
• Problem areas
– Transport (roads, aviation, rail)
– Energy
– 40% cut in capital spending during the first part of coalition government.
• Government induced policy risk
– Lack of clear sense of strategy – uncertainty
– Vacillation in and politicisation of policies and projects
• Rigid planning framework
– Rationale with little economic content
– Limited scope to share benefits
• Rigid and misleading public accounting conventions
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A New Institutional Architecture (as proposed by the LSE growth Commission)
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Investment and Innovation
• Low investment as a share of GDP
- heavily weighted towards property and buildings
• Weak intangible investment
– Low R&D and patent intensity
– Weak commercialisation
– Poor management quality
• Aggravated by lack of skilled labour and infrastructure investment
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Issues in UK Capital Markets
• Short-termism in equity markets
– Link voting to length of share holding
• Lack of competition in retail banking
– Referral to competition and markets authority
• Lack of scale economies in SME financing
– Should UK have a business bank?
• Excessive reliance on debt
– Introduce allowance for corporate equity in tax system
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Taxation and Public Finances
• Move beyond austerity debate
• Recognize the implications of ncreasing dependence on taxing the rich:
– top 1%: 1980: 11%, 1990: 15%, 2000: 20%, 2010, 25%
– top 10%: 1980: 35%, 1990: 42%, 2000: 50%, 2010: 54%
• Focus on role of state and worthwhile intervention
– Especially in infrastructure
• Common sense tax reform
– VAT base broadening
– Reform of property taxation
– Merger of income tax and NI
– Restore expenditure tax treatment of savings
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Speculations
• The future of independent institutions
• The Localism Agenda
• Measurement and change
• Back to the future
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The future of independent institutions
• Proposals to change how the Bank of England operates
– The Bank has been asked to take on a wider range of tasks some of which will prove to be highly political.
• Minimum wage proposals
– Current government has directly announced policy without consulting the low pay commission
• OBR has limited domain
– Especially in accounting for debt which funds infrastructure.
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The Localism Agenda
• UK is one of the most centralized political systems in the world
• Which policy and investment challenges be solved locally?
• Thinking behind building appropriate local state capacities is still in its infancy.
• What is the right balance between a national strategy and local engagement though LEP’s?
• Blueprint still unclear
• How to find funding for needed investments?
• Whitehall strangle hold on debt finance
• Is Presidentialism the right model?
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Measurement and Change
• Finding ways to encourage publication of non-GDP based measures of progress
– LSE growth commission proposed a focus on median household consumption
• Follow on work of Sarkozy commission
– National happiness measures??
– Measuring capability
– Distribution
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Back to the Future
• Are we about to have a debate about reversing the post-Thatcher consensus?
– Who is now making the case for the market?
– Will we see the return of public ownership and industrial subsidies
– How far will we go on activist Industrial policy?
– What reforms in tax policy
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Concluding Comments
• Retrospective on the Thatcher-Blair era of policy making
– Saw strong economic performance (reversal of misfortune?)
– But rising inequality
• Where next?
– A more interventionist future?
– How can we address the investment challenges? • This will ultimately determine how far we remain a prosperous nation in future
• And the institutional structure will be key
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Thank you very much!