Real Resources

There was a useful Twitter exchange between Chris Bertram and Chris Dillow today that captured a fundamental truth about the UK economy: namely that with low unemployment the government lacks the human resources necessary to significantly invest in public services, and that there is little enthusiasm for the constraints on private consumption that could free those resources up. The last few weeks have been characterised as a struggle between monetary and fiscal methods - the now-departed Chancellor's plan for unfunded tax cuts at the upper end of the income scale versus the intervention of the Bank of England to prop up pensions funds as the cost of borrowing rose steeply. What this has occluded is the role of real resources, both capital and labour. The former is alluded to only in the context of fears that property prices may fall if higher borrowing costs crater the housing market, while the latter received only an indirect reference in the latest exhumation of the Britannia Unchained quote about British workers being among the world's great idlers.

I take a less pessimistic view of this quandry because it seems obvious to me that much of our capital and labour is currently misallocated - the evidence is there in the weak productivity data - and that can be changed. Unproductive capital can be taxed, which effectively means a portion of it can be reallocated to addressing the pitiful state of the public fabric, while the cost of labour can be increased to incentivise better allocation within the private sector. The latter would best be done through a combination of increased payroll taxes (i.e. employer NICs) and an increase in the minimum wage. Some businesses at the margin of profitability would go under, but that is precisely what we need given the long tail of low productivity firms. It would be nice to believe that businesses can raise their productivity endogenously, and some undoubtedly can and will, but the hard truth is that significant aggregate improvements come about through business churn and people moving jobs.

If the travails of the current administration have confirmed anything it is that conventional policy has run out road, even if that orthodoxy remains tenacious. If the cuts to public services a decade ago didn't alter the UK economy's long-term trajectory, another round of austerity now is hardly going to do the trick. And let's not forget that the delay to the Bank of England's unwinding of its quantitative easing programme isn't simply down to the bad timing of Liz Truss and Kwasi Kwarteng's mini-budget. The Bank has been unable to wean the financial markets off QE for the past 13 years. The return of Jeremy Hunt has been greeted by centrists as an "adults in the room" moment, but their determination to restore a status quo ante marked by low growth, widening inequality and a steady deterioration in the balance of payments is frankly perverse. So too is the suggestion that all will be well if we simply reverse Brexit: the mother of all u-turns that the liberal media are now urging on Keir Starmer as the Prime Minister-presumptive.

It's a commonplace to observe that Margaret Thatcher's desire to create a shareholding democracy through the privatisation of public assets failed. Those assets are now in the hands of foreign governments or international conglomerates while the number of indvidual private investors in British companies has steadily declined. But what this narrative misses is that she succeded in cultivating a new breed of petty capitalists and rentiers in the form of sole trader companies (there are now over 4 million of these) and buy-to-let landlords. Much of the hidden under-employment in the UK economy can be found among these micro-businesses, and many sole traders are only reluctantly self-employed: they'd prefer a better paid, more stable job with a bigger firm, not a "bonfire of red tape". The recovery of the rentier after the near-liquidation of the mid-twentieth century reflects not only widening inequality and greater financialisation but also the massive injection of capital into property, which in turn was the result of the state's deliberate withdrawal from the provision of public housing.

Given these characteristics, there is little reason to believe that the UK economy is about to turn the corner. Productivity growth will continue to be weak; house prices may stumble but without a massive public housing programme they will recover; and the balance of payments will continue to widen as the pound slowly drops and global inflation steadily rises. While the government's mini-budget was badly-timed and tone-deaf, the strong reaction of the financial markets clearly reflected a more profound correction in expectations about the country's prospects. This pessimism goes beyond disappointment with the choice of Conservative Party members, or worries about the future trading relationship with the EU. Centrists who insist that all our problems are of recent vintage, going back no further than 2010 or even 2016, are deluded. We are still suffering from the deindustrialisation of the early-1980s and the hubris that led to Black Wednesday in 1992. The New Labour years were simply a missed opportunity.

A rational policy would turn the state's punitive gaze away from welfare recipients towards the self-employed and small businesses. It would also shift the burden of taxation from income to accumulated wealth - property above all. Neither is likely to happen during the fag-end of the present government. Not only would such measures be anathema to Truss, or indeed any other Tory leader, but the time required to effect the changes and to see the benefits is too long to be considered at any point other than the start of a parliament. Assuming Labour next takes office, the centrist clamour for a "return to normality" suggests that the "hard choices" of a Starmer-led government would once more centre on hoary old debates about means-testing and the need to keep business sweet. Blairite outriders like Philip Collins are already preparing the ground: "Good social democratic virtues can be served without committing a single extra penny. “We will work with what we have” is a good and comprehensible approach that still leaves plenty of room for action."

We are trapped because the real resources of the economy, i.e. capital and labour, are not being put to efficient use, and there is no political will to take the steps necessary to rectify this. That lack of will isn't simply the result of calculations over the reaction of electorally-important groups such as homeowners. The truth is that the politico-media caste are perfectly happy with this state of affairs. While they have derided Liz Truss as an idiot, she wasn't wrong to talk of "managed decline" in this context. Obviously her insistence that only her plan to arrest this would work has proved a hostage to fortune, and her maladroitness has been spectacular, but her initiative went well beyond the usual "something must be done" new-broomism of previous Prime Ministers that invariably left the fundamentals untouched. What this debacle has proved is not just that the international financial markets retain the disciplinary power that Hayek celebrated but that the machinery of informal government, from Threadneedle Street to Fleet Street, remains dedicated to preserving the gains of Thatcherism.