Economic liberalisation and the growth agenda: actions speak louder than words
17 February 2011
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16 February 2011
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The government has realised belatedly that it wants to pursue an agenda for ‘ growth ‘. The problem with this sort of language is that it encourages government departments to take interventionist measures that they believe promote growth and improvements in productivity. These measures nearly always backfire.
The rhetoric is important because government ministers and civil servants need no excuse to intervene in the economy and, if government strategists do not promote the right message, intervene they will.
What we really need is an agenda for ‘ supply-side liberalisation ‘ or, more simply, ‘ economic liberalisation ‘ . We need to set people free so that individuals are not constrained from creating wealth and growing their businesses. Employment and economic activity should not be unduly constrained either explicitly by regulation or implicitly through the operation of the benefits system. Economic growth and employment growth happens when people are economically free – governments do not have to actively promote it.
For these reasons the IEA has been asking experts to examine supply -side liberalisation. They have come to a number of conclusions:
Unfortunately, these burdens on ‘producers’ are not decreasing – they have increased over the life of the coalition government. Some of the measures have been inherited from the last government, some of them are imposed by the European Union, but many are home grown. The British Chambers of Commerce estimate that the cost to employers of forthcoming changes to employment regulation will be £23bn in the remaining life of the coalition. This relates to only one aspect of the supply side problems discussed above. As David Cameron surveys the dole queues (with alarming figures for long-term and youth unemployment being announced yesterday) , this should weigh very heavily on his conscience.
The rhetoric is important because government ministers and civil servants need no excuse to intervene in the economy and, if government strategists do not promote the right message, intervene they will.
What we really need is an agenda for ‘ supply-side liberalisation ‘ or, more simply, ‘ economic liberalisation ‘ . We need to set people free so that individuals are not constrained from creating wealth and growing their businesses. Employment and economic activity should not be unduly constrained either explicitly by regulation or implicitly through the operation of the benefits system. Economic growth and employment growth happens when people are economically free – governments do not have to actively promote it.
For these reasons the IEA has been asking experts to examine supply -side liberalisation. They have come to a number of conclusions:
- The planning system should be liberalised. Currently planning restrictions raise business costs and prevent the expansion of the retail industry as well as preventing people from having the living space to which they legitimately aspire. This would not lead to the country being concreted over: currently retail space occupies an area no bigger than half the Isle of Wight.
- Regulatory restrictions on employment contracts are a big and growing burden. This government has also increased those burdens enormously, bringing in new ‘ rights ‘ for employees, raising the minimum wage and reducing the age at which a minimum wage has to be paid. Indeed, the government has further plans to impose burdens on employers. The evidence shows that such an approach locks the most vulnerable people out of the labour market.
- We have a benefits system which, despite reform, makes it very difficult for people to enter full-time work without losing huge amounts in benefits and taxes. Furthermore, housing benefit gives rights to people to live in particular local areas whereas those in work may have long commutes because of the difficulty of affording housing.
- The tax system is very complex and taxes have increased dramatically in recent years. The recent increase in VAT, for example, reduces real take-home pay for those in work whereas those on benefits will be compensated by the indexation of benefits. The complexity of the tax system bears especially heavily on small firms who have a tax-administration cost burden 16 times that of the largest firms as a proportion of turnover.
- The government’s energy policy is imposing greater energy costs on businesses and households alike.
- Increased financial regulation, the regulation of hedge funds and bank capital requirements – none of which resolve the problems that caused the financial crash – are in danger of stifling the supply of new capital to businesses.
Unfortunately, these burdens on ‘producers’ are not decreasing – they have increased over the life of the coalition government. Some of the measures have been inherited from the last government, some of them are imposed by the European Union, but many are home grown. The British Chambers of Commerce estimate that the cost to employers of forthcoming changes to employment regulation will be £23bn in the remaining life of the coalition. This relates to only one aspect of the supply side problems discussed above. As David Cameron surveys the dole queues (with alarming figures for long-term and youth unemployment being announced yesterday) , this should weigh very heavily on his conscience.
7 thoughts on “Economic liberalisation and the growth agenda: actions speak louder than words”
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I agree with Philip Booth about regulations and economic liberalisation.
But I think we have to upgrade introducing datevaluation as an investment’s substitute. It is about Googledepending and Obamadepending.
Regards/FilipeAlvesFerreira#4(1942)
Elsewhere in this website there is an article that criticises steady state economic ideas in a shallow and predictable way. This article supports the growth at any costs contention as if it were the only option.
We live in a finite world and we humans as a species are likely in what ecologists call overshoot. I will define “overshoot” so that I can set the context for the balance of my letter. A species is in overshoot when its population, by consuming non-renewable resources or renewable resources faster than the replacement rate, increases its size beyond the long term carrying capacity of its environment. That definition definitely describes the human species. If you think otherwise you must either be stupid, ignorant or deluded. I don’t mean to be harsh or rude, but there aren’t any other choices.
So how can growth persist indefinitely? Oil production has not increased since 2006 and is unlikely ever to exceed that years levels again (according to the IEA). Just to demolish any Economics 101 nonsense I want to make it clear that there are no substitutes for oil. If oil production has stopped growing; and certainly it looks that way, global economic growth is finished. Sure, there may be some growth somewhere for the odd month or quarter, but overall globally – growth is finished.
For the UK the situation is particularly bleak. The country is broke and your free bonanza of North Sea Oil is in terminal decline after being squandered at low prices over the last 40 years. The UK is once again an oil importer and it is no accident that the pound has lost its petrodollar status.
I also understand that the global credit system cannot work without growth. However I do not understand what structures we need put in place and how we should arrange our economies for us all to live as well as we can in a steady state; or contracting world. This site would do us all a great service if it began to publish some ideas and opinions on this topic. Opening the debate with some serious articles is overdue.
SailDog – you call for opening the debate with some serious articles. I don’t think it helps that the first para of my piece repudiated strongly the growth rhetoric and then you argue that I want growth at any cost. Secondly, simply to call people who disagree with you deluded, ignorant etc is not the basis for any type of rational discussion. I call for liberalisation. I believe that will lead to growth. It might not. There might be factors that, in any era, will lead the economy to shrink but, I would argue (and I cannot go into the details here – but I am not stupid or deluded, I can assure you) a free economy based on the rule of law and well established property rights (including in environmental goods) wil resolve those problems better than any alternative. It will also lead to better environmental protection. Whether a country is producing its own oil or importing is, of course, irrelevant. If the world as a whole were to run out of oil quickly that would certainly be a problem. However, you simply avoid the most serious question – what is the form of economic organisation that allows that problem to be dealt with most effectively? In my view it is a free economy, private property rights and the price mechanism. Simply being rude about people you disagree with and posting a comment that knocks down a straw man gets us nowhere.
Of course liberalisation lead to growth. For me that true is out of discussion. The problem is the number of economic degrees of liberty for our economic action. For me Classic Economy based on
1. Consumption
2. Savings
3. Investment
is not able to resolve the creation of added value which we need for our research of wellbeing.
Thats why I’m trusting on the money datevaluation action as the first investment’s subtitute for the folks creation of added value.
I’m defending datevaluation to get the Universocial Cash Economy on Googledepending basis for internet structure and on Obamadepending basis for regulation on Financial Reform Act.
Regards/@Filipe27
Dear Prof Booth – good luck with the agenda/campaign (?). Are you going to publish the analysis fully? If so – how? As a ‘briefing document’ or monograph. I hope so either way – some up-to-the-minute concrete proposals for supply-side liberalisation would be most welcome I think. It would focus people’s minds on what could be done rather than the rather depressing thought of thinking about what should be done!
Whig – we plan to produce a big book on cutting public spending. I am afraid that we have no concrete plans on supply side publications (which is one reason why we had the event and ran the blog series). However, individual issues are being taken up in future publications. In a sense almost everything we do is on this!
I agree with Whig. Please propose recipes to arrage our ending Classic Economy.