Regulation

Labour should focus on growth above inequality


It used to go without saying that growth matters. But if former US Treasury secretary Larry Summers now feels the need to take to the pages of the Financial Times to make the ‘progressive case for economic growth’, it shows just how far other issues, whether inequality or climate change, have come to dominate the thinking of much of the political left.

Summers is primarily addressing the US Democrats in worrying that the ‘objective of increasing growth has been discredited in the minds of too many progressives’, but his message applies to Labour too. Compare the number of times Jeremy Corbyn has talked about the distribution of income versus achieving higher GDP.

How has this come about? Partly, no doubt, due to the failure of planned economies to deliver promised improvements in living standards. With free markets succeeding, a new focus was sought. After the fall of the Berlin Wall, the co-option of the anti-growth wing of the green movement into the ‘progressive’ family strengthened this feeling too.

But those who say they care about the poor (as Corbyn and Owen Smith do) should make economic growth front and centre of their offering to voters. Not just for the reasons that Summers outlines, though he is right that robust growth potentially provides more resources for the NHS and other public services, and safeguards employment. No, the case for economic growth is much stronger even than Summers implies.

First, it more dramatically impacts living standards than anything redistribution could achieve. Even growing at the 2.2 per cent the Office for Budget Responsibility believes is the UK’s sustainable annual growth rate would increase GDP by 87 per cent in 30 years. If we were to increase that rate to 2.5 per cent, this would double GDP over the same period.

Second, as economists have shown, material prosperity strongly correlates with many other areas of human development. The Joseph Rowntree Foundation has found, for example, that higher incomes boost children’s development and outcomes. Growth enhances all-round well-being.

Third, at a global level, growth increases the likelihood of a focus on conservation. If your family is starving, the benefits of chopping down a forest to sell wood look pretty attractive. As income levels increase and primal needs are fulfilled, people are more willing to focus on issues such as sustainability.

And finally, growth undermines the political conception that the economy is a zero-sum game. Inequality has become a more politically salient topic after the financial crisis, despite being largely unchanged for the past 25 years in the UK. Much resentment towards ‘the rich’ and the feeling of a ‘divided society’ appears to come about due to economic stagnation.

Given the relatively weak post-crisis recovery, and with significant headwinds against growth in the future, it’s crucial for the prospects of the poor that all parties, including Corbyn’s Labour, take growth seriously. The question then becomes whether higher growth is achievable – and how.

With labour market participation strong and women more fully integrated into the workforce, the most important component of future GDP growth will be labour productivity increases arising from innovation. Nobody quite knows just what degree of an impact government policy could have in improving this, though my reasoning suggests it is worth trying.

Here, sadly, even leftish growth advocates such as Summers engage in wishful thinking. He implies that merely raising government spending and ‘demand’, coupled with minimum wage hikes, can permanently enhance productive potential. It is difficult to see where we can find theory let alone empirical evidence for these claims.

Of course, it’s much easier to win support for economic growth if the ‘solutions’ for getting it are what other left-wing thinkers propose anyway. It’s also much easier to propose big ‘macro’ solutions than detail the large number of very small things – such as changes to regulations, tax reform and institutions to deliver new infrastructure – that could really enhance innovative activity.

But that is a debate for another day. Summers’s key message – that politicians of all parties should shift concern from static issues to focusing on growth – is both important and timely.

This article was first published by City AM.

Head of Public Policy and Director, Paragon Initiative

Ryan Bourne is Head of Public Policy at the IEA and Director of The Paragon Initiative. Ryan was educated at Magdalene College, Cambridge where he achieved a double-first in Economics at undergraduate level and later an MPhil qualification. Prior to joining the IEA, Ryan worked for a year at the economic consultancy firm Frontier Economics on competition and public policy issues. After leaving Frontier in 2010, Ryan joined the Centre for Policy Studies think tank in Westminster, first as an Economics Researcher and subsequently as Head of Economic Research. There, he was responsible for writing, editing and commissioning economic reports across a broad range of areas, as well as organisation of economic-themed events and roundtables. Ryan appears regularly in the national media, including writing for The Times, the Daily Telegraph, ConservativeHome and Spectator Coffee House, and appearing on broadcast, including BBC News, Newsnight, Sky News, Jeff Randall Live, Reuters and LBC radio. He is currently a weekly columnist for CityAM.


3 thoughts on “Labour should focus on growth above inequality”

  1. Posted 24/08/2016 at 13:47 | Permalink

    Great blog.

  2. Posted 25/08/2016 at 15:20 | Permalink

    Completely agree. Fairness and efficiency are two sides on the same coin. For an economy optimized for growth, we only need a fair set of property rights, that will then enable a fair and efficient allocation of the factors of production. Therefore we should not be taxing people for what they produce. Instead, we should shift as many taxes as possible onto location values and other natural resources. As land by value is more concentrated towards the wealthiest than income or capital, such a shift would also see a substantial reduction in wealth and income inequality. So more wealth, divided more evenly. A win-win. Unless of course your are an economic parasite or a socialist control freak.

  3. Posted 28/08/2016 at 18:49 | Permalink

    I’m not convinced economists know how to create growth. Nor that the growth they’re talking about makes for a desirable future.

    We citizens are more interested in what changes we’ll have to live with due to GDP increases such as Job locations, job content, job losses, lower pay, overcrowded roads, trains, hospitals etc; or too many young men away from home having drunken revels in our previously quiet suburban street. Over the past 20 years, I’ve been unable to live closer to work than an hour and a half each way which has caused my evening social life and gardening time to disappear. Any pay rises I’ve had have been less than the increased cost of living. Most of the local shops in my high street have disappeared, so that I end up buying items via Amazon over the internet instead of browsing happily & chatting to the assistants. In general, resulting in a much less enjoyable life-style.

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