The growth raindance

Andrew Tyrie wants George Osborne to do a raindance:

Mr Tyrie called for the tax system to be simplified and business taxation to be reduced, and said he wanted to see fewer regulations and changes to labour laws…
"A much more coherent and credible plan for supply-side reform to improve the long-term economic growth rate of the UK economy is now needed."

This runs into an embarrassing fact - that history shows that Tory “supply side reform” has not raised growth. In the 23 years since Nigella’s dad cut the top rate of income tax to 40%, GDP growth has averaged 1.92% a year. In the previous 23, it averaged 2.47% a year. Even if we ignore the recent recession (and there‘s no reason we should) growth in the 20 years after Lawson‘s Budget averaged 2.4% a year - less than in the 1965-88 period. 
This matters. Since the 80s, Tory supply-siders have had pretty much the policies they hoped for - deregulation, lower corporate taxes, lower top taxes, privatization and much weaker trades unions. And yet growth during this period has been no higher than it was when, according to legend,  Red Robbo and Paddy Fleming were shouting “everybody out” every day.
This is not necessarily proof that “supply side” policies alone fail. It could be that no government policies can reliably raise long-term growth, because this is determined by factors which governments cannot control, such as entrepreneurial spirit or the rate of monetizable innovation.
This is why I say Tyrie wants the Tories to do a raindance. He wants them to give the impression of doing something, so that they can claim credit if growth picks up later. This is policy-making not as rational, empirically-guided activity, but as ritual.

Comments

[Keith]

Yes, but when have conservatives ever based their views on facts? Labour gave up on facts under Tony Blair as well, and he got away with it. The Lib Dems have joined in too and no one in Euroland or the USA bothers with facts either. Politics and economics seems today to be based entirely on prejudice and class interest. Or just fantasy. You choose the "narrative" to appeal to the right group and bask in the adulation they give you for confirming their errors. Choose respectable errors and all is well. Galileo choose incorrectly and had to recant the mistake of discovering the truth. "But it does move!" must be whispered quietly; or the Popes torture chamber awaits.

What do you think about the idea that the lower productivity growth since the adoption of "supply side policies" is in fact the result of those very policies? Maybe very highly paid people are less important to societies wealth creation than they think and privatisation merely raises the economic rent extracted from consumers including the state? When the state uses private firms to perform functions formerly carried out directly by itself. Maybe tight money to control inflation works by creating more open and hidden unemployment and reduces investment in both private and public sectors? Low Inflation and slow growth are both produced by the same policies? Almost all societies with high growth suffer from inflation, sometimes quite high inflation. Low demand with low inflation slow down productivity growth by removing demand side pull? And reduce risk taking by increasing the penalty for failure. More productivity growth with higher inflation would be a more optimal policy from the point of view of most members of society as they would be richer in real terms. As so called supply side policies enrich a small minority at the expense of the majority they slow down productivity growth by restricting the size of the market. Think of France before the revolution of 1789 and the effect of a system of political economy designed for the Nobility of sword and robe taxing the masses to the point of penury. Think of student debt as like the debts of the emancipated serfs in Russia holding back economic growth. Galileo if he was still alive might tell us which Economic theory accords with the methods of Science; namely conclusions based on facts.

[Jimmy Hill]

"In the 23 years since Nigella’s dad cut the top rate of income tax to 40%, GDP growth has averaged 1.92% a year. In the previous 23, it averaged 2.47% a year. Even if we ignore the recent recession (and there‘s no reason we should) growth in the 20 years after Lawson‘s Budget averaged 2.4% a year - less than in the 1965-88 period."

How do we know that growth wouldn't have been even lower without these reforms?

[gastro george]

It never ceases to amaze me how the policy of "growth through fiscal austerity" is not just laughed at for being the idiocy that it is - unsupported by any empirical evidence.

According to Osborne, BAE Systems should be investing in new factories and workers, because prosperity and profits are just around the corner. Instead, they are sacking workers and closing factories. Why? Because they have no orders - no demand. Any amount of supply-side tinkering is not going to change this.

[Luis Enrique]

Not much of attempt to consider a counterfactual, so all this talk of evidence and facts is a bit hollow. A there any countries that did not enact supply side reforms around that time? How did we fare next to them?

GG I have some concerns about demand side policies, w.r.t. Weapons manufacturers

[gastro george]

I'd agree Luis - it was only meant as an example.

[Jim]

If you think that there are less regulations on businesses now than 30 years ago, you know little about running your own business. Its not about cutting taxes (although that might help), its about cutting swathes of regulations that just have the effect of preventing new entrants into business sectors (existing businesses quite like them as they prevent anyone competing with them).

Get rid of all the rules, make it easy to employ people and you'd be surprised how much new employment would be created.

[CahalMoran]

@Jimmy Hill

Well, empirical evidence suggests higher tax rates are actually good for growth. The Angry Bear guys have a fair few posts on this with strong supportive evidence:

http://www.angrybearblog.com/2011/09/basic-macroeconomics.html

http://www.angrybearblog.com/2011/09/effect-of-individual-income-tax-rates_18.html

You should be able to find the others from here.

[gastro george]

"... regulations that just have the effect of preventing new entrants into business sectors ..."

I'd prefer to see that as "getting real".

[Matbu764]

GDP per capita (World Bank figures) normalised as a fraction of US GDP per capita.

Country 1980 1994 2008

USA 1.000 1.000 1.000

Australia .841 .770 .837

Canada .905 .818 .843

Britain .688 .705 .765

France .780 .730 .713

Germany .803 .812 .763

Italy .756 .754 .675

Sweden .868 .777 .794

Switz. 1.146 .987 .915

HK .547 .845 .948

Japan .732 .815 .736

Singapore .577 .899 1.064

Argentina .395 .300 .309

Chile .210 .251 .311

Make of that what you will.

[Jon]

Growth could well have been lower without these reforms - that would actually be consistent with a tendency of the rate of profit to fall.

[chris]

I'm not ruling out the possibility that growth would have been lower, but for the reforms.
For this to be the case, you'd have to argue that capitalism has (temporarily or not) run out of oomph. But the Tory right don't seem to have argued this - and doing so would make it harder to attack Labour for running fiscal deficits in the mid-00s.
What's more, even if this is right, a weaker version of my point still holds - that right-wing supply-side reforms are not sufficient to boost growth, even if they might (v.arguably) be necessary.

[Luis Enrique]

sorry, should have said ... I don't see any reason to think that supply-side constraints are what are holding growth back right now, so I agree with you on main point.

I'm not sure I follow the implications of acknowledging trend growth is low for fiscal policy. Doesn't low growth make deficits harder to justify, not easier?

[gastro george]

"Doesn't low growth make deficits harder to justify, not easier?"

Isn't that a chicken or egg question?

[Luis Enrique]

GG - no, I don't think so, not in the context of low trend growth, as opposed to low growth during a recession. The idea is that even if we used deficit spending to dig ourselves out of the present hole, the rate of growth we'd get when things are back to normal would be lower. Lower trend growth reduces your ability to grow your way out of debt, it reduces the size of the deficit you can run whilst keeping debt/GDP stable.

[Keith]

I don't think scraping fire regs and allowing hotels to burn their guests alive or letting more fast food joints poison their customers will boost productivity growth. Most small firms stay small or go bust; getting more people to go bust won't boost the economy! If the neoliberal panaceas worked we would have seen the evidence by now.

[cjcjc]

If Keith believes that the regulatory burden is mainly of that kind then he has clearly never worked in the private sector.

[Big DAD]

"Doesn't low growth make deficits harder to justify, not easier?"
I agree with Gastro George: Its a chicken or egg question