Economic policy after Brexit

One of my biggest gripes with Brexit is that it is stealing cognitive bandwidth; it’s distracting us from proper economic policies. This is an especial problem for Labour as the party is showing few signs of having much cognitive bandwidth to spare.

There is, though, a big question here: assuming we get a hard Brexit, what should post-Brexit economic policy look like?

Here, we must admit that Philip Hammond’s threat to turn us into a low-tax Singapore-type economy at least answers a good question: how can the UK attract and retain business given that we’ll be offering less good access to the single market than EU nations?

The fact is that we cannot compete on price: Bulgaria and Romania have labour costs which are only one-fifth of the UK’s (pdf).

We could and should, however, compete on labour quality. Post-Brexit, the importance of an educated and trained workforce will be even more important: this means not just university education, but investment in vocational training and early years. We should emulate Singapore in having an educated workforce. In this context, the closure of Sure Start centres should be seen as an act of vandalism, a destruction of the future capital stock.

Hammond might also have point in seeing the need for lower business taxation. However, the answer here might not be so much blanket cuts in taxes and spending but rather a shift in taxation – perhaps from profits and incomes to land (pdf). As the Mirrlees review said (pdf), “there is a strong case for introducing a land value tax.”

It’s also important to encourage the growth of home-grown businesses. In this context, Labour might well press the case for a state investment bank, and for more state involvement in encouraging research and innovation along the lines suggested by Mariana Mazzucato.

A second angle here is that Brexit is likely to compound a massive pre-existing problem – that the UK’s productivity has stagnated. Slower trade growth will probably mean slower productivity growth (pdf): it’s no accident that the two have slowed down together since the financial crisis.

In this context, policies to increase productivity will become even more necessary. This too requires encouraging education, capital investment, innovation and new business formation: a lot of productivity growth comes not from incumbent firms upping their game but from new ones entering markets.

The traditional rightist answer to these issues – to cut taxes and regulation and so release capitalist dynamism – is not sufficient. The fact of secular stagnation tells us that capitalism (perhaps temporarily) has lost its mojo. This points to a need for more interventionist policies.

Thirdly, Labour should acknowledge the power of Vote Leave’s slogan: “take back control”. However, rather offer the merely formal and legalistic sovereignty that Brexit offers, Labour should consider policies to give people real control. These might include devolution; greater consumer say in public services (pdf); and more worker democracy. The latter, of course, should also be a means of raising productivity.

Finally, we should recognise that there is an economic base to demands for immigration control. Stagnant real wages and faltering public services have hardened people’s hearts to migrants. One solution to this is a reversal of austerity: more spending on public services would raise GDP and real wages, thus eventually increasing toleration of migrants; and it would diminish perceptions that migrants are putting a burden upon public services. And, of course, the continuation of sharply negative real gilt yields means that such policies are feasible and sustainable at least for a few years.

Most of these policies, of course, were good ideas before Brexit - and indeed Labour was thinking along such lines. The point is that, in threatening to depress economic growth, Brexit makes it even more imperative to introduce other growth-enhancing policies. Supply-side socialism should become even more important.

And this should be something Labour can unite around: the right can emphasise the need for better education and training policies, the left co-ops and anti-austerity. Yes, Labour is confused and divided. But there is no logical reason why it must be.

Comments

[Patrick Kirk]

Is there really no value in my dream of a massive public housebuilding program that creates jobs and provides affordable homes? You might find that concerns about trade and immigration and taking back control abated if people instead were making decisions about themagnolia paint in their new homes.

[Steven Clarke]

@Patrick Kirk

I'm in complete agreement with you that we need more housebuilding.

Chris mentions introducing a land value tax, which I've long favoured but doubt it's politically possible.

But we should look at ways of freeing up land for housebuilding and allowing local governments to capture the uplift in land values that would come from granting planning permission for homes.

Imagine if place like London and Cambridge permitted more residential construction (even on their greenbelts); capturing the considerable uplift in land values to fund infrastructure and provide compensation for locals concerned about development.

This would provide jobs and homes, as you say, but also increase productivity. High house prices prevent people from moving to our most productive cities.

[H]

Would it not be wise to combine a land value tax with a relaxation of planning controls, in order to allow landowners to respond to incentives?

[Dave Timoney]

Not only will we struggle to compete with Romania and Bulgaria on labour costs, but we will struggle to outbid Ireland on corporation tax and Luxembourg on tax avoidance.

The rational approach would be to identify the UK's intrinsic strengths and then exploit them to the max. Those strengths were: a) being in the single market but not the Eurozone, b) providing a business environment that was culturally and institutionally midway between the US and Europe, and c) having a number of centres of expertise in services that can be leveraged globally (finance, law, consultancy, media etc).

We've bollixed the first of these for the sake of a dubious sovereignty and a reduction in immigration that will underwhelm its supporters. The second is now looking more fragile under a Trump administration (a trade war between the US and EU would hit the UK harder than either of the protagonists). That pretty much leaves the last, which is why the "Singapore model" is at least coherent.

The problem is that it means relying even more on London, so the Brexit heartlands can expect further neglect. Supply-side socialism might be the better approach, but politically this will struggle against a Tory party increasingly focused on the Home Counties and looking to the LibDems and UKIP (and the Blairite remnants) to fragment opposition votes.

It also means the Tories will probably be increasingly sanguine about both Scottish independence (the Scots may ironically be pushed before they jump) and Northern Ireland moving closer to Dublin. It may be a good time to re-read Tom Nairn.

[Olli Ranta]

Are you aware that "supply-side structural reform" is the term that Chinese President Xi Jinping has been using for the year 2016 to describe the need for state led economic expansion?

[Luis Enrique]

"The only robust result appears to be that shifts in tax revenue towards property taxes are associated with a higher level of income per capita in the long run."

http://eureka.sbs.ox.ac.uk/3213/1/WP1120.pdf

[Blissex]

«compete on labour quality. Post-Brexit, the importance of an educated and trained workforce will be even more important»

If one wants to turn the UK into an "headquarters" economy with lots of "staff" (as opposed to "line") jobs; the problem is that it is too big for that.

«a shift in taxation – perhaps from profits and incomes to land»

Politically unacceptable until a colossal house price crash happens, and if that happens all bets are off.

«Brexit is likely to compound a massive pre-existing problem – that the UK’s productivity has stagnated»

As F Coppola and others have demonstrated, the growth and stagnation of aggregate productivity was due almost entirely to rise and fall in scottish oil production.

«growth-enhancing policies. Supply-side socialism should become even more important.»

That's a very good point,and Germany (for liberal-socialism) has demonstrated it, but most swing voters seem to much prefer "Blow you! I am allright Jack" owner-side rentierism, and have done so for decades.

[Bonnemort]

Hammond did one thing right. In front of the assembled oligarchs at Davos he pointed the finger at Tony Blair as the chief author of Brexit.

[AndrewD]

Rather than a Land Tax, which is politically difficult, replace Stamp Duty with VAT levied on the total price of a new house or the uplift in value for existing properties and other forms of land. this would depress house price rises and capture some of the illegitimate profits made on houses.

[Blissex]

«Rather than a Land Tax, which is politically difficult, [ ... ] VAT [ ... ] this would depress house price rises and capture some of the illegitimate profits made on houses.»

What is politically difficult is not a Land Tax, but to «depress house price rises and capture some of the illegitimate profits». Whether you do that via a Land Tax or VAT does not matter much.

[George Carty]

What can be done about the electoral tyranny of the MEWing and BTLing minority that Blissex is always banging on about?

Sounds like a good argument for PR.

[Blissex]

«electoral tyranny of the MEWing and BTLing minority [ ... ] a good argument for PR»

That's a difficult question, and I reckon that PR is an important part of it, because currently it is swing property owning voters in the south who decide general elections.

But at the same time I suspect that such «electoral tyranny» is something "The Establishment" is happy with (even if some of the establishment strongly dissent, like Cable or Kay); Probably, if FPTP resulted in general elections being decided by unemployed renters in the north, FPTP would have been "reformed" already.

Some form of PR would definitely help, but it is not by itself going to do much: countries like Ireland or Spain have some form of PR and they have been managed for the benefit of property speculators too.

In the UK there is the added situation that the interests of property owners in the south and in the north are quite different, and within the south between those who want to upsize (usually younger people) and those who don't (mostly older people).

Overall I think that in principle many small owners could be persuaded that in the long term they benefit more from good wages and safe jobs than from 100% per year profits on property speculation; for most people their job is a far more important "asset" than their house.

The problem is that the boomer generation already got by and large good wages and safe jobs, thanks mostly to the trade unions they now detest; there are also cultural issues, where many english people (Daily Mail readers...) would rather think of themselves as respectable "gentry" rather than well-off worker "nobodies".

Ultimately 100% per year profits on property speculation are unsustainable, as property prices in the south-east cannot double every 10 years *forever*, and when the endgame happens like it did in Japan in the early 1990s then 1-2 generations won't touch property. But it could still take a while before that happens. The Conservatives/New Labour and the BoE seem desperate to keep the south-east property boom going until the 2020 elections at least.

[rogerh]

Late as usual.

All fairly reasonable but I have a concern. Brexit was driven by rich men who run the Tory press and backed by some of the old Nasty Party. Daisy May is merely their smiling? front of house.

I agree we should compete on labour quality. But quality comes not only from education and training but from a whole set of social attitudes. When the attitude from the top is 'screw you' I don't think that is likely to inculcate a dedicated workforce. Then there is housing. Being stuck in rented whilst the next layer up the pile is making like bandits on the property ladder is not conducive to calm craftsmanship or robot programming either. But to change this situation does I fear not suit the ruling class one little bit and so won't happen.

Lower taxation might be forced on the government. That will suit very well, public service can be cut back and a private pay-as-you-get-better health service introduced. Farmed out to the very wealthy types pushing the Brexit agenda with a view to getting richer still.

I doubt they really plan to turn Britain into a booming workers paradise with well educated workers knocking off at 17:30 and riding the plentiful public buses to the library and Workers Education classes (remember them). I rather fear they will make a grab for as much of the UK's assets as they possibly can before the whole Brexit scheme unravels.

[Blissex]

«think of themselves as respectable "gentry"»

https://books.google.co.uk/books?id=1lPfuGQB3-sC&pg=PT69

«then 1-2 generations won't touch property»

For a similar situation in post-Depressions USA:

J. K. Galbraith, "The Great Crash 1929", pages 25, 32, 68
«One thing in the twenties should have been visible even to Coolidge. It concerned the American people of whose character he had spoken so well. Along with the sterling qualities he praised, they were also displaying an inordinate desire to get rich quickly with a minimum of physical effort.»
«For now, free at last from all threat of government reaction or retribution, the market sailed off into the wild blue yonder. Especially after 1 June all hesitation disappeared.
Never before or since have so many become so wondrously, so effortlessly, and so quickly rich.
Perhaps Messrs Hoover and Mellon and the Federal Reserve were right in keeping their hands off. Perhaps it was worth being poor for a long time to be so rich for just a little while.»
«Just as Republican orators for a generation after Appomattox made use of the bloody shirt, so for a generation Democrats have been warning that to elect Republicans is to invite another disaster like that of 1929. The defeat of the Democratic candidate in 1952 was widely attributed to the unfortunate appearance at the polls of too many youths who knew only by hearsay of the horrors of those days.»

How some things change, and others don't.

[AndrewD]

rogerh, just to say The Workers Educational Association still exists, I should know as I am secretary of the local branch. We have been better off but are currently hanging in.