Clarity - who needs it?

Tim Pitt calls on the government to set out “a renewed Conservative economic philosophy.” I’m not sure this is wise. Having a clear philosophy requires you to think, which is not a self-evidently good thing in life or in politics. Worse still, it gives people something to disagree with, and so invites party disunity. Constructive ambiguity can be a good thing.

I say this because a new Conservative economic philosophy requires the party to answer loads of tricky questions. Here are a few.

Are you pro-business or pro-markets? Pro-market policies would promote competition by for example relaxing intellectual property laws, reducing planning restrictions, simplifying regulations,  expanding the British Business Bank to encourage start-ups and imposing tougher rules against mergers and monopolies.  All of these, however, would threaten the profits of incumbents.

Which leads to another issue. What should be the rules on state aid, procurement and outsourcing? These can in theory be used to promote competition by encouraging contracts from outside the usual suspects of Serco, Capita and G4S or by favouring start-ups. Or they can entrench power by giving handouts to the powerful and well-connected, as when the government spent millions on worthless PPE provided by an advisor to Liz Truss. Which is it to be?

And then there’s the question of competition versus community. We learned in the 80s that when industries collapse workers do not easily move to other jobs: as Duflo and Banerjee show in Good Economics for Hard Times, economies are stickier than Thatcherites assumed. Instead, we see the decline of whole areas. Should today’s Conservatives do more therefore to protect jobs, or to help people move jobs? What sort of regional and training policies does this require?

But there’s not just a divide between start-ups and incumbents. There’s also a conflict between landlords and businesses. More working from home and decline in the high street require that many rents be cut. Should the government facilitate this by outlawing upward-only rent reviews? Which side are the Tories on?

 Which leads to another question: what should be the tax base? There is a case for shifting tax from profits to land, because the latter cannot move. But of course, this hits landlords whilst benefiting other businesses.

Then there is the fiscal policy issue. How much should policy be tightened and how soon? If we need an early tightening, why? Why are bond markets wrong to lend to the government at favourable rates?

If you favour such a tightening, other question arise. What should be the mix of tax rises and spending cuts.  If the latter, where might the cuts fall given that local government in particular has already been stripped back so much? If the former, how much can be raised from the wealthy alone, or do we need to tax the middlingly rich whose numbers and inability to move mean they might generate more revenue? And then there’s the question: what form should the offsetting monetary loosening take? Is conventional QE sufficient? Or dual interest rates? Or do you support helicopter drops? And if you don’t favour an early fiscal tightening, what has changed since the austerity of 2010-17 that many Tories supported?

The questions don’t stop there. Another is: why has productivity stagnated since the mid-00s? We lefties can blame inequality, or fiscal austerity, or the effects of the banking crisis which itself was caused by lax regulation. It’s not so clear what a Conservative answer would be.

And yet the productivity stagnation undermines a central plank of the Conservative thinking of the 80s – a plank which New Labour inherited to a large extent. They believed that the economy would grow nicely if the state stepped back, and provided only the right framework of rules. It now looks as if this isn’t true. Kickstarting productivity might well require greater state intervention. But what would a distinctively Conservative approach to this look like?

A Conservative economic philosophy must answer other questions. One is: are we in a wage-led regime (pdf) – in which fuller employment and greater equality are necessary for growth – or are we instead in a profit-led regime, wherein growth requires the restoration of profit margins? Separately from this, where do we draw the trade-off between legitimation and accumulation? Some policies (such as Brexit?) are justifiable not because they promote growth but because they buy off discontent, or at least channel it away from capitalism. How many such policies are needed?

And then there’s the question: what role should public opinion play in this? It favours leftist policies such as more nationalization and taxes on the rich. Should Conservatism accommodate these views or argue against them. If so, how?

All of us have answers to these questions – though many of them should be tentative. But do you have answers that are coherent, evidence-based, and distinctively Conservative? That’s a much tougher one.  

The point here is that a Conservative economic philosophy requires a lot of issues to be addressed which in turn provides lots of potential to anger and alienate lots of voters and indeed Tory supporters.

And they face a massive handicap in developing such answers. There are pretty much no distinguished Conservative economists, at least in academia: Patrick Minford’s views lost their relevance at about the same time that Haysi Fantayzee split up. Whereas Thatcher could and did call upon Nobel Laureates such as Freidman and Hayek, Johnson can call upon…well, who?

If I were a Tory, I would reject Tim’s call. The party won an 80-seat majority without having to think about economics. Why jeopardize things now? Intellectual coherence is not always necessary for political success.

Comments

[Dipper]

All good pints. But as discussed previously, the primary question of UK politics has moved from economic/social to constitutional. In that sense everywhere is Northern Ireland now. Economic policy can be outsourced, chopped and changed as appropriate.

[andrew Kershman]

I have never voted Tory in my life and never will, but I do think that their approach and indeed this article manages walk a very fine line between being both Hazy and Fantazy. It also does something very vital in these times of Covid and as we head towards a no deal Brexit, namely it asks is John Wayne really Big Leggy! Fantastic stuff!

[IceyX]

I guess the Tories can just watch the US election and see how well the "no platform" approach works out for the Republicans. Just need to kick that can down the road for two more months.

Mind you, they might need to actually do something before then.

[Blissex]

«economies are stickier than Thatcherites assumed. Instead, we see the decline of whole areas. Should today’s Conservatives do more therefore to protect jobs, or to help people move jobs?»

In the case of the City and in general the property and finance industries based in the Home Counties and London tthe tories (New Labour and Conservative) spent close to trillio in outright donations and 0% "rollover forever" loans to protect the jobs, bonus pools and asset prices of their core constituents, and the "free trade" Economist, that gleefully approved the "better dead than red" harrowing of northern industry wrote instead advocating an unlimited bailout of the finance industry (and indirectly of property):

http://www.economist.com/node/21542417
«Britain will one day wake up to discover that it has lost one of the world's most successful business clusters, and the best hope the next generation has of earning a decent living»

[Robert Mitchell]

"There is a case for shifting tax from profits to land, because the latter cannot move. But of course, this hits landlords whilst benefiting other businesses."

See the chart in this tweet: https://twitter.com/rcwhalen/status/1298341380864053250?s=20

The chart shows the price/book value of Real Estate Investment Trusts. I take "book value" to be the "ground rent" that tenants actually pay. The "price" is how much you can sell the bundle of ground rents for. You could sell hybrid REITs for 8 times what the underlying land was worth.

Thus, by investing in REITs, you earn higher profits without owning land. (And what tax is ever assessed on REIT returns?)

Any land tax will miss the vast majority of real estate profits because finance allows you to make money off land without needing to own land or pay taxes on land.

[MJW]

Covid and Brexit may replace need for a philosophy with needs must approach. For last few decades a low productivity economy has been propped up by immigration, the end of free movement and points based visas may shift capital to productivity increasing approaches away from labour intensive ones.

A permanent shift to regular WFH (I suspect a more even split between office and home) may see rebalancing away from city centres, better paying jobs spread away from current clusters, eventually benefiting current peripheries. People will be able live in places they can actually afford. In turn city centres will eventually become more affordable again.

Obviously there is pain involved. The endless chains of casual dining outlets, heavily staffed by EU immigrants are already contracting. But there will opportunities in the locales. Living in the London commuter belt (East Surrey) I think small towns and villages are bouncing back strongly as people who usually disappear to London five times a week stick around more. I have colleagues living up and down the country who haven't been into London for five months, chains near the office may have lost trade but they still spend near where they live.

There will also be pain for institutional investors in property, it's already happening in high street retail space, so if office space (and dependent retail) follows there will be anger from some pretty powerful people (Cummings won't give a fuck about Polish waiters, but institutional investors are a different matter). But that surplus of city centre office and retail space could eventually be converted to residential space. This will be a ready made replacement for those institutional property investors; large scale, long-term, tenancies in professionally managed developments delivering stable returns to pension funds etc.

The market may actually force positive changes where central economic policies have failed.

[Bill Bedford]

I wonder just how many of those people who decide they want to work from home will end up thinking than working for someone else is a mug's game and go on to start their own business.