Paul Diggle and Paul Ormerod: A strong supply-side environment, not technocratic economic analysis, is needed to secure growth

Paul Diggle is an economist at Volterra Consulting and obtained a First in PPE in 2008. Paul Ormerod, is one of the UK’s most experienced macroeconomists and author of three bestselling books, the Death of Economics, Butterfly Economics and Why Most Things Fail. Their report, Be Bold for Growth was published on Monday by the Centre for Policy Studies.

The rise of the "expert" is bedeviling political discourse in the West. Whole areas of debate in political economy have become reduced to litanies of technocratic empirical "evidence", the result being that anyone not intimately familiar with the latest research is automatically locked out of the discussion.

This anti-democratic tendency affects not just the electorate in general, but the very heart of political decision-making. It requires great self-confidence on the part of an elected minister to reject a course of action when the benefits and costs have seemingly been calculated almost down to the last penny. For example, the analysis around Harriet Harman’s Equalities Bill calculated that the value of the ‘general benefits to the economy’ of the bill is £498,996,319. Who could quibble with a scientific calculation of such accuracy?

Yet, especially in the social sciences, there are serious limits to the extent of our knowledge, extending far beyond any quantitative estimates that can be made. Quite often, even the causal mechanisms at work are at best understood only poorly.

It is essential that politicians regain control of the agenda, and bring a wider perspective to policy issues.
A current example is the question of the sustainable long-run growth rate of the British economy. The Treasury performs a regular analysis of the longer-term annual growth rate of the U.K. economy, and in 2006, as we neared the peak of an asset price and lending bubble, revised upwards its estimate of sustainable long-run growth to 2.75%. The analysis is opaque, but buried in the technocratic evidence it turns out that the Treasury discarded virtually the whole of the UK’s economic history when arriving at its estimate for the growth rate. Most of the indicators analysed by the Treasury go back only to 1989, with some starting as late as 2001.

Use of this short history not only gives a misleading impression of the potential levels at which GDP can grow or fall, but suggests that the trend rate of growth is much more stable than it really is. It is almost as if nothing ever happened in Britain before the advent of New Labour

A real danger for whoever forms the next government is to allow the debate over growth to be dictated by the technocratic agenda. The concept of the sustainable long-term growth rate of the economy is at the heart of modern macroeconomics. Policy can all too easily be captured by the narrow, technical terms in which these matters are discussed, rather than being set in the wider context of political economy.

Policy makers can affect long-term growth rates - witness the success of the supply-side reforms of the 1980s in Britain that transformed us from a moribund declining economy into one of the most vigorous in the West. But to do so requires strong policies based on conviction and judgment as opposed to spurious expertise.

The most important challenge facing the new Government is to create a supply-side environment which encourages economic growth. This is the abiding lesson of economic history. It is essential to avoid being sucked into a frame of mind which is set by seductive but ultimately flawed technocratic approached. Politicians must act on the basis of their convictions and be judged by the electorate on the consequences of these actions.

The grip of questionable technocratic accuracy on the government machine is shown clearly by the fact that, 40 years ago, the UK Government Economic Service employed about 20 people. It now employs 1,600. Nothing symbolises more the worship of spurious technocratic exactitude by New Labour than the massive growth of the GES. At least 1,000 of these should be made to find employment in the productive sector of the economy.

The massive distortion in relative prices, with public sector pay being 15% higher than in the private sector, also needs urgent correction. This disparity gives incentives to obtain rent-seeking positions in the public sector rather than in the wealth-creating private sector.

Public spending needs to reconnect with people, employing blue-collar workers providing genuine services, rather than bureaucrats. One of the most inegalitarian trends in British society in recent years is the way in which public employment has become less and less the preserve of the blue collar worker, and more and more that of the bureaucrat. On a pure cost-benefit analysis basis, jobs such as park keepers or bus conductors are hard to justify. But such jobs provide very positive social externalities. The jobs are relatively unskilled and so can be filled by people who have been squeezed out of the labour force completely and who are contributing to Britain’s broken society. Many such jobs provide reassurance to the public in terms of a presence in areas where there is a fear of crime. And they are a visible sign that public sector employees are performing socially.

Dramatic simplification of the tax system is essential. Tolley’s Yellow Tax Handbook has grown from 4,998 pages in 1997, to 11,520 this year. This complexity encourages some of the most highly skilled people in the country to devote their abilities to developing tax avoidance schemes rather than to productive industry.
A flat tax on income with generous allowances so that anyone on the minimum wage paid no tax would be very progressive.

Given sufficient determination, a government can recreate an overall environment in which enterprise and initiative are once again encouraged. But first politicians must become willing once again to use their own judgment rather than meekly follow the spurious precision of so-called expert calculation.