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Labour and the Tories are wedded to a failed status quo

Their quest for ‘economic stability’ is a recipe for endless stagnation.

Phil Mullan

Topics Politics UK

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All of Britain’s mainstream political parties continue to support the stagnant economic status quo. They propose policies that will keep lower-performing businesses on publicly funded life support. And they continue to shy away from the root-and-branch restructuring that’s needed to get the UK economy growing again.

There is barely a cigarette paper between Labour and the Conservatives on the economy. The Tories say stick with us to ensure stability. Labour leader Keir Starmer says his No1 priority would be to ‘stabilise the economy’ and that the country needs ‘change’ – that is, a change of governing party – to make that happen. Starmer’s shadow chancellor, Rachel Reeves, appeared to be channelling George Orwell’s Ministry of Truth when she declared last week that ‘stability is change’.

The truth is that neither of these two near-identical approaches can fix Britain’s economic malaise. In the name of ‘security’ and ‘stability’, Labour and the Tories both aspire to preserve things as they are. Their aversion to risk will discourage the transformative change that our economy desperately needs.

To claim, as both the main parties do, that stability drives growth ignores the lessons of history. The era from the Industrial Revolution up to the end of the 20th-century postwar boom was one of near continual disruption and change. The movement of capital and people from lower, often labour-intensive agrarian work into factories was especially critical to the growth in productivity. As a result, by the 1970s, both output per person and wages, in real, inflation-adjusted terms, had both soared more than six-fold. (In China, we have seen a compressed version of this productive transition, with hundreds of millions of people being lifted out of poverty in just the past four decades.)

The immense progress of the past 200 or so years stands in stark contrast with the relative economic stasis of the preceding five centuries. With only very occasional technological advances, average output per head doubled. According to the Bank of England, real wages grew by less than 20 per cent during that half a millennium. The message from history is clear: economic and social progress comes not from continuity and stability, but from change and transformation.

Economic research confirms this. Several think-tank studies have identified the lack of change across mature, industrialised countries as being a major contributor to the declining pace of productivity and economic growth.

Research from the OECD, published in 2020, found that business dynamism and firm-formation rates were in decline across all advanced economies between 2000 and 2020. The researchers highlighted the adverse effects this has had on innovation, employment and on economic growth more generally. ‘Business dynamism is significantly related to aggregate productivity’, they explained. ‘Job reallocation and dynamism are key for an efficient allocation of resources, allowing successful firms to grow and the less productive ones to shrink’. Without high rates of business transformation, investment in radical innovations and the diffusion of better technologies, sustained national-productivity growth is impossible.

Britain is certainly suffering from too much economic stability. This was a key finding in the final report of the three-year long Economy 2030 Inquiry, published last December. Produced by the Resolution Foundation and the Centre for Economic Performance at the London School of Economics, the report notes that ‘structural change in the economy – the growth and shrinking of the different industries in which we all work – is currently at its lowest level in over 90 years’. It shows that the slowdown in business change over the past three decades is at the root of low levels of investment, flatlining productivity and stagnant incomes.

The report blows apart the idea that the British economy needs ‘stabilising’ or ‘securing’. ‘Britain today isn’t wrestling with the consequences of ever faster change’, it concludes, ‘but rather the fallout of a big slowdown’.

There is clearly a mismatch between the perception of a world in accelerating flux and the stagnation that we actually face. This mismatch is largely a product of the growing impotence and loss of purpose of our governing elites. They increasingly see the world as being out of control and the economy as constantly buffeted by external forces. Politicians today talk about the UK being on the receiving end of a succession of external shocks, from the pandemic to Russia’s invasion of Ukraine and the subsequent energy crisis. They then assert that they are the best placed to steady the ship, to ensure security and stability. Hence Sunak’s and Starmer’s election pitches.

The intrinsic irony of this ‘stability economics’ is that it begets the opposite of what it promises. The state’s efforts to ensure stability end up entrenching stagnation and preparing the ground for future economic and financial crises. As Andy Haldane, former chief economist at the Bank of England, recently pointed out, today’s ‘paradox of risk’ is that ‘well-intentioned safetyism is making the world less safe’.

But state efforts to preserve the status quo are wrong not just because they create new economic risks – they are also the most immediate barrier to growth. A flat economy deters new business start-ups and discourages incumbent businesses from experimenting with new technologies, products and services.

Only through investment in innovative change can we boost growth and raise living standards. In particular, through the business investment that brings resources from low- to high-performing firms. This reallocation of surpluses is much more important for raising overall productivity than the kind of short-term measures proposed by the Tories and Labour, which are aimed primarily at supporting existing firms.

Over the past three decades, politicians from across the political spectrum have embraced this anti-growth stasis. At the fiscal, monetary and regulatory level, they have pursued pro-stability policies. We have paid the price for their indulgence. We may have been spared the disruption of the conventional boom-bust cycle, but we’ve also lost out on the benefits of creative destruction.

So, if you get the opportunity to question your local parliamentary candidate at a hustings or on your doorstep, ask them to spell out how they plan to get the economy going again. Ask them what they think of the view held by the OECD and other think-tanks that our biggest barrier to growth is the lack of disruptive change. And ask for their response to the Resolution Foundation’s reckoning that ‘fear of change inspires nothing but the politics of sclerosis’.

That’s the economic discussion we need to have if we’re going to make any headway in the battle for growth.

Phil Mullan’s Beyond Confrontation: Globalists, Nationalists and Their Discontents is published by Emerald Publishing. Order it from Emerald or Amazon (UK).

Pictures by: Getty.

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Topics Politics UK

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