Cultural aversion to wealth stifles growth

My news analysis from this week’s Fund Strategy attempts to grapple with the debate on economic policy in the run-up to Britain’s general election.

It is rare for so much fuss to be made over anything so small. Yet the announcement of a 0.1% rise in Britain’s GDP in the final quarter of 2009 got economic pundits highly excited last week.

Up to a point, the hype can be explained by the figure’s symbolic value. After six consecutive quarters of falling output the economy had finally returned to growth. For production industries, where the fall was steeper still, the relief was even greater.

But one quarter’s figures mean little. Even if the preliminary estimate is revised upwards, which many argue is likely, it says nothing about the long-term trend.

The most important economic challenge facing the next government, whichever party wins the election, is how to generate the best possible growth.

More rapid GDP growth means increasing prosperity as well as enhancing Britain’s ability to repay its burgeoning debt.

Despite the bickering there is little difference between the main parties on macroeconomic policy.

There is a broad consensus that the next government will need to make substantial spending cuts and that growth is likely to be slow over the next few years.

As Jonathan Loynes, the chief European economist at Capital Economics, concluded in a recent paper on the subject: “On fiscal policy, the gap between the two main parties is perhaps not as big as the rhetoric suggests, but an earlier and rather bigger tightening is probably still likely under the Conservatives.

“Whoever is in power, though, the next parliament will be characterised by a long and painful fiscal squeeze, accompanied by ultra-loose monetary policy.”

This narrow consensus begs the question of why there is not a bigger debate on economic policy.

In broad terms there are two ways to deal with the debt problem. The one emphasised by the main political parties is to restrict consumption so that Britain can slowly reduce its fiscal deficit. The alternative approach, to strengthen the productive side of the economy to generate more growth, receives relatively little consideration.

Some might argue that the size of Britain’s debt burden means that ¬savage spending cuts are necessary. According to a recent study by the McKinsey Global Institute, Britain’s debt-to-GDP ratio is the highest of any major economy except Japan’s – and this is even adjusting for London’s role as a global financial centre.

But the size of the debt burden alone does not explain the widespread anxiety about growth among Britain’s political elite. If anything, more rapid growth would enhance the country’s ability to rapidly reduce its debt.

In broad terms, it is possible to identify three related ways in which the nervousness about growth is expressed:

Bubblephobia
Politicians seem incredibly worried that any surge in growth will be followed by a bubble and inevitable bust. The experience of the past two years is enough to warn them of the ¬turmoil that such a course of action could bring.

That is one reason why all the main parties are concerned to restore stability to public finances and maintain the independence of the Bank of England. However, it does not follow that any rapid growth will automatically turn into a bubble.

The challenge is to promote growth which is strong and consistent rather than an artificial boom based on credit expansion.

Sense of limits
Since the 1970s a pervasive sense of limits – environmental, moral and social – has enveloped the British political establishment. It has become widely accepted that there could be damaging consequences if growth is not restrained.

So, for example, in a speech given last week, Vince Cable, the Liberal Democrats’ shadow chancellor, warned the government against being “too absorbed by growth for its own sake rather than protecting the environment and maintaining a sense of fairness and community”.

Cable’s statement was particularly peculiar in that context. It is hard to imagine many people favouring growth “for its own sake”. The benefits of growth include greater prosperity and the ability to repay debt more rapidly.

In addition, the idea of limits to growth is open to question, but an investigation of this subject is beyond the scope of this article.

Blindness to production
It is striking how little of Britain’s economic debate is about restructuring and bolstering the productive side of the economy.

Although there is some talk of entrepreneurship, innovation and even industrial policy the character and scale of what is being proposed
is limited.

Britain is suffering from a strong cultural aversion to economic growth and prosperity. Unless this is tackled it is likely that Britain’s growth record will remain muted in the years to come.