Economic prosperity debate
Robert Skidelsky
Hansard | Thursday, July 18, 2013

[Bracketed sections were omitted in the delivered speech due to time limits]
 
My Lords, I am grateful to the noble Lord, Lord Haskel, for introducing this important discussion. He has been rightly impressed by the argument put forward by the noble Lord, Lord Sainsbury, that the state must play a key part in fostering innovation, and I agree with that. However, of course, that does not exhaust the role of the state in creating prosperity. In the last chapter of his General Theory, the economist Keynes pinpointed as,
 
“The outstanding faults of the … society in which we live … its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes”.
 
I believe that these are still the outstanding faults of the society in which we live and that the state has a vital role to play in remedying them. Moreover, that is clearly connected to the topic of the noble Lord, Lord Haskel. The worst environment for innovation is rampant economic insecurity and excessive inequality. The private sector will not invest in jobs and skills unless it sees a market. The state has a role to play in sustaining that market in general, as well as in providing support to particular sectors. Once again I apologise for being the only macroeconomist taking part in this debate—I feel very lonely.
 
Let us consider two arguments. After the Thatcher-Reagan revolution, politicians and economists no longer believed that government policy should aim directly to influence the level of employment. Noble Lords will remember the new doctrine announced by the noble Lord, Lord Lawson: government should concentrate on controlling inflation and leave employment to the market. Let us see how well the market has done. Between 1950 and 1973—the period when economic policy was influenced by the Keynes doctrine—UK unemployment averaged below 3%. Since 1979, when the Lawson doctrine held sway, the average has been almost 8%. Today, Britain’s unemployment rate of 7.8% tells only half the story. The widest indicator of joblessness, which includes unemployment, part-timers seeking full-time work and those who are economically inactive but who nevertheless want a job, is estimated at about 12%, or 6.4 million people. On top of that you have to add the much higher level of youth unemployment. The Prime Minister and the Chancellor constantly tell us that the nation must live within its means and that the Government cannot spend more money than they have. Has it occurred to these great thinkers that our means include those unused resources and that if they were being properly utilised, the Government would have more money to spend?
 
[So as against the Lawson doctrine, I would counterpose the doctrine that the government should so manage the economy as to keep unemployment stable at between 5|% and 6%; and insofar as it fails, it should be prepared to act as employer of the last resort. Had it acted on these principles after 2008 we would have had less pain and faster recovery.]
 
The second revolution that has been associated with Lady Thatcher was the abandonment of any commitment to equality. The ideology of the 1980s was that undue compression of incomes brought about stagnation: get taxes and welfare benefits down in order to increase the incentives to work and innovate and the result would be a more dynamic economy and one in which wealth would steadily trickle down without any need for obvious redistributionary policies. The trade-off has not happened—growth was slower than it was in the Keynesian period and we are waiting for the trickle-down to happen. In the past 30 years, the share of income captured by the top 1% has more than doubled to 14%, leading to the joke that the new class struggle is between the have-nots and the have-yachts.
 
[The Gini index, which measures inequality, increased from 26 in the 1970s to 36, its highest level in more than half a century, by 2008]
 
The economist Tony Atkinson, the great expert on distribution, writes:
 
“Moves towards reduced income inequality were dramatically reversed in the 1980s with a sharp rise in inequality”,
 
a rise which was historically unprecedented. Margaret Thatcher and her successors—we should note this historical fact—dismantled two of the main drivers of equalisation: the system of progressive taxation, and strong trade unions. The old tax system set, in effect, a cap on post-tax incomes and profits. The call for caps on bankers’ remuneration today simply reflects the failure of the current tax system to limit its stratospheric rise. The main achievement of the trade unions was to push up pre-tax earnings in line with productivity. This function has now collapsed.
 
The triumph of greed over professionalism and restraint has been most obvious in the financial services sector, which, ironically, new Labour decided was to become the powerhouse of the British economy. I understand well the frustration of the noble Lord, Lord Sainsbury of Turville—as a Minister for Science and Innovation under new Labour, he was told that the financial services were a great source of innovation. When he asked for examples he was told that,
 
“tax avoidance is an art where we are very innovative”.
 
[Any policy to lift us permanently out of slump conditions needs to deal with the issue of income distribution. In the short-run, stimulus money should go towards those with the highest marginal propensity to spend –for example, any tax cuts should be targeted at the poor, the reverse of the welfare cuts now in train.
 
In the longer-run we need more post-tax equality in order to stabilise the broad base of consumption and free it from its excessive reliance on debt.
 
Further, the government should steps through minimum wage legislation to raise the pre-tax incomes of the lowest paid]
 
I have no doubt that we will recover from the present semi-slump; we may even recover sufficiently by 2015 to give the coalition—or the Conservatives at least—another term of office. My great fear is that, having got to something like normal, we will come to believe that we can continue much as before, except for a few watered-down reforms to the banks. I believe, on the contrary, that the system of political economy that has evolved since the 1980s has, for all its benefits, grave flaws that, if allowed to continue uncorrected, will land us in a succession of crashes and crises of differing degrees of severity, which will cumulatively destroy support for the free-market economy. The chief of these flaws in our system are, to repeat Keynes,
 
“its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes”.
 
The Government have a big role to play in addressing both. I am grateful to the noble Lord, Lord Haskel, for giving me the chance to set out my ideas on these matters.