By finally daring to tell a new economic story that puts investment first, Labour is showing the UK there is another wayby Joseph E. Stiglitz / October 9, 2017 / Leave a comment
Published in November 2017 issue of Prospect Magazine
As an American looking across the Atlantic at the policy debate heating up in the UK, I feel a certain envy: at least in Britain there is a pretense of belief in rational argumentation. Maybe a few words about what economic theory and evidence have to say might make a difference.
A third of a century ago on both sides of the Atlantic an economic experiment was undertaken. Until then, growth had been amazingly strong in the post-war decades, and there was shared prosperity. In the US, incomes had risen at every part of the distribution, and they rose fastest at the bottom. There was convergence. In the US, especially, there was heavy public investments in infrastructure (the national highway program), education, science and technology—Sputnik gave a particular spur. There was a bipartisan consensus on this, and on the need for regulations, for instance concerning the environment. Air became breathable, and rivers swimmable. Depression-era regulations on banks had resulted in decades of financial stability: again, in the US, an unprecedented half-century without a financial crisis.
Historians may debate what motivated the Reagan-Thatcher experiment, but the economics of what followed is not debatable: growth slowed and inequality grew. In the US, the bottom 90 per cent saw their incomes virtually stagnate. Today, the median income of a full-time male worker—and remember, these are the lucky ones with full time jobs—is lower than 42 years ago. Britain didn’t have quite as much inequality, and the NHS prevented the disastrous consequences that have scarred the US, where life expectancy is now in decline across the country as a whole, and especially for those in the middle and bottom. But in the 1980s, the UK did move markedly towards the US, becoming a much more unequal society than before. It remains so to this day.
In short, the theory that tax cuts and deregulation would—by removing the restraints on entrepreneurship and increasing incentives—lead to a new era of high growth has been thoroughly discredited. Deregulation led to new efforts to manipulate markets and public policy for profit, and unheard-of instability which has cost both UK and the US dearly, in the aggregate, trillions of pounds. Nor did lower taxes translate into higher capital investment, or more research. Indeed, under the so-called reforms, economic horizons got shorter, and performance deteriorated.
Jeremy Corbyn’s Labour Party and Theresa May’s Conservatives today now provide, as the conference season made clear, two different visions. Despite the long years of stagnation, May gave a big speech arguing—albeit with a few caveats about regulation—that old-style laissez-faire in essence remains the best way to raise living standards in the end. What she was calling for amounted to a doubling down on a failed experiment. Labour, meanwhile, calls for new visions and particularly for a new emphasis on investment, recognising that we can learn from the past, but 21st century economic policy will have to be different from that of the previous century.
Take the central issue of austerity: it has never worked. Herbert Hoover tried it, and converted the 1929 stock market into the Great Depression. I saw it tried in East Asia, when I was the World Bank’s chief economist: downturns became recessions, recessions depressions. The austerity medicine weakened aggregate demand, lowering growth; it reduced demand for labour, lowering wages and pushing up inequality; and it damaged public services on which ordinary citizens depend. In the UK, sharp cuts to public investment do not merely weaken the country today, but also ensure it will be weaker in the future.
No firm would pretend it had a future if it didn’t invest. So too for a country. It must invest in its people, its infrastructure, and its technology. If it has to borrow to do so, yes its liabilities (debt) go up, but its assets go up even more, so its balance sheet improves. And there is plenty of scope for raising revenues in ways which increase both efficiency and well-being. I chaired, with Lord Nicholas Stern, an international commission on carbon pricing which unanimously supported high charges on carbon use—£30 a ton or more; such a tax would provide incentives for a transition to a bright green economy of the future. Taxing the returns on land, including capital gains, can raise large revenues—and land won’t emigrate. The UK, like the US, could actually benefit from a more progressive tax system.
An across-the-board cut in corporate taxes—competing with Ireland in the race to the bottom—won’t attract firms or foster investment. Instead, the UK should increase taxes on corporations that don’t invest in the country and create jobs, and lower taxes on those that do. And it should send a simple message to multinationals like Starbucks and Apple that pose as good corporate citizens: their first responsibility ought to be to pay their fair share of taxes. Continuing to let them off the hook not only deprives the country of needed revenues, but also gives these multinationals an unfair competitive advantage over local firms.
Reagan/Thatcher/May economics is based on the discredited trickledown theory—somehow, if we reward the top, the economy will grow more rapidly and everyone will benefit. It hasn’t worked anywhere. Why should the UK expect it to work in the coming years, as it struggles with the adjustments of Brexit? As EU research funds are lost, if the UK wants to maintain the quality of its distinguished universities, it will have to invest more—much more.
The strength of any society is in its people, so it makes sense to build up an economy from the bottom and middle up. A 21st century knowledge economy has to be based on education and innovation, and the recognition that a changing workplace requires life-long learning. With a declining role of corporations in training, government will need to do more, making full use of technology. And university education must be made affordable to all—shutting out large fractions of the population because they fear being saddled with tens of thousands in debts is not only morally unconscionable, but economically stupid.