06 January 2017

Bank of England Chief Economist Andy Haldane spoke to IfG Director Bronwen Maddox about the state of the British economy – and the state of the economics profession. Most of the press comment has focused on Haldane’s discussion of forecasting errors, but Jill Rutter reports he had some interesting insights into how economics might contribute to tackling the UK’s more deeply entrenched economic and social problems. 

Andy Haldane, Chief Economist at the Bank of England

The tale of two households…

The story of the economy since the recession is one of sluggish growth. A slower recovery means the ‘pie’ is not expanding.

That pie is also not being evenly distributed. The only region where incomes are appreciably higher than pre-recession level is London and the South East. There is a ‘striking disparity’ between the young and old – pensioners have seen incomes rise while those of working age have seen incomes stagnate. And the gains in wealth have all gone to those already in the top quintile, widening pre-existing differences.

The tale of two companies…

But the distributional differences do not just apply to people. For more than 30 years, the gap has grown between ‘frontier firms’, with high productivity, profitability and are able to pay their employees more, and the ‘long tail’, without those traits. Frontier firms are in every region and not sector-specific – the problem is that there are not very many. The long-tail accounts for most of the British economy (more than 75% of firms) and drags UK productivity down. Economic theory would suggest that the laggards would learn from and catch up with the leaders, but instead the gap is widening.

Bridging the gap

Haldane sees no magic bullet to improve the stagnant productivity of the vast majority of UK firms. Evening out the performance of firms is key to achieving a more equal distribution of household incomes – more equal across regions, generations and socio-economic backgrounds. 

But he welcomes the Government putting in place an industrial strategy to tackle the three p’s: pay, productivity and place.

Haldane believes the first element of the industrial strategy is infrastructure, the connective tissue of local public goods needed to support skills, investment and innovations. The Autumn Statement starts to ‘turn the tide’ on the UK’s performance on total infrastructure spend and on Research and Development in particular. But he notes that the UK ‘punches below its weight on numeracy’ – 17 million adults are stuck with primary school-level numeracy skills – and the UK scores 17th out of 17 in an OECD survey of financial literacy. 

The Government’s new industrial strategy must learn from the failure of past industrial strategies. Past strategies were sector-specific, trying to ‘pick winners’ but too often just ended up ‘supporting losers’. The long tail of less productive firms is not confined to any particular sector or region, meaning that this new industrial strategy needs to take a cross-sectoral approach.  

A profession in crisis

Haldane thinks economists found themselves with nothing to say after the global financial crisis. The profession suffered from a ‘methodological monoculture’ which worked well with low volatility but could not cope with the ‘fat tail’ of extreme events. 

But economics renewed itself in the 1930s, and could take heart from the way in which weather forecasting recovered from the Michael Fish Great Storm debacle of the late 1980s. So what might that next renewal look like?

Economists to the rescue?

The Prime Minister expressed her frustration with civil service advice about helping the ‘just about managing’ (JAM). But Haldane believes she is setting policy on the right lines. A focus on industrial strategy could start to ‘lift the spirits’ of the long-tail of underperforming businesses, especially if taken forward in tandem with a focus on social mobility – something he says has been stuck for centuries.

Haldane suggests that economists need to get ‘super granular’: stop working at the level of aggregates and focus more on distribution and differences. Numbers should also take more account of the stuff that matters to people as well as money.

If economists can shed more light on the gap between the headline numbers and perceived experience, it will help policymakers develop responses. Only then can a profession in crisis might get on the road to recovery.

Comments

Surely one of the worst problems in the UK is that only the South East is managed productively. When the old industries declined elsewhere, little effort was made to replace them by expanding local companies that were already there, or to foster local start ups. The main emphasis was on attracting inward investment from multinationals who stayed just as long as it suited them, or another country made a better offer. Smaller local companies could not have walked away, but most would have adapted and survived. Local companies usually spend their profits in the local communities, multinationals take profits to tax havens.

And the Government has a silly attitude to grant support for start-up business. If someone sees an opening for window cleaning and buys a ladder, is successful and needs to buy a bicycle to expand his area, the smallest grants are to buy a van. But if he buys a van he needs three times as many customers to cover the running costs, and is pitched straight into employing staff, before he is comfortable with filling in his own tax return. Outside a big city there may not be enough customers to justify the van anyway, so the business folds and the proprietor becomes another person on the unemployed register.

The Government must stop thinking up grand plans, and start dealing with the real world as experienced by real people. Macro economics is important and we must balance the national books, but a commercial manager who leaves half his property portfolio unproductive would not last long. Neither should governments.

It is no use complaining that the rest of the country is unproductive and lavishing resources on the productive 15%, that will only increase the differences between the regions and devolved areas. (I lived in the spoilt home counties for 25 years before moving back to West Wales, I have seen both sides.)

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