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.