Martin Wolf: “The Government doesn’t have a plan for growth”


Will Straw is editor of ‘Going for growth‘, a collection of essays from leading academics and economic thinkers.

The coalition’s strategy for growth came under renewed pressure today from three leading economists. Martin Wolf, Professor Wendy Carlin and Gerald Holtham discussed ideas from a new book on growth at the Institute for Public Policy Research.

Speaking at lunchtime today, the Financial Times’ chief economics commentator, Martin Wolf, said:

“I think it’s pretty clear that we agree that the Government doesn’t have a plan for growth and I think we all agree that the deficit reduction plan is enormously risky in terms of macro[economics] and ill supported by the risks tha they have pointed to.”

Following remarks made in a recent op ed (£), he questioned the government’s approach to cutting the headline rate of corporation tax rather than providing increased investment allowances. He went on to list the importance of macroeconomic stability which meant more than solving the “inflation problem”, “making the use of land less irrational” through better land use planning, and “raising standards of education and training through all levels of society”.

Venture capitalist, Gerald Holtham, fleshed out his contribution to the collection of essays arguing for a state-led investment vehicle for the production of marketed services such as toll roads, high speed rail, and wind farms. His argument, which has been set out previously on Left Foot Forward and in the Financial Times (£) and could provide a template for the mooted Green Investment Bank, was largely endorsed by Martin Wolf. In the Q&A, Holtham described the coalition’s current approach as “ideological” and said:

“I don’t think that cutting the corporation tax is going to solve any problems.”

Professor Wendy Carlin of University College London and the Centre for Economic Policy Research presented slides outlining the UK’s economic predicament which showed that compared to previous recessions, unemployment rates had taken a less severe hit during the current recession. Carlin also detailed how the UK’s front-loaded fiscal consolidation put it at odds with other G7 countries as the graph below shows.

Carlin suggested a three point plan for government which would make use of:

- the low interest rate environment to promote investment along the lines later set out by Holtham;

– complementing behavioural changes induced by increases in the oil price with policies to steer “large-scale structural change towards a low-carbon economy” by; and

– the boost to tradeable goods and services from depreciation by using complementary rather than conflicting policies.

Carlin and Wolf both criticised the Government’s immigration policy with Carlin arguing that the current policies were damaging higher education and “other high value added industries”.

A podcast of the event can be heard here.

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  • william

    OK.Export growth based on investment in toll roads , wind farms,and HSR.Who are you kidding?Sure, the deficit reduction plan may be risky(btw that is CAPITALISM), but not half as risky as thinking you can sell gilts in whatever quantity you like. What has happened to Oxford PPE?Going for growth’ in public and private borrowing was what destroyed the Labour government, and ruined the UK.

  • Mr. Sensible

    I think we’ve known for some time that the government doesn’t really have a growth strategy…

  • http://order-order.com/ Guido Fawkes

    There is no explicit government plan for growth, no picking of winners, no state subsides etc. This is a feature not a bug.

    Just as there is no government plan for Silicon Valley to develop new software.

    Higher growth comes from free markets. Lower growth correlates with highly taxed and over-regulated economies.

  • scandalousbill

    Guido Fawkes,

    You say:

    “Higher growth comes from free markets. Lower growth correlates with highly taxed and over-regulated economies.”

    Problem with this argument is that the US and Japan, for example have considerably higher taxation rates than the UK, and of course Ireland’s is considerably lower. So the correlation falls. Similarly UK corporate governance and regulation is far less complex than SEC Regulation, SOX etc.

  • Mr. Sensible

    Couldn’t agree more Bill; I’m afraid we’ve heard this from the right before

  • Chris

    @Guido

    “Higher growth comes from free markets.”

    China being an excellent example of this…oh no wait…they’re the commies. What about Germany? Nope, they’re highly regulated with lots of state support for key industries. Ermmmmmm where are the actual examples of your theory working in practice that hasn’t ended in tears for the vast majority?

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  • Mark Stevo

    All that China tells you is that if you suppress the private sector for hundreds of years and stifle economic growth, then you’ll see massive economic growth when you relax the restrictions. I’m not sure how you’d apply those lessons to UK policy.

  • Mark Stevo

    While we’re on the subject of Germany, I’m not sure their recent strong performance is a strong endorsement of tight economic policy. Certainly if we were to compare unemployment rates on average over the last 10 years we’d reach a rather different conclusion.

  • http://www.leftfootforward.org/ Will Straw

    Thanks for the comments:

    william – I suggest you give Gerry Holtham’s chapter in ‘Going for growth’ a full read. The argument is that there is another side to the balance sheet.

    Guido – What’s the correlation you’re referring to? As others say, China and Germany would be significant outliers.

    Mark – What do you mean by ‘tight economic policy’? Britain’s active labour market policies under Labour were to thank for both the highest employment levels in history and the lower impact on unemployment of the recession. Wendy Carlin’s slides cover the latter point. Germany has also used active labour market policies to reduce the impact of the recession on unemployment. Where we have something to learn from Germany is how you support industry with government-led measures.

  • Mark Stevo

    Lazy typing on my part. The point being that a liberalization of Germany’s labour Market had contributed, at least in part, to their outperformance on a variety of metrics following a decade of significant underperformance. Germany’s outperformance of late isn’t a ringing endorsement of active government intervention at all. I’m not sure which slide of Wendy’s you’re referring to, I suspect it might be slides 8 and 9, but given that there’s no cross country comparison it more than a little tenuous to draw the conclusion that it was “Labour wot dun it”.

  • Mark Stevo

    Incidently, a good Construction PMI reading this morning, highest for 8 months. Huzzah! Let’s see how services turns out tomorrow.

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  • IDL

    Guido Fawkes,

    You say:

    “Higher growth comes from free markets. Lower growth correlates with highly taxed and over-regulated economies.”

    The evidence does not support this. Finland, Norway and Sweden have grown faster than the US over the past 10 years. This was at a time when the US was bingeing on cheap credit. In fact, all Western European nations grew faster than the US between 1950 and the late 1980s. This is the sort of nonsense I hear repeated by half-wits down the pub who read the Daily Mail. The Tories have had their right wing Think Tanks working on this for the past five years and have failed to find any credible evidence. If you don’t think government can pick winners then I suggest you look at the growth performance of S. Korea – from third-world levels in the 1960s to G20 forty years later.

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  • Will Podmore

    Guido, and other free-market dogmatists, should read, The myth of the rational market: a history of risk, reward, and delusion on Wall Street, by Justin Fox (Harriman House Ltd, 2010.)
    In this fascinating book, Justin Fox, the business and economics columnist for Time magazine, charts the rise and fall of the myth of the efficient market. Fox shows how life has exploded the idea that the market processes information rationally and allocates resources efficiently.

    This is in part a history of those looking for a sure-fire way of making money from the stock market. They share the fantasy that they can know where share prices are going and the level of risk, and that they can produce a ‘scientific forecast of the market’. Of course, when markets crash, most investing ‘stars’ crash too. If the market is that efficient, surely speculators could never beat it?

    But the crash of capitalism has crashed its theories too. As Alan Greenspan admitted, “the whole intellectual edifice collapsed.” Adair Turner, chairman of the Financial Services Authority, said that we had experienced ‘a fairly complete train wreck of a predominant theory of economics and finance’.

    Prices do not reflect real values. As Clive Granger and Oskar Morgenstern wrote in their 1970 book, Predictability of stock market prices, “It is … a subterfuge going back at least to Adam Smith and David Ricardo to say that market price will always oscillate around the true (equilibrium) price. But since no methods are developed how to separate the oscillations from the basis, this is not an empirically testable assertion and it can be disregarded.”

    Eugene Fama, who formulated the efficient market hypothesis in the 1960s, admitted in 1991, “Irrational bubbles in stock prices are indistinguishable from rational time-varying expected returns.” There was no way to know if the market was irrationally volatile or not. He now believed that prices could go wrong and stay wrong. In sum, markets’ behaviour determines the economic reality that market prices are supposed to reflect. The market is created subjectively; it does not reflect the real world.

    The market is not about allocating capital efficiently but about giving speculative parasites the chance to make vast profits with our money. As Larry Summers, Clinton’s Treasury Secretary, once concluded, “We might all be better off without a stock market.”

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