ONE of the most influential books in America today – Tyler Cowen’s The Great Stagnation – argues that technological innovation peaked in 1873 (yes, you read that right). Most of the progress of the past 100 years has come from the application of innovations made prior to 1914, he says; what we now think of as dramatic, revolutionary discoveries (the internet, mobile phones, some new medicines) are in fact less life-transforming than previous, truly colossal breakthroughs such as the invention of the internal combustion engine, electricity, the telephone or penicillin. This, Cowen argues, helps to explain why the West is grinding to a halt in terms of productivity growth and incomes.
Whether Cowen is right or not is fundamental to the future of humanity. But here is the good news: it doesn’t matter much in the short term. Britain’s problems are more prosaic. There are lots of lowish-hanging fruit to be picked in a system as sick as ours; a few sensible yet radical policies could trigger a productivity explosion, regardless of global technological change or lack thereof.
The first reform is loosening planning laws to boost the supply of housing, keeping a lid on prices and freeing vast amounts of resources to be spent on other things. The second is cutting marginal tax rates, especially on income: as the Adam Smith Institute documents today, we are now at a stage where tax is reducing economic activity. Third, there needs to be fewer regulations: the avalanche of red tape, including a flurry of costly regulations on business this year, is acting as a major break on private sector growth and investment.
Last but not least, the public sector needs to be reduced in size and made more efficient. The gains to be had from increasing the efficiency of health, education and other services are immense and would transform the UK. Productivity fell by a cumulative 3.4 per cent in the public sector during the Blair years, against a 28 per cent gain in the private sector. Even then, some of the figures are exaggerated: better GCSE results are classified as an increase in government output (and thus as a rise in GDP) even if caused by grade inflation. The Centre for Economics and Business Research calculates that taxation could be £58bn a year lower had the public sector achieved private sector levels of productivity improvements.
One reason for the public sector’s appalling inefficiency, as a Centre for Policy Studies paper out today explains, is that it has failed to capture economies of scale that usually accompany growth. A school that goes from 100 to 200 teachers shouldn’t require a doubling in the number of administrators to cope. As spending goes up, the front-line component of the workforce should expand more rapidly than the back office. Yet the opposite happened.
What is obvious is that growth can no longer come from debt. Between 2000 and 2007, nominal GDP rose 44 per cent while property prices jumped 131 per cent, outstanding mortgage amounts 121 per cent and unsecured lending 110 per cent. Debt-financed “stimulus” has also run its course: the return on hundreds of billions of state expenditure has been astonishingly poor. The only answer is for Britain to increase its productivity and get more out of its resources. For that, we don’t need a scientific revolution – just a proper pro-growth set of policies. Over to you, chancellor.
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