The Year of the MATE
Having returned from various party conferences, my overwhelming conclusion is that Britain’s economic debate is firmly in the control of our MATEs:
Militant
Advocate for
Theories of
Everything
The Housing Theory of Everything. The Planning Theory of Everything. The Energy Theory of Everything. The Welfare Theory of Everything. The Transport Theory of Everything. The Capital Investment Theory of Everything. The Devolution Theory of Everything.
What they all have in common is a belief that growth is being held back by one big thing, just fix this and you unlock growth.
MATEs mean well, but they aren’t really your friends.
Policy makers operate in an age of short-attention spans. They are desperate to look bold and have something easy to sell. So, they are giving MATEs even more attention, then pumping them out on social media and television (and merchandise).
The truth is that Britain’s entire economic model is broken. We have a trade crisis, a production crisis, a consumption crisis, an energy crisis, a savings crisis, an ownership crisis, a workforce crisis, a geographic crisis – and many more beside. There are overlapping, interlocking and require a comprehensive approach to social and economic planning. Focusing on one thing (e.g. planning) is just going to exacerbate the problems elsewhere.
Policy makers do not want to hear it, but they need to have multiple policy agendas working coherently and broad approach to economic reform and stop hoping for some silver bullet.
Let’s take one of the MATEs favourite topics and consider it.
Flat-MATEs
Housing was for a while the dominant Theory of Everything but now seems to be rapidly overtaken by energy (the thing about MATEs is that they can be fickle). Does the UK have a housing crisis? Absolutely. However, there is a difference between recognising that and being a MATE.
Say that we build 1.5m homes over this Parliament (unlikely to happen but let’s go with it).
Assuming average cost of £1,800-2,000 per square metres (the lower end of the spectrum) and the average size of a UK property between 90-100 square metres – you are looking at a cost that is going to run to around £300bn for those homes. In crude terms, therefore, to cover this cost – and assuming a maximum two workers moving into each of these homes – each of the 3m workers moving into these homes will have to generate £100,000 in additional economic output to cover the cost of building the property.
(Oh! But there will generate economic activity through building them! Yes but that is true of anything that we build. We could build factories, railway lines, power stations etc. The economic benefits of construction are obvious and clear but that is not a case to build a specific thing.)
Now if these workers were doing nothing today and waiting for the new homes to come on board before they starting producing output, then the return would be pretty immediate. However, that is simply not the case. Even in the midst of a housing crisis, people are still working and contributing just as they were in the post-war period where many homes had been converted to rubble.
So, these new homes need to generate additional economic output on top of the output they are otherwise generating. One way that this can be achieved is through job or sector switching away from low output or low productivity sectors to higher output and productivity sectors. For example, if you can get someone to switch from say a real estate job (output per job of £127,693) to something in financial services (output per job £186,211), then you are onto a winner. But are you really going to get 3m career switching workers, moving from low-productivity sectors to high-productivity sectors (also keeping in mind that a lot of people moving into these homes will not work and so will have to generate even more output per job to compensate)?
Moreover, to enable these job / sector switches will require investing, training and support and a host of other factors beyond simply building the home. It will also require investment and support for the firms so that they can take on board more workers (at a time when it appears the labour market is softening) etc. etc. Moreover, as research by The Resolution Foundation’s 2030 Inquiry found, job mobility is falling:
“In 2000, 3.2 per cent of workers moved jobs per quarter, and 1.7 per cent of workers moved jobs to a different sector per quarter. In 2019, the rate of job mobility was 2.4 per cent, 25 per cent lower than in 2000, and the sector mobility rate was 1.1 per cent, 35 per cent lower than in 2000. It is not clear what is behind this fall.
The returns to moving jobs, compared to staying put, have also not changed dramatically during this period, suggesting workers aren’t responding to changing incentives. The incentive to move job and home has likely been dampened due to faster rising housing costs in higher paying areas, but job-and-home moves only account for a small minority of all job moves.”
Maybe if new housing makes housing more affordable that would help boost job switching and productivity? New supply may reduce the growth of housing costs, but given it is already unaffordable how will new homes make existing housing (or these housing units) affordable? Essentially, we are talking about decades of hoping that wage growth outstrips the growth of housing costs to close the gap? Hardly an immediate boost to growth. Furthermore, this assumes that those building new homes are going to undercut those that have existing homes, which feels like the opposite of what they are going to do (if I know that someone is renting a home for £2,000 a month, why would I rent it at less than that when supply is constrained). To really address the gap we would need massive oversupply of housing so that prices are driven down so we would need to build far more homes than we need perhaps 500,000-600,000 homes per year (doubling the cost and therefore doubling the economic contribution that would need to be made to offset that cost).
In summary. Building homes is a good thing. We should do it. Is it going to fundamentally change the economy of the country? No. Is it going to boost growth by much? Probably not. Hence the OBR’s £1.5bn additional to UK growth per year over ten years…
Check-MATEs
You can do the same with planning, transport, energy production, anything really.
Roads and railways? Very important. But what are they connecting? Power stations? What are they fuelling?
Planning reform? Yes, we need to build a lot more stuff, but the right stuff. If you liberalise planning reform and build a load of luxury properties, golf courses or shopping arcades, you are not going to address our fundamental economic problems.
Our predecessors did not build things and hope that they would create earnings overseas. Victorians built railways to connect pits, mills and docks that they knew had markets and viability. In the post war we built roads and railways to connect workers, industries and distributors together to support our global trade. This is the crucial element of the debate and to this we hear little from our MATEs who don’t like to get into the nitty-gritty because it offends their ideological principles.
Ever widening circles
So, what is the alternative to being a MATE?
Firstly, it is recognising the interconnectedness of the UK’s economic problems. We need a range of interventions (planning reform, tariffs, boosting domestic savings, skills, infrastructure, R&D etc.). So it is less ‘Build, Baby, Build’ and more ‘Plan, Baby, Plan’.
If there is a single problem in Britain, and I don’t think there is one, I’d say our rejection of any attempt at economic and financial planning – considering the composition of our workforce and investment, where we are going to earn exports and developing a strategy to beat competitor nations. MATEs are part of the problem because their plan is a non-plan. Don’t think about what you are doing and just do this thing, and the market will take care of the rest. It really won’t. If it did, we wouldn’t be in the mess we are currently in.
Secondly, we need to recognise trade-offs. There is no infinite money. You need to get the sequencing and prioritisation of different things right. We could build more housing. We could build more energy production. We could invest in more transport. All these things have relative costs and benefits. You cannot do them all at once, so you need to think about how you prioritise. Ignoring the trade-offs is not serious.
Thirdly, we need a method of prioritisation. If I subscribe to any particular ‘theory of everything’, it is that we are importing too much and exporting too little. So ideally, you want to prioritise doing things that are going to generate you more exports or reduce your imports. Just talking about ‘growth’ is silly. We will keep ‘growing’ in the next few years, but our economic and financial situation will get worse not better because of our economic imbalances. Thinking about firms, workers and markets is a better way of developing policy than focusing on vague horizontals (i.e how do we grow JLR in the face of Chinese competition? How do we rebuild our chemicals industry?). I’d argue that that this is the successful strategy the UK deployed after the Second World War to rebuild, repay debt and boost living standards.
Finally, you need to think about how you pay for them. The UK has a shortage of domestic capital and an overdependence on overseas finance. Addressing this problem (as I have written about previously) is essential. Relying ever more on foreign investment is a diminishing return. Anyone who lacks a theory of paying for everything is not really addressing the issues we face.
Policy makers should be careful. MATEs are good fun and love what they do, but just because your MATE does it doesn’t mean you should.