Never Mind Plan B - Plan V needed for the UK Economy!

George Osborne is convinced that the Coalition does not need a plan B. But for growth to be nurtured and sustained in the years ahead we need a Viagra-style boost to our competitiveness and capacity - Plan V. This was one of the main themes from a talk given by Professor John Van Reenen at a packed Hong Kong lecture theatre at the LSE (London) last night.

A 6.5% decline in real GDP during the first 12 months of the recession was a decline of 1930s dimensions. But the subsequent recovery (of sorts) puts the recent UK recession on a par with of that the early 1980s. Where we head to next is shrouded in a fog of domestic and external uncertainty, many of the economic headwinds over which we have little or no direct control point to a period of slower rather anaemic growth which will be dangerous for a Coalition committed to the deepest fiscal austerity programme since World War II.

Students and teachers familiar with a range of theories of competitiveness and growth will have found much that was familar in Professor Reenen’s talk. The sources of growth in most advanced economies can be found in getting the right balance between consumption and investment plus fostering the right climate for enterprise and innovation. All of this allied to a sufficiently robust level of domestic spending on goods and services so that an economy does not descend in periods of semi-permanent deflationary recession.

Here is the essence of Plan V from Professor Reenen

1/ Get the conditions right for long term growth - have credible macro policies and an active policy to counter de-industralisation

2/ Have a strong commitment to trade and competition

3/ Incentivise R&D as the social return from research is twice the private return

4/ Consider tax reforms such as one to remove 100% inheritance tax exemptions for family businesses to encourage improved management

5/ Focus human capital investment at lower skilled and younger workers E.g., expanded apprenticeships

6/ Avoid damaging migration caps and removal of teaching subsidies for universities – especially when there is a global war for talent. The universities fear the loss of billions of pounds worth of fees from forreign students

7/ Focus on sector growth in industries where competitive advantage can be successfully nurtured and exploited. Namely…healthcare, niche manufacturing, green energy, universities, bio-pharmaceuticals, creative industries

Note in particular point 4 regarding the tax treatment of family firms.

The middle stanza of his talk provided some interesting evidence on the relative quality of management practices in the UK compared and statistical links between waves of survey evidence from managers on how their businesses operate and relative productivity levels for the UK.

Reenen was critical of managerial weaknesses in family-owned businesses and hinted a lack of managerial excellence and dynamism in such corporations. It seems to be an argument about dynastic succession preventing creative destruction!

One of his key findings is that family, founder and government firms, in uncompetitive markets are likely candidates for bad management and this hits productivity growth and competitiveness.

There is a danger of tarnishing businesses with the same brush. I teach some students who expect to take over the family firm as one generation passes on the baton on to another. All of them are bright, and committed and most will take one perhaps two degrees before deciding on whether to stay in the family business. They are comfortably well off for sure but entrepreneurial - they have to be, the commercial world is a vastly different one to what their parents emerged into twenty or thirty years ago.

I enjoyed John Van Reenen’s talk and he is one of the star attractions at the LSE - he is lucid, articulate and has some strong ideas on promoting growth in a globalised world. He also has some entrepreneurial experience, a refreshing change to the anti-enterprise delusion of tenured ivory tower academics who are more concerned with academic citations than taking risks in setting up real businesses.

I have put some of the notes from the lecture into the attached powerpoint file and added in some relevant charts on the economic cycle and aspects of our supply-side economic performance. I have also added some links to revision resources on economic growth for AS and A2 macro students.

You can read and listen to more about John Van Reenen’s work here

Tim Harford: Welcome to Boss-onomics (January 2011)

PowerPoint Presentation

Where_will_economic_growth_come_from.pptx