Cameron and Osborne race to the bottom in economic literacy

Google Cameron global race and you get a depressing 33,000,000 responses. Google Osborne global race and you get a depressing 2,650,000 responses. Apparently, the ‘global race’ is going to be a major theme of the Conservative Party conference. The concept of the global race is terrible economics and a reflection of utterly incoherent thinking. This is a pity because one of David Cameron’s major speeches on the concept contained a very fine set of aspirations (even if those aspirations are a long way from being implemented in policy). However, the policy analysis in the speech was completely overwhelmed by the reporting of the global race rhetoric which does so much to undermine understanding of economics in the public sphere.

So what is the problem?

Cameron does not say with whom we are in a race. But, given that it is a global race, I guess we can assume it is everybody: India and China at one end of the scale (rapidly growing but still relatively poor countries) and France and Germany at the other end. Presumably, in Cameron’s view, there is some kind of fixed prize. If France or China adopt bad policies, we are more likely to win the prize and come first in the global race. But there is no evidence for this competitive theory of development. A poor France or a failing India does not help Britain. It will mean more expensive imports for Britain if other countries are less efficient and smaller export markets for our own companies if other countries are less prosperous. Furthermore, good policy can be copied – if there are models of good policy abroad, that provides evidence for Britain and we can copy those ideas: low corporate tax rates in Ireland and competition in education in Sweden are both examples of global copying rather than global races in a zero sum game.

Secondly, trade is based on comparative advantage not absolute advantage. In a static analysis, we see competition between (say) German and British firms for individual markets and this may look like a race. However, the long-term dynamic perspective suggests a very different picture. Germany may be relatively good at exporting luxury cars and so resources in the UK will flow towards other industries such as insurance and legal services that we will export instead. We will export these things in order to import luxury cars. We could not possibly produce teddy bears at a lower unit cost than China. We can, though, export higher education to China and, with the revenue from one Chinese student over three years, import about 20,000 teddy bears. That is how trade works at the individual level and at the country level.

So, let’s have good policy at home because it will lead to prosperity at home. And let’s encourage, in appropriate forums, good policy abroad because it will lead to prosperity at home and abroad. There are no losers in the global race if all countries adopt good policy – all will have prizes. There are no winners in the global race if we are the best of a bad lot – there will be stagnation for all. There is no sense in which the term ‘global race’ is useful in policy analysis. It is an attempt by ministers to avoid the difficult task of explaining why free markets and free trade produce prosperity for all.

 

Does it matter if political statements are inaccurate if they achieve something useful?

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