Politicians cannot stop trying to design the economy. In this respect they have a hugely over-inflated sense of their own abilities. Gordon Brown, of course, was an impulsive meddler – he really did believe that government knows best. However, George Osborne – and other coalition ministers – are falling into the same trap. Last week, George Osborne announced that we needed a country oriented towards exports and investment. His recent budget was even more interventionist in tone. A genuine growth agenda would involve freeing entrepreneurs to pick the winners of the future by reducing tax and regulation.
Perhaps the worst example of government meddling is in the energy sector. Environment secretary Chris Huhne, for example, has suggested that the coalition’s policies will lead to 250,000 green jobs and to the development of major export industries. But the artificial creation of jobs comes at a cost. The new jobs are the “seen” consequence of the policies. As companies struggle to pay the increased energy costs that the “green” measures entail, they will be shedding jobs. Governments cannot create wealth by subsidising particular sectors of the economy.
The 2011 Budget articulated a more general strategy. The government has regularly littered its rhetoric with attacks on financial services and pleas for a “rebalanced economy”, but, it was not until the Budget that George Osborne decided to nail his colours so strongly to the mast of manufacturing – a sector responsible for less than 10% of national income.
At the beginning of his Budget speech, George Osborne talked about: “a Budget for making things” and then, as he closed, he said: “we want the words ‘made in Britain’, a Britain carried aloft by the march of the makers.” It seems that the government’s rhetoric is about picking winners. Stuffing teddy bears is in; the 74% of the British economy involved in producing services is out. But Britain did not suffer a financial crisis because we stuffed too few teddy bears and produced too many credit derivative swaps. We suffered the financial crisis because our banking system was not disciplined by market mechanisms and was over-indulged by loose monetary policy.
Why should we favour the 10% of our economy that is making things over a services sector which is nearly eight times the size? It is not as if success in manufacturing is the sure route to prosperity. We expect manufacturing to decline in prosperous countries. It has been declining for over a generation in France, Germany and the US as well as in the UK. Meanwhile, manufacturing is booming in China – a country which is 20% as rich as the UK. Indeed, it is the export of services that finances the welcome import of low-value-added manufacturing products. That is why the UK had a £46 billion trade surplus on financial and professional services alone in 2009.
David Cameron has argued that we should have a re-balanced and more diverse economy. However, in a world of free trade, countries specialise in what they are best at and trade with other countries – they do not need to be diverse. If Germany is, indeed, the jewel in the crown of western high-tech manufacturing it would not be surprising if British companies found it difficult to compete and, instead, chose to produce other things – such as services – which they are relatively more efficient at producing.
It would not be so bad if the government simply stuck to the rhetoric. Unfortunately, it backs the rhetoric up with action. £200 million a year is being spent on Technology and Innovation Centres for manufacturing research. In the government’s growth review framework for advanced manufacturing, even the section of the document on “removing barriers to growth” had, as its key points, four forms of government intervention. Yet, intererstingly, research undertaken by Professor Patrick Minford at Cardiff University shows that though government spending to improve productivity has no effect on growth, the taxes that are used to finance those measures are a very serious impediment to growth.
David Cameron, civil servants, nor indeed the best economic forecasters, are in a good position to determine the industries of the future. Instead, we should remove the shackles from entrepreneurs. Perhaps the future of the UK economy will indeed belong to manufacturing, but we need to leave it to entrepreneurs to respond to the price signals that show what goods and services are valued most – both at home and for export.
As ever, the government should focus on doing less and not more. It is, indeed, possible that manufacturing has been hampered by government borrowing and also by huge levels of government spending in traditional manufacturing regions and these things should be addressed. But, our intellectual classes have had a long-standing prejudice in favour of “making” things – or at least in favour of other people making things. It is remarkable how successful the service sector has been given this prejudice. Entrepreneurs do not need George Osborne to decide whether they should be involved in “making” or “serving” and the government should stop trying to shape the future of Britain’s economy.
This article originally appeared in the Wall Street Journal on 28.07.11 and can be viewed here (subscription required)