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It's time for Osborne to use the I word - 'Intervention'

We need the state to invest in business innovation and infrastructure that commercial investors fear

By Adam Lent Published 22 August 2011 19:09

It's not looking good for Osborne. Output, employment, sectoral data and confidence all point to an economy either on the brink of recession or stuck deep in the doldrums. Inevitably, the debate about how to escape this very nasty patch intensifies and the battle lines dividing fiscal hawks from doves become ever more stark. But it is a debate that masks an even nastier truth for the UK economy. Even when we are through this crisis, we will still be an economy unfit to fight the big global economic battles ahead.

As a new paper published this week by IPPR and written by myself and David Nash shows, the UK is a serial under-performer compared to our competitors on those OECD, IMF and other international economic indicators which are most vital for successful competition in the global market.

On investment in business, on skills, on innovation and productivity, and on presence in emerging markets we are decidedly mediocre and, in some cases, worse than mediocre when compared to similar economies.

This should be troubling at any time but at a point when new, confident players from the East are striding into global markets and as business practices and markets are being turned upside-down by web technologies, fear and trepidation should be stalking Whitehall and the business world.

But because of the intense focus on the short-term crisis there is a real risk that once the economy is growing healthily again, a 'job done' mentality will seize policy-makers. It would hardly be a surprise. There is a long history of complacent back-slapping in British economic policy-making: Macmillan's "never had it so good" as inefficiency ate away at the economy, Nigel Lawson's self-satisfaction at rapid growth in the late 1980s just before the property market crashed under its own weight, and Gordon Brown praising the City to the skies in his 2007 Mansion House Speech while the credit crunch (and worse) rumbled in the distance.

A continuation of this ignoble tradition could prove equally disastrous now.

We can avoid the potential crisis of the future not just by acknowledging the threat but also by moving beyond ideological shibboleths about the state as the enemy of enterprise that has gripped government for too long. Instead we need a new pragmatism that learns from those economies that have long out-performed us on business investment, skills, innovation and exports. These are countries have a hugely healthy respect for the free market and intense competition as the main drivers of growth and innovation but also recognise that the market simply is not very good at delivering some of the fundamentals.

Germany, Japan, the Scandinavian economies and, yes, even the USA use the state to invest in business innovation and infrastructure that commercial investors fear. At their best, they take an active role in predicting skills needs and so can shape their education and training systems to get ahead of the curve. They positively target innovative firms not just with tax breaks but with world class generously funded research. And when firms want to export they get generous credit guarantees plus a whole range of other supports. In short, they intervene. Not out of some ideological love of the state but because it works. Of course, these economies have their own problems and they are far from perfect but on the measures mentioned above, they consistently do better than us.

Intervention has, of course, had a very bad name in the UK. This is partly because the Thatcherite world view became so successfully embedded into Whitehall and into Party political debate (even though Thatcher herself could be quite the intervener when she wanted). But it is also because intervention became confused in the public mind with the economic planning of the 1940s and 1950s when the focus was actually on controlling employment and prices, not on the modernisation of business, as it was in the rest of Europe. The only time when intervention was seriously tried in the 1960s, it was all too late and ill-conceived to save out-dated British business and it degenerated in the 1970s into support for lame duck firms and fading industries.

The intervention we need today should have a very different focus. It is not about predicting the economy of the future and plotting a path there. It needn't even be about identifying high growth sectors and giving them special support. It should focus instead on the very significant long-term weaknesses of the UK economy relative to our competitors by building a bold policy framework to address those weaknesses before it is too late and we find ourselves once again in decline mode. In short, it is the opposite of our tradition of complacency replaced by an embracing of the pragmatism and common sense displayed overseas.

Adam Lent is Associate Fellow at IPPR.

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Tags: George Osborne

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20 comments

Thu, 2011-08-25 11:03 — Amergin

Its nice to see the self-satisfied litttle birk has stopped smirking. We can only hope this means he is now taking the job seriously.

Mon, 2011-08-22 20:34 — Awake!

spot on, Sir.
Long term weaknesse of the UK ecocmy relative to our competitors-
May I sugesst inability to mass produce mid/high end products as a candidate?
Enjoyed this...

Mon, 2011-08-22 21:54 — Indu Pendent (not verified)

"We need the state to invest in business innovation and infrastructure" - Labour are not the party to advise anybody on this.

I remember very similar things being said by the party when 'things can only get better'.

Before 2008, Labour borrowed and spent £350Bn effectively doubling the national debt, but what did our kids get for it? It was enough money to make the UK self sufficient in green energy or to pay for 2 Japan earth quakes. During the same period, UK industry declined at its fastest rate since the 1970's.

The problem is that the party elite used the money for simplistic fiscal expansion (government borrowing for the synical manipulation of voter preferrences).

And what are the elite talking about and preparing for now? More of the same all over again.

The government can support high risk businesses through tax breaks rather than loans. They work. Tax take increased through payroll tax on higher paid employment and there are none of the risks of nationalisation.

But Labour are ideologically opposed to low business taxes.

Mon, 2011-08-22 22:05 — swatantra

... and the earlier the better. QE4.

Thu, 2011-08-25 11:58 — Gracie

@Amergin - I wouldn't hold your breath. Osborne is an arrogant little **** who thinks he is always right. We are powerless to do anything about the car crash he is making of the UK economy and that is what is really frightening!

Wed, 2011-08-24 11:14 — Awake!

Stu
I'm not sure if the PURPOSE of the economy is for consumption, more about managing the finite resources the planet has to offer up to us in the face of our practically infinite demands... certainly there is consumption in the process.
Re the trains, yes, if u say the germans can build them more efficiently then on a PURELY COST OF BUYING THE TRAINS basis u award them the contract-BUT, there are other costs this method does not take into account- redundancy, welfare subsidies, the human toll of dad being out of work... this last one is the worst YET it's difficult to account for since (and the left won't like this,sorry, everyone is different- and so handle unemployment differently), so there is no accounting for it. What is certain is that it is genuinely tragic for families, in the fullest sense of the word tragic, not the debasement of language that Blanchflower is so keen on. Does the contract still go abroad when these have been taken into account?- i don't know the numbers, and consultations take forever when run by 9-5 men so...
Give british workers jobs- I agree will. just one thing though- in the last 15 years 2 million immigrants have settled in the uK (it's something of that order I think), yet unemployment stands at 3 million currently. Why didn't the Brits take those jobs? People will offer thosands of words on this, but it boils down to they didn't need to, so many chose not to.
Mr blanchflower: u are meant to comment on matters social, political but mostly economic- how about a view on this?

Tue, 2011-08-23 07:22 — Luddite (not verified)

'We need the state to invest in business innovation and infrastructure that commercial investors fear' So why didn't Labour?
Five trillion £5,000.000,000-which is how much Labour taxed and spent in it's time in power. Very 'little' if any, of this humongous amount of money found it's way into manufacturing.

Wed, 2011-08-24 12:10 — Mr. Divine (not verified)

Three very high speed train lines separate from the other train lines, perhaps using Motorway land. One from West London stopping at West Birmingham, Manchester Lancaster, Glasgow. Another from North London stopping at Coventry, Sheffield, Leeds, Newcastle. Another from West London stopping at Reading, Bristol, Cardiff, Swansea.

Wed, 2011-08-24 12:14 — Mr. Divine (not verified)

Two ex-army camps converted into ecological community housing with solar, wind, methane power. With shared vegetable gardens and other facilities.

Get building.

Two very large wind and two wave farms in the North West Scotland.

Get building.

Water tanks, solar power incentives.

Wed, 2011-08-24 12:16 — Mr. Divine (not verified)

Organic farms on ex-army land with unemployed and mentally disabled being used to work two days a week.

Tue, 2011-08-23 10:49 — Stu (not verified)

Yeah we're a nation based on the financial sector thanks to Labour and Brown who thought that the cycle of recessions would never ever happen, how wrong he was... many will dislike this but it will take a decade to build up manufacturing sector in this country whilst ever other country will benefit.

Thu, 2011-08-25 15:36 — Awake!

now we see why we can't mass produce anything...

Tue, 2011-08-23 12:16 — Jimbo (not verified)

Good article, if we are talking about moving forward - rather than continually lamenting previous government policy and scoring politcal points - the state should act in everyone's interest and seek to support businesses whose growth at home and abroad will benefit the country as a whole. Surely this kind of action would be in 'the national interest' and show 'we are all in this together.' There are cerain areas where the government should intervene, where the government should take the lead - this doesn't mean shower sectors with cash, it means making strategic, well researched, thought out decisions which will aid the UK in the future...we should always remember that government is not like a private company acting only in the interests of shareholders and its employees, it should have a broader view, it should offer perspective and leadership for industry and lead the way!

Sadly with the present goverment the possibility of them sticking their neck out on anything is pretty unlikely I feel ...

Tue, 2011-08-23 13:56 — Stuart (not verified)

So you think the private sector is not investing well in the economy and better investment would make the economy more productive?

Fantastic. Here's what you should do: start a business and invest all your money in it, persuade other people to invest in your company. Once you have raised enough capital you can use it to invest in those areas the UK is failing in. As we are not doing enough in those areas (according to you) there will be very large returns on your investment and the investment of the other people who invested in your fund. You have now made a great deal of money and the UK is in better shape economically. Brilliant.

I don't think you will do that though. What you will instead do is this:

Threaten the people of this country with violence unless they give you their money (it's called taxation). Use their money (not your own but someone else's) to invest in things you think are important. Perhaps more high-speed rail, perhaps more windfarms. The point is you are not investing your money but someone else's money. If they are useful for the economic wellbeing of the country they will provide a good return as people will pay for them once you have produced them.

Tue, 2011-08-23 14:08 — Stuart (not verified)

Also, why are you trying to subsidise exports? Do you believe the State should subsidise people in Birmingham to sell goods to people in London. Or indeed to subsidise people from Islington to sell to people from Brixton? Trade is always a good thing but it needs no encouragement. Exports are the cost not the benefit. Imports are the benefit. Imports can be thought of as Christmas day, exports are the credit card bill arriving on the 1st January. Exports are the time you spend at work and imports are the time you spend in the pub.

Tue, 2011-08-23 14:15 — Awake!

what about intervening in the recent train building contract that went to germany? Bombardier (the LAST british train builder may have to cut half their workforce, and the nearby town it sustains will suffer terribly. I'm NOT saying subsidise, but when operators award contracts, how is this done and does it reflect the real cost of sending the work abroad? Isn't this what Labour should be looking at, rather than that Balls foaming at the mouth repeatedly calling for VAT cuts which is AGAIN all about consumption, why not ask that question- finally we're making progress it feels...

Tue, 2011-08-23 14:19 — Awake!

and to NS- adam lent should be writing more pieces, there was more credibility here on economics than in the last 15 years of the labour parties economic policies. I am being serious-

Tue, 2011-08-23 16:22 — Stuart (not verified)

@ Awake.

The purpose of an economy is for consumption. If Germany is building our trains more efficiently than we can then it means we can produce other things and increase our levels of consumption - which is the purpose of the economy. Before this economic crash we had virtually no unemployment (as long as you use a sensible definition of unemployment). Unemployment is a result of the recession, not loss of manufacturing jobs.

Tue, 2011-08-23 16:56 — Jimbo (not verified)

We need to encourage investment in ideas from the financial sector. This investment will help UK companies compete in a heavily crowded international market place. This investment should be placed in a central fund maintained by the government. This would then hopefully help to create an ethos of investment around UK ideas and entreprenurial zeal. Where the investment goes needs to be studied, researched...we need to think collectively - the government needs to be open and take a lead

Tue, 2011-08-23 17:44 — Willp

Awake is getting pretty close to right when he wrote "what about intervening in the recent train building contract that went to germany? Bombardier (the LAST british train builder may have to cut half their workforce, and the nearby town it sustains will suffer terribly."
Give British workers the jobs!
But none of the parliamentary pimps dare say that!