Do we want more growth? A preliminary assessment of the LSE Growth Commission
The LSE Growth Commission was set up in early 2012 to examine ways to improve the functioning of the economy. So far, it has thrown up a number of challenges for policymakers
The LSE Growth Commission was set up in early 2012 by Professors John van Reenen and Tim Besley to examine what can be done to restore medium and long term growth in the UK economy. It is due to report at the end of the year.
At the time it started its deliberations and evidence gathering, output (GDP) in the UK was some 4% below where it had been before the 2008 financial crisis. Since then the economy has gone into even greater reverse and by the end of June had suffered three quarters of declining GDP - in a so called double - dip recession. The Commission collected evidence on skills, innovation, energy and management. However very importantly it also held hearings on measurement issues which throw up a number of challenges for policymakers.
In recent days and in response to the weak economic environment, Cameron and Osborne have felt the need for urgent action and have announced measures intending to improve the functioning of the economy - with the government playing a leading part in many areas. Possible interventions are aimed to address some of the underlying issues and problems that the Commission will be reporting on, with the Government playing an active part.
Indeed Vince Cable has also finally instigated a process towards a more comprehensive Industrial Strategy for the UK. The focus now, we are told, is relentlessly on growth. But while there is no doubt that there are a number of short term blockages to growth that need to be tackled, it will be wrong to forget that most of the emphasis during the deliberations of the LSE Commission has been on understanding the longer term issues that have shaped growth in the past, and to learn from them.
We await their report. But recent debates and the new look at environmental and quality of life indicators are throwing up a number of interesting questions for economists and policymakers. Do we feel certain we know enough about what has been going on? Are we gathering the right data? And is there something more fundamentally wrong with the way the economy expanded in the previous few decades which has in fact sown the seeds for only slow growth in the future to which we may need to become accustomed?
Tony Atkinson in his presentation to the LSE Commission referred to the 2009 Stiglitz-Sen-Fitoussi Commission report which recommended amongst other things that the output measure of GDP may not be the best measure to assess economic performance and that consumption and real household incomes could well be a more accurate measurement of material well being than production.
He also followed up the Stiglitz Commission’s recommendation that measures should include distribution data as part of the overall measure rather than be provided in isolation as a separate element. His conclusions were that inequality adjusted growth tells a different story about long run growth and about cross country differences.
The OECD in the same evidence session argued that though GDP was still a good measure for monitoring macro economic activity, productivity and the supply side of the economy it needed to be supplemented by better use of national accounts measures also focusing more on household income and its distribution.
This is clearly a big agenda that needs addressing. But the recent increased emphasis on the importance of the inequality of the income distribution during the boom years is interesting in itself as people realised that, in the US for example, median incomes hardly rose in the past 30 years. The benefits from increased wealth seem to have gone mostly to the top 1% of the population. The wealthy spend a much smaller percentage of their incomes on local goods and services, funds move more easily abroad, they don’t use public services as much and therefore tend to be indifferent to their quality.
The way income is distributed may therefore affect patterns of tax collection, government spending and the structure of the economy. And meanwhile if inflation is properly adjusted to better reflect what lower income groups spend their money on, real household incomes may indeed prove to have been inflated away.
Why does this matter? Clearly there is an issue of fairness here but also one of economic efficiency.
According to Stiglitz’s latest book The Price of Inequality, the distribution of incomes can have a material impact on growth. A substantially ‘unequal’ economy may see a lot more volatility and crises than a more ‘equal’ society and in the process productivity could be undermined and growth distorted.
If true then the emphasis perhaps has to be less on ‘picking winners’ where the likelihood is that policy makers will be ‘captured’ by the sectors they are trying to sponsor and instead on improving the ‘horizontal’ aspects of policy - better education and skills; widening participation; reduction in regulatory protection for powerful industries; encouragement of innovation and entrepreneurship through a proper and fair financial and educational system; greater corporate governance and transparency to restore confidence; and a serious look at incentive structures that have distorted sustainability and encouraged short-termism.
Vicky Pryce is a city economist and former joint head of the UK Government Economic Service
LSE Growth Commission
John van Reenen