Getting Growth With Austerity

Getting Growth with Austerity: Lessons from other Similar Geographies and Similar Times

Standard of living is dependent on GDP per capita. Without growth and/or productivity gains which make it possible to grow an economy faster than its workforce, so increase GDP per capita, our standard of living drops and we feel poorer and worse off.

Proposition 1: Multi-nationals contribute disproportionately to productivity growth – our focus on SMEs may need rethinking.

The UK – part of northern Europe – needs productivity increases more than labour utilisation.

Proposition 2: Shifting demographics means labour’s contribution to productivity gains is diminishing – our immigration policy, retirement age policy, female and youth participation policies need retooling.

As retirees increases, and female participation plateaus, contribution of labour to GDP will diminish. By increasing labour participation by encouraging old people to work longer, expanding immigration and the participation of women and younger people, we can increase GDP.

According to McKinsey, Sweden had one of the highest rates of labour force participation—87 percent—among women aged 25 to 54 of any OECD country. The participation of women in Sweden began to rise after the government switched from joint to individual filing in 1971, reducing the marginal tax rates on second earners.

Proposition 3: Without changing the labour market, the other source of GDP growth is improvement in productivity, otherwise GDP per capita will slump.

The productivity gains needed to sustain historic GDP growth rates have not been achieved in the US for 50 years.

Proposition 4: To increase productivity, efficiency gains are not all that is important. We need to focus on increasing the value and quality of outputs.

Proposition 5: Although productivity gains occur through job-losses in downturns, they also lead to long term economic growth through higher productivity and increasing employment.

Increasing productivity and employment is vital to increasing growth in austere times. In the US since 1929, every ten-year rolling period except one has had increases in both productivity and employment. This is because first, cost-savings from productivity gains lead to consumer savings spent elsewhere, creating demand.

Second, improved quality, increases demand usually.

Third, high income economies like the UK cannot compete on low wages, so to remain competitive and keep employment, need to compete on quality and value and productivity.

Proposition 6: Productivity gains are sustained by labour and capital market flexibility, innovation in high technology areas, adopting best management practice

In 2009, China surpassed the United States for the first time in the size of clean energy investments, spending $34.6 billion compared with $18.6 billion in the United States.

EU still supports slow growth industries

Proposition 7: With transparency come outside pressure to be productive even in sectors such as healthcare where competition prevents competitiveness.

Proposition 8: The major problem is microeconomic – principal/agent problem.

Just as behavioural economics, ‘moral hazard’ was ignored in the credit crunch as the UK PM has noted; the sister area to ‘moral hazard’ is the principal-agent problem.

In politics and government, the astute know the problem, is often of lack of execution at the bottom end. Proof here is that banks have been given money – the supply is there. Business wants it – the demand is there. What is failing? The principal (government and top level banker) cannot get the agent (middle management) to do their bidding.

Why? A lack of appropriate incentives, poor management, poor communication? Quite frankly it is safer for a manager not to lend than it is to lend – in terms of his own job security. Until we understand the micro problem, we cannot fix the macro problem of growth. Just as with the credit crunch, unless you understood loans were going to people who could not pay them back you did not understand why the US Government may default on its debt obligations.

Case Study: Builders

Without SME family developers in the UK, the Government’s policy on increasing developments and focusing on SMEs fails. It also reduce price competition as a few larger players remain in the fray only.

We know examples of 15 acre sites with planning ready for 200 affordable homes. Banks claim not to be able to fund despite the owner having expended hundreds of thousands of pounds to secure planning over 3 years and then the bank revising what was worth £12million to them in 2009 to worth £2m now with planning. This despite huge demand for housing. This results in monopoly super-normal profits for the likes of Barrats who remain the only buyers of land at artificially cheap prices (not passing on savings to the house buyer, but instead to their shareholders). The banks are preventing asset values to appreciate, create employment, provide affordable much demanded homes – in order to tacitly collude solely with big developers.

The bank will artificially take advantage of small developers by forcing them out as a consequence the surveyors value land on ‘willing buyer’ concept and that really does not reflect true value – so if the large developers are the only players in the market then they dictate the price and land values.

If on the other hand the funds were made available to small players then the economy and market will be instantly rejuvenated and you would get true asset and profit ratios via thousands of smaller developers – the challenge is to restrict cartel practices and let the smaller players in.

Proposition 9: Related to proposition 8, focus on the lagging sectors which are the worst culprits of low productivity and provide micro solutions.

Factors such as land barriers, weaker entrepreneurial mind-set and talent gaps are key problems, price-fixing, monopolistic structures, entry barriers, marketing prohibitions, regulation.

The government as enabler: set standards (eg GSM); provide skilled workforce, build infrastructure, create demand (eg e-govt); set direction (eg tourism).

(local services include car retail, retail, wholesale, hotels).

Proposition 10: Innovation clusters remain small

Proposition 11: More benefits will come from University-Industry collaboration and innovation

In the United Kingdom, the University of Sunderland participated in an alliance to make Nissan’s new car plant the most productive in Europe. Such initiatives can pull in inward investment, boost growth, are hard to replicate for other countries, and strengthen skills.

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