What would you say if I told you that one ( just one) sector was actually growing year on year? What further would you say if I said that it was accounting for ALL growth in the UK and holding up every other sector?
You would likely think I had lost my marbles, but no. I speak the truth. Indeed, it is the reason (the only reason) that the IMF thinks Britain will grow over the next year. Actually there is another reason. They’ve fallen for the cuts Reeves pencilled in at the end of the Parliament which have as much chance of happening as I have of being 18 again.
In case you haven’t guessed, it is the tech sector. The bald figures are startling enough. Only one in twenty people work in it. It is growing both in employment and output. The other 19 people are all in reverse or static, which is why everyone (well, nearly everyone) is not feeling optimistic.
Year on year growth is 8%. Compare that with the EU where regulation is literally strangling the sector. And bear in mind that Burnham – who like almost every other politician has not one clue about economics or business – wants to take us back into those regulations which would send our entire sector to America or Dubai or anywhere really. Apple has said it won’t be launching its “Homeview” smart hub in the EU because of the level of regulation and out and out hostility. That’s what’s coming for us if we go back.
None of this should be a surprise. Our tech sector has been incredibly lucky in so far as the politicians of all parties really don’t understand it, and therefore ignore it. Beware the point at which they wake up to the possibilities and start to try to interfere with it.
The thing most people don’t realise is that the natural state of Man is poverty. According to some research, from the birth of Jesus up to about 1820, there was literally no growth in the world. From then on things started to improve, and an average person today cannot even conceive what poverty (true poverty) is really like.
So as an economist, you don’t have to understand poverty. You have to understand what it is that creates growth.
One of this year’s Nobel Laureates (Robert Hall) has in my view put it rather well. And here I’m indebted to the excellent Mani Basharzad. In 1988, the output of a worker in the USA was 35 times that of a worker in Niger. Today that gap is almost identical, if anything favouring the USA. But what created the difference in the first place?
Here I am going to use Mani’s own words as they couldn’t be bettered.
“Imagine trying to start a business in a country where property rights are poorly defined, taxes are unpredictable and the ruling class can arbitrarily seize your property whenever it wishes. Why would you bother starting a business in the first place?
Now imagine the opposite: a social infrastructure that rewards enterprise. Where trade is open, capital can move freely, exchange is voluntary and government policy is predictable, people have an incentive to start businesses.
That is when we see capital accumulation, investment in research and more long-term thinking. Even if two countries begin with the same capital and labour force, the divergence between them can be enormous.”
And there you have it. Governments that support business, the rule of law, and do not arbitrarily change direction for ideological reasons will have a growing economy to support them. Those governments that treat businesses as mere cash cows will eventually discover the cow has up and left.
I reread an article about Taiwan the other day and was struck by the fact that they have achieved an effective 20% overall tax take (as opposed to our 45%) by a 40 years-long focus on growth. Not chopping and changing and subsidising losers but ruthlessly letting last year’s losers die. They effectively scrapped planning laws to enable factories and houses to be built quickly (compare to UK) and USED quickly rather than stagnating. Taxes were cut making it more profitable for small companies to expand and retain profits. Energy costs are sensible and competition makes sure they stay that way. Most importantly, the government is lean and does not take resources away from business, unlike the UK where the Blob regularly defeats all attempts to slim it down.
The other point is that we economists are taught that there are two strands – microeconomics and macroeconomics. At the risk of being simplistic the first is daily interactions whilst the latter is longer term trends and waves. The former are quite specific and happen all the time. The latter are arguably merely constructs and to a certain extent aren’t trackable – except in the rearview mirror. So the argument runs that macroeconomics does not “really”exist in the way that microeconomics is in your face and happening. If you want whatever macroeconomics is to go your way you have to ensure that the microeconomics is in robust health.
I know I go on about inflation, but it is absolutely the bane of wealth accumulation as opposed to growing numbers which don’t mean anything. I noticed that since 1971 (55 years) the US dollar has lost 87% of its value. That means that $1 in 1971 is only worth 13 cents today. So you need nearly $8 to buy the same amount today. In the UK the drop is 93% (so £14 needed). That’s a very important point in the cost of living crisis. The Swiss have managed to contain the drop to a mere 66% (so about CHF 3 needed now). So keeping inflation down has a wonderful effect both on the cost of living and the accretion of wealth. Next time you think your portfolio is doing well go back over these figures and think again.
The one thing everyone forgets all the time is that what makes a difference is liquidity. As I’ve argued before, extra taxes reduce liquidity in the market. Banks have their ability to lend curtailed (and in the UK we have gone so far that smaller businesses are effectively priced out of getting a loan.) Is it any wonder that people go elsewhere to start their businesses if they can. Those millionaires fleeing at an accelerating rate won’t come back any time soon.
Oh and in unrelated news, it was confirmed that by the end of September we officially owed more than £3 TRILLION. I don’t expect for an instant that anyone in government will care.
