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Commentary
Ethos Journal, Issue 11

Home Economics

__Will Hutton and Irwin Stelzer ask what role the government should play in stimulating UK economic growth. Stelzer's comments are below. Click here to read Will Hutton's comments.__

Growth. The new buzzword. With governments desperate for new revenue sources, with taxes already so high that more than modest increases in rates will not generate a great deal of revenue, with populations ageing and pension and healthcare costs therefore rising, rapid economic growth is now seen as an absolute necessity if national bankruptcy is to be avoided, or if benefits are not to be cut to riot-inducing levels. But governments are uncertain what to do, if anything, to stimulate growth. Most economists know that ‘industrial policy’, which involves some government bureaucrat ‘picking winners’, is a sure path to breeding inefficient enterprises that cannot survive in a globalised competitive market. We know, too, that subsidising loss-making enterprises involves trying to enable lumbering dinosaurs to survive in a world in which the race goes to the nimble.

We also know that corporate taxes can reach a point at which they drive businesses out of Britain, as the tax on overseas earnings seems to be doing. And that personal income taxes can reach a level at which they discourage work and risk-taking. That failure to protect intellectual property can remove incentives to innovate, and that too draconian a protective regime can prevent the spread of knowledge. That words matter – anti-business rhetoric from high government officials can cause businesses to sit on their cash rather than invest it and expose it to whatever nasty policy comes to the mind of the incumbent government. That governments on all levels sometimes erect barriers to the creation of new enterprises, and that it is new enterprises that drive job creation and improve productivity. All of which tells us what the British government – any government, really – can do to stimulate growth.

Start with two things. First, pro-business rhetoric that assures businessmen that their long-lived investments will not be subject to ex post rules and taxes that will make them wish they had stayed in bed. Words from people in authority matter. John Maynard Keynes was right to point out that economic growth depends on unleashing investors’ ‘animal spirits’. And Joseph Schumpeter was right to point out that it takes bold entrepreneurs, unimpressed by the status quo, to unleash the gale of creative destruction that drives economies forward. Government can’t do much to unleash those animal spirits or to create an entrepreneurial attitude, but it can do a great deal to stifle them by equating success with some form of anti-social behaviour, rather than celebrating it.

Second, as a general principle of taxation and regulation, adopt President Ronald Reagan’s famous dictum, “Don’t just do something, stand there.” Yes, for a market economy to function properly it needs rules, it needs a government that acts as referee, especially to prevent incumbent firms from adopting anti-competitive business practices designed to make it difficult for newcomers to enter an industry. But government should not become a player in the game except in a crisis. The recent past, in which its role expanded in order to prevent an implosion of the financial system, should not be taken as a prologue.

Those broad precepts in hand, government can adopt a series of measures to stimulate growth. Repeal regulations that are obsolete or do not pass a cost-benefits test, and eschew any new ones that do not promise to add more to national wealth than the costs they create. This is no easy chore, more difficult in the implementation than in the formulation. But it must be done, even imperfectly, to cut down the profusion of dos and don’ts that rain down upon businesses from well-meaning bureaucrats in Whitehall.

Review the level of corporate tax, as well as the structure of taxation, to reduce compliance costs. Add certainty by eliminating the adversarial relationship between the tax collector and the sheep he must shear, and remove invitations to flee to more benign climates, as several major businesses and hedge funds have already done.

Then become more imaginative. Small business start-ups in Britain suffer mightily from the lack of a vigorous venture capital industry, and the presence of a banking system populated by lenders who only want to lend to those in no need of loans. They are also confronted by a mountain of regulations that can easily be scaled by large businesses with their armies of accountants, lawyers and lobbyists, but are insurmountable for the small entrepreneur. So exempt all new businesses from all regulations and all taxes for, say, five years. Note that this is not industrial policy. No government official is saying which new enterprises will benefit. Rather, all will, whether a whelk stall or the creator of a new computer programme.

There is more, of course. Government can improve all public services by maximising competition and consumer choice: the dead hand of producer-led public services creates a society unattractive to thrusting entrepreneurs. It can make sure that its immigration policies do not exclude the skilled and talented.

None of these things is easy. Government naturally tends to be active where it shouldn’t – in the affairs of business, and inactive where it should be active – reducing crime and protecting the realm. So it has come to pass that the successful ‘Silicon Roundabout’ congregation of small, high-tech start-ups in the Shoreditch area of east London has attracted the attention of the British government. Rather than heed Reagan’s interdiction, the Prime Minister has decided to lavish his skills and attention on this successful exercise in individual, creative entrepreneurship, by arranging for the big beasts of the technology industries to lend their support to these start-ups. Start-ups that, if successful, will threaten the dominance of the big beasts.

Such is the wisdom of government officials ever ready to interfere in areas they do not and cannot understand – the risk-taking entrepreneurial world of men and women prepared to face the consequences of their actions.