The economists’ manifesto
We’ll send you a myFT Daily Digest email rounding up the latest Life & Arts news every morning.
It’s often said that economists have too much influence on policy. A critic might say that politicians are dazzled by data-driven arguments and infatuated with the free-market-fetishising practitioners of the dismal science. As a card-carrying economist, I have never been convinced that politicians are the puppets of economists. Still, the idea seemed worth exploring, so I called up some of the country’s most respected economists and presented them with this scenario: after the election, the new prime minister promises to throw his weight behind any policy you choose. What would you suggest?
My selection of economists was mainstream — no Marxists or libertarians — but arbitrary. There is no pretence of a representative survey here. But there were common threads, some of which may surprise.
Let’s start with the deficit which, if we are to judge by column inches alone, is the single most important economic issue facing the country. Yet with the chance to push any policy they wished, none of my economic advisers expressed any concern about it. Indeed several wanted some form of increased spending and were happy to see that financed through borrowing or even printing money.
Economists have a reputation for being low-tax, free-market champions. Yet none of my panel fretted about red tape, proposed any tax cuts or mentioned free trade. Other untouched issues included the National Health Service, immigration and membership of the EU. Nobody suggested any changes to the way banks are regulated or taxed.
Less surprising is that several economists suggested structures that would put decision making at arm’s length from politicians, delegating it to technocrats with the expertise and incentives to do what is right for Britain. The technocracy already has several citadels: the Bank of England’s Monetary Policy Committee, the National Institute for Health and Care Excellence, the Competition Commission and the regulators of privatised utilities. My advisers wanted more of this. That is economics for you: when a political genie offers you whatever policy wish you desire, why not simply wish to have more wishes?
Former chief economist of the World Bank, professor at the London School of Economics
Nick Stern will forever be associated with the Stern Review, a report into the economics of climate change published in 2006. He hasn’t stopped banging this drum but these days he is reframing the problem as an opportunity.
“I would launch a strategy for UK cities to be the most attractive, productive and cleanest in the world,” he says. Cities hold out the hope of being productive and desirable places to live as well as environmentally efficient ones. Consider Manhattan: it is rich, iconic and, with small apartments and a subway, it boasts a much smaller environmental footprint than most of sprawling, car-loving America.
That is the aim. But what is the policy? Lord Stern offers what he calls a “collection of policies”, including an expanded green infrastructure bank and more funding for green technology. His broadest stroke is to change the governance of British cities, devolving the power to raise taxes and borrow money but imposing strong national standards on energy efficiency.
Stern would introduce a platform for congestion charging to enable cities to develop areas connected by public transport and walking/cycling routes. He’d also raise the price of emitting carbon via a direct tax or an emissions trading system. Stern suggests £25/ton of CO2, and rising. That should add a penny to the price of 100g of airfreighted vegetables and £100-£200 to a household energy bill. It would raise £10bn, less than income tax or VAT but enough to narrow the deficit or allow other tax cuts.
But Stern doesn’t dwell on taxation. His policies are “long on UK strengths such as entrepreneurship, architecture and planning”, he says. While warning of the “deep deep dangers” of climate change, he claims his package “is attractive in its own right”.
Tim’s verdict Developing these new green city centres is a challenge. Are our urban planners up to it?
Political feasibility 3 out of 5
Economic radicalism 3 out of 5
Professor of economics at Imperial College, London
“Some people think that scientists have their heads in the sky, and if you gave them more government money they would simply do weirder research,” says Jonathan Haskel. Science enthusiasts, however, would say that weird research can help: Sir Andre Geim of the University of Manchester won the Nobel Prize for his discovery of the revolutionary material graphene — but not before receiving the Ig Nobel Prize for levitating a live frog.
Supporting scientific innovation has long been an easy sell for politicians. Who could be against technological progress, after all? The more difficult question is how to encourage this innovation. For Haskel, the answer is straightforward: the government should simply spend more money directly funding scientific research. At the moment the government gives about £3bn to research councils and more than £2bn to the Higher Education Funding Council. For the sake of being specific, Haskel was happy to accept my suggestion of simply doubling this funding over the course of a five-year parliament.
Haskel’s research finds that government funding of science is the perfect complement to private, practically minded research funding. “This is an example of crowding in,” he says, meaning that if the government spends more on scientific research it is likely to draw in private funding too. There is a high correlation between the research scientists who receive government grants and those collaborating with or being funded by private sector companies. Haskel has found that sectors that attract government funding are also sectors with high productivity growth.
According to Haskel’s estimates, the rate of return on basic scientific research is around 20 per cent at current funding levels — a level that would not displease Warren Buffett himself. This would probably be less if science funding dramatically increased but, even at 15 or 10 per cent return, the case for spending more would be persuasive.
An extra £5bn is not trivial. Increasing all income tax rates by one percentage point, or raising VAT to 21 per cent, would cover the cost. But given current ultra-low interest rates, Haskel says he is happy for the government to borrow to fund this spending instead. “I would regard borrowing to fund the science base as a form of infrastructure investment,” he says. It may not be the traditional Keynesian infrastructure of roads and runways but it is investment for the future nonetheless.
Tim’s verdict It’s hard to object to scientific progress and Haskel’s evidence is persuasive. Leave a bit of cash for the social scientists, please.
Political feasibility 4 out of 5
Economic radicalism 2 out of 5
Top pensions expert at the Institute for Fiscal Studies
A confession: I may have led Gemma Tetlow astray. We begin by discussing how employers can avoid national insurance contributions by diverting some of their workers’ salaries into a pension. This, she says, is an unwarranted subsidy for the comfortably off, and abolishing the rule is “not a bad way to raise £11bn”.
As we talk, a bolder thought forms in my mind: why not just abolish national insurance entirely and replace it with higher rates of income tax? That would close Tetlow’s pension loophole and many other inconsistencies besides. I wonder if I have missed something obvious. Apparently not. Tetlow is perfectly happy to endorse the idea of a merger.
In some ways this would be a huge change: national insurance raises more than half as much as income tax does, so merging the two would mean huge increases in headline income tax rates. But while the policy would make things simpler and more transparent, it would not greatly alter the tax that most people pay.
The idea is tempting to an economist because successive governments have discovered a feat of political arbitrage. They reduce the basic rate of income tax, which gets a lot of attention, while increasing national insurance rates, which do not. Since 1979 the basic rate of income tax has fallen from 30 to 20 per cent but national insurance rates have risen and so the marginal tax rate on much employment income is still above 45 per cent, much the same as ever. A bit more honesty about this would be welcome.
As Tetlow explains, national insurance was once a contributory system, designed to cope with a male workforce in conditions of near full employment. Now national insurance is more like an income tax, where people pay if they can afford to and receive the benefits in any case.
So Tetlow and I agree that the system could comfortably be scrapped — even if we might be looking to replace it with a basic rate of income tax at 40 per cent or so. The benefits? Transparency, administrative simplicity and the end of a few unwelcome loopholes. The risks are chiefly administrative, although a decision would need to be made about whether to have a special income tax rate for people above the state pension age, who currently pay no national insurance.
Could it happen? Tetlow says she would be “astonished” if it did. Perhaps governments are too fond of pretending that the true basic rate of income tax is just 20 per cent.
Tim’s verdict I bounced Tetlow into this so can hardly object. But for our politicians, the confusion over national insurance isn’t a problem, it’s an opportunity.
Political feasibility 2 out of 5
Economic radicalism 1 out of 5
Macroeconomist at Merton College, Oxford
Simon Wren-Lewis has a growing audience as a trenchant critic of George Osborne’s fiscal contraction. I had expected him to make the case that the incoming government should spend more but he has something more radical in mind.
“We’re passing the period when the damage was done,” he says. For Wren-Lewis, the policy error was to tighten the fiscal screws in 2010 and 2011 — he estimates that with lower taxes and higher spending the economy today would be about 4 per cent larger, while deficit reduction could wait until the economy was stronger.
Cutting spending in a severe but temporary downturn is macroeconomically perverse but makes good sense to voters, so Wren-Lewis feels that a future government would make a similar mistake in similar circumstances. What to do?
Economists have faced a related problem before. When politicians controlled interest rates they were always tempted to cut rates before elections, overheating the economy and leading to inflation once the election was safely gone. The solution was to delegate control of monetary policy to the technocrats, as when Gordon Brown gave the Bank of England this power in 1997.
“That was a good idea,” says Wren-Lewis. But, he adds, “it was always incomplete.” The missing piece of the puzzle was what the bank should do when interest rates are nearly zero — as now — and cannot be cut further to stimulate the economy. The usual solution is a fiscal expansion — cutting taxes and increasing spending, just what George Osborne has shied away from. Wren-Lewis’s response: in future, the Bank of England should print the money and hand it to the government on condition it be used for a fiscal expansion.
This is radical — but not without precedent. Economists from Adair Turner to Ben Bernanke (in 2003) and Milton Friedman (1948) have argued that deficits could be financed by printing money rather than issuing government debt. Funding real spending from paper money might seem like nonsense: if the economy is working well, creating too much money will produce inflation. But when the economy is slack, judicious money printing can turn the waste of a depressed economy into useful output, without dangerous inflation. This is a rare free lunch.
The radicalism of Wren-Lewis’s proposal lies less in the economics than the politics: the idea that the Bank of England would decide a fiscal expansion was needed, and shove a reluctant, democratically elected government into it.
Wren-Lewis calls his idea “democratic helicopter money”. He feels the government should decide whether the stimulus takes the form of tax cuts, increased benefits or new infrastructure. But the actual decision to cut taxes and raise spending to stimulate the economy? Not something one should leave to the politicians.
Tim’s verdict I sympathise with Wren-Lewis’s wish for more stimulus spending in the last parliament but outsourcing such a basic democratic responsibility feels too bold to me.
Political feasibility 1 out of 5
Economic radicalism 5 out of 5
Professor of economics at the University of Manchester
“My starting point is that the extent of income inequality has got too big,” says Coyle. She points to median annual full-time earnings of just over £27,000, while the average pay of FTSE 100 chief executives is — according to Manifest, a proxy voting service — about £4.7m. “If you were to ask me whether the productivity of chief executives is really that much higher, my answer is no. Something has gone wrong with the way the market is operating here.”
That market failure is easy to diagnose: it is hard for dispersed shareholders to monitor what is going on and to insist on a more rigorous approach. So Coyle would give them a little help.
The most eye-catching suggestion is that companies should publish the ratio between what the chief executive is paid and what the median worker in the company is paid. A review body would give a strong steer as to how high that ratio could reasonably go (“I don’t know what the right number is,” says Coyle) and companies who did not comply would face unwanted scrutiny from shareholders, employees, unions and politicians.
“Just talking about this much more would start to shift the social norm,” says Coyle, who in her term on the BBC Trust (soon to end) has seen the BBC start to publish these pay ratios, which have been falling. Coyle wants a binding rule, too, that companies should not be able to pay performance bonuses linked to share price. That is too easily manipulated. Instead, these must be linked to indicators such as customer satisfaction, sales or profits.
Tim’s verdict Shareholders and citizens alike should welcome pay that is tied more closely to good management decisions. But can any of this be legislated effectively?
Political feasibility 4 out of 5
Economic radicalism 4 out of 5
John van Reenen
Professor at the London School of Economics
“Low productivity is the number one problem Britain faces,” says Van Reenen. Even before the crisis, it lagged behind other rich countries. The latest data suggest UK output per hour worked is 30 per cent below US levels, and 17 per cent below the G7 average (at purchasing power parity).
Such a problem has no single solution but Van Reenen wants to focus on a lack of investment in the UK’s core infrastructure — housing, energy and transport. As the FT reported recently, government capital investment has fallen by a third between 2009-10 and 2013-14, despite repeated statements by the chancellor that infrastructure is at the heart of plans for growth.
Milton Keynes, the last of the “new towns”, harks back to 1967 and has 100,000 dwellings. That gives some perspective on recent proposals to build a “garden city” at Ebbsfleet of a mere 15,000 homes. If the Barker Review’s headline number of 245,000 new homes a year is to be achieved, we need an Ebbsfleet every three weeks and have done for the past 12 years.
The HS2 high-speed rail line was first examined in 1999 and is still unlikely to be finished 30 years after that date. An observer might feel the project should either have been cancelled or completed by now. And let’s not dwell on London’s airports: in 1971 the Roskill Commission proposed a major new airport north of Aylesbury after rejecting the idea of building one in the Thames estuary. We are still weighing up the issues.
“I would propose to radically change the whole way we deliver infrastructure projects,” says Van Reenen, “with a new institutional architecture for making decisions.” There are three elements to this. First, an infrastructure strategy board to recommend long-term priorities, which would be voted up or down by parliament. Second, an infrastructure planning commission to meet those priorities and arrange compensation to those affected by the march of progress. Third, an infrastructure bank to help finance projects by borrowing from capital markets and investing alongside private-sector banks.
If this seems anti-democratic, Van Reenen’s defence is that his approach “puts politics in the right place”. MPs are concerned with the short-term and the local, which causes problems with long-term investments of national significance. Like Simon Wren-Lewis, John van Reenen has more faith in technocrats than politicians.
Tim’s verdict An approach that seems justified when facing such a chronic and serious problem. Sign me up.
Political feasibility 3 out of 5
Economic radicalism 1 out of 5
Author of the 2004 Barker Review of Housing Supply
I am expecting Dame Kate Barker to propose something controversial but straightforward: that we should build more houses. It is, after all, her report that policy wonks have been citing for the past decade whenever they want a number for how many houses England needs. Instead, some of her solutions “are so unpopular I can hardly bring myself to suggest them to you”. This is music to my ears.
In 2002/2003, the private sector completed 125,000 houses in England; the Barker Review argued that number needed to almost double to reduce the growth in real house prices to the EU’s long-term average. But the number of private-sector housing completions in England has fallen to below 100,000 a year from 2009 through 2014. The trickle of new houses is manifestly failing to accommodate population growth.
So: more houses? Not necessarily. Barker lays out three options. The first is the status quo. It is not attractive. There will be an increasing divide between the housing haves (who enjoy capital appreciation) and the housing have-nots (who find it ever harder to buy a home).
Option two is a dramatic programme of house building, which seems logical. “We’ve built much less than the top-line number associated with my name,” says Barker. “I haven’t changed my view that we need to do more.” But she is sceptical about how feasible it is to expect house building on the scale needed, given the strength of opposition to development. She has had the ear of prime ministers before, after all, and not much changed.
And so to option three: resign ourselves to not building enough houses to meet demand, and use the tax system to soften the blow. Meaning what, exactly?
Consider someone with the finance and good fortune to buy a home in London in 1992. That person has enjoyed an enormous increase in the real value of her house. But she has paid surprisingly little tax on the windfall. Council tax is proportionately lower on expensive homes. Capital gains tax does not apply to people living in their own homes. If you become a millionaire through skill, effort or entrepreneurial spirit, you will be taxed. If you do it by buying a house in Islington at the right moment, your bounty is yours to keep in its entirety. That’s inequitable and the inequity is likely to last from one generation to the next.
Barker suggests two thrusts to the tax reform, and “ideally we would do both”. The first is to replace council tax with a land value tax. This would tax expensive homes more heavily, in line with their value, and encourage valuable land to be used intensively. But it would also weigh heavily on elderly widows living alone in large houses. The second is to charge capital gains tax on people’s principal residency. If you live in your own home and its price starts to soar, you will be taxed.
But both these reforms are complicated. A land tax would require frequent revaluations. The capital gains tax reform would require some sort of system for postponing the bill until death or entry into a retirement home. That is fiddly but the alternative might make it impossible to move house without a punitive tax charge.
As Baker admits, this is dramatic and unpopular stuff. The people who lose out are clearly identifiable and politically influential. But the same is true of the straightforward proposal to build many more houses. The UK’s housing problem seems to be the toughest of political tough nuts.
Tim’s verdict This makes sense despite the difficulties. But Barker identified the cure for unaffordable housing more than 10 years ago — build more houses. It’s depressing that she now has to advocate palliative measures instead.
Political feasibility 1 out of 5
Economic radicalism 2 out of 5
So what would the UK look like with my board of economists in charge? We’d have more borrowing and considerably more investment — in housing, in big infrastructure, in science and in green cities. Taxes seem unlikely to fall but they would be rationalised, with a focus on energy efficiency and a transparent taxation of income and housing wealth. Inequality would be in the spotlight.
The economists seem happy to leave the politicians to their usual arguments about the EU, immigration, the price of beer and the problem of tax-dodging. Noting that every party makes similar promises about funding the National Health Service, the economists have let it be.
Perhaps that is for the best because if the economists have their way, one big thing will change after the election: politicians will be kept at a safe distance from the decisions that matter.
Portraits by Charlie Bibby
Illustrations by leillo