How to meet the demands of the new electoral majority
We can balance politics and increase productivity
One of the most striking features of modern politics is the separation of the values and ambitions of the political class, and the values and ambitions of the electorate. What kind of policies can better satisfy British voters whilst maximising Britain’s economic potential?
In a recent piece I discussed the increasing re-alignment of UK politics and analysed the emerging electoral majority’s demands in terms of socio-cultural and economic change. I outlined how Matthew Goodwin and others have identified the electoral sweet spot as centre right on culture and centre left on economics, but explained why I believe the “centre left on economics” claim to be a little simplistic.
In this article, I intend to show how it is possible to put together policies which can achieve the electoral majority’s economic wishes, without being policies one would traditionally consider centre left.
As I explained in the previous article, culture and economics are inextricably linked, but in terms of the economy alone I think the electoral majority’s wants can best be summarised thus:
They want a rebalanced economy. Between the professional and non-professional classes, the university and non-university educated, between services and production and geographically between the South East of England and the rest of the UK.
Whilst delivering these demands during recent decades of globalisation would have meant holding back the economic tide, today we are fortunate to be living in a time when the global economic river is beginning to flow rapidly in their direction. Thus, to deliver economically for this electoral majority, we merely need to embrace and run with the economic shift.
As much as 25 per cent of global trade will shift within the next decade
For a variety of reasons, economic globalisation is reversing, and I believe this shift will accelerate (and quickly) and be sustained for decades to come. In part it is being driven by the USA’s belated realisation of the military, economic and ideological threat China represents. In part it is also being driven by the Covid lockdown supply chain disruptions that altered businesses’ perception of the true cost of long and uncontrolled supply chains.
But both are simply adding force to a trend which was moving anyway, driven by the changing economics of the cost of production. This has been in part a consequence of rising wages in China and elsewhere, which reduce the cost of labour arbitrage vs the West. But more importantly, it is a consequence of technological advances in AI and robotics, which are fundamentally reducing the labour intensity of production. In short, labour as a cost input is diminishing in importance, and the more it does the more corporate investment models will favour shifting production closer to the consumer.
McKinsey estimates that as much as 25 per cent of global trade will shift within the next decade or so. That’s $4.5 trillion worth of trade (1.5x UK GDP). Already Canada and Mexico have both overtaken China as the USA’s major trading partners.
Just creating the right environment for AI and Robotics would have a significant impact on UK GDP and productivity. PWC, in its June 2017 report on AI and robotics, estimated that UK GDP could be boosted by over 10 per cent by 2030 (the equivalent of an additional £232bn) if we get our policies right.
Professor Juergen Maier, in his October 2017 Government report, was even more bullish, estimating that the “fourth industrial revolution” could add over £455bn to the UK economy (about 18 per cent) and create over 175,000 jobs if implemented correctly.
Accenture estimates that by 2035, AI has the potential to double UK economic growth and boost labour productivity by up to 40 per cent.
For the UK, implementing policies which embrace these trends can do a lot of the heavy lifting of the economic rebalancing that the electoral majority desire. Production will largely return to the geographical areas they left — providing direct investment and jobs, supply chain investment and jobs, and ancillary investment and jobs.
The “market” — I prefer the term “rational economic decisions made by individual companies” — will make these choices itself. But if encouragement is needed, policies can be implemented to ensure business investment models show better returns on investment in desired areas.
And no, these policies do not just have to be about subsidies — as tipping the scales so fundamentally means poor economic decisions are made — but about understanding the key variables in corporate investment models which determine where higher returns are achieved.
For example, a ready and consistent supply of reasonably priced electricity/energy. The availability of skilled labour and systems for reskilling and retraining (for the pace of change is also accelerating, and skills will need updating/changing much more frequently in the future). Good transport links. Expedited planning. A network of trade deals which allow for easy export of production and so on.
This investment boom will not only help with economic rebalancing, but will also help with the UK’s largest economic issue — productivity, which has stalled since 2007.
When asked what I think the UK Government’s three main priorities should be, my answer is always the same. Productivity, productivity, productivity. Ultimately the only long term gain in wealth comes from gains in productivity.
A government which wants to capture, represent and lead the electoral majority which Matthew Goodwin so ably describes could do no better than assess all policies on just two things. How will this affect our productivity (and hence long term wealth generation)? And how will it advance the needs and wishes of the somewheres? Rebalance the economy, provide opportunity and devolve decision making closer to the people.
Looking at policies this way will help ensure consistent and joined up policy agendas. Whilst sometimes it may appear that the policy priorities — productivity and meeting the demands of the somewheres — are diametrically opposed, this need not be the case.
Take immigration. The ruling elite wishes to continue mass immigration. On taking office, Chancellor Hunt told the OBR to increase its long term forecasts for annual net migration, in its GDP estimates, to about 250,000 a year, ostensibly because it boosts GDP (but not GDP per capita) growth and is supported by companies.
Yet it is clear that the electoral majority wishes a significant reduction in legal immigration, for cultural reasons as well as economic factors like wage suppression. Nearly 70 per cent of C2s, Ds and Es think immigration has been too high in the last ten years, but so do nearly 60 per cent of As, Bs and C1s.
But reducing immigration can serve to meet the demands of the new electoral majority and boost productivity. Mass immigration of unskilled labour not only suppresses domestic wages — driving ever increasing economic divergence between the anywheres and somewheres — but also discourages businesses to invest in automation etc, driving down productivity. It could be stopped (except for true asylum seekers) entirely.
Where there are real skills gaps that will take time to fill through expanded domestic training, an annually limited VISA scheme allowing companies to import the necessary skilled workers for a certain amount of time could be introduced. Extensions could be made possible where companies are able to demonstrate a need for an extension, with the applicant able to apply to stay permanently, subject to the annual limit.
Making the annual limit a manifesto commitment and set by Parliament with a full national debate would provide visibility and boost public confidence, although undoubtedly the limit would have to be low at the start in order to demonstrate to the people that the system works and that the Government really can control the numbers.
Like Daniel Hannan, I believe the public will grow to be more relaxed on the numbers once control is demonstrated and once immigration has truly shifted towards skilled rather than unskilled immigration. Not least because these immigrants will not be competing for the same scarce public resources and not living in the same non-integrated parts of the country.
At the same time as implementing this immigration policy, the Government could introduce a policy to aid companies to shift to automation to drive productivity and make up for the loss of cheap labour. Some of this can be generic, such as the current Sunak tax policy on investment. Some could be specific to industries. For example in farming, replicating the Dutch system on access to capital and financing via a specialised “farmers” bank (Rabobank) and education/training and R&D via specialised “farmers” university (Wageningen). There is no doubt that such a policy in farming will encourage further consolidation, which should be encouraged and supported as farming automation generates significantly higher returns at scale.
There is also no doubt that such an immigration policy will drive unskilled/low skilled domestic wages up. This should not be seen as a flaw of the system but a benefit. Not only because it rebalances between the somewheres and anywheres, but because it will force companies to invest in improving productivity and reducing labour intensity. Over time you get fewer but higher paid employees and less demand for cheap unskilled labour.
For those sectors of the economy where automation is more difficult, society will simply have to swallow higher costs as a price of the rebalancing, but with the benefit that it can be used as a means to shift the population gradually away from in work benefits.
As much as a third of a degree course is obsolete by the time of graduation
But lower immigration and increased automation will only work if they are combined with policies to boost training and reskilling. As we have already discussed, whilst in the short term investments in automation etc will lead to labour shortages (driving up wages), in time they will reduce the need for unskilled labour. Concurrently, demand for skilled labour will increase and the types of skills required will change rapidly.
Relying on importing these skills ad infinitum is not a sustainable option, economically or politically. Mckinsey estimate that the lifespan of the average company (already down to 18 years) will fall further to little more than a decade. Already it is estimated that as much as a third of a degree course is obsolete by the time of graduation. Such is the continuously quickening pace of change.
Successful economies and societies will require the ability to skill and reskill their people, and the social cohesion to adapt to change without failing. It will not be enough to expect people to find their own way to reskill or instead shove millions on benefits or basic income. Help will be required.
One possible solution is a national skills fund, which people could access throughout their lives to pay for this training. It could be partly funded from the tax revenues generated by fracking. Government could also encourage large companies to set up their own training centres — like the Dyson Institute of Engineering and Technology — such that entire supply chains, from large and small companies, can benefit from access to the best training in their sectors. Universities which wish to provide such training should be encouraged to do so (over and above degrees).
Together these policies will both significantly boost productivity and rebalance the economy, as the new electoral majority demands.
You may have noticed that I mentioned tax revenues from fracking. It should be noted that an energy policy which allows for fracking also meets our policy ambition of boosting productivity whilst driving economic and political rebalancing. Fracking — at least until nuclear capacity is built — is the only way to secure our energy security and ensure a guaranteed supply of reasonably priced energy to encourage reshoring and further production investment.
If local authorities shared in the tax revenues generated to invest in local transport and other infrastructure, this would also encourage public support, rebalance the economy (most fracking sites aren’t in the south east of England) and devolve decision making power closer to the public.
There is even an argument that the UK should limit the amount of fracking gas which is available for export — perhaps only when the UK price is below a certain level — ensuring the UK has one of the lowest guaranteed prices for energy/electricity around. That is one of the most important requirements companies are now looking for when deciding where to reshore and invest.
Industrial policy is connected with immigration policy, which is linked with skills policy and energy policy, in such a way that all boost productivity, drive investment, and generate economic and political rebalancing.
Whilst none of the policies might be described as “Thatcherite”, neither could they be described as traditionally “left of centre”. Yes, there is state involvement — not least in creating the environment for investment to flourish — but not state control or direction. Companies and individuals get to decide where and how to invest, what skills are required, what products and services to supply and consume.
To answer the question I set myself at the beginning of this article. Yes it is possible to deliver the economic changes the electoral majority demand without resorting to state command and control. It simply requires the political will to embrace and run with the existing economic trends.
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