The think tank Reform is a master of guerilla tactics. It claims to be one of the most influential of right-wing think tanks, but it cannot be described as heavyweight. It flits from one subject to the next, making eye-catching claims and recommendations based on very thin research. Its reports contain thought-provoking insights alongside assertions based on air, amid lots of right-wing waffle. Its most recent offering Off Balance, which looks at economic growth, is a case in point. Based on its headline claims, I had intended to use it as base to blog on the subject of the conflict between economic growth and the pursuit of happiness. But there was nothing in the report that I could get any traction on. I’m afraid this doesn’t say much for the quality of national debate on the economy.
That’s a pity because the report does contain a very interesting idea, on monetary policy, in its final chapter. The muddle and confusion within which this gem is set will unfortunately detract from it. This idea is that interest rates have been set too low in the US, UK and Euro zone (for different reasons), which distorted the market for savings and investment, and that this was the prime cause of both the financial crisis and the unbalanced world economy. Because interest rates were too low, there was too much borrowing, too much consumption, asset bubbles, and not enough proper investment in the developed economies. Interest rates will need to be higher if our economies are ever to rebalance properly. This means that the conduct of monetary policy over the last two decades, including the development of inflation targeting, has been fundamentally flawed. Loyal followers of this blog will recognise something like this case being advanced by this humble undergraduate economist (Time to rethink the Bank of England). Unfortunately the report’s authors have little to say on how monetary policy should be conducted in the future, beyond better prudential regulation of financial services.
What of the the rest of the report? At headline level it all sounds quite sensible: we need more free market policies, with three priorities in particular: reducing the deficit, reforming public services, and a better business environment. Sensible, but potentially highly contentious in each case – but you won’t find much in the text that takes the debate forward. In particular there is a deep confusion over the concept of competitiveness, most apparent in its airy claim that:
The future competitiveness of the UK economy demands a move to a high-wage, high productivity workforce.
This is candyfloss economics; its reasoning collapses as soon as you touch it. Businesses compete; countries don’t (except warfare and sport). If the country’s productivity stagnates, for example because our system of education is weak, then overall living standards will suffer: we will be able to consume less. Period. The exchange rate takes care of competitiveness. The are very good reasons to improve our education system (the context of this quotation), but competitiveness is not among them.
I could go on, but honestly the report isn’t worth it. At a turning point in our economy it is such a pity that so much of our debate about the subject is so lightweight.