EVENTS

The quest for growth: ideas for a new political economy and a more responsible capitalism

Date(s) 6 September 2012 Time 08:00 – 17:00 Location City of London

Policy Network hosted an all day conference debating how Britain can develop policies that could support growth both in the short and long term against the background of a difficult economic and financial situation.

To this end, senior practitioners and experts from Britain and other parts of Europe will debated around four different themes:

• From debt crisis to growth: the return of macroeconomics? • Industrial policy: a new role for the state in economic policy? • Research, science & innovation: how to foster greater entrepreneurialism? • Labour market, skills and inequality: how do we build an economy that works for working people? A series of memos prepared by conference speakers on growth strategies and the political dilemmas they present can be accessed at http://www.policy-network.net/news/3949/The-quest- for-growth.

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 1 5 October 2012 Speakers include: Ed Miliband, leader of the Labour Party Ed Balls, shadow chancellor of the exchequer and Labour MP Larry Summers, economist and former US Secretary of the Treasury under President Clinton Karl Aiginger, director, WIFO Institute of Economic Research, Austria Marion Dewar, member of the cabinet of Maire Geoghegan-Quinn, EU commissioner for Research, Innovation & Science Richard Lambert, former director general, Confederation of British Industry Helen Thompson, reader, Department of Politics and International Studies, University of Cambridge Andrew Adonis, Labour adviser on industrial policy and former transport secretary and minister for schools and member, House of Lords Liam Byrne, shadow secretary of state for work and pensions, Labour Party Mariana Mazzucato, professor, science and technology, University of Sussex School of Business, Management and Economics Geoff Mulgan, CEO, National Endowment for Science Technology and the Arts Jonathan Portes, director, National Institute of Economic and Social Research Roger Liddle, member, House of Lords and chairman, Policy Network Paolo Reboani, chairman and chief executive officer, Italia Lavoro SpA and former economic and international adviser, Ministry of Employment and Social Policies, Italy Rachel Reeves, shadow chief secretary and Labour MP Xavier Rolet, chief executive officer, London Stock Exchange David Sainsbury, former minister for science and innovation and member of the UK House of Lords Nita Clarke, director, IPA Involve Miguel Sebastian Gascon, former industry, tourism and trade minister, Spain Paul Everitt, chief executive, Society of Motor Manufacturers and Traders Chuka Umunna, shadow business secretary and Labour MP Reinhilde Veugelers, senior research fellow, Bruegel thinktank, Brussels, professor, KULeuven and research fellow, CEPR Paul Gregg, professor, economic and social policy, University of Bath Roy Anderson, professor, School of Public Health, Imperial College London, former chief scientist, MoD Nick Pearce, director, Institute for Public Policy Research (IPPR) Marcus Stuttard, head of AIM, London Stock Exchange Group

Hosted by

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 2 5 October 2012 Further information Main Katherine Roberts Contact Email [email protected]

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 3 5 October 2012

The quest for growth: ideas for a new political economy and a more responsible capitalism London Stock Exchange 6 September 2012

AGENDA

08:00 Registration

08:30 Welcome Roger Liddle , chair, Policy Network and member of the House of Lords

08:35 – 08:45 Opening remarks Xavier Rolet, CEO, London Stock Exchange Group Ed Balls, shadow chancellor of the exchequer, The Labour Party

08:45 – 09:30 Keynote speech Larry Summers , economist and former US secretary of the treasury under President Clinton

09:30 – 10:45 Session 1: Labour market, skills and inequality: how do we build an economy that works for working people?

Moderator : Nita Clarke, director, IPA Involve

Speakers: Jonathan Portes, director, National Institute of Economic and Social Research Paul Gregg, professor, economic and social policy, University of Bath Paolo Reboani , economist and chairman of Italia Lavoro SpA Liam Byrne, shadow secretary of state for work and pensions, The Labour Party

10:45 – 11:15 Coffee break

11:15 – 12.00 Keynote speech Ed Miliband, leader, The Labour Party

Q&A Ed Miliband, leader, The Labour Party Ed Balls, shadow chancellor of the exchequer, The Labour Party

12.00 – 13:15 Session 2: Industrial policy and an active state: delivering real change

Moderator : Andrew Adonis , Labour adviser on industrial policy, former transport secretary and minister for schools and member of the House of Lords

Speakers : Miguel Sebastián Gascón, former industry, tourism and trade minister, Spain Karl Aiginger, director, WIFO Institute of Economic Research, Austria Reinhilde Veugelers , senior research fellow, Bruegel thinktank, Brussels, professor, KULeuven and research fellow, CEPR Paul Everitt , chief executive, Society of Motor Manufacturers and Traders

13:15 – 14:00 Lunch Break

14:00 – 15:15 Session 3: Research, science and innovation: why the right firm matters

Moderator: Marcus Stuttard , head of AIM, London Stock Exchange Group

Speakers: Roy Anderson , professor, School of Public Health, Imperial College London, former chief scientist, MoD Mariana Mazzucato , professor, science and technology, University of Sussex David Sainsbury , former minister for science and innovation and member of the House of Lords Marion Dewar , member of the cabinet of Maire Geoghegan-Quinn, EU commissioner for Research, Innovation & Science

15:15 – 15:30 Coffee Break

15:30 – 15:45 Chuka Umunna , shadow business secretary, The Labour Party

15:45 – 17:00 Session 4: From debt crisis to growth: the return of macroeconomics

Moderator : Rachel Reeves , shadow chief secretary, The Labour Party

Speakers: Richard Lambert, former director general, Confederation of British Industry Helen Thompson , reader, Department of Politics and International Studies, University of Cambridge Geoff Mulgan , chief executive officer, National Endowment for Science Technology and the Arts Nick Pearce , director, Institute for Public Policy Research (IPPR)

17:00 Closing remarks Roger Liddle , chair, Policy Network and member of the House of Lords

Memos, Speeches and Presentations Memo to the Chancellor Richard Lambert Britain's economic outlook continues to deteriorate. There is an urgent need for the Chancellor to come up with a bold and credible plan to point the economy towards a better place.

Economic policy after the crisis: Towards a new politics of production Patrick Diamond The coalition is halfway through term and little way towards finding a strategy for growth. For the British Labour party, several key priorities for growth are taking shape, but sharper definition is now required.

Repair and renew: learning the lessons of the crisis and forging a new agenda Rachel Reeves Tough decisions on tax, spending and pay cannot be avoided. But when money is tight, our values and priorities matter all the more.

No way back: the legacy of a financial sector debt crisis Helen Thompson This is no ordinary recession and it has happened at a time of massive economic change. Any centre-left economic strategy must grapple with the central economic problem of our times; ‘radical uncertainty’.

Plan I: why the UK needs innovation-led economic growth Geoff Mulgan Commentators and policymakers have struggled to understand the world of innovation. We need not just a change of economic policy but a change of political culture as well.

Things could and should be better Jonathan Portes The UK economy has many underlying strengths and things could and should be better. If only policymakers would act.

Labour needs a new ‘golden rule’ Dan Corry & Peter Kenway While nobody should doubt the seriousness of the public sector deficit and the need to reduce it, it cannot and must not be treated in isolation.

Becoming players in the innovation game Reinhilde Veugelers Europe’s future competitiveness depends on the active promotion of innovation based growth sectors.

Labour policies for the jobless generation Paolo Reboani Demographic changes and globalisation are destroying the old welfare state. Lowering

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 4 5 October 2012 unemployment is essential to maintain a cohesive society and avoid growing inequalities.

5 myths preventing a progressive growth strategy Stephen Beer Labour must talk about investment in terms of being a responsible steward of the public’s money. Labour's new agenda Ed Miliband Speech delivered to Policy Network, London, 6th September 2012. On growth Larry Summers Speech delivered to Policy Network, London, 6th September 2012. The case for an active government and modern industrial policy Chuka Umunna Speech delivered to Policy Network, London, 6th September 2012. The speeches and memos were presented at the Policy Network conference "The quest for growth: Ideas for a new political economy and more responsible capitalism"

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 5 5 October 2012 A memo to the Chancellor

RICHARD LAMBERT - 04 SEPTEMBER 2012

Britain's economic outlook continues to deteriorate. There is an urgent need for the Chancellor to come up with a bold and credible plan to point the economy towards a better place

Memo to the Chancellor From Richard Lambert September 2, 2012

The economic outlook continues to deteriorate. In November, the Office for Budget Responsibility will publish sharply reduced growth forecasts for 2012 and 2013: back in March, it was expecting GDP this year and next to rise by 0.8 per cent and 2 per cent respectively, whereas the consensus today is for a fall of about 0.3 per cent in 2012 followed by a rise of a little over 1 per cent next year. Business leaders are getting restive, and there is an urgent need for you to come up with a bold and credible plan to take the economy through its present difficulties and point the way towards a better place a few years hence.

The starting point is to reinforce both your determination to get the fiscal deficit under control over the medium term, and your own credibility as a chancellor with a mission. There are a number of options to choose from here, such as bringing forward the increase in the pension age and further planning reforms. In addition, you should make the case for a shift in the composition of public spending – at least on a temporary basis – away from areas that do little or nothing to drive the economy forward, and redirecting the proceeds to areas that create jobs and wealth. Examples would include taking away both my bus pass and my winter fuel allowance. Tax incentives that encourage the well-off to save also come into this category: they may be nice to have, but they are not motors for growth. Possible examples suggested by the Social Market Foundation include imposing a cap on ISA allowances, and another reduction in higher rate relief on pension contributions.

But simply shifting public spending and transfers from low to higher growth areas will not be enough to reboot the economy at a time when private sector demand and confidence is as weak as it is now. You need to go further, and at a time when your government can borrow for the long term at the lowest rate in history, that’s just what you can and should do.

For the immediate future, the need to scale back the pace of fiscal adjustment now planned for next year is becoming increasingly clear. As the IMF wrote in its own inimitable way back in July, “Current plans envisage structural adjustment accelerating from 0.5 per cent of GDP in FY12/13 to nearly 1.5 per cent of GDP in FY13/14. Such an acceleration may be difficult for the economy to handle if it remains very weak.”

The automatic stabilisers will play their part, as the faltering economy holds down tax revenues and pushes up the cost of benefits. But you will need to be bolder and take control of events in

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 6 5 October 2012 order to have a real impact. Again, you should focus on moves that would be strictly time limited, and that could be expected to feed through rapidly into economic activity and demand. The IMF, which broadly endorsed this approach in its July report, suggested that you should focus on an increase in infrastructure spending, which has a high multiplier effect and can increase productive capacity. It also argued for targeted tax cuts, rather than general increases in current spending which in practice almost never turn out to be temporary. Its (sensible) idea was that such cuts should be aimed at lower-income households, which would be likely to spend any extra income rather than to squirrel it away.

Another worthwhile initiative would be to introduce a tax allowance for new corporate equity, which would encourage companies and banks to bring down their borrowing ratios by building up their equity base rather than by contracting their outstanding assets and thereby making it harder for the economy to expand, which is what is happening now.

None of this is an argument for a massive fiscal stimulus, or anything like it. Rather, the need is for a more growth oriented approach to public spending, and a modest temporary increase in investment compared with your current plans. There are three reasons for doing this now. The first is that there is not much more to be expected in the way of macroeconomic support from yet another burst of monetary easing by the Bank of England. The second is that the economy in 2013 is unlikely to be strong enough to stand the significant further tightening that is currently envisaged. The third is that the credibility of current policy could well be called into question anyway if the economy continues on its present path.

Of course you have to be concerned about the likely impact of such a policy shift on the financial markets. The credit rating agencies may not like it, but so what: the US does not appear to have been hurt in any way by a downgrade in its market rating. Fiscal indicators appear to be weakly related to government bond yields for advanced economies – so long as, like the UK, they have an independent central bank to control their monetary destiny. Provided the changes were properly communicated, they should enhance rather than undermine confidence in the UK economy.

The political challenges of such a course of action – which would inevitably be subject to all kinds of unkind comments from the Opposition – would probably be much harder to handle. But that’s your area of expertise, not mine.

Richard Lambert is the former director-general of the CBI, and the present chancellor of the University of Warwick

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 7 5 October 2012 Towards a new politics of production

PATRICK DIAMOND - 05 SEPTEMBER 2012

The coalition government is nearly halfway through its term and little way towards finding a strategy for growth. For the British Labour party, several key priorities for growth are taking shape, but sharper definition is now required

The Left has to identify a new politics of production and growth. The recent UK growth statistics underline the catastrophic damage and continuing aftershocks inflicted by the financial meltdown in 2008-9, exacerbated by the never-ending crisis in the eurozone.

Despite it’s disastrous track-record of macro-economic management, epitomised by the Lawson boom in the late 1980s and George Osbourne’s ill-timed retrenchment since 2010, the Conservatives have consistently positioned themselves as the party of fiscal discipline and economic competence, as well as the party of entrepreneurship and material affluence.

By contrast, for decades, the left was seen as merely interested in a fairer distribution of growth, while largely oblivious to expanding the frontiers of production. Wilson’s ‘White Heat of Technology’ in 1964 and Blair’s ‘New Britain’ in 1997 were exceptions to the rule. British Labour strove to secure a fairer share of the cake on behalf of the organised working-class, whereas the Conservatives sought to grow the cake and spread the benefits among all classes and interests in society.

Observing the state of the economy in 2012, ahead of an intervention by the Labour leadership in the City of London this week, it is clear that the UK’s Conservative/Liberal Democrat Coalition have no growth strategy. Across Europe, centre-right governments embraced the virtues of austerity, but are apparently devoid of answers as to how growth might be secured . What has been offered by David Cameron and George Osbourne is another version of the 1980s supply- side strategy focused on deregulation, lowering wage costs, making labour markets more ‘flexible’, and securing a permanently smaller state. The impact on UK growth has so far been negligible, and these ill-timed austerity policies have created a mood of pessimism and rising public discontent . A recent survey carried out by You Gov [http://yougov.co.uk/news/2012/07/23/dark-dawn/] for the Sheffield University Political Economy Research Institute (SPERI) demonstrated that voters in Britain now prioritise growth over deficit reduction (47-34%), deeming current spending cuts to be hasty and excessive. A political and policy vacuum is emerging: social democratic parties must be in a position to seize the agenda as the economic credibility of Conservatism is sorely tested.

The principal task for parties of the Left, therefore, is to secure the mantle of fiscal credibility recognising that much of the credibility so painstakingly established after 1992 has been lost. This need not entail simply mimicking the Right’s programme of cuts. What is required is discipline in managing the public finances, with a root and branch review of all current expenditure commitments. The UK economy is currently among the most indebted in the OECD (second only to Japan in total levels of public sector, financial, and household debt). Nonetheless, the challenge for the Left is more profound than merely rebuilding confidence in its

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 8 5 October 2012 economic management credentials: key is framing a credible, post-crisis growth strategy - a new politics of production for the UK economy.

The seismic impact of the crisis has underlined the need for fresh thinking and novel ideas. Previous crises have been accompanied by radical questioning of existing political and economic orthodoxies. Since 2008-9, however, most political debate has focused on restoring the UK economy to ‘business as usual’: Although the power of government was used to stabilise the financial system through bailouts and nationalisations, in stark contrast to the 1930s New Deal era, there is no apparent enthusiasm for entrusting the state with new powers and responsibilities.

What is clear is that a radical programme for British and continental European social democracy is unlikely to emerge from ‘ivory tower’ blueprints, rather through a constant process of ‘bold, persistent experimentation’, in FDR’s memorable phrase.

For the British Labour party, several key priorities for growth are taking shape, but sharper definition is now required. The first pillar of a national growth strategy ought to be a state-driven national house-building programme, enabling local authorities to borrow against their assets, and issuing government-backed bonds to raise finance through capital markets. A clear, politically feasible target of one million affordable homes within the lifetime of a single parliament (a third of which would be homes for families) would capture the imagination of the electorate, and project a clear sense of Labour’s post-crisis economic and social priorities.

Second is re-nationalisation of the Royal Bank of Scotland (RBS), creating a public interest bank focused on business investment, channelling credit to fledgling businesses and SME’s. Britain lacks an equivalent of the German Mittelstand, attracting private capital for major public infrastructure projects to tackle the chronic short-termism of the capital markets, while providing a much needed boost to economic growth. There is a strong case for such a bank to have a regional mandate, with a proportion of funds directed towards UK regions with persistent structural weaknesses, in particular the north-east and north-west of England.

Thirdly, is using the proceeds of the bank-bailout to create local community investment funds: 1% of the total bailout ought to be re-invested in credit unions and building societies that support local businesses, while enabling people in disadvantaged areas to borrow without resorting to usurious rates of interest. It is vital to restore the connection between finance and the common good.

Of course, there are other necessary elements including an innovation strategy, policies to boost human capital giving employees a stake and voice in the firm as well as upgrading skills, more investment in science and R&D, and more risk capital for firms in export-led sectors. Nonetheless, a domestic agenda for growth alone will be insufficient given the exposure of the British economy to European and international markets. The UK must therefore play a role in brokering a decisive end to the turmoil in the eurozone. The most plausible approach so far proposed requires the creation of Euro-bonds, such as the proposal for ‘blue bonds’ [http://www.bruegel.org/publications/publication-detail/publication/403-the-blue-bond- proposal/] advocated by the Bruegel think-tank in 2010. There has been criticism of this proposal for avoiding issues of moral hazard in debtor countries. Nonetheless, the idea is plausible, and has traction among key European decision-makers.

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 9 5 October 2012 Whatever reforms are undertaken to avert catastrophe in the eurozone, it is clear that sustainable, long-term growth will only be created if there is a systemic shift of wealth and power within the global system. This still requires some form of global polity rather than a fragmented structure of nation-states. Despite the deep disconnect between European elites and citizens, the European Union (EU) is an association of constitutional, democratic states that has numerous advantages. That the UK remains part of an interdependent European and global economy, able to influence and shape the international system, will be essential for future prosperity and growth. The idea that Britain can act unilaterally as a ‘great power’ state has long appeared illusory. A constructive, engaged partnership with the European Union surely remains non-negotiable.

Patrick Diamond is senior research fellow at Policy Network, and Nuffield College, Oxford

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 10 5 October 2012 Learning the lessons of the crisis and forging a new agenda

RACHEL REEVES - 04 SEPTEMBER 2012

Tough decisions on tax, spending and pay cannot be avoided. But when money is tight, our values and priorities matter all the more

The global financial crisis, and resulting global recession, raised fundamental questions about inequality, irresponsibility and Britain’s future economic prospects. These questions have only been sharpened by the failure of the Conservative-led Coalition to deliver the change that they promised, and their imposition of unfair tax rises and spending cuts that have choked off the recovery and pushed us back into recession.

For Labour, this presents a challenge and an opportunity: to advance an alternative to austerity and an agenda for reform that answers popular aspirations for a fairer, stronger economy that works for working people.

That is why we are working with economists, business people, trades unions and leading policymakers from around the world to ensure we learn the lessons of the crisis, and forge a new agenda that combines a strict focus on economic and fiscal credibility with policies to deliver the growth and reform our economy needs if we are to raise living standards and expand opportunities for the majority.

The current squeeze on ordinary families’ incomes and living standards is historically unprecedented. Tax rises and spending cuts have hit women, pensioners and households with children especially hard – while big banks and those with incomes above £150,000 have seen their taxes cut.

In addition, unemployment, underemployment, and stagnant or falling wages caused by the economic slowdown mean people are earning less. The result is what Ed Miliband has called “a quiet crisis that is unfolding, day by day, in kitchens and living rooms up and down this country” as people struggle to keep up with the rising cost of food, fuel and fares.

But the long-term costs go beyond even this. The current climate of uncertainty has a stifling effect on business investment, and current levels of joblessness have a scarring effect on people’s skills, motivation and long-term employability. The permanent damage this does to our economy’s competitiveness and productive potential will make it even harder to raise growth and living standards for years to come.

And the government isn’t even delivering on the deficit reduction it declared to be its central purpose. The latest figures from the Office of Budget Responsibility show the government on course to borrow £150 billion more than they planned – and that’s based on figures from before the economy fell into double dip recession.

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 11 5 October 2012 As the failure of the government’s economic plan becomes clear, with the years of austerity and uncertainty stretching on into the future and no sign of light at the end of the tunnel, people are asking if we just have to accept all this, or if there is an alternative.

It’s our responsibility, as progressive politicians and policymakers, to show that there is.

First, it is because we are serious about deficit reduction and long-term fiscal sustainability that we have been urging the government to put into action a plan for jobs and growth that can restore business and consumer confidence, stimulate investment, and tackle the current crisis of joblessness and underemployment.

Second, tough decisions on tax, spending and pay cannot be avoided. But when money is tight, our values and priorities matter all the more. A Labour government would make different choices – ensuring those with the broadest shoulders bear their fair share so we can do more to protect living standards and opportunities for those on low and modest incomes.

Third: while tax credits and other forms of support for families will remain critical to reducing poverty and rewarding work, a Labour government could achieve far greater leverage over social and economic outcomes at much lower cost to the taxpayer if it found ways of addressing what Jacob Hacker has called the ‘pre-distribution’ of income and opportunity.

For example, a bold government ready to challenge powerful providers could do much to ease the squeeze on household budgets – reforming energy markets, regulating rail operators, getting banks and pension providers to be more transparent about fees and charges, or improving the availability of affordable housing (for first time buyers but also in the private rental sector).

We also need an active government strategy to reform the rules of our economy and increase the availability of high quality jobs paying a decent wage. I am working with Ed Balls and Chuka Umunna to identify the levers we could use to promote more long-term investment in cutting edge industries: from a more strategic use of government procurement to incentivise innovation, to examining the role that a British Investment Bank could play in getting more finance into strategic infrastructure and high growth sectors.

This is an exciting agenda that we have only just begun to explore. But already Ed Miliband’s call for a more responsible capitalism has re-energised the party, morally and intellectually, and opened new areas of discussion and debate across the policy community and wider civil society.

On the basis of the radical ideas and proposals these debates are generating, I am confident that, just as the last Labour government repaired and renewed our public services, the next Labour government can repair and renew our economy – and be one of the great reforming governments in British history.

Rachel Reeves is Labour MP for Leeds West and shadow chief secretary to the Treasury

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 12 5 October 2012 No way back: the legacy of a financial sector debt crisis

HELEN THOMPSON - 05 SEPTEMBER 2012

This has been no ordinary recession and it has happened at a time of massive international economic change. Any centre-left economic strategy must grapple with what is perhaps the central economic problem of our times; what Keynes called ‘radical uncertainty’

Any centre-left economic strategy must grapple with what is perhaps the central economic problem of our times which is what Keynes called ‘radical uncertainty’. This is in part a case of recognising the general vulnerability of all advanced economies to defaults in the euro-zone and the currency’s possible break-up without anything like a clear way of judging probabilities about the economic and political outcomes that would ensue. But it is also a case, more simply, of seeing how difficult it is to understand causal relationships in the economy at all at the moment or make reasonably sound predictions about the future, a problem exemplified in the present puzzle of the divergent UK growth and employment figures.

We must also recognise the specific nature of the acute problems the UK economy faces. This has been no ordinary recession and it has happened at a time of massive international economic change. Debt-driven recessions are always pernicious in their medium-term consequences, especially when much of that debt is located in the banking sector. A banking crisis inevitably makes recovery from recession protracted and difficult because it paralyses the process of channelling money from savers to investors. The UK has not only endured such a recession, it has done so in a way that is unique among the world’s largest economies.

Comparing the UK with the other G7 economies plus Spain, total debt in the UK financial services sector in 2011 was around 100 per cent higher as a percentage of GDP than the next highest state and much higher than most of the others, including the US with which the UK is often compared as an ‘Anglo-liberal’ economy. Again of the large economies, only Spain has suffered a fall-out from the financial crisis for its retail banking sector on anything like the scale of Britain and the scale of Spanish problems emerged significantly later than they did in the UK. Moreover, the UK banking sector has been particularly exposed to the ongoing euro-crisis precisely because of the amount of UK bank funding that still comes from the wholesale markets and this is probably what explains the continuing decline in bank lending in the UK in 2011 and the first half of 2012 that has impeded recovery. It would take years for retail banks to move to their pre-2000 business models where retail deposits cover lending. The medium-term consequences of the UK banking crisis for the capacity of the economy to recover cannot be wished away because more growth would be a good thing. The legacy of the banking crisis will be ongoing and it is quite possible that there is worse to come given the ongoing difficulties at the two banks in which UK Financial Investments Limited is a major or majority shareholder.

There should be no a priori assumptions that there is significant growth to be had in the short term. Monetary policy has been aggressively targeted at growth and has best succeeded at stopping output contracting further. Moreover, growth versus deficit cutting is not a coherent antithesis as it assumes without argument that the reason why there is not growth is either insufficient public expenditure or too high taxes and that even if that were true that the two

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 13 5 October 2012 priorities can simply be traded off against each other in some kinds of Phillips curve.

There may possibly be a persuasive case for loosening fiscal policy, but it is a complex and difficult argument to make requiring both an assessment of the risk to the rate at which Britain can borrow and the cost in future interest payments in relation to the benefit gained and of the likelihood that fiscal loosening would actually increase demand.

Supply-side growth measures are more likely to yield positive benefit at less risk. In fiscal policy terms itself, there is a better argument to be made that distributionally the burden of fiscal adjustment is not enhancing prospects for growth as well as raising important questions of fairness, not least generationally. In addressing this issue, there should be no sacred cows. Any future policies that require more expenditure also should have as their corollary a serious approach to tax avoidance. The sustainability of the present tax system that distinguishes acutely in its burdens on those paying tax on wages and salaries through PAYE has been severely damaged by the fallout of the financial crisis and any centre-left government concerned with fairness should not ignore the problem.

Medium- and long-term growth prospects require asking some hard questions about the future of the financial services sector. Whilst much of this sector will be inhibited by debt and deleveraging for some time and London has suffered significant reputational damage as a financial centre that the United States is ever more conspicuously seeking to exploit, it makes little sense to think that it will not be important to the UK economy going forward. Financial services will have to be an important part of what advanced-economy states do in an international economic world that has been transformed by the rise of China and others’.

Nonetheless, the UK still needs an economy where there are also alternative engines of growth. Systematically encouraging long-term growth in other sectors requires better infrastructure and a more skilled and technically better equipped workforce. These require the state to spend money as well as education reform, but the state won’t be able to act here without spending proportionately less on other things, not least health when the demographics pressures will lean towards increasing expenditure on it.

There is no way back to the political territory occupied on the economy by the last Labour government after 2001. The legacy of financial service sector debt is ongoing, and the international economic conditions that sustained significant fiscal autonomy from the financial markets have changed and created a strong vulnerability to confidence crises in bond markets of the kind that bedevilled centre-left governments in the foreign exchange markets in the past. There will have to be more zero-sum political choices about distribution and expenditure priorities and a recognition that there is the potential for some extreme economic outcomes.

Helen Thompson is reader at the Department of Politics and International Studies, University of Cambridge

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 14 5 October 2012 Plan I: why the UK needs innovation-led economic growth

GEOFF MULGAN - 04 SEPTEMBER 2012

Commentators and policymakers have struggled to understand the world of innovation. We need not just a change of economic policy but a change of political culture as well

Across much of the Western world the policy debate has polarised into a choice between just two options: Plan A or Plan B, austerity or stimulus. These macroeconomic choices matter greatly. But neither addresses the UK’s longer-term growth prospects. They are familiar territory, but they miss much about the modern economy.

Macroeconomic strategy needs to be matched by a strategy for innovation. Economic theory has struggled to understand the world of software and new materials, computing and design. But there is now a pretty broad consensus that innovation is the most important driver of long-term productivity and prosperity (including at least two thirds of UK productivity gains in recent years)i , and that innovative businesses create more jobs and grow faster ii. Yet all too often economic commentators, who can be precise about exports or quantitative easing, resort to vague platitudes when it comes to innovation.

The UK has many significant strengths in innovation, from world class firms like ARM and Rolls Royce to dynamic creative industries. But our research shows that we face major problems of finance, structures and culture. Nesta’s Innovation Index (which is acknowledged as the most authoritative measure available) shows that investment in innovation by UK businesses has fallen sharply since the financial crisis of 2008: the most recent data suggests it declined by as much £24 billion last year iii. This issue predates the credit crunch: in the period from 2000 to 2007, businesses’ investment in innovation levelled off, investment in fixed assets fell and became increasingly dominated by bricks and mortar at the expense of technology, and companies accumulated cash. For many businesses, the 2000s were less an age of innovation than an age of cash and concrete.

Commentators and policymakers are slowly waking up to these facts, though most are more at home with the more familiar discussions about stimulus packages, investment in infrastructure and credit easing for small business. Fortunately there is a lot we can learn from other countries, even if specific policies are hard to transplant. Evidence from around the world shows that the most successful innovation strategies combine many, often apparently contradictory elements: generous public funding for basic science and lively universities, but also entrepreneurial cultures; strong industries based around complex technologies like life sciences, as well as others like fashion and design with very fast turnarounds; high risk investment in start-ups combined with patient capital to help firms grow.

Our strategies need to be equally heterodox. The steps needed to boost innovation, and thus boost both productivity and economic growth include a significant reshaping of financial flows – with new funds, tax treatment, and both bank and non-bank lending which we will set out in

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 15 5 October 2012 detail in Plan I [http://www.nesta.org.uk/home1/assets/features/plan_i]. It will require new roles for government procurement; a reorientation of infrastructure spending away from rail and road and towards high speed broadband and smart energy grids; and it will require a host of small changes to everything from HE and schools to planning rules and public services.

In the short run we argue for directing forthcoming windfalls from technology back into the innovation system; in the longer run we argue for a shift in the balance of government spending away from consumption and towards investment, reversing movements that have gone in the wrong direction over the last few years.

That will require a change of political culture as well as economic policy. The UK has a highly influential science lobby. But that lobby has relied too often on the inside track, and on enlightened science ministers, rather than making its case to the wider public. It has also tended to privilege upstream research over downstream application. Other countries have a broader constituency supporting innovation, and arguing for its share of resources – and in some cases, such as Finland, Israel or Taiwan, it is seen as vital for national survival, as well as smart economics.

In the UK, by contrast, these choices have been largely invisible since the financial crisis. If they are mentioned at all, they are presented as choices to turn to once the economy has turned around. But this misreads both the economics and the politics: around the world that the most successful stimulus packages have prioritised growth sectors and technology areas rather than being wholly neutral. And there are good reasons for thinking that it will in fact be easier to make microeconomic changes alongside the major dislocations and sacrifices of macroeconomic reform, rather than apart from them. So let’s get beyond Plan A and Plan B – and turn our attention as well to what actions now will deliver the greatest rewards in ten or twenty years time.

Geoff Mulgan is CEO of the National Endowment for Science Technology and the Arts

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 16 5 October 2012 Things could and should be better

JONATHAN PORTES - 03 SEPTEMBER 2012

The UK economy has many underlying strengths and things could and should be better. If only policymakers would act

There is plenty of spare capacity in the UK economy. The Office for Budget Responsibility’s (OBR) estimate of the "output gap" (a little over 2 percent) is unrealistically low; both the National Institute of Economic and Social Research (NIESR) and the International Monetary Fund (IMF) think it is higher (around 4 percent). And we may well be too pessimistic.

Indeed, even with an improving labour market, unemployment is still nearly a million higher than official estimates of the "structural" rate (the NAIRU), while on the OBR's forecasts (which are likely to be too optimistic on growth in the short term, and too pessimistic on supply potential) unemployment will remain well over the NAIRU, and output well below potential, for years to come.

All this represents an inexcusable failure of macroeconomic policy. So what should we do? The main short-term problem (as the IMF says) is a lack of demand. Long-term interest rates are at historic lows; and as such, the government can borrow money for essentially nothing (the yield on long-term index-linked gilts is close to zero). The UK suffers from both creaking infrastructure and a chronic lack of housing supply, especially of affordable housing. In these circumstances, both common sense and basic macroeconomics [http://notthetreasuryview.blogspot.co.uk/2012/05/four-charts-and-why-history-will-judge.html] argue that it is the role of government to channel those private sector savings into demand and investment, by borrowing more if need be.

Would borrowing more lead to higher interest rates? This is unlikely. Every single major advanced economy with monetary independence - that is, outside the eurozone - has seen long-term interest rates fall sharply over the past two years. It is simply false to say that we have low long-term interest rates now because the deficit has been cut: projected future borrowing is now higher than before the austerity plans were announced. As the IMF says [http://notthetreasuryview.blogspot.co.uk/2012/07/the-imf-explodes-myth-of- fiscal.html], low interest rates are the result of weak growth [http://notthetreasuryview.blogspot.co.uk/2012/04/long-term-interest-rates-and-confidence.html], here and around the world.

So we can afford to borrow, spend and invest. Indeed, we can't afford not to. The quickest and most effective way to do this would be to boost house building. Whether this is by direct government borrowing or through complicated off-balance sheet guarantees, as the government is now considering, matters little in economic terms, although the latter approach will result in some money going unnecessarily into bankers' pockets.

More broadly, there are plenty of other infrastructure projects that could be taken off the shelf. The coalition government points out that it has cut the deficit by a quarter; but two-thirds of the

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 17 5 October 2012 reduction came from cutting public investment [http://notthetreasuryview.blogspot.co.uk/2012/07/weve-got-deficit-down-by-quarter-if.html]: schools, roads and hospitals.

In addition, a temporary, but large, cut in National Insurance Contributions for both employers and low-paid employees would boost labour and consumer demand at the same time as improving work incentives.

Broader and more comprehensive measure to tackle youth unemployment would also help.

The Bank of England could also do more. Rather than simply buying gilts, quantitative easing could help unblock financing constraints for SMEs, at a time when the banking system is transparently incapable of doing so.

Medium-term growth: the supply-side So in the short term, there is plenty that can be done to help the UK economy. The main thing holding back growth in the UK is bad policy, here and of course in the eurozone. But over the longer term sustainable growth will require a whole host of policies: Planning reform, Increased aviation capacity, Better quality education for disadvantaged children, Better childcare provision, Clearer pathways from school to work for those who don’t go on to higher education.

On all of these, we know what the problems are, but successive governments have failed to address them. One policy area that currently works very well, however, is the labour market [http://www.guardian.co.uk/commentisfree/2012/may/16/flexible-workers-invest-job-creation], which has performed extraordinarily well of late. Three decades of successful reform have given the UK a flexible and generally well-functioning labour market, suggesting that there is little to gain from further deregulation. Spain and Italy need radical labour market reform; but we don't.

There is however one area where deregulation is urgently needed, and that is immigration. The government has introduced a set of new burdensome and bureaucratic rules and regulations, including a quota on skilled migrants, that are designed expressly to make it more difficult for businesses to employ the workers they want. By the government's own estimates, this will reduce growth and make us poorer. But another consequence has been to take a thriving, dynamic and high value-added export industry - further and higher education - and stop it from selling its product to foreigners.

As long as the UK policy debate focuses on immigration as a threat to be minimised, rather than as a potential driver of growth and innovation, then the UK will not be "open for business."

The UK economy has many underlying strengths. Since 1995, GDP per capita has grown faster than in Germany, France, Japan or the US. This reflects improvements in the UK labour market, a more skilled workforce and a more competitive economy. There is, of course, plenty to worry about. We are still stuck in the longest period of stagnation in recorded economic history, thanks to damaging and unnecessary policy failures, both here and globally. But things could and should be better. If only policymakers would act.

Jonathan Portes is director of the National Institute of Economic and Social Research (NIESR)

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 18 5 October 2012 Labour needs a new ‘golden rule’

DAN CORRY & PETER KENWAY - 03 SEPTEMBER 2012

While nobody should doubt the seriousness of the public sector deficit and the need to reduce it, it cannot and must not be treated in isolation

Progressives, like everyone else, have got caught up in the need to reduce public sector deficits and debt. In many EU countries the public sector soared into deficit as a result of the financial crash and recession, and, in places like the UK, attempts to use counter cyclical Keynesian policies increased that debt. So now the pressing economic and political issue appears to be to get it down.

But while nobody should doubt the seriousness of the public sector deficit and the need to reduce it, it cannot and must not be treated in isolation. We argue in a new paper published by the Fabian Society [http://www.fabians.org.uk/wp- content/uploads/2012/09/ANewGoldenRule_report.pdf] that progressive macro-economic making – and the Labour Party in particular - needs a new ‘golden rule’ that includes the public sector – but which includes the business sector too. And that in return helps direct progressive thinking back to the issue of making the market economy – and its businesses - really function properly and away from an exclusive obsession with how much austerity.

For the UK, our conclusion is based on an analysis of what was happening to the economy in the years even before the crash of 2007/8.

On most normal measures, few economists dissented from the view that the economy in that period was performing well. Between 2003 and 2007, the economy grew at three per cent a year. Inflation averaged less than two percent while the public finances were in order with public sector debt averaging just 35 per cent of GDP while the annual public sector deficit was under three per cent.

And yet – with the benefit of hindsight, it is clear that below this surface, something strange and disturbing had started to happen: from 2002, the corporate sector – businesses – had started to run a surplus.

In 2002, in the wake of the slowdown of the world economy, such a surplus was to be expected. What was not expected was for this surplus to persist into 2004 and beyond and not just persist but grow. The sector continued to run an annual surplus through to 2007 – after which it jumped sharply, to above five per cent of GDP, where it has remained ever since.

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 19 5 October 2012

Such a large and long-lasting corporate sector surplus is bad for two reasons. In aggregate the business, household, overseas and public sector surpluses and deficits must sum to zero. While cause and effect run both ways, the public sector deficit won’t come down without one or more of the surpluses coming down too. Reducing the deficit, contrary even to what some on the left have argued, is not just a matter of discipline and political will.

Some of that can happen if we get export led growth but a world economy in the doldrums has dashed this hope and anyway, not all countries can do this. Nobody should want the household sector to cut its saving. So if the public deficit is to come down, the corporate surplus must come down too.

The problem here is more than an accounting one. As the most innovative part of the economy, business is the one that should be running a deficit, borrowing to invest, exploiting the profitable opportunities it sees and raising productivity. An economy with a large and chronic corporate surplus which is what we have today is the opposite of one that is dynamic and productive.

By calling for a new ‘golden rule’ that takes both the public deficit and corporate surplus into account – rather than just being about the public sector deficit as Gordon Brown’s old rule was - we are saying that reducing both should be government’s business. Put another way, economic policy has to be about more than austerity. Public sector deficit reduction is needed but has to be linked to the pace at which the corporate surplus comes down. In itself, this suggests less austerity now. But this isn’t enough: government has to reduce this corporate surplus – business saving – too.

How might that happen? A Labour government might get the privatised utilities to up their investment spending on things like broadband, water supply and distribution and green energy; or insist that firms pay the living wage; or raise corporation tax and increase investment allowances – so that firms are in a ‘use it or lose it situation’.

In an important sense, however, such specifics are for later. The problem we identify is a problem now, not just in 2015. The policies may be different but the need for governments to

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 20 5 October 2012 develop policies towards the business sector is not. This requires abandoning a doctrine that has held extraordinary sway for 25 years, that disturbances to the economy arise in the private sector are self-correcting, provided only that the public sector does not destabilise things.

This doctrine has patently not been true since 2007 but mainstream opinion is reluctant to embrace its implication, that governments need once more to develop active industrial policies. After 2007, in Peter Mandelson’s second spell as Secretary of State, Labour started to do this. We think Vince Cable would like to too – if only the Chancellor would let him.

This perspective on policy therefore not only opens up for progressives a way of thinking about growth and the public finances together, but points to the need for a renewed activism when it comes to the corporate sector. To those who would scorn this as a return to a corporatist yesteryear, we would respond that clearing away the debris of the financialised economy born with Big Bang in 1986 will inevitably unearth some of the progressive preoccupations of the 1960s and 70s.

Dan Corry is former head of the Number 10 Policy Unit and senior adviser to the prime minister on the economy

Peter Kenway is director and co-founder of the independent thinktank the New Policy Institute

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 21 5 October 2012 Becoming players in the innovation game

REINHILDE VEUGELERS - 05 SEPTEMBER 2012

Europe’s future competitiveness depends on the active promotion of innovation based growth sectors

We are confronted today with a daunting post-crisis growth challenge that will influence the policy agenda well up until and beyond 2020. But already before the crisis, Europe’s growth performance had been diagnosed as poor. Multiple studies have examined this poor overall growth performance in Europe, especially compared to the US. The analysis traces the roots of the problem to path-dependent sectoral specialisation. European countries are specialised in medium-tech sectors, missing strong positions in new high-tech sectors, which were the drivers of growth in the late nineties in the US. European companies in traditional sectors do not innovate less than their competitors in the US. But Europe has much fewer young leading innovators (“Yollies”) [http://www.bruegel.org/publications/publication-detail/publication/437- young-leading-innovators-and-eus-r-and-d-intensity-gap/] in sectors characterised by high levels of innovation and rapid productivity growth, particularly in ICT sectors.

Europe’s failure to redirect towards innovation based growth sectors is likely to matter for Europe’s post-crisis recovery dynamics. In the new ICT eco-system (i.e post-internet), the locus has shifted to those where platform, content and application providers are more pivotal. These ICT sub-sectors were the sectors where most of the pre-crisis ICT growth opportunities emerged and those that also experienced only a minor reduction in growth rates during the crisis. In these sectors, Europe is weakly represented [http://www.bruegel.org/publications/publication- detail/publication/745-new-ict-sectors-platforms-for-european-growth/] by (young) leading innovators.

The missing Yollies problem is not to be so much in the generation of new ideas, but rather in bringing ideas successfully to world market. Obstacles include the lack of a single market, the limited role of advanced early (public) users, fragmented IP, lack of an entrepreneurial culture, poor access to risk capital and strong clusters with pooled skills.

As the barriers to growth need to be overcome for young firms in new growth sectors, does this imply a call for a targeted policy approach? Not necessarily. Since young innovators need to find a complementary overall innovative environment, a policy to redress the age and sector structural deficit needs to fit into an overall innovation and growth policy.

This overall policy should further the integration of the European capital, labour, goods and services markets, making it easier for players in the innovation system to interact and, at the same time, create competition. Combating fragmentation caused by uncoordinated national regulations, of relevance for new sectors, cannot be high enough up on the policy agenda. This includes not only product or service market regulations. The fragmentation in IP rights within Europe should also be tackled.

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 22 5 October 2012 Having made progress on the EU-wide patent system, policymakers' attention should also be directed towards an integrated EU approach to digital rights, copyright and data privacy policies. And without jeopardising quality standards, the European Patent Office’s examinations should be much more open towards new technologies and soft protection mechanisms. Updating Europe’s overall innovation and growth policy framework should also involve a closer look at competition policies, where getting the balance right between promoting new entry and creating incentives for innovators by protecting their innovation is a delicate undertaking.

Nevertheless, a specific policy is also needed to address the specific barriers faced by young highly innovative firms in new highly-innovative sectors. But this specific policy does not require targeting or cherry-picking technologies, sectors or firms, as the following, non- exhaustive, list of recommendations details.

• Lower entry and exit costs would allow more experimentation by entrepreneurs with new highly risky ideas. This requires product market reforms to decrease the red tape and administrative burden to ease the starting of new businesses.

• But equally important for getting experimentation, but politically less popular, particularly during crisis times, are reforms of bankruptcy law allowing easier exits and particularly not precluding new starts.

• Addressing the access-to-finance-barrier for new firms with highly innovative and risky projects warrants specific attention, especially now during the crisis. In particular policy should address the early commercialisation and larger-scale deployment of innovative projects. For a concrete proposal for a Young Innovator’s Program at EU level, see Bruegel Policy Brief 2009/2 . In addition, removing barriers to EU-wide venture capital markets has long been on the policy agenda but is still not been achieved.

• Concerning the demand for innovative products and services, Europe should make greater use of public procurement for nurturing early-stage innovations, at least in those sectors in which the public sector can act as a pivotal lead user. New ICT markets offer ample examples. Public procurement is not about picking and protecting winners. Procurement policies should encourage the entry and growth of new firms, nurture potential competition and the development of complementary actors. When done at a European integrated or at least coordinated scale, risks and resources can be pooled across a larger public market. Removing the fragmentation in the European public procurement markets should therefore be high on the policy agenda.

• Standards and regulations, by overcoming market uncertainties, can help early-stage innovations to come to market sooner. Nonetheless they may also carry a risk of becoming trapped too early, precluding the emergence of new and better technology breakthroughs. If and when governments intervene in standards and regulations, they should be designed with a technology-neutral and open perspective, which will allow new future innovators to continue to compete.

Most of these policy recommendations do not require targeted approaches, only focusing on barriers that are particularly important to young sectors and young firms. Nevertheless policy

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 23 5 October 2012 makers should be advised to engage in the monitoring of emerging markets to evaluate whether the right mix of horizontal policy instruments is present and effective for ensuring the smooth development of firms in these new sectors.

With a highly complex area to address and limited evidence about which policy instruments are best to use, designing an appropriate policy for new growth markets is bound to be a challenging endeavour. Learning from best practices, experimenting with new instruments and regularly evaluating existing programs, including abandoning or restructuring them when inefficient, should therefore be high on the policy agenda.

Reinhilde Veugelers is a professor at KULeuven, senior fellow at Bruegel and research fellow at CEPR

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 24 5 October 2012 Labour policies for the jobless generation

PAOLO REBOANI - 03 SEPTEMBER 2012

Demographic changes and globalisation are destroying the old welfare state. In these circumstances lowering unemployment is essential to maintain a cohesive society and avoid growing inequalities

Demographic changes, globalisation that developed without basic rules, and economic growth that – in many countries - is still below the level necessary to guarantee an equal wealth, are destroying the old welfare state and the old system of safety nets. Such radical changes have a substantial negative impact on peoples incomes and are increasing their worries about future livelihoods. Labour policies are an essential part of the operation to restore confidence, produce growth, and to reduce inequalities in our societies. In such an agenda, jobs should be ensured from the beginning of one’s lifecycle in order to guarantee to people economic and social independence and to offer a future for their family choices.

The global economic crisis has worsened the conditions of the labour market even if wide cross- country differences do exist. Four years after the collapse of Lehman Brothers and the consequent economic recession our societies face a rapid and continuous rise of unemployment – in Europe such increases reversed the progress achieved since 2000 -; the resurgence of long term unemployment – an ill we believed we had defeated after the ‘80s; and soaring youth unemployment - NEET (neither in employment nor in education or training) is now a worldwide common word.

The economic outlook remains highly uncertain but the weakening recovery supports the likelihood that unemployment will stay high during the coming years. In these circumstances the increase of the employment rate is a goal difficult to achieve but essential to maintain a cohesive society and to avoid growing inequalities. Policy choices, at the national level as well at the global level, become very difficult since the aim must be to provide adequate support for the unemployed, ensure activation strategies, and to guarantee sustainable welfare systems. Governments should keep budget deficits under control but fiscal tools are limited. Furthermore, future labour policies have to take into account both short-term challenges with structural problems.

Promote job creation. Macroeconomic management is necessary to avoid a jobless recovery and to achieve high employment rates. It aims to create the right conditions to stimulate growth. Keeping budget deficit under control shouldn’t hinder the role of the State in the economy. On the contrary, the State has a duty to support economic and industrial policies that will ensure sustainable growth and create more jobs (i.e., strengthen SMEs and self-employment entrepreneurship, boost infrastructure projects, invest more on services). New credible strategies for growth are required based on restoring confidence, stimulating demand, and offering good conditions for businesses. At the European level stronger action for growth is necessary; a common policy on employment and welfare, positive policies for jobs and business; and rebalancing Europe’s monetary stance.

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 25 5 October 2012 Avoid the collapse of active society. The jobs crisis has produced a substantial increase of long term unemployment, among the young as well as among adult workers. The closure of many plants, new patterns of production and the consequent decline in job opportunities have increased the likelihood of unemployment. There is thus a risk of a mass exodus from the labour market. Labour policies should provide adequate unemployment benefits, even if a longer period of safety net could be needed, while they should continue to discourage passive behaviour of recipients and disinvestments in activation.

Jobless generation. Young people, particularly between the ages of 15-24, have been hit very hard by the economic crisis. For this generation the probability to stay out of the labour market is increasing. Longer periods of unemployment affect future careers and livelihoods. Being without a job exposes one to the danger of inactivity, emigration, and social deprivation. Nevertheless, even during the crisis job vacancies have grown and mismatches increased. Labour policies must tackle such disconnection and help out-of-work youths enter into the labour market. Public programmes of activation should be reinforced and better tailored to match the demand and supply of jobs, also involving private partnership. However, even in the job crisis the principle of mutual obligation has to be maintained, in order to safeguard the value of individual responsibility. At the same time, firm practices of providing long-term contracts should be supported throughout more organised contracts combining work and training (i.e., traineeships, apprenticeships etc.).

Improving school-to-work transitions. The link between education and work is key for obtaining highly qualified human capital, increasing productivity, and guaranteeing future careers for young people. The educational mismatch is a weakness we need to fight in order to avoid social instability. Today’s students should have the possibility to access firms when they leave school. For this reason youths should learn basic foundation skills required by employers and vocational technical education should be restructured in order to better reflect the skills demand from the economy. Apprenticeships and traineeships should be used to give young people a foothold on labour markets, thus avoiding the loss of human capital.

Regulation and the labour market. The so called flexicurity model needs to be updated to reflect the new economic climate. Regulatory systems should reduce the uncertainty in working relations allowing the economy to allocate resources in a more efficient way. In such circumstances, the balance between permanent and temporary is crucial so that employers do not become discouraged from hiring new employees. Stronger firm level relations also are essential to guarantee productivity and high levels of employment.

Fiscal measures to support labour demand. Supporting labour demand through tax breaks or hiring subsidies for companies could be experienced, particularly for youths or for women. However, these measures should take into account the conditions for government budgets, they need detailed monitoring and they have to be well targeted and conditioned to rules for employers (i.e., long term hiring, training programmes, expanding the workforce).

Investing on labour market institutions. The jobs crisis is a strong incentive to reorganise employment services aimed to a rapid and wider match between supply and demand. Active labour market policies are key for achieving the goal of an active society, particularly if they put great attention to local dimension of labour markets. Expenditures on private and public

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 26 5 October 2012 employment services should be guaranteed, strengthening their effectiveness (i.e., more coverage, new tailored schemes for different groups, use of IT technologies).

Collective bargaining and labour relations. Improvement in productivity and increase in employment depend on large scale by practices adopted by employers and unions. Trust should be given to collective bargaining – at any level - more than to the law, particularly regarding training, working regulations, re-employment services and, obviously, wages. Establishing a closer link between the increase of labour compensation and productivity developments is the main challenge for collective bargaining as well the creation of more intensive cooperation practices on employment.

Paolo Reboani, chairman and chief executive officer, Italia Lavoro SpA and former economic and international adviser, Ministry of Employment and Social Policies, Italy

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 27 5 October 2012 5 myths preventing a progressive growth strategy

STEPHEN BEER - 04 SEPTEMBER 2012

Labour must talk about investment in terms of being a responsible steward of the public’s money

Developing a credible economic strategy is the most important task facing progressive parties today. We need policy rooted in the real world, relevant to the majority of voters and reassuring to financial markets. We need also to appreciate the scale of the task and the measures required. The evidence suggests that we are only part way through an extended period of low or no growth, persistent deficit problems, and stubborn unemployment levels.

The Left first needs to face up to five myths, belief in which will lead us astray in our quest for growth [http://www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new- political-economy].

Further recession will destroy the Right’s economic credibility and lead voters back to Labour. To re-establish economic credibility on the Left we simply need to repeat the approach of the 1990s. The financial crisis boosted support for right wing parties in rich countries. The UK has a Coalition government dominated by the Conservative Party, with an economic strategy focused on severe spending cuts, most of which have yet to kick in. Yet the UK is experiencing a second recession and output is well below pre-crisis levels. Surely this will lead people to return to Labour?

There is little evidence that is yet the case. While polls suggest Conservative economic credibility has been damaged, belief in Labour’s abilities has not increased. We can have the right policies but people remain unconvinced we can deliver.

In the late 1990s Labour finally convinced the electorate it would be sound on the economy. It embraced much of the prevailing economic consensus, and pledged to reduce the deficit and adopt strict Conservative spending plans in its first two years of office. The strategy worked. It will be tempting to do the same next time, pledging to match whatever further spending cuts the Coalition proposes.

That will not be sufficient. The Labour Party has fewer ‘easy wins’ available this time (unlike its continental counterparts). Many voters still blame it for large deficits; they may not like ‘austerity’ measures but there is a prevailing sense they are necessary. So Labour needs to go the extra mile. It must offer an effective spending guarantee and talk about spending in terms of being a steward of the public’s money and have a solution to the ongoing squeeze in living standards.

We can get away with being generally silent about the deficit An attractive strategy is to let the Coalition take the flak for the hard work of deficit reduction,

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 28 5 October 2012 while reaping the rewards of public discomfort at the next election. Even if this worked, it would paint Labour as the spending party, only to be trusted when others have fixed the finances (in contrast to its achievement after 1997). So while the Left must avoid traps set by its opponents, it must show it takes deficit reduction seriously and will keep public finances sustainable.

Our focus on macroeconomic policy means we can avoid radical reform of public services, at least for now We are talking now about macroeconomic themes: how to promote investment and restore growth. It is tempting therefore to push thought about public sector reform into the long grass and wait to repair them later. This is too simple. At a time when people are facing stretched finances and an uncertain future, it is our national duty to emphasise a commitment to public services that are good value for taxpayers’ money. Thinking on this is woeful at present, apart from a few exceptions. We must not abandon the debate and let the Right argue that growth can be promoted by shrinking the state.

Progressives were right on economic policy before the financial crisis It is still a common myth on the Left that we had it right before the crisis and it was the banks that torpedoed our economic policy. Yet Ed Miliband and Ed Balls have already admitted that lighter regulation was wrong and that Labour could have done more to prevent falling in living standards. The Left could also have retained its prudent approach to public finances. A long boom with apparently benign conditions beguiled the entire political class. Regaining credibility is not about going back in time but about remaking policy and changing attitudes now. The electorate is looking at Labour for evidence it gets this.

A few key policies will show people Labour means business There will be no end of ideas for how to stimulate growth but the task is enormous. A classic mistake both governments and oppositions make is to compromise between radicalism and ‘managerialism’. That leads to commitments to look at radical ideas and a focus on temporary measures. The Coalition is caught in this bind, with its anti-state ideology making the position more acute.

We do not live in a Neo-Keynesian world in which we just need to get beyond a short downturn before normal economic service is resumed. The economy faces a crisis of debt and economic confidence. The solution may be a cocktail of innovative policies but the overall theme must be that Labour will commit for the next decade to promote growth. That will mean hard choices, prioritising some capital spending over current for example. It will also mean going beyond bank bashing to being pro a reformed City. If we want to transform our economy, half-hearted measures will not work.

In its quest for growth Labour’s belief in a role for government frees it to be radical but carries great responsibility too. At the next election, Labour must offer a vision of credible hope. There must be no Coalition-style flailing around. Backed by an effective spending guarantee, its theme should be, in its broadest sense, investment. Investment in our children, through first class education; in our citizens, through an employment guarantee and rebooted training opportunities; in business, with a simple tax system and a national investment bank standing behind small

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 29 5 October 2012 business loans; and in infrastructure, so we will have the best in Europe, if not the world. Such should be the chapter headings of the next Labour manifesto.

Stephen Beer is the author of The Credibility Deficit – how to rebuild Labour’s economic reputation. He is a City investment manager, chair of Vauxhall Constituency Labour Party and a board member of Policy Network. This article represents his personal opinion

From www.policy-network.net/event/3918/The-quest-for-growth-ideas-for-a-new-political-economy-and-a-more- responsible-capitalism 30 5 October 2012 Industrial policy: AtilltfttAn essential element of a new strategy

The quest for growth: ideas for a new political economy and a more responsible capitalism Conference: London, September 6th, 2012

Karl Aiginger

H:user/aig/vortrag/Industrial_Policy_London_PolicyNetwork_2012.ppt 0 05.10.2012 Outline

ƒ The goals of the European Society ƒ Status of United Kingdom as of 2012 ƒ Specific problems to be addressed ƒ Policy change needed (incl. Industrial Policy) ƒ Real change for Europe and the United Kingdom

1 05.10.2012 Beyond GDP/ Welfare, Wealth and Work

ƒ GDP per capita, economic growth

ƒ The other goals in a welfare function:

• Social inclusiveness, employment, housing

• Ecologgy,gyy,ical sustainability, energy efficiency, low carbon

• Fair distribution of income and wealth, low regional disparities

• health, education, democracy, life expectation, happiness *

ƒ Documentation of these goals:

• Stiglitz-Fitoussi-Sen Report, Europe 2020 strategy

• WWWforEuropeProject: Welfare, Wealth and Work.

2 05.10.2012 WWWforEurope Project: large socioeconomic FP7 programme

ƒ Searching for a new path of development for Europe

• More dynamic, more inclusive, more sustainable

ƒ 33 research organization, 4 years, lead WIFO

ƒ Policyyp,yy(y) Network as partner, University of Coventry (David Bailey)

ƒ Boards with a novel laureate, ex prime minister, ex Commissioner EU *

ƒ First tasks: European governance, problems of periphery

⇒ Scientific Support for EU-2020 and policy change in Europe.

3 05.10.2012 Economic status of Europe

ƒ Slow growth (medium run), recession 2012

ƒ Double digit unemployment, youth 20 %, some countries 50%

ƒ Rather constant export shares, no trade deficit=>price competitive

ƒ Low R&D,,ggy limited ambitions in green technology

ƒ Increasing inequality; disequilibria between countries

ƒ Successful Euro (higher than at start) *

ƒ Procrusted Central Bank, no vision of European institutions 2030

ƒ Public deficit &debt (lower than in US, but higher interest rates).

4 05.10.2012 Europe´s assessment in a broader perspective

Jeffrey Sachs in Financial Times August 19, 2008:

ƒ Strong democracies, no US style underclass

ƒ Peace, negotiating instead of bombing

ƒ Low child mortality, hig h life ex pectanc y

ƒ Preference for leisure *

World Bank (golden years project 2012)

ƒ Europe is an integration machine

ƒ Rapid transformation and catching up of socialist countries.

5 05.10.2012 Outline

ƒ The goals of the European Society ƒ Status of United Kingdom as of 2012 ƒ Specific problems to be addressed ƒ Policy change needed (incl. Industrial Policy) ƒ Real change for Europe and the United Kingdom

6 05.10.2012 Status of UK I

ƒ Double dip recession, GDP 2012 probably smaller than 2008

ƒ GDP just a trifle above EU-15 (No 10) despite of devaluation of £

ƒ Unemployment rate 8%, youth 21% (2011)

ƒ Social goals no 11, sustainability no15 (WIFO 2011) *

ƒ Manufacturing sector declining from max. 19% (1989) to 9% (2010)

ƒ Financial sector increasing from 7% ( 1997) to 9.4% (2011) *

⇒ The financial sector has overtaking manufacturing.

7 05.10.2012 GDP per Capita (1000 PPS) just above average – far away of top countries

35 EU 15 United Kingdom

Germany Netherlands 30

25

20

15

EU15 UK Germany Netherlands

10 2008: 27.7 28.1 29.0 33.6 2012: 28.1 28.4 31.0 34.2

5 1980 1984 1988 1992 1996 2000 2004 2008 2012

8 05.10.2012 Status of UK II

ƒ Investment/GDP lowest in G7 - falling from 22% (1989) to 15% (2011)

ƒ Trade deficit -6.0%; current account -1.7% of GDP (2012)

ƒ Public debt 91.2% of GDP and increasing (despite of austerity)

ƒ Highest household accumulated debt (100% of GDP)

ƒ Financial sector debt four times GDP – a bomb to explode

ƒ UK corporations (non financial): higher savings than D and F

ƒ Net lending position of non-financial corporations over 10 years *

⇒ Business profits not used for investment.

9 05.10.2012 Outline

ƒ The goals of the European Society ƒ Status of United Kingdom as of 2012 ƒ Specific problems to be addressed ƒ Policy change needed (incl. Industrial Policy) ƒ Real change for Europe and the United Kingdom

10 05.10.2012 Investment share in GDP low and decreasing

EU15 United Kingdom EU15 UK Germany 25 Germany 2008: 22.2% 17.1% 19.3% 2012: 19.1% 14.4% 18.3%

23

21

19

17

15

13 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

11 05.10.2012 UK is no leader in innovation

ƒ Innovation follower; no 6th (Innovation Score Board)

ƒ Falling back over last 10 years

ƒ R&D/GDP 2010: 1.77%, no 8; (1995: 1.91%, no 6)

ƒ WkifiWeak in firm research hl; low numb er of fi innovat ors ⇒Business profits, government expenditure of about 50% of GDP are not used for research, innovation.

12 05.10.2012 R & D in UK much lower than military spending

4.5 R&D 2010 Military expenditure 2010 SE, FI: 3 : 1 4.0 GR: 1 : 5 3.9

3.5 3.4 3.2 3.1 3.0 2.8 2.8 2.7 2.5 2.5 2.3 2.1 2.1 202.0 2.0 1.8 1.8 1.8 1.8 1.7 1.6 1.5 1.5 1.4 1.4 1.4 1.5 1.3 1.2 1.2 1.3

1.0 0.9 0.6 0.6 0.5

0.0

S: Eurostat, SIPRI Military Expenditure Database. 13 05.10.2012 Low and declining R&D ratio in UK

4.5 United Kingdom Germany Sweden EU 15

4.0

3.5

3.0

2.5

2.0

1.5 1990 1995 2000 2005 2010

14 05.10.2012 Share of manufacturing in GDP strongly decreasing (at current prices)

27 EU 15 United Kingdom 25 Germany 23

21

19

17

15

13 EU15 UK Germany 2008: 13.8% 9.2% 19.9% 11 2010: 13.2% 8.9% 18.7%

9 1980 1985 1990 1995 2000 2005 2010

15 05.10.2012 Why manufacturing is important - Ranks for industrial base and performance after crisis 30 DE SE FI AT CZ NL BE SK SI 20 EU27 IT + current account IE DK HU PO FR UK US RO 10 MT ES PT LT CY EE GR LV Share of manufacturing manufacturing Share of 0

0 10 20 30 Real GDP growth 2007/2012

16 05.10.2012 Business is saving, government is spending

8 Business (Non-financial) Government

6

4

2 P

DD 0

-2 In % % In of G -4

-6

-8

-10

-12 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

17 05.10.2012 Fiscal balances – Household sector Labour share in income low, consumers indebted

5 Euro zone UK 4

3

2

P 1 DD

0

In % % In of G -1

-2

-3

-4

-5 1999 2001 2003 2005 2007 2009

18 05.10.2012 Financial balances – financial sector Who saves most, why?

4 Euro zone UK

3

2

P 1

0 In % In % of GD

-1

-2

-3 1999 2001 2003 2005 2007 2009

19 05.10.2012 Outline

ƒ The goals of the European Society ƒ Status of United Kingdom as of 2012 ƒ Specific problems to be addressed ƒ Policy change needed (incl. Industrial Policy) ƒ Real change for Europe and the United Kingdom

20 05.10.2012 Policy for the UK – seven priorities

ƒ Education (from lowest to highest)/Innovation (R&D)

ƒ Reshifting resources from finance to manufacturing

ƒ Making firms use profits for investment (incl. intangibles)

ƒ BiBringi ng youth thb back kt to work

ƒ Looking for successful clusters

ƒ Foster sustainability and raise exports

ƒ Social innovations (organization, lifelong learning, health).

21 05.10.2012 Industrial policy past/future

ƒ Past: isolated policy

• Sectoral/horizontal; picking winners

• Conflict with competition policy; shielding from competition

ƒ Future systemic , fitting to the targets of society

• Married with innovation and education policy

• Building on comparative advantages, but one step ahead

• Supported by external and domestic competition.

22 05.10.2012 The Systemic Industrial and Innovation Policy (SIIP) in a nutshell

Pulling forces Vision of a new growth path (welfare beyond GDP) Societal goals (health, climate, social cohesion) Excellence in specific technologies (e.g. energy) )

IIP Competition Procure- Policy ment

Trade Industrial Innovation Education Policy Policy Policy

Internal Regional Market Policy

Pushing forces Competition, openness and globalization Activated, trained and retrained labor force ( flexicurity ) Competitive advantages (supported by policy ) Climate change, ageing 23 05.10.2012 Five instruments of SIIP for UK

ƒ Promoting business starts: industry, software parks, spinoffs • Less administration & less taxes

ƒ Industrial Funds: not state owned but state procured via tendering to existing bank

ƒ Margi nal t ax credit so tha t firms use profit s f or i ncreasi ng investment (incl. intangibles); not saving

ƒ Cluster policy plus upgrading and social/ecological goals

ƒ Areas of excellence with specific emphasis on competition (subsidies for 3 or more firms, never for one champion).

24 05.10.2012 The best environment for a new industrial policy I

ƒ Collective bargaining with elements of flexibility and contracts for change on firm level

ƒ Shift investment from large physical projects to smaller ones and business starts

ƒ Reduce fiscal drag for 2 years against promise to cut expenditure automatically in recovery

ƒ Rescind some reduction in shovel ready programs: schools, universities, social housing

ƒ Reduction of low VAT, increase of 3rd VAT on luxury goods

ƒ Reduction of compulsory insurance for people < 25.

25 05.10.2012 The best environment for a new industrial policy II

ƒ Readdress distribution issue (wage rate and dispersion)

• This reduces debt, welfare bill and increases consumption

ƒ Looking for elements of the Nordic socio-economic model

• Connect welfare payment with learning , innovation in kindergarten and schools *

ƒ Tax financial transactions (from full FTT to double stamp tax, taxing short run transaction of banks)

ƒ Decide to be active part of Reformed Europe, instead of twinkling to US and complaining isolation from former Empire.

26 05.10.2012 Definition of UK’s role in EU

ƒ Positive definition needed: “extended home market” in globalization

ƒ Go for a double track integration model with trend

ƒ Make better rules for and more coordination with Euro outsiders *

ƒ Honest assessment of role of national states in globalized world 2050

ƒ UK had produced 7% of world output 1950, 3% 2010, 2% 2030

ƒ Europe including neighbors may achieve a constant share of 30%

ƒ European integration and extension will go on: with or without UK * ⇒UK wants to have a say in EU, but not to comply with decisions. 27 05.10.2012 Share of UK and Europe in world GDP

40.0

USA (24.3%)(24,3%) 34.9 35.0 31.3

30.0 28.2

25.0 21.5

20.0

15.0 13.5

10.0 8.6

5.0 3.7

0.0 UK Core Europe Euro area EU 27 EU plus direct EU plus wider China neighbours neighbourhood

28 05.10.2012 Outline

ƒ The goals of the European Society ƒ Status of United Kingdom as of 2012 ƒ Specific problems to be addressed ƒ Policy change needed (incl. Industrial Policy) ƒ Real change for Europe and the United Kingdom

29 05.10.2012 Real change for Europe needed

ƒ More dynamics, externally (extension) and internally

ƒ Lower unemployment, lower disparities, and disequilibria

ƒ Higher share of wages and investment into real sector

ƒ Leading in education, innovation, gender equality

ƒ Leading in energy efficiency, clean technologies

ƒ Changing from GDP to Beyond GDP as benchmark of success.

30 05.10.2012 WWWforEurope: a new growth path

ƒ The vision: transformation of Europe

ƒ The goals: more dynamic, social sustainable

ƒ One driver of change: a systemic industrial policy *

ƒ The hor izon: 4 years

ƒ Firsts tasks: • European governance • Solving problems of periphery.

31 05.10.2012 Real change for UK

ƒ Boost investment and manufacturing • In a competitive environment ƒ Develop UK 2030 and Regional Visions 2030 ƒ Improve education (specifically at lower end) • Vocational training, lifelong learning ƒ Become a leader in innovation (firm based, SME and clusters) ƒ Increase wage rate and decrease dispersion • Instead of fostering household debt

⇒ Social and environmental innovations chance and not costs.

32 05.10.2012 Real change will not work if …

ƒ Financial sector larger than manufacturing/ • Less regulated/less taxed/high bonuses, attract best human capital * ƒ Government expenditure more than half of GDP • High taxes on work and rea l sect or • financial transaction not taxed * ƒ Business firms accumulate surpluses and are net lenders • But do not invest ƒ Military spending is higher than R&D ƒ UK-exceptionalism (besides that of US, F, D).

33 05.10.2012 UK and Europe

ƒ An attractive role for UK in EU is necessary ƒ Without Europe the role of UK in globalizing world evaporates • Europe incl. Neighbours: 30%, UK: today 3%, 2050: 2% ƒ European integration makes and regional conflicts obsolete ƒ Isolation,,g looking for US or lost emp ire is no alternative * )

⇒ Cooperating with new neighbors from North Africa to Black Sea ⇒ UK alliance with neighbors to create a wider EU is a chance.

34 05.10.2012 Industrial policy: AtilltfttAn essential element of a new strategy

The quest for growth: ideas for a new political economy and a more responsible capitalism Conference: London, September 6th, 2012

Karl Aiginger

H:user/aig/vortrag/Industrial_Policy_London_PolicyNetwork_2012.ppt 35 05.10.2012 Wage share in income: low and declining (dispersion increasing; GINI)

79 EU 15 UK 77 EU15 UK

75 1991: 69.4% 77.5% 2011: 68.1% 70.8%

73

71

69

67

65 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

36 05.10.2012 Income distribution in UK

ƒ Wage share no 16 and decreasing ƒ Gini 25th and increasing inequality ƒ Poverty 22 and decreasing up to 2005 ƒ 80:20 income ratio 26

S: Stylized facts on the interaction between income distribution and the great recession Prepared for the NERO meeting of OECD in Paris on June 18th

37 05.10.2012 Financial balances in UK

Households Business (Non-financial) 8 Government Net exports Financial sector 6

4

2 P

DD 0

-2 In % % In of G -4

-6

-8

-10

-12 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

38 05.10.2012 Financial balances – business sector

5 Euro zone UK 4

3

2

1

0 In % % In of GDP -1

-2

-3

-4 1999 2001 2003 2005 2007 2009

39 05.10.2012 Financial balances – government

4 Euro zone UK

2

0

-2 P DD -4

In % % In of G -6

-8

-10

-12 1999 2001 2003 2005 2007 2009

40 05.10.2012 Globalisation not seen as a great opportunity – compared with Nordic countries

100 Question: Globalisation is an opportunity

90 87 for economic growth 82

80 76

71 70 70 68 64 63 63 62 61 60 60 59 60 58 56 55 53 53 53 53 52 49 48 50 46 45 44 42 40

30

20

10

0 DK SE NL FI HU SK EE BE DE UK LU SI IE AT MT EU27 BG PL CY LT CZ ES IT LT RO PT FR GR

41 05.10.2012 Euro zone: better but not good

1

0

-1

-2 P DD

-3 In % % In of G -4

-5

-6 Business (Non-financial) Government

-7 1999 2001 2003 2005 2007 2009

42 05.10.2012 The case for a Microeconomic European Policy

Miguel Sebastián , Universidad Complutense de Madrid

Policy Network meeting

September 6, 2012 , London Stock Exchange The case for a Microeconomic European Policy

• It is indubitable that a Macroeconomic European Policy is needed, at least for the euro area • It should include: • A Monetary Policy, with a real lender of last resort, a new governance and new goals for the ECB • A real Fiscal Policy coordination, including eurobonds • Financial Stability issues, including a banking union and an European regulator, to avoid asymmetric bubbles.

2 The case for a Microeconomic European Policy

• But a Microeconomic Policy at the European level is also needed, not only because of the current global and euro crises, but for “structural reasons” as well. • Such a Policy should include: • An Energy and Raw materials European policy • A Tourism European Policy • An Industrial European Policy, including not only the Manufacturing sector, but the ICT sector as well.

3 The case for a Microeconomic European Policy

The “structural reasons” for such an European Policy are: 1. The EU is steadily loosing weight in the world economy 2. The European energy dependence is worsening. And the raw materials dependence is dramatic 3. The EU share of world exports is shrinking, and so is the relative European manufacturing sector. 4. Tourism is a stronghold, but action is needed.

4 1. The EU is steadily loosing weight in the world economy Europe is shrinking at a faster pace than the US Share of World GDP EU USA BRICS Rest of the World

1980 32% 25% 12% 31%

1990 29% 25% 15% 31%

2000 25% 23% 18% 34%

2010 20% 19% 25% 36%

2040 (E) ?? ?? 50% ??

The BRICS (Brazil, Russia, China, India and South Africa) have more than doubled their share in world GDP in the last 30 years and, according to several forecasts, by 2040 they will become almost half the World's GDP. 5 2. The European energy dependence is worsening

European Union Energy Dependence In the last ten years the EU’s energy

60 dependence has increased almost 10 58 points. 56 54 An increase of 30 € in oil prices (what the 52 IEA expects for the next 10 years) will 50 mean an additional annual transfer of 48 Percentage 46 132.000 M€ to oil producing countries. 44 42 The EU annual budget sums up to 40 140.000 M €. 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

EU Net imports of primary energy

600.000 Energy 486.178 500.000 376.941 dependence, together 400.000 378.258 311.930 with rising oil 208.999

Million € Million 300.000 168.947 prices, have multiplied 187.247 199.646 200.000 137.125 the EU’s energy import 96.175 100.000 bill by 5 in the last 10

0 years 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 6 2… and the raw materials dependence is dramatic

Critical raw materials According to a recent study, developed by a group of experts in the framework of the EU Raw Materials Initiative, Europe is on a critical position to ensure the supply of some raw materials.

Antimony Display panels, micro capacitors Indium Displays, Thin layer photovoltaic China 91% Bolivia 2% Russia 2% South China 58% Japan 11% South Korea 9% Africa 2% Canada 9% Beryllium Military applications Magnesium Space, manufacturing EEUU 85% China 14% Mozambique 1% China 56% Turkey 12% Russia 7%

Cobalt Lithium‐ion batteries, synthetic fuels Niobium Micro capacitors, ferroalloys D. R. Congo 41% Canada 11% Zambia Brazil 92% Canada 7% 4% Fluorspar Lenses Fuel cells, catalysts, seawater desalination China 59% Mexico 18% Mongolia 6% Platinum South Africa 79% Russia 11% Zimbabwe Group Metals 3% Gallium Thin layer photovoltaic, Led Permanent magnets, laser technology N.A. Rare Earths China 97% India 2% Brazil 1% Germanium Fiber optic cable, IR optical technology Tantalum Micro capacitors, medical technology China 72% Russia 4% EEUU 3% Australia 48% Brazil 16% Ruanda 9% D.R. Congo 9% Graphite Steelmaking Tungsten Drills, steelmaking China 72% India 13% Brazil 7% China 78% Russia 5% Canada 4% The study considers 14 of 41 raw materials as critical. This is due to their high relative economic importance and to high relative supply risk.

7 3.The EU share of world exports is shrinking

Global Trade of Goods The EU’s share in goods trade, as an approximation of industrial production, has decreased in the last years, mainly because of emerging economies growth

Share in world trade of Goods

EU excluding internal trade

19%

18%

17% Percentage 16%

15% 2003 2004 2005 2006 2007 2008 2009 8 3. ….and so is the relative European manufacturing sector.

Example 1: Shipbuilding The global market for new ships has increased one and a half times in the last 10 years but the production in European shipyards has remained almost constant, reducing notably the EU share in the shipbuilding global market.

Shipbuilding Sector Evolution

50.000 45.000 40.000 35.000 30.000 25.000 20.000 Rest of the World 15.000 World Total 10.000 Production CGT Thousands 5.000 Europe Europe 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 9 3. ….and so is the relative European manufacturing sector.

Example 2 : Automotive Sector In 1999 European factories produced 3 in 10 of all the cars and trucks built in the world. Ten years later they produce 2 in 10 and the tendency is a further decrease.

1999 Automotive Production 2009 Automotive Production

Rest of the world Rest of the world 66,7% 57,2%

EU (15) China EU (15) China 20,2% 3,3% 30,1% 22,6%

10 3. ….and other technological sectors

Example 3: the ITC Sector The EU shows a big gap between imports and exports in the ITC Sector. Its coverage ratio is just above 0,5. This difference is mainly due to hardware and semiconductors. Only 9,2% of the sales of the top 25 companies in this area come from Europe.

ITC Imports and Exports (2008) Million US$ Hardware & Semiconductors Top 25 Enterprises. Sales

309 287

USA; 31,8% 174 159 ITC Exports

114 115 ITC Imports Asia; 59,0% 84 Europe; 9,2% 58

EU USA Japan Korea

11 4. Tourism is a stronghold in the EU

But action is needed to keep such a position The EU is currently the main destination for World Tourism This year the number of tourists will reach 1 billion, for the first time ever Byy, 2020 this number will climb to 1,5 billion (an additional half a trillion € ).

The EU must act to preserve its Share in world tourism

leadership. Africa+Mi ddle East, 11%

Americas, EU, 39% 16%

Asia+Pacif ic, 22% Other European, 12% Source: UNWTO 12 What should a Microeconomic European Policy consist of?

• The EU micro policy should be complementary, not a substitute for domestic micro policies. • It is not a matter of spending more at the EU level, but spending better, shifting public investment and financing support towards EU exporting sectors • A higher coordination of policies is needed • We must improve EU regulation. • We should change the role of EU surveillance institutions: from chasing member states (and European companies) to building an EU productive industry.

13 What should a Microeconomic European Policy consist of?

In particular, specific targets for EC authorities and EU institutions should be established regarding 3 measurable and accountable goals:

1. The EU share of world output (its decline should be stabilized). 2. The EU share of global exports (it should be held constant). 3. The EU current account (it should improve)

14 Some examples Energy Dependence United, Europe may better manage its uncertainties, thanks to a stronger negotiating position through: 11 TWh 7,2% • An EU single voice

15 TWh 2 TWh • More interconnections 13% 12 TWh 35 TWh • A common regulatory framework 20,9% 8 TWh 8,6%

18TWh 1 TWh 8 TWh 9 TWh 41 TWh 9,7% 15,2% 3% 1 TWh

1TWh

key regional electric connections capacity in Europe

X% % Cross‐border electricity between regions

The solution of the Russian‐Ukraine gas crisis of 2009 is an example of our strength if we negotiate as one. The same strategy is needed when discussing with Northern African countries. 15 Some examples

Tourism

In order keep the EU leadership in World Tourism, we need to compete for the new markets: the Russian, Indian and Chinese outbound travel markets •Joint packages • Multiple visas, exchange of information • Joint promotion abroad Number of tourists worldwide (M) In 1980 there were only 270M 2000 tourists world wide. This 1800 1600 1400 year, 2012, we will reach 1000M. By 1200 950 the year 2030 there will be 1800M 800 530 tourists. 400 270 0 Each visitor spends 1000$ on 1980 1995 2010 2020 (E) 2030 (E) average. So, we are talking about a 800b $ cake. Source: UNWTO

16 Some examples

Single Digital Market

In order to reach a real Single Digital Market we must accomplish: •Remove technical and legal barriers •Accessibility: 100% population covered with basic broad band •Infrastructure: Deploy of New Generation Networks •Promote intra EU e‐commerce

Single Digital Market Europe has a great potential in this

area. In 2010 only 20% of European 80%

enterprises sold through internet to 70%

other European countries and only 60%

50% Only in their country 7% of European citizens had bought 55%

something through internet from 40% In other European Countries another European country. 30%

20% 24%

10% 20% 7% 0% Enterprises that sell Citizens that bought through internet through internet 17 Some examples

Industrial Policy Following the (unfortunate) years in which “the best industrial policy is no industrial policy”, the need for an active European industrial policy should be widely recognized.

Why an European Industrial Policy?

Although Industry only represents 18% of the EU GDP, it accounts for:

• Internationalization: Industry produces almost 75% of all exports of goods and services from the EU. • Innovation: Industry is responsible from almost 80% of the R+D executed by the EU private sector. • Productivity: Industry productivity is 9% higher than the productivity of the whole economy.

INDUSTRY = JOBS + EXPORTS

18 A final question for debate

We want a strong and dynamic industrial sector and we also want to be leaders in:

Climate Welfare change system prevention ¿? ¿?

Fiscal Monetary discipline orthodoxy

Can we make all these 5 goals compatible?

19 The case for a Microeconomic European Policy

Miguel Sebastián , Universidad Complutense de Madrid

Policy Network meeting

September, 2012 . London Stock Exchange

11 November 2011

On Growth Larry Summers, economist and former US Secretary of the Treasury under President Clinton

Speech delivered to Policy Network, London, 6 September 2012

Thank you very much Ed Balls for that overly generous introduction. It brings to mind an occasion when I was Secretary to the Treasury and I was asked to introduce President Clinton at a major financial meeting and as you might expect I worked quite hard on my introduction and I introduced President Clinton extolling his many virtues in the financial area and after I finished my introduction he came up, he put that big arm of his around me and he said, ‘Larry, you have just demonstrated one of my first laws of political life – whenever possible be introduced by somebody you appointed to higher office’. There is a kind of academic corollary, whenever possible be introduced by a former student to whom you gave an A. I am here for three reasons. I am here because I am Ed Balls’s friend and was his teacher. It should be clear that anything that he says that is wring is a reflection of my failings as a teacher and anything that he says that is correct is because the apple fell some distance from the tree. I am here because I have been, on and off now for more than 15 years, part of an ongoing transatlantic dialogue about the future. About what progressive governments can do to make economies work for all their people and especially to create a thriving middle class. A dialogue that was started initially by Bill Clinton and Tony Blair in the mid‐‘90s, that was carried on by Al Gore and Gordon Brown and that continues to this day. That provides an opportunity for us in the United States and you in the United Kingdom to do what we do too infrequently which is to learn from the experience of other countries. To learn by looking beyond our own borders as we think about economic policy and I think that that is something that is very important. Now, at the time that dialogue began, while there were important differences, the broad thrusts of US and British economic policy were in the same direction. That is no longer true today. Indeed I believe that all economists should be subject to an important discipline; when they express views and opinions it is reasonable to ask of them, what could happen in the next three years that would convince you that you were misguided in your analysis and were substantially off‐ track in your understanding of how economies work. Now I believe that is a good discipline to which any economist or political figure expressing views should be subject. I regret to have to tell you that I have subjected myself to that discipline over the last several years and I have done it in the following way. When people have said, what would convince you that your understanding of macroeconomics was substantially misguided? I have had for the last two and a half years a consistent answer. And that answer is, that if Britain were to enjoy a rapid recovery and a major acceleration of growth as a consequence of policies of fiscal consolidation, radical hurried fiscal consolidation, I would have to concede that my understanding of macro‐economics was

Policy Network, 11 Tufton Street, London, SW1P 3QB T: +44 (0) 207 340 2200, E: info@policy‐network.net, www.policy‐network.net substantially amiss and radically alter my views. Fortunately for my intellectual pride, but more significantly vastly unfortunately for the people of Britain, that has not been what has.. I have a picture here.

This is the picture of what has happened to the American economy that pursued a strategy of recognising that restoring economic growth and resisting, with all force, the possibility of depression. Our results are manifestly unsatisfactory in an 8.3% unemployment rate, we have a long way to go but US GDP is significantly ahead of its previous peak ‐ the same cannot be said in Britain. When I became President Obama’s chief economic adviser in 2009 I was asked how would I know if we had succeeded and the answer I gave was this: I said that my daughters had just completed a secondary school education in US history and I was struck that many events that seemed important to me, they had not learned about. The 1987 stock market crash, the recession of 1982, even the recession of 1974/1975, was not something that they had studied. On the other hand they had spent six weeks studying the events of the 1930s. And I said we would have succeeded if these events were the subject of economic history a generation from now but were not the subject of secondary school history. And by that standard, after nearly three years of sustained economic growth, we are through the valley, but certainly not yet up the mountain but we have avoided the prospect of a 1930s‐like experience in the United States. I cannot say the same with respect to Great Britain. The downturn in British output is more sustained than at any point in your 20th century economic history. And so this is a moment when the comparison between our countries is particularly instructive and that is why I am glad to be here.

Finally, I am glad to be here because I think this year’s, everywhere in the industrial world, a moment of extraordinary importance in political economy. On the one hand there has not been a moment with more potential. Take this device. I would guess almost everyone in this room is carrying a device – a device like this one. Here are some things you can say about this device – it has more computing power within it than the Apollo programme that sent a man to the moon did. I work at Harvard University which has one of the world’s five greatest libraries. If you gave me my choice between access to all those libraries and no access to this device, and access to this device and not access to those libraries, it would be an easy choice. And everyone can have a device like this and increasingly we are on a path to everyone on this planet having a device like this. Here’s a third thing you can say about this device – which would you rather have: the communications and connectivity with people all over the world that this device – email, social networks have, or full access to the Whitehouse communications system as it stood for President Kennedy in 1960? I don’t think that’s a close call either. It was a major technological achievement that enabled you to have a phone conversation with people in Moscow – it is nothing with this device. So we are at a moment on the one hand of staggering economic potential being driven by information technology, and yet on the other hand, as this figure tells us, too much in our current moment is reminiscent of the time, another time, after a remarkable technical change; after the dissemination of widespread electrification in the 1920s; after vast increases in the use of automobiles; after the development of synthetic fabrics. Then too there was remarkable technology and remarkable capacity and then too, overconfidence, financial excess, drastically declining asset values, excessive debts, compressed demand stunted the life of the middle class, impoverished the state and led to international disintegration as frustrated electorates turned to nationalist policies. That too was a moment of opportunity but it was a moment of opportunity that ended in disaster and so there is

Policy Network, 11 Tufton Street, London, SW1P 3QB T: +44 (0) 207 340 2200, E: info@policy‐network.net, www.policy‐network.net much that needs to be considered at this moment. I don’t think there has been a more significant juncture for economic reflection during my professional lifetime.

How then are we to understand the conditions that bring us to this point? Here I believe that Keynes, with his rejection of Say’s law and his insistence on the importance of aggregate demand had it exactly right. You know if you ask, what is it that a student should come away with from an introductory economic course, what is the most important thing to come away from an introductory economics course? There are many things, power and markets, all of that. But I think the most important thing that a student can come away with from a macroeconomics course is the idea of the fallacy of composition – that what’s true individual by individual is not true for the group. If any one of us rushes out of this room they will get out of the room more quickly than everyone else. If we all try to rush out of this room we will trip over each other, injure each other and very few of us will succeed in leaving this room. If I stand up at a football game I can see better, if everyone stands up at a football game no one can see better and everyone is less comfortable. And in the same way it is the central insight of modern macroeconomics that one person or one firm or one government is another’s spending. Spending is another’s income. Any one of us can make ourselves wealthier by not spending and accumulating. The effort for us all to do so simultaneously makes us all poorer. It is the same idea by the way, or a related idea, in the global context. It is common to think of countries in competitors in international commerce, like Coke and Pepsi, but that is actually wrong. Coke doesn’t buy anything from Pepsi. Pepsi doesn’t by anything from Coke. Britain sells to China and Britain buys to China. Coke’s misfortune is Pepsi’s good fortune. China’s misfortune is Britain’s pain. One needs, in macroeconomics, to think about the whole system.

How then to understand what we have been through. It can be very very complex or it can be made very simple. We went through a period in which excessive serenity and confidence proved to be a self‐denying prophesy. It led to excessive borrowing and lending, excessive capacity creation and spending. Eventually the optimism stopped, reality set in, asset values declined, financial strains increased. Creditors were nervous about debtors and wanted to spend less. Debtors were nervous about their situation and wanted to repay more. Everyone tried to save more. If everyone tries to save more and spend less and no one tries to spend more, the result is economic contraction. Now to be sure there is a market answer. The market answer is that interest rates are supposed to fall but interest rates can only fall so far; that was the idea of the liquidity trap. And so the private sector swung, in my country and in yours, from substantial deficit – spending more than it saved – to substantial surplus – saving more than it spent, leading to economic contraction. Here’s lesson… while first taught by Keynes is today being better understood on my side of the Atlantic than by those in power in yours. And if you remember only one thing that I say, remember this – it is the central irony of financial crisis that while it is caused by too much confidence, too much borrowing and too much spending it is only solved with increased confidence, increased borrowing and increased spending. That was the central insight behind the recovery act put in place by President Obama that is estimated to have saved or created some 3.5 million jobs, and that was the central truth missed in the lurch to fiscal consolidation here in Britain.

Let me develop the argument in this way. First, output in a situation like yours or in a situation like ours is demand‐constrained. You see that in the number of people who are unemployed. You see that in the low level of vacancies. You see that in the lack of severe wage pressure. Anyone who

Policy Network, 11 Tufton Street, London, SW1P 3QB T: +44 (0) 207 340 2200, E: info@policy‐network.net, www.policy‐network.net doubts that demand is the major constraint in the British economy should ask themselves this question – what would happen if a major surge of export demand were to develop tomorrow. Would the response be to raise interest rates sharply in order to curtail inflationary pressure or would the response be to welcome the increases in employment that would result? Would we welcome an increase in private sector confidence that enhanced the animal spirits of businesses and led them to invest more or would we resist it as excessive demand pressure? I think the answer to those questions is relatively clear and may confirm that it is demand that is the short‐run constraint in your economy, as in ours.

Second, demand shortfalls that constrain output in the short‐run limit potential in the medium and long‐run. They do so in five ways. They do so by curtailing capital investments, in new capacity that will increase productivity in the long‐run. They do so by limiting what is often most fundamental for the long‐run but most dispensable in the short‐run – investments in research and development, investments in brand development, investments that are a cost in the short‐run ‐ a deduction from profits‐ but establish the basis for long‐term prosperity.

Third, they lead to increases in unemployment and all if us as human beings are erasures of habit. The habit of working is one that persists. The habit of not working is also one that persists. The first time I encountered this phenomenon, some years before I studied – well before I worked with Ed – was when I was led to consider the experience of women’s massive entry into the labour force during the Second World War. And there were two views among economists at that time – there was a view of the rational expectation school that this represented something called intra‐temporal substitution and that having worked very hard during the Second World War it would be time for a rest and so we would see fewer women working after the Second World War if that massive expansion had not happened. There was an alternative view that wasn’t those of the rational expectations school that wasn’t of the common sense expectations school that people who had had the experience of working would stick with it. And one looked at the data and it was very clear and the same has been demonstrated in study after study of long‐term unemployment ‐ those who have been unemployed for more than a year, certainly more than two years, have a very difficult time returning to work. They are much more likely to go on some form of the dole, burdening their pride and their nation’s fisc.

Fourth, and perhaps most painfully, studies, at least in the United States and I wager that the same is true in Britain, studies of people who are today in their high 40s or their early 50s find that those who have entered the workforce in very difficult moments like 1982 or 1975 are 30 years later much less well situated than those who got the kind of good start that a strong economy can provide a young person with. That there is a shadow cast forward for a substantial period by economic slack. And finally, and perhaps most ironically, economic contractions burden nations with – and governments ‐ with increased debt ratios that reduce their scope for action. If Britain had even achieved.. had even achieved its level of GDP that it reached at the previous business cycle peak five or six years ago today British debt ratios, debt to GDP ratios, would be seven or eight percentage points lower. Britain’s freedom of action would be enhanced. Britain’s capacity for public investment would be greater than it is. So you are constrained by lack of demand. That demand is proximally a short‐run issues but the single largest issue for Britain’s economic potential in 2020 or 2025 is the pace at which you recover from the current slump. Let no one dismiss the

Policy Network, 11 Tufton Street, London, SW1P 3QB T: +44 (0) 207 340 2200, E: info@policy‐network.net, www.policy‐network.net objective of restoring rapid economic growth as some kind of short‐run stimulus – it is the most important possible inducement to necessary long‐term investments.

Third [sic], the government has the capacity to spend and invest and to spend and invest in ways that may well pay for themselves. Ponder this, in your country and in mine the real interest rate – the interest rate after adjusting for inflation, the interest rate that represents the actual cost to the fisc of borrowing – is even for a ten year period significantly negative and is very close to zero for a generation or more. Now ponder an investment programme, not a great investment programme, not an investment programme that generates remarkable results. And investment programme in which a pound is invested today and a stream of returns, not that earn 20%, not that earn 10%, but that earn 5% is produced. That 5%, that 5p of GDP will, given your tax rules and your benefit programmes, lead to 2p a year of extra government revenue. What is the cost of servicing the debt that was necessary? The cost of servicing the debt that is necessary, in real terms, is very close to zero. The investment can pay for itself. Now make some allowance for the fact that that investment is an investment that pays for… that raises demand and increases output and therefore expands the economy beyond the direct return from that investment in both the short‐run and the long‐ run. There is the potential for the investment to lead to a lower debt ratio and not a higher debt ratio. This is not speculation, this is ordinary arithmetic. In such an environment, to radically slash public investment is, I would suggest, to violate the Hippocratic Oath – first, do no harm. It compromises jobs, it compromises the future, it ultimately raises the debt burdens that are passed on to children.

Now these arguments are not universally accepted. There are many who do not accept this view. They choose instead to moralise about living within their means. Who choose instead to be alarmed about the prospect of some kind of catastrophe if more borrowing, I’m not very good with this [projector]. Keynes had it about right, in characterising the motives and the logic behind such assertions. Conservative bankers regard it as more consistent with their cloth and also as economising thought to shift public discussion of financial topics off the logic onto an alleged moral plane which means around the thought where vested interest can be triumphant over the common good without further debate.

But what is the argument and can the argument be tested? The argument is that yes it might be wonderful to do all of these things but if you don’t radically reduce debt, if you don’t engage in rapid fiscal consolidation, the markets will panic, the markets will become alarmed an suddenly you will become Greece in a far more difficult situation. Of course to the extent that the investment succeeds and succeeds in stimulating economic growth, through the logic I have just presented it will lead to lower and not to higher debt ratios. But there are further points to be made as well by looking at the logic of markets. If a major part of driving the British bond market was concerns about solvency then you would expect that at moments when interest rates rose, stock prices would fall as everyone became more anxious about the future and yet the pattern of correlation is very different. Interest rates rise and the stock market rises because there is a bit of hope for the economy. Interest rates fall and the stock market falls. But what about a more direct measure? What about the relationship between the level of interest rates. This graph takes a moment of explanation but I think is illuminating. It plots on a reverse access British yields and Britain’s risk premium as measured by CDS. What do you see? You see that at moments when interest rates are highest, CDS are lowest. When interest rates fall as they have over time, CDS rise, what is that

Policy Network, 11 Tufton Street, London, SW1P 3QB T: +44 (0) 207 340 2200, E: info@policy‐network.net, www.policy‐network.net telling you? It is telling you that it is economic weakness that is pulling down interest rates and at the same time raising the markets assessment of risks associated with British debt. It is telling you that the concern that people have for Britain is not that a profligate government will somehow spend itself into unsustainability leading to default it is that profound economic weakness that leads to lower interest rates is what is associated with the risk premium. It is paradoxical because you’d think that a higher risk premium adds to interest rates and creates higher interest rates but it looks exactly the opposite. Now, you can say anybody can put two lines on a chart and make it look however they want and my profession is not innocent entirely of that but another way to look at the question is to look at correlation over time between movements in interest rates and movements in credit default swaps. And here too, what you find is that the correlation is consistently negative. That is, when interest rates are going up, credit default swaps are going down. Now, if somehow this fiscal consolidation was having the desired effect you wouldn’t see that king of pattern. So I would suggest to you that in the fact that interest rates are down not up in Britain, down not up in the United States you see that it is economic weakness that is the greatest threat to the long‐run fiscal health of both or our nations and that is why addressing economy weakness, in part through necessary public investment starting from cancelling imprudent and excessive slashing of public budgets has to be the first and major priority. I have belaboured this point because I think it is the single most important economic issue for Britain. I think the lack of demand has been the single greatest constraint on the US economy. I think the greatest folly we have committed in the United States is that at a moment when we could borrow money for 30 years in our own currency at a rate in the 2s, at a moment when construction unemployment was in the range of 15%, at a moment when paint was chipping of the walls in 30,000 American schools we were unwilling to invest, that is our greatest mistake. Yours has not just been an unwillingness to step up and invest more but a determined insistence in investing less.

Now make no mistake, and I will speak much more briefly about these things, that bad monetary policies bad fiscal policies can do enormous damage to an economy but the dials of fiscal and monetary policy no mater how brilliantly twiddled do not ultimately create an inclusive prosperity. That depends on a nation’s people, that depends on a nation’s businesses, that depends on a nation’s institutions and so, even as the short run issue of demand is addressed with fiscal policy it is essential to embrace other issues. I would highlight three. Any programme must be associated with a systematic long‐run look at the financial health of the public sector. The situation and the arguments I made are arguments that go to the particular situation of a demand constrained economy with a zero interest rate, not to the canonical situation of a modern economy. It is essential to engage in long‐term budget projection exercises and to make plans today to align over the medium and long‐term revenues and expenditures of government. That is why the fiscal debate in the United States that will take place after our election is so profoundly important and there are parallels here in Britain. Second, it is essential after all that we have been through that we think about the financial sector in the context of a responsible capitalism. A responsible capitalism is one that avoids the financial crises that have been a recurrent feature of our landscape for the last generation, in 1987, in Mexico, in Asia, in Russia, with LTCM with the internet bubble and now this most recent set of episodes and so we must make sure that our financial system is stable but that is not enough. If you think about it if you are trying to design a financial system to work for the few but not the many and to create the greatest potential for instability how would you design it? You’d make it be centred around very large institutions whose failure could not be contemplated because those very large institutions wouldn’t really have a strong incentive because they were so

Policy Network, 11 Tufton Street, London, SW1P 3QB T: +44 (0) 207 340 2200, E: info@policy‐network.net, www.policy‐network.net large to focus on ordinary small businesses. They would have a funding advantage because they were too large to fail so they’d absorb almost all the capital and because they had that funding advantage and because there was a sense that they were too big to fail they would be very comfortable engaging in marco‐risky acts rather than micro‐prudential acts and that is too much, the financial system today in too many countries. So yes, let us focus on ensuring adequate levels of capital and liquidity for our major financial institutions but let us also make sure that there are financial institutions that want to lend to the high street shop. Let us also assure that families looking to purchase a home while their children are still young enough to live in it have that opportunity as well, you know this is an area where we have I think benefited relative to you. America has the JP Morgans and the Citigroups as you have large institutions but we also have 8000 community banks. We also have a flourishing bond market. We also have and this is something that I have for many years regarded as an important source of America’s success, we are, I believe the only country where if you have a good enough idea you can raise you first $100m before you buy your first suit. And that first $100m that you raise is equity not debt and so a culture in which equity is available, a culture in which there exist institutions whose focus is on lending to medium sized enterprises, a culture in which finance for housing is readily available is a culture that will have more demand, is a culture that will have a healthier financial system and is a culture that will have a greater middle class.

Finally, I spoke early on about this device and about how the world was changing because of devices like this. There is one important thing I think you have to recognise about this device it is of next to no use to you at all. If you can’t operate logically and think conceptually you can’t exploit most of that potential to replicate the Harvard libraries or the White House communications system or the Apollo’s computing power. If you look at the statistics on educational achievement they are not where we would like them to be for my country or for yours. A rising Asia is demonstrating a capacity to develop human capital that is remarkable. Some of that is cultural, some of that may have to do with issues of measurement, some of that may come at the expense of the kind of creativity that has led to our economy success but, if you take the long run, we had an agricultural economy, then we had an industrial economy and now we are going to have a knowledge economy. An industrial economy without power does not succeed and I knowledge economy without successful education and skills development does not either and that is why that too must be at the centre of an inclusive economic policy. None of this is an argument against the power of markets; none of this is to begrudge success. As my old boss Bill Clinton used to say, he wanted there to be more millionaires in America because that would mean there were more people succeeding and creating opportunity and that is something that all of us should want but it should be by creating opportunity and that will require re‐imagining the public sector. A public sector that is able to meet it’s fundamental obligations in a new economy. It is a new economy but the old truths. There needs to be demand, there needs to be healthy finance, there needs to be able capable and willing workers and there needs to be a strong and capable and generous government as part of a strong and capable and generous society remain as true as ever. Thank you very much.

‐ends‐

Policy Network, 11 Tufton Street, London, SW1P 3QB T: +44 (0) 207 340 2200, E: info@policy‐network.net, www.policy‐network.net Old Truths for a New Economy

September 6, 2012 London Stock Exchange

Lawrence H. Summers Charles W. Eliot University Professor, Harvard University The Profile of Recession and Recovery

Source: NIESR GDP Recovery Since Mid‐2009

Source: Krugman “Conservative bankers regard it as more consonant with their cloth, and also as economising thought, to shift public discussion of financial topics off the logggpical on to an alleged ‘moral’ plane, which means a realm of thought where vested interest can be triumphant over the common good without further debate.”

‐ John Maynard Keynes, A Tract on Monetary Reform CUKT1U10 Curncy (UKT CDS USD SR 10Y) GUKG10 Index (UK Govt Bonds 10 Year Note Generic Bid Yield) GUKG10 Index (UK Govt Bonds 10 Year Note Generic Bid Yield) CUKT1U10 Curncy (UKT CDS USD SR 10Y) GUKG10 Index (UK Govt Bonds 10 Year Note Generic Bid Yield)

11 November 2011

Labour’s New Agenda Ed Miliband, leader of The Labour Party

Speech delivered to Policy Network, London, 6th September 2012

I want to start by thanking the Stock Exchange for hosting us, and Policy Network for organising today.

Policy Network has long been committed to new thinking and building a progressive alternative.

And the speakers on today’s programme are a tribute to your influence.

I also want to thank Larry Summers.

He has always brought rigour and seriousness to the great problems of politics, the economy and society.

And he showed that again with his speech this morning.

My argument today is this. In the 1990s most economic conferences of this type were held against the backdrop of a set of assumptions that had emerged from a decade earlier. Three were particularly important: ‐ Low inflation was the key to growth. ‐ A rising tide would lift all boats and wealth would trickle down to all. ‐ And the rules governing our economy were unchangeable.

New Labour challenged some aspects of those assumptions, but also left others unchanged.

But as I will argue, all of them have been discredited by the events of the last five years.

And that is why today’s conference is so important.

Because it is a meeting of economists, business people and politicians who believe the old answers won’t work.

Policy Network, 11 Tufton Street, London, SW1P 3QB T: +44 (0) 207 340 2200, E: info@policy‐network.net, www.policy‐network.net

And who believe in the need for new ideas to rise to the challenges facing Britain today.

Events over the summer have simply reinforced how urgent this new thinking is.

Britain’s economy has now been shrinking for three quarters in a row.

This means young people across the country denied hope and opportunity.

It means families who are struggling to pay their bills each month.

And businesses struggling to keep their heads above water.

The Government made a bargain with Britain: It said all this is a price worth paying to get our economy back on track and put the nation’s finances in order. But it has failed. Public borrowing, far from falling, is actually rising.

26 per cent higher than it was at the same point last year.

Alongside the Government’s economic failure, we have watched their political failure.

No longer able to say “we’re all in it together” after the Budget for millionaires, the failure of Lords reform and boundary changes, and a reshuffle which changed nothing but the faces.

Now there are some who believe that this economic failure means that all the Labour Party needs to do now is:

Attack the Government. Sit back. Wait for it to fail. Wait for it to fall.

So that we can go back to governing as we did before.

But that would be the wrong strategy for my party and the wrong strategy for our country.

The lesson that Ed Balls and I take from this summer is the opposite: We need more change, not less.

Because the scale of the challenges have become greater: Restoring growth. Tackling debt. And building an economy that works for working people once again.

Just as the pre‐war consensus could not solve the problems Britain faced in 1945.

Policy Network, 11 Tufton Street, London, SW1P 3QB T: +44 (0) 207 340 2200, E: info@policy‐network.net, www.policy‐network.net

Just as the postwar consensus could not solve the problems of the late 1970s.

So the ideas of the last three decades will not solve the central economic challenges we face.

Instead we need a new agenda.

An agenda sufficient to the scale of the challenge, and to the demand of the British people for change.

Today is part of building that agenda.

That is a task not just for politicians, but for all of us who want to see Britain rise to these challenges.

I said earlier that economic conferences of the 1990s were created in the context of the assumptions of the Thatcher era.

Our new agenda must be built around new assumptions.

So first, my starting point is an obvious one, and that is the immediate crisis.

It’s easy to forget now but the old assumption was that low inflation would guarantee stability and growth.

And at conferences like these in the 1990s there were debates about the role of Governments versus central banks in making low inflation happen.

But low inflation didn’t ensure growth and stability.

In future the lesson is that macroeconomics is much more complex and faces much more uncertainty than was believed.

And the challenges we face go much wider than simply securing low inflation.

They include proper financial regulation.

And there is a more immediate lesson for the crisis we are in.

A lesson this Government desperately needs to learn: Growth does not happen automatically. Demand matters.

Anyone working in construction over the last year knows that they just don’t have the orders.

Struggling small businesses know they have fewer people coming through the door.

Policy Network, 11 Tufton Street, London, SW1P 3QB T: +44 (0) 207 340 2200, E: info@policy‐network.net, www.policy‐network.net

The young people scouring the Jobcentre for work know that there aren’t enough vacancies.

In the aftermath of a financial crisis, monetary policy alone, leaving it to the Bank of England, cannot solve the growth crisis we face.

I’m afraid the Government believed its own propaganda – that they could cut as far and as fast as they liked and the private sector would pick up the slack.

And that this was a route map for every country to follow. If ever greater austerity at home is a flawed philosophy, the rush to collective austerity – every country following this route ‐ is the ultimate in misguided dogma.

Because it denies countries the export‐led route out of the problems they face.

And we see the results in Britain and in much of the developed world.

Two and a half years on and the British economy has not grown at all in that time, and we are in a double dip recession.

So the evidence is in ‐ everyone now knows that the Government’s approach was wrong.

But they are lashed to the mast of a plan A that has failed.

As a result, instead of a change of direction, we get increasingly complex schemes and initiatives. We have more of them today.

Someone in New Labour said if you want to understand aspiration you need to understand conservatories.

They were right.

But a one‐year holiday from the current rules on planning for a conservatory extension of up to eight metres into a garden does not represent an economic plan.

The problem with these schemes is that it is unclear that they will have any substantial effect, and crucially that they are too complex to restore the confidence we so badly need.

For the housebuilders, for the small business, for the young jobless, they have made no difference.

So the immediate priority for our new agenda is measures that will restore both demand and confidence.

That is what Labour is aiming to do with its Five Point Plan for growth and jobs.

If the Government really wanted to get infrastructure moving they would follow our advice.

Policy Network, 11 Tufton Street, London, SW1P 3QB T: +44 (0) 207 340 2200, E: info@policy‐network.net, www.policy‐network.net

Bring forward long‐term investment projects like schools, roads and transport, not just tinker with the planning rules.

If they really wanted to make a difference to housing they would tax bankers’ bonuses and as we recommended, build tens of thousands of new homes.

Not simply fiddle with the social obligations of developers. And as we face a crisis of youth unemployment, they should be offering young people a Real Jobs Guarantee. That is the action our new agenda requires now. It is the only way to start to turn things around.

But the answer is not simply to deal with our short‐term crisis and then go back to business as usual.

The second of the old assumptions was that a rising tide would lift all boats.

And that cutting taxes at the top, trickle down economics, would eventually put income in the pockets of everyone else.

The last Labour Government challenged this by recognising that we needed redistribution to share the proceeds of growth.

We introduced tax credits which helped take around a million children out of poverty.

We should be proud of that achievement.

But today there are still 2.3 million children growing up in poverty.

And we have inequality that scars our country.

This shows that redistribution is necessary and will remain a key aim of the next Labour government.

But is not sufficient to achieve our goals.

So we need new ideas if we are to tackle the problems the economy faces.

What’s more, the Government’s economic failure means that whoever wins the next election will still face a deficit that needs to be reduced.

The redistribution of the last Labour government relied on revenue which the next Labour government will not enjoy. The option of simply increasing tax credits in the way we did before will not be open to us.

Policy Network, 11 Tufton Street, London, SW1P 3QB T: +44 (0) 207 340 2200, E: info@policy‐network.net, www.policy‐network.net

Of course, redistribution will always remain necessary. But we’ve learned that it is not sufficient.

And fiscal circumstances will make it harder not easier. The new agenda is that we need to care about the model of the economy we have and the distribution of income it creates.

We need to care about predistribution as well as redistribution.

Predistribution is about saying: We cannot allow ourselves to be stuck with permanently being a low‐wage economy.

It is neither just, nor does it enable us to pay our way in the world.

Our aim must be to transform our economy so it is a much higher skill, higher wage economy.

Think about somebody working in a call centre, a supermarket, or in an old peoples’ home.

Redistribution offers a top‐up to their wages.

Predistribution seeks to offer them more: Higher skills. With higher wages. An economy that works for working people.

Centre‐left governments of the past tried to make work pay better by spending more on transfer payments.

Centre‐left governments of the future will have to also make work pay better by making work itself pay.

That is how we are going to build growth based not just on credit, but on real demand.

And that is how we are going to help the squeezed middle of this country and, build a better economy when there is less money around.

And how we do this takes me to the third part of our new agenda: the rules of the way our economy works.

In the 1990s New Labour rightly embraced markets, most famously in our change to Clause 4.

The party embraced the creativity of capitalism.

And demonstrated it didn’t want to nationalise the corner shop.

Policy Network, 11 Tufton Street, London, SW1P 3QB T: +44 (0) 207 340 2200, E: info@policy‐network.net, www.policy‐network.net

New Labour did challenge some of the Right’s assumptions, introducing a National Minimum Wage to prevent exploitation and enabling more young people to go to university.

But in general, it was too silent about the rules that shape the way markets work – the key to responsible capitalism.

New Labour saw its task as showing it understood the dynamism of capitalism.

As a result it was harder for it be the party to reform it. Today, clear about the role of markets, we can more confidently be the people who set out how the rules need to change.

And it is urgent that we do so.

Urgent in the wake of the financial crisis.

Urgent if we are to tackle the challenge of predistribution that I have just talked about.

And urgent if we are going to compete as a country.

I appeal to everybody in this room to work with us on this agenda.

It is about changing the relationship between finance and the real economy.

That is why we have made proposals on changing the way our banking system works, and promoted a British Investment Bank.

We need fundamental change so that we have banks that serve the country not a country serving its banks.

We need to tackle the short‐termism that has characterised Britain for so many decades.

That is why Sir George Cox, formerly Director General of the Institute of Directors, is leading our review on short‐termism.

Because Labour is on the side of the business people who want to take the long‐term decisions to make their business a success now and in the future.

Not the speculation that tries to make a fast buck out of it.

All of the issues, from quarterly reporting to takeovers, are on the agenda of this review.

We need proper competition in all sectors of the economy so that consumers get a fair deal.

That means not allowing cosy cartels to develop in any sector, from energy to our train network.

Policy Network, 11 Tufton Street, London, SW1P 3QB T: +44 (0) 207 340 2200, E: info@policy‐network.net, www.policy‐network.net

Especially those which are essential to the standard of living of millions.

We also need a proper industrial policy for the country: all Government departments working together, including through procurement, to support British business.

For too long we operated on the assumption that this meant a return to 1970s‐style picking winners.

It doesn’t.

It’s about recognising the proper relationship between the private sector and government working together.

It’s what all major industrialised countries do.

And part of that industrial policy agenda is about recognising the importance of the green economy for the future.

Not posing the environment and the economy as alternatives as the current Chancellor does.

We need a skills system that doesn’t leave us as a country where the 50 percent of our young people who go to university have a career, but the other 50 per cent feel completely left out, hoping to be lucky and get an apprenticeship.

That means building a skills system that deals with the supply of skills and also drives up demand for those skills.

And we plan to build that new agenda with schools, young people, businesses and trade unions working together to fashion our new vocational training system.

And finally the new rules of the game must ensure responsibility from top to bottom in our society.

We need a welfare state that encourages people to work, and rewards those who do.

We also need companies that reflect the values of our society.

It was controversial at last years’ Labour Party Conference when I talked about predatory and productive behaviour.

But the move towards a more responsible capitalism is actually being led by many business people.

Firms who want to invest in their workforce, and who know that companies flourish best when rewards are fairly shared.

And those businesses should feel that the rules of the economy are on their side, not making their life harder.

Policy Network, 11 Tufton Street, London, SW1P 3QB T: +44 (0) 207 340 2200, E: info@policy‐network.net, www.policy‐network.net

And I believe creating this responsible capitalism will be better for our country.

A responsible capitalism is a resilient capitalism.

I recognise that this agenda is about long‐term change in the economy and it will take time.

But I believe the British people know in their heart of hearts that our economy needs big change.

Not business as usual, let alone politics as usual.

They recognise the scale of the challenge. And they demand that we rise to it.

We’re not going to wait for this Government to fail.

That’s why I say the new agenda is so important.

It is essential, if we are to pay our way in the world, pay down the deficit, and build an economy that works for working people.

The task for my party, and for you, is to develop this new thinking that will allow us to build the new economy. That is the shared challenge we face today.

I look forward to working with you on it in the months and years ahead.

Ends

Policy Network, 11 Tufton Street, London, SW1P 3QB T: +44 (0) 207 340 2200, E: info@policy‐network.net, www.policy‐network.net

11 November 2011

The case for an active government and modern industrial policy Chuka Umunna MP, Shadow Business Secretary

Speech delivered to Policy Network, London, 6 September 2012

Many thanks for that introduction, to Policy Network for organising this conference, and to the London Stock Exchange for hosting us.

The debate we have had today underlines what a pivotal moment this is for those of us on the centre left ‐ progressives ‐ in Europe and beyond.

The starting point, as always, is our beliefs and values. What distinguishes us from the Right is a belief in our mutual dependence, that “through the strength of our common endeavour we achieve more than we achieve alone”; that we depend on the collective for an environment in which each of us can fulfil our potential and realise our aspirations as individuals.

With that in mind, our goals remain unchanged: to build a fairer, more equal, democratic and prosperous world in a sustainable way. But the context, in which we seek to achieve those, goals has fundamentally changed since the mid 1990s and we have been too slow to react.

As Ed, Ed and others have described, we face huge challenges and need new ideas and a new agenda. That agenda is one that recognises that growth is not automatic, that growth alone may not help everyone, and that the rules of our economy are not set in stone.

In Government we did much to improve the functioning of the economy. Real growth in the economy led to substantial improvements in living standards for many, and we overhauled public services which had been neglected for so many years.

Then along came the crash of 2008 which exposed structural problems with our economy that we, and previous governments, had not sufficiently addressed. Growth had become concentrated in too few sectors and in too few regions of the economy, despite the RDAs, investment in skills and other measures. This, alongside the UK's open economy and historical strength in finance, left us somewhat exposed to a crisis rooted in that sector.

And despite rising productivity, as we heard this morning, not enough of the reward found its way into the wage packets of average earners, who saw their wages stagnate from 2003. Even as strong growth and labour market reforms meant employment reached record levels, too many people remained distant from the labour market, in insecure employment, or outcompeted by new entrants.

Policy Network, 11 Tufton Street, London, SW1P 3QB T: +44 (0) 207 340 2200, E: info@policy‐network.net, www.policy‐network.net

Those structural problems persist – indeed they have been exacerbated by a government of the Right which has failed to back key industries like defence, narrowed access to skills and educational opportunities, and held back regional economies. Living standards are being squeezed like never before, made worse by a Government that has hiked up VAT and done little to tackle rising rail fares and energy prices. The labour market is dividing, with highly skilled, well paid jobs at one end, and a badly paid, insecure economy at the other, with a hollowing out of those jobs in the middle. There is a hollowed out and a squeezed middle.

Despite this, those who are now in government are still vociferously championing the old neo‐liberal orthodoxies: that the preferred role of government is to get out of the way; that the only purpose of business is short term profit. They would rather leave markets to shape the nature of our society, rather than seek to shape markets to advance our goals. If this approach was ever right, its moment has assuredly passed.

Without new ideas and a new agenda we will not be able to adapt our economy to the seismic global and technological shifts which are under way, as the global economic centre of gravity moves south and east. The rise of the BRIC economies and the Next 11 coming up behind them are intensifying competition, but also creating new opportunities on breathtaking scale. Adaptation to these changed circumstances will not happen of its own volition.

And we will not be able to ensure that future growth benefits all unless we hard‐wire fairness into the ways that our wealth is created. The more that markets deliver better jobs and fairer outcomes, the less corrective action government will have to take: the ‘predistribution’ Ed Miliband referred to this morning ‐ a fiscally responsible and sustainable path towards the good society.

So, to achieve both rising and shared prosperity, we need to rethink the relationship between government and markets – we need to be far more discerning about the kind of capitalism we would like to see. We must set aside the neo liberal dogma that markets are the domain of efficiency, and that equity is for governments. We must combine the best of the market with the best of the state: to shape markets to achieve both social as well as economic objectives. This is what we mean when we say we need a more responsible capitalism.

But to make this agenda a reality requires a modern industrial strategy, as the panel this morning rightly argued. An agenda where the role of government is not to step back, but to step up: to work with business to create better outcomes at home and ensure we can pay our way in the world. But why do I argue for Government to play this role?

First, because – in a modern economy – market and state are inevitably intertwined. Whether they like it or not – governments can’t help but influence the functioning of markets. The challenge is to find and foster positive interactions.

Second, because there is a lot that active government can do to improve the health and functioning of markets. Markets work best where no one has a monopoly of power, where people can access the information they need so they know what they are getting into; where there is a strong competition regime. None of this is a state of nature. It requires the right policy framework and constant vigilance.

Third, the market outcome is the market outcome but policy actions can make other market outcomes possible: growth that creates jobs over jobless growth; sustainable growth – in all senses of the word – over short‐termism; and economy competing on quality, rather than an economy stuck in a low‐skilled equilibrium, competing on price.

Policy Network, 11 Tufton Street, London, SW1P 3QB T: +44 (0) 207 340 2200, E: info@policy‐network.net, www.policy‐network.net

Fourth, I would argue that governments can improve on market outcomes on their own terms, by doing things that – left to their own devices – markets cannot or will not do:

 Markets can’t set strategic direction. Governments, working with business, can. There are risks in doing so – not least the risk of capture by incumbents – so caution is necessary. But knowing that government is behind an industry or a technology reduces uncertainty and promotes investment.  Early stage, fundamental research is often too risky for businesses to undertake. In that respect, the role the US government played in financing or buying many of the innovations behind the ICT revolution is increasingly being recognised.  Through regulation, governments can create entirely new markets, as Labour did by requiring zero carbon homes within ten years.  And governments can help to foster clusters and institutions that enable pre‐market coordination and support.

What we are advocating here is in keeping with the international mainstream. I don’t just mean the obvious places like South Korea, China and Singapore. In modern industrial policy – as in life – it is important to remember that the winners write history. Ha Joon Chang likes to joke that the most successful industrial strategy of the US has been to convince the world that it doesn’t have one. Just because the some Americans preach a gospel of free markets does not mean that the federal government has not made huge interventions in markets through vehicles like DARPA, the Small Business Innovation Research programme, and the National Institutes of Health.

Looking at what they do – not just at what they say – it is the international norm to have an industrial strategy along the lines we are arguing for. It is the international norm to have a national investment institution, just as we are arguing for a British Investment Bank. And it is the international norm to have more developed regional institutions to create more balanced growth.

In terms of industrial policy itself, there is little controversy over the role of government in developing economy wide improvements in the business environment – improving infrastructure, access to finance and general skills. The seeming neutrality of these kinds of approaches is viewed as especially virtuous – although, in truth, no intervention is neutral. There is no doubt that we must do more to strengthen these so‐called horizontal approaches. This Government has failed to get lending flowing: net lending to businesses has fallen by more than £10 billion over the last year, and by more than £33 billion since they took office. It is failing to invest in the infrastructure of the future. These are the fundamentals.

But beyond this support for business across the economy, we need a clear focus on the needs of individual sectors that can drive our future success. In this respect, I am intensely relaxed about picking sectors. Just look at what has happened in the UK automotive sector since Labour set up the Automotive Council, as Paul Everitt has already talked about today. It brought the industry together to create a shared understanding of the problems it faces and a shared commitment to solving them, supported and encouraged by government, paving the way for more than £5.5 billion of new investment over the last 2 years alone and the set the industry on the path towards record production. There is much more to do in that sector to build the supply chain capacity where so much value is added, but it is on the right track.

By being an honest broker, government can help industries discover futures they didn’t know they could have. While ensuring competition in the market place, it can encourage and facilitate collaboration away from it. By standing behind these visions of the future, government can help firms move towards them with

Policy Network, 11 Tufton Street, London, SW1P 3QB T: +44 (0) 207 340 2200, E: info@policy‐network.net, www.policy‐network.net confidence. What this means will differ from sector to sector – which is why the focus at the sectoral level is so important.

Although there are risks from this kind of action – of entrenching the position of incumbents, of investing in the wrong technologies – this cannot be the end of the argument. The risks of action must be properly balanced against the risks of inaction. These kinds of balanced decisions are the essence of normal policy making. Of course it means being absolutely clear about the limits of industrial strategy, and having the discipline to stay within them. It means having objective criteria, impartially assessed to inform decision making, away from the glare and distortions of political calculations. So let us have that conversation – with our eyes open to the risks, but also to the possibilities.

There is a clear alternative to stalled growth today and national decline tomorrow. It is a choice between self‐defeating austerity, and fiscal and macroeconomic policies for growth. It is a choice between stepping back and leaving our national future in the hands of the market, or a Labour Government, ambitious for Britain with a plan for growth, stepping up to support productive business, and shaping our economy to serve the needs of our society.

Policy Network, 11 Tufton Street, London, SW1P 3QB T: +44 (0) 207 340 2200, E: info@policy‐network.net, www.policy‐network.net