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Q: Do you think that the challenges the UK is facing now are very different to those of five years ago or are they lingering problems that we’re still struggling to address?
A: In one sense one of the big problems before the crisis is still with us, namely the dearth of investment opportunities. Maybe that will work itself out and maybe the very fact that we’ve had so little investment for so long will create a replacement demand so that we’ll get some kind of economic recovery some time. However, I think that the structural problem of the global savings glut and investment dearth is still with us. What has been highlighted in recent months is the possibility that we didn’t just suffer an aggregate demand shock but a supply shock as well. The fact that productivity has been so very weak suggests there is a supply side problem. That could be a result of the crisis or it could be something else at work. It is possible that the same slowdown in technical progress that caused the investment dearth also lies behind the slowdown in productivity.
Q: Does this suggest that a simplistic debate between “supply-siders” and “demand-siders” could be unhelpful in diagnosing and addressing current economic problems?
A: I find this really odd because I consider myself an extremist in many fields, yet here I am taking rather a centrist position. It is the case that there are supply- side issues and it is therefore the case that any economic stimulus, monetary or fiscal, wouldn’t just lead to a pure increase in quantity. The problem lies on both sides. I don’t think it is the case that any macroeconomic policy would be able to do much to greatly reduce unemployment. If you take the view, as I do, that there are probably around six million people either out of work or who would like to work more than they do I don’t see how pure macroeconomic policies can bring that down to one or two million. In that sense, you have to say either that mass unemployment is here to stay or take the view that we need far more radical unconventional policy – such as job guarantees and an explicit public works program of the sort that none of the major political parties are thinking about.
Q: What do you think the crisis has suggested in terms of the relationship between flexible labour markets and employment?
A: To my mind the argument that labour market flexibility leads to higher employment is entirely false, frankly. Firstly, look at the historical evidence. We had as much labour flexibility as you are ever likely to get in the 19th century and yet unemployment then was high and volatile. The only period when we’ve had really low unemployment was in the 1950s and 1960s when we had string trade unions and quite an inflexible labour market. So the historic record seems to completely discredit the labour market flexibility case. Also remember that the arguments for labour market flexibility, weaker unions and deregulation were supposed to work through the investment channel. If labour unions were weaker and companies were less regulated there was supposed to be more people willing to invest. That argument might have held in the 1980s for a brief while but the fact that there’s been a dearth of investment opportunities for the past 10 years tells us that quiescent unions and relatively deregulated labour markets are not stimulating that side. You could argue the counterfactual that investment opportunities could have been even worse if we had stronger unions and more regulation but it’s not at all obvious. I think labour market flexibility is a red herring.
Q: What do you make of the argument that increasing the minimum wage could improve the economic prospects of the UK?
A: I’m not sure about that. It is certainly the case that the minimum wage did not destroy jobs on the scale that the hysterics claimed, but I don’t think there was ever any economic justification for that sort of extremist claim. Yet I’m not sure the minimum wage has done much to raise productivity or employment either. I take the conventionalist view that it might have had a slight adverse impact on employment. If you raise the wages of low-wage workers you tend to see a lot of that gain being clawed back in lower tax credits. So a living wage is not necessarily a good way to boost the incomes of the low paid and it might well cost a few jobs. One of the reasons that the legal minimum wage didn’t cost many jobs is that it was set so low. If you start raising it further up the income scale then it might have an adverse effect on employment. It could even be viewed as a form of fiscal tightening.
Q: A number of voices on the supply-side have argued that there is a case for sharply cutting government entitlement spending to pay for cuts in corporation and capital gains taxes in the hope of reinvigorating the private sector. What do you make of their case?
A: That’s just ideological nonsense. In the 1970s and early 1980s profit margins were horrifically squeezed and it was the situation back then that in order to stimulate investment you needed to get margins wider and you therefore needed to depress workers’ bargaining power. That’s not the world we live in now. The historical record of the past 10-15 years shows increased labour market flexibility has not been accompanies by increased animal spirits and strong capital investment. I don’t see how it will be. I think this view is motivated partly by path dependence – the Right got the idea of supply-side economics in the 1970s and 1980s that worked briefly and so they’re sticking to it beyond its utility. But it’s also motivated in part by the ideology that if only the state could butt out then we would have high and stable level of employment and activity. There is absolutely no historical support for that.
Q: Do you feel that in discussions of grand economic reforms there’s an issue about a lack of democratic accountability?
A: This is a tricky one. An awful lot of sound economic policies are prevented by public opinion. It’s public opinion that creates this hostility to immigration and benefits, for example, and public support for austerity is stronger than the economic evidence would warrant. In Europe possible solutions to the euro crisis are prevented because of their political unpopularity, not least in Germany. From the point of view of pure economic efficiency we probably need a bit less democracy and a bit less attention paid to public opinion.
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"You have to say either that mass unemployment is here to stay or take the view that we need far more radical unconventional policy"Posted by Chris Dillow on Mar 26th 2013
Chris Dillow, economic writer at Investors Chronicle discusses the tension between policy and public opinion.
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