Tuesday 28 November 2017
UK Industrial Strategy - Productivity the non-problem
There is much clamour in the Media and from Left-Wing politicians for a strategy, but this long and well-researched report just goes to show how little the Government can really do - it certainly can't pick winners. Just look at the results of hundreds of millions spent on Graphene over 10 years plus - patchy would be to over-state things and now China as ever has stepped up to the plate.
It is not that the Government cannot pave the way with seed money, it is that Government cannot oversee the development of private industry - this has been proven again and again.
So, as the Government sort of recognises this, the main thrust of the strategy is to improve education and infrastructure to enable growth by the Private sector, together with tax breaks to increase R&D.
This is more sensible and harder to disagree with, but it does mean that the Industrial Strategy has 1/3rd of its budget of £3 billion allocated to house-building. Which feels a bit odd overall even if that is a reasonable logical conclusion.
However, the big elephant in the room for me is productivity and its relationship to immigration. I have never agreed with this as a measure since I studied economics at post-graduate level. France is more productive than the UK because people officially work less hours and unemployment is higher. If we fired 5% of people from their UK jobs then our productivity would match that of France! It is a crazy and out of date measure which takes no account of technology impacts nor modern working patterns (such as longer-hours of unpaid work). It is an OK measure when most people work in factories in fixed settings with fixed inputs and hours spent at work, in a post-industrial society it has little meaning.
It is a bizarre thing to measure input times output divided by GDP and I note in the whole document the Government who use the word liberally, don't find space for a definition of productivity. A much superior measurement would be company revenues per employee over the quarter and years - company revenues vs employee numbers give a much better reflection of improvements made. Worrying about the capital investment or hours worked is too detailed to be captured properly and leads to a meaningless figure. The company I work for employs around 10% more people than 10 years ago and yet has revenues 50% higher which is what matters overall - the fact we all work longer hours without overtime is irrelevant to the economy as a whole.
For the UK the currently defined productivity measure is doubly bad for two main reasons - firstly immigration really skews the stats as first generation immigrants lacking language and social skills (for their new market) take-up low wage jobs and encourage their creation (e.g. hand car washes). Secondly, the vast public sector has no revenue increase incentive, as such productivity gains are not only hard to make but rarely even tried given there is no incentive with their cash accounting system; or if they tried are often involve huge, unwieldy IT systems upgrades. As such, UK productivity is always going to be weak whilst immigration is high and the state owns a high GDP share of the economy. Much better to not be seduced by this economist's enigma.