Supply-Side Shock and Awe

September 3, 2012

There are at least three levels of rhetoric which one can use to justify a policy: the historical, the ideological, and the pragmatic. When it comes to markets versus central planning, the first is eminently preferable: as Timmy is fond of telling us, the 20th century can be viewed as a great experiment about the relative merits of both systems in terms of delivering growth, with markets defeating central planning under the Nazis and the Soviets in turn. It is clear that, if one wishes to deliver growth, markets are on average the tool for the job.

However, from an ideological perspective, this argument doesn’t wash. If I am a great believer in economic freedoms, then whether those freedoms deliver growth is a moot point: I want them regardless, and making them contingent upon delivering growth is to devalue them. Freedom has value in and of itself, and while the historical context may have value when trying to sway non-believers, it should not form the justification for that belief.

On pragmatic grounds, neither of the arguments above work. Economics is fundamentally about trade-offs: a particular form of freedom may impose costs upon others, and the adjudication of which costs are heavier may come in the form of market forces or of public policy. Let us say that we forbade employers from requiring a notice period from their employees, while still requiring that an employer provided a notice period before letting someone go. Employees are free to change jobs at will, assuming someone else will take them on, while employers still find it difficult to get rid of a difficult employee quickly. This increases the economic freedom of employees in our present context, in which almost all desirable jobs require a notice period before departure, while decreasing that of employers.  While we can argue about the particulars, simply demanding increased economic freedom on ideological or historical grounds does not necessarily lead to a particular set of policies. Pragmatically speaking, we have to weigh up which and whose freedoms are more important.

I bring up the above because of a regrettable tendency among the Right to reach for supply-side reforms as an answer to our current economic problems seemingly as a result of an ideological position, and only then going into pragmatic reasons why such reforms are appropriate. Handily, today David Davis has provided an example par excellence of this kind of thinking, which I shall analyse.

His speech meshes the historical, the ideological and the pragmatic into a melange of recommendations. Consider the following selected passages:

“Let us take Switzerland as an example. Its economic dependence on banking was a third greater than ours, and its exports are predominantly to its Euro zone neighbours. Yet, while our economy struggles, Switzerland’s is back up and running. So Britain’s problem cannot simply be attributed to bad banks at home and collapsing export markets abroad.”

“[We] must liberate individuals and companies from the impediments that are undermining their confidence and limiting their freedom of action.”

“The virtue of small businesses is they create jobs and wealth. […] Jump starting the economy will above all else involve liberating this sector to do what it does best, create jobs and wealth.”

“Our Business Secretary congratulates himself that we have one of the most lightly regulated labour markets in the developed world. Perhaps, from the point of view of a large company we do, but not according to the real job creators – small and medium sized businesses.”

“When the German government launched its growth strategy in 2003, the labour market
was the centre of the reform program. Special exemptions from employment law for small companies, easing of laws governing dismissals and redundancies, protection of companies from vexatious employee lawsuits, were combined with reform of the welfare system to improve incentives to work. And it worked.”

On historical grounds, because Switzerland shows our current economic difficulties are not related to our banking sector or exports, we should liberalise our employment market. On ideological grounds, because small business have virtues that must be freed to flourish, we should liberalise our employment market. On pragmatic grounds, because it worked for Germany and Switzerland, we should liberalise our employment market. This would seem to be a coherent argument.

Unfortunately, if you mash differing lines of thought together to create an argument, you leave it open to being picked apart. For example, our employment protections were amongst the lowest in the OECD (below Germany and Switzerland) going into the economic crisis, and I’m fairly sure they haven’t suddenly gone up since then. Germany’s reforms to their labour market were put in place because they were in relative decline compared to their competitor nations with more liberalised employment policies (e.g. the UK); right now, the UK is actually doing worse than countries with more rigorous employment protection (e.g. France). One is left with the ideological argument, which does have merit, but is devalued by all the other arguments around it being incorrect.

There are genuine pragmatic arguments for supply-side reform, and indeed Mr Davis makes one – it should be easier to set up banks, and banks should be more exposed to competition. It’s fairly clear that our banking sector suffered during the economic crisis, and a good dose of marketisation should help it return to health. Unfortunately, the fact that Mr Davis makes it after claiming that woes with our banks aren’t the cause of our current woes again devalues it – but Mr Davis needs to make that claim to justify all his other supply-side recommendations.

If you start from a position of ideology and then reach for arguments of pragmatism and historicity, you devalue your own position. If you’re in favour of freedom, then argue for freedom. If you’re in favour of growth regardless of how it’s achieved, then argue for that. But mashing the two together results in ridiculous situations like Mr Davis objecting to support for green energy, when it’s one of the few examples of the UK actually generating wealth in the current climate, if you’ll pardon the pun.

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