Labour austerity looks inevitable

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It’s impossible to disagree with Labour leader Sir Keir Starmer when he says that Margaret Thatcher was responsible for significant and long term changes in the way that the UK economy works, or that she entered government with some clear ideas about what she wanted to do. Whether the changes were a good thing or not is much more arguable, to say the least; and the idea that those changes released entrepreneurialism in the UK has been succinctly rebutted by Prof. Richard Murphy. Perhaps Starmer merely wished to praise the determination and attitude she showed rather than what she actually did, but it didn’t sound that way when he said it, and not for the first time he seems to be struggling to ‘correct’ his words retrospectively. And whether it was politically wise even to go that far is another question entirely – why on earth raise a comparison to Thatcher when you’re staring at an open goal left by Sunak?

There is a fundamental belief at the core of Conservative ideology that the private sector and the public sector are in competition, and that the private sector creates wealth whilst the public sector consumes it. It’s clear from their statements that better public services depend on private sector economic growth that Starmer and Reeves also believe it. They’re not alone: it’s one of those things that is so ‘obvious’ that many people across the political spectrum believe it. It’s also absolute tosh. It may be based on a confusion between two different meanings of the word ‘wealth’. There is the wealth which all the individuals in a country own, measured by bank balances and assets held, and there is the wealth of the country as a whole, measured by GDP. The ‘growth’ that Starmer is referring to is an increase in GDP, but an increase in spending by the public sector leads to the same amount of GDP growth as the same amount of increased spending in the private sector. Given the way that GDP is calculated, it cannot mathematically be otherwise. Certainly, some people became extremely wealthy under Thatcher, but much of that was a redistribution of wealth from the poor to the rich, and the ever-increasing gap between the richest and poorest in society is the most pernicious long-term effect of Thatcherism. The accumulation of private wealth in an ever-smaller number of hands is not the same as an increase in national wealth.

There are, of course, arguments to be had about whether it is ‘better’ for investment to come from the private sector or the public sector – and the public sector’s record in managing some projects and investments leaves a lot to be desired. Whether that is inevitable or a result of structural or procedural problems is a debate for another time, but the idea that only one of those approaches should count in measuring growth is just ideological bias. When the private sector invests, the money comes from a combination of borrowing and income raised from customers; when the public sector invests, it comes from a combination of borrowing and taxes raised from the population as a whole. In GDP terms, whether we pay for something out of tax or as part of the price of the goods and services we buy is irrelevant – we’re still paying either way. It’s just that tax deducted from salary is more obvious. And in either case, 'borrowing' is a simplistic way of describing a complicated process whereby the government - or the banks operating under government licence - create and destroy money at the press of a few keys, as well as borrowing directly from people who see their loans as investments.

The debate which we should be having – and which a Labour Party worthy of the name would be leading rather than suppressing – is about which things we want to purchase collectively through the state, which we want to leave to the profit-driven market place, and how we decide between the two. It’s a point which ideologically-driven fiscal conservatives like Starmer can’t even begin to understand. And that lack of understanding leads inevitably to Labour austerity.

Four negative numbers can become one positive number - with enough faith

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The UK Government continue to insist that they have a ‘plan for growth’. They do not: they have a plan for tax cuts, half a plan for spending cuts, and a half-baked plan for deregulation, the sense of which the head chef, Jake, is having difficulty convincing even his fellow cultists about. Their ‘plan’ for growth consists of little more than an unshakeable faith that growth will inevitably follow the implementation of those three ‘plans’ despite a complete lack of corroborating evidence.

Leaving aside the question of whether growth is always desirable or even attainable anyway (infinite growth in the context of a finite quantity of resources, for instance, is at the very least questionable), and assuming that what the PM means (although she hasn’t actually spelled it out in so many words) is an increase in overall GDP, how likely is it that growth will actually happen? There are a number of different ways of calculating GDP (all of which should ultimately produce the same answer, although the presence of estimated numbers in all of them means that there can be some variation). One of the most common is the simple equation:

GDP = C + G + I + (X-M)

By the same token, any increase in GDP can be measured by the increase in the total of the four factors, which are: C = consumption, G = government spending, I = investment, and (X-M) = the difference between exports and imports. (Prof Richard Murphy has more here). For GDP to increase, simple arithmetic tells us that at least one of those four terms must increase. The problem is that the increasing gap between prices and income will reduce C, the government is due to reveal on 23 November (assuming that the markets and restive backbencher allow it to wait that long) by how much it will reduce G, I is outside the control of the government to a large extent, but investment in new plant, equipment etc looks like a risky assumption in a time of economic uncertainty, and we know that (X-M) is impacted directly by Brexit. A government which was serious about growth would want to ensure that household consumption could at least remain static rather than fall, it would ensure that government spending – particularly on infrastructure – rose, it would do its best to create the sort of stability which reduces the risk to businesses of making large investments, and it would seek a closer trading arrangement with the UK’s closest and biggest markets. In reality, a government which claims to be committed to growth is actively taking decisions in relation to all four of those factors which will either suppress growth or, even worse, ensure a recession. No amount of blind faith can make four negative numbers add up to a single positive one.

There is, though, another possibility, and that is that the PM is not referring to growth in GDP at all. She wouldn’t be the first to confuse ‘making people wealthier’ with ‘economic growth’, and leaping from there to an assumption that an increase in the concentration of wealth amounts to economic growth. It would make rather more sense of her statements, to the extent that making sense of them is a realistic possibility. If the wealthiest in society have more money in the bank, the inescapable corollary is that they will be wealthier as a result, and if all the people with whom you mix are in that ‘wealthiest’ category, it can be easy enough to believe that ‘people in general’ are getting wealthier. The salary of a back-bench MP puts MPs in the 95^th percentile of employed people in the UK, and many of those with whom they socialise (and from whom they seek donations) will be in an even higher percentile. The numbers, to say nothing of the everyday experiences of the rest of the population, might tell a different story; but who needs numbers when you have faith? That would be almost like asking an expert.

Getting it right whilst still being spectacularly wrong

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Once upon a time, I found myself trying to drive through a major investment in IT with the intention of improving the productivity of software development in the company where I worked at the time. Somehow, I had to persuade the big boss that the investment was going to produce the returns to justify it, and it wasn’t an easy task. Partly, that was because of the difficulty in measuring productivity in the first place. In principle, ‘productivity’ is easy enough to calculate. It’s simply a question of dividing output by input: the more output you get from a given number of person-hours/ salary costs, the more productive the team is being. Whilst the input is easy enough to measure, the output from software development is a much more difficult task. ‘Lines of code’ is a simplistic approach, but any experienced coder (using the tools available in the 1980s) would know that the number of lines of code required for a given functionality is variable, depending on skill, knowledge and experience, and that some of the best coders wrote fewer lines of code to achieve the same result. Obviously that didn’t mean that they were less productive; generally it meant the reverse. And then, how about accuracy? If the working definition of an operational piece of software is code with all the obvious errors removed, how do the remaining errors (and there were always some, in those days at least) impact on productivity? But the difficulty of measuring productivity was only part of my problem; the biggest part was convincing said big boss that we couldn’t just stand over people with whips (almost literally what he said to me) and force them to work harder, thus achieving the desired improvements whilst avoiding the capital spend.

This week, Liz Truss, who clearly comes from the same school of management as the afore-mentioned big boss, has proved that even the most obtuse politician can sometimes get something more or less right. She is right to draw attention to the poor level of productivity in the UK economy, and right to point out the regional variations in productivity, which appear to show that London has the highest productivity levels. She has, however, rescued her reputation for ideology-led ignorance by getting her diagnosis (people outside London don’t work hard enough), and her solution (bigger whips) so spectacularly wrong. We should be seriously concerned that someone so divorced from reality could ever get anywhere near the levers of power.

The main driver of improved productivity is investment, and the reason that the UK has such a poor level of productivity compared to most other developed economies is because there has been such a low level of investment in recent decades. That in turn has been led by an emphasis on short-term profits, cost-cutting, and asset-stripping. A UK economy which used to be led by people who knew what producing and selling stuff was all about has been replaced by one where everything is about short term returns; a Conservative Party which used to be in tune with productive industry now dances to the tune of the hedge funds and private capital asset-strippers. For sure, profits can be increased in the short term by stripping out costs, leveraging balance sheets, reducing standards and bearing down on the terms and conditions of employees (maybe even by wielding bigger whips), but the extent to which that is possible is limited, and the longer term damage caused by a failure to invest is immense. That lack of investment, in turn, is a direct result of modern Tory ideology, whether applied by Thatcher, Blair or whoever – and the problem doesn’t go away by simply doubling down on the ideology. Or improving whip manufacturing.

The regional differences aren’t all they appear either. That takes us back to the first of the problems I referred to earlier – how to calculate output, in order to measure productivity. There’s a useful explanation here of the three different ways of calculating GDP (which should all produce the same answer), and one of those simply adds up the total of wages and profits in the economy. One of the consequences of that is that a CEO based in London and paid £2 million per annum ends up contributing the same to total output as 50 widget makers, each paid £40,000 per annum, employed in his company’s factory in Wales, despite the fact that the CEO, personally, produces precisely nothing. Since London is often the location for head offices and senior staff, it will almost inevitably appear that London therefore has a higher economic output per head than the rest of the UK – but much of that ‘output’ is, in effect, simply being transferred (some might even argue, ‘stolen’) from elsewhere in the UK. What Truss is telling us is that the widget-makers of Wales (and elsewhere in the UK) add little of value to the economy, especially compared with the bankers, head office staff, hedgies, speculators, and gamblers of London. Truss and her Britannia Unchained colleagues are arguing that the problem is that the widget-makers are just indolent and need a damn good kicking; a rational economic analysis would be asking whether we’re really valuing different economic activities in a sensible way.

It's about how wealth is distributed

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One of the old chestnuts trotted out by the PM in his ‘conference’ speech this morning was that it is the private sector which provides the nation’s wealth. It’s one of those ‘truths’ which many believe but which is, in reality, complete nonsense. The problem is that people who argue that are defining ‘wealth’ in a limited way.

If we define ‘wealth’ as the accumulated value owned by individuals, then there is, indeed, no doubt that that ‘wealth’ has been obtained through the profit-making activities of the private sector. But there are two important caveats to that statement. The first is that increasing private profit does not in itself lead to an increase in the total wealth of a society. In many ways, profit simply redistributes existing wealth from the poorer to the richer. An increase in private wealth, if squirreled away or taken offshore can actually have the effect of reducing the total amount of wealth in a given economy. The second is that one of the biggest customers of the private sector is the public sector itself; without public sector spend, the capacity for making ‘profit’ would be greatly reduced.

The alternative definition of ‘wealth’, and the one preferred by economists, is measured by GDP (or more usually these days GVA), which is ultimately simply a measure of how much money is in the economy and how fast it changes hands. It is a measure which is ‘blind’ to the question of whether the economic activity producing the GDP occurs in the private sector or in the public sector; it really doesn’t matter. There are sufficient historical precedents to demonstrate that GDP (and therefore overall wealth) can and does increase, even if all economic activity is carried out by state agencies and nationalised companies, enough in itself to disprove the PM’s point.

Whether the two alternatives increase wealth with equal efficiency in the use of resources is a rather different question. Whilst there is no obvious or necessary reason why state-run enterprises should be less efficient or profitable than private enterprises, we know from experience in the UK and elsewhere that, in practice, it has generally been the case that they are. There are a number of reasons for that (not least of them being the inclination of politicians and civil servants to attempt to micromanage), but that is a question for another time. The point is, though, that Johnson did not argue that case at all; he argued in black-and-white terms that the public sector does not create wealth.

Whether from ignorance or ideology, the PM clearly identifies ‘wealth’ with that which is owned by wealthy people. They would be his cronies and donors – the sort of people who have been getting contracts from the public sector without even having to go through any sort of competitive tender since his government came to power. It is an ideological position which leads directly to the transfer of assets and resources from those held in common by the state to those held by a few private individuals. It may or may not be an approach which increases the total amount of wealth in an economy, but it is definitely an approach which makes some people wealthier, by transferring such wealth as does exist from the many to the few. In that regard, he is more of a traditional Conservative than some are giving him credit for.

Taking control

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One of the arguments regularly used by independentistas who prefer not to talk about it is that the economic situation of Wales is too bad to allow independence at this stage.  It’s an argument that I understand, but I have never understood why, even if it were true, it means that the case in principle shouldn’t even be put.  Failure to make the case at all – even as a context for deciding which economic changes are required and in what timescale – looks more like electoral expedience than principled position.  It also gives the impression that we need ‘someone else’ to fix things for us first; and actually, that is a greater argument against independence than Wales’ undoubted economic problems.  A nation which needs ‘someone else’ to fix things for them doesn’t sound like a nation ready to take responsibility for its own affairs.

In any event, I’m far from convinced that our problems are as serious as they’re made out to be by a political class which actually seems to enjoy being in a state of dependence.  I’ve pointed out previously that on the most commonly accepted measure of prosperity, GDP per head, Wales is in fact one of the world’s richer nations.  And we are above the average for member states of the EU.  If those other countries can be successful member states, what stops Wales emulating them?  Why are we so ready to use only one single comparator – England – rather than taking a wider view?  It’s as though we’re so dazzled by our nearest neighbours that we’ve fallen into their habit of believing that the civilized world ends at Dover.

Would we need to make changes in order to cope with becoming an independent state?  Yes, of course we would; indeed, that’s the whole point.  And since even a positive vote for independence tomorrow would still lead to a transitional period before independence actually happened, the government of Wales would have time during that period to start that process.  Add to that the fact that there isn’t going to be a vote tomorrow – and since it appears unlikely that any party will even enter the 2021 Assembly elections with a promise to hold a vote, let alone win those elections and implement that promise, we can probably rule out a vote for at least ten years. 

I find it impossible to believe that any country with our level of GDP per head could not prepare itself adequately to take control of its own affairs in that timescale; and any political movement serious about achieving that aim would be setting out a route map towards that goal.  It isn’t a soft option; far from it.  It is a lot easier to whinge about other people letting us down than it is to take responsibility for putting things right ourselves.  But if that’s the best we can manage, then perhaps we really aren’t ready even to consider the idea.

We can be independent if we want to

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One of the most oft-quoted reasons for opposing the idea of independence for Wales is that we’re too poor.  The idea has gained so much currency that even Plaid has fallen for it in recent years.  But is it true – and what does it even mean?

One common way of judging how rich or poor a country is by looking at the country’s GDP – or more specifically, the GDP per capita.  It’s not an entirely unproblematic basis for making an assessment.  It tells us nothing about the relative cost of living in a country, for instance – so the population of a country with a low GDP per capita and a low cost of living might actually feel better off than the people of another country where both figures are higher.  It also tells us nothing about the way wealth is shared out in a country – so the population of a country with a low GDP per capita but where the wealth is evenly shared might feel better off than the people of a country with a high GDP per head and huge inequality.

But, even with those caveats, GDP per capita is as good a starting point as any to assess where Wales fits.  Here’s a series of charts, setting out GDP per head using three different methods of assessing it (that’s another problem with using GDP as a basis – the definition and method of calculation aren’t exactly clear either).  Wales, of course, simply doesn’t figure in the charts at all, being considered solely as part of the UK. 

That doesn’t mean that we can’t make a guess as to where Wales would fit, though.  There seems to be a general acceptance that the GDP per head in Wales is around 75% of that of the UK as a whole.  Using any of these three tables, it’s easy enough to see where a country with 75% of the UK’s GDP per head would sit.  What does that tell us?

·         On IMF figures, Wales would be in 24^th place.  Only 150-odd countries worse off than us.

·         On World Bank figures, we’d be in 27^th place, again with 150-odd countries lower down the table.

·         On UN figures, we’d be in 31^st place, with another 160-odd countries lower down the table.

·         In each case, the list of countries lower down the list than Wales includes at least 15 (i.e. more than half) of the independent member states of the EU.

So if an independent Wales would be rich enough to be a middle-ranking member of the EU in terms of GDP, why are so many of us convinced that we’re too poor to be independent?  Part of the answer is that we are accustomed to drawing the comparison (or having it drawn for us) with too narrow a range of comparators.  In fact, the usual range of comparators is one – the UK.  And for sure, it’s easy to look at the south-east of England in particular and see ourselves as poor.  But if we look out across the world, it becomes obvious that we’re actually one of the world’s richer countries.

None of that means that independence for Wales would be easy, or problem-free.  It would not.  Taking responsibility for our own future; taking our place in the world – these are hard options not soft ones.  The soft option is to continue to close our eyes to any wider analysis and hide behind our perceived poverty. 

Too many people in Wales have become too comfortable avoiding the question, trying to put it off to a later date, as far as possible into the future.  For too long, the case for Wales taking responsibility for its own future hasn’t even been put – and the one thing that I can more or less guarantee is that no argument ever got won by not being put.  It’s time for that case to be put before the people of Wales, and I’m pleased to have ben invited to speak at an event to kick-start that process on Saturday in Cardiff namely the rally organised by Yes.Cymru.

Averaging the averages

Tweet The idea of ‘city regions’ as some sort of solution to Wales' economic woes has taken far too strong a hold amongst the political classes.  It’s not often that I hear doubts being expressed, so this article on the Bevan Foundation blog earlier this week was more than a little welcome.  Not least, it’s a counterpoint to the interview with the chair of the Cardiff City Region a few days ago, in which he said that Cardiff is the “priority for driving Wales forward”.

It’s hard for those of us who are sceptical about the city region concept, and the emphasis being placed on it, to argue the case without sounding like we’re opposed to economic success in Cardiff.  I’m certainly not opposed to that, but I do want to see economic success in the north, and down here in the west as well.  The question is how we achieve that without competing and arguing with each other.

I’ve never been convinced by the argument that creating wealth in one place means that it somehow ‘trickles down’ to other places; if that were true, we wouldn’t have seen such a huge concentration of wealth and income in one small corner of the UK.  It often seems that policy in Wales is trying to ape that of the UK as a whole, and merely exchanges the south east of Wales for the south east of England.

But I’ve also wondered whether it’s not at least in part a result of politicians failing to understand that increasing the average income per head in a country is not the same as increasing the income of the average person.  Maths is not often their strongest point.

I have no doubt that increased economic success in Cardiff could lead to an increase in average GDP per head when looking at the figures for Wales as a whole.  But the point is that it could all too easily do that without there being any change at all in the average GDP per head outside Cardiff.  Improving things for a few only looks like an improvement for the many when people fall back on the use of unqualified averages.

Yet it is often those overall averages – or rather the misuse of them – which fuels much of what passes for debate about economic ‘success’.  Just think of the headlines comparing Welsh averages with English averages, with no serious consideration of whether the comparison is a valid one.  And I fear that may be part of what is driving Welsh Government policy – a need to be seen to be improving the figure for average GDP per head, without worrying too much about how that is achieved or what it means for all the people of Wales. 

It’s the wrong starting point – and people who start out in the wrong place rarely end up in the right one.

Half full or half empty?

Tweet Glyn Morris draws attention to the story about Plaid arguing that Wales isn’t ready, in economic terms, for independence.  It’s not a new statement of course; it repeats a statement which Plaid made about 18 months ago.  I didn’t agree then, and I don’t agree now – not because I think that there would not be problems, but because I don’t see the existing problems being resolved within existing structures and processes.  Quite the opposite, in fact – I’d argue that the problems that we face are a result of existing structures and policies, and a pre-condition that they be solved first is a recipe for indefinite delay of any discussion of independence.

But how poor is Wales, in reality?  One of the things that the Yes campaign did quite effectively in Scotland was to argue that Scotland’s GDP per head put the country amongst the league of the wealthiest, not the poorest.  Where would Wales sit in that table?

There are plenty of different rankings of countries to be found, and they show slightly different rankings for countries.  This Wikipedia page for instance shows several different ways of calculating relative wealth.  If we want an absolute measure, then which one we select becomes an important decision; but if we’re only after a relative measure, it really doesn’t matter a great deal which we choose.

Wales isn’t listed, naturally enough – it’s a list of sovereign states – but if we use as a rule of thumb the claim that Wales’ output per head is about 70% of that of the whole UK, it’s easy enough to work out where Wales would come on any one of the rankings here if we were listed separately.  The answer, depending on which list we choose, is around 30^th. 

Yes, on a simplistic measure of GDP per head, Wales would be one of the 30 or so most prosperous countries in the world – with another 150 or more which are poorer than us, including such outposts of unsustainable independence as Russia.  Even within the EU, there are a basket of countries which are worse off than Wales would be – and, as far as I’m aware, no-one is arguing that they’re “too poor” to be independent member states.

We have, perhaps, become too accustomed to seeing the glass as half empty; comparing ourselves to the richest areas and finding ourselves wanting.  It’s an inevitable result of an approach which simply demands that we get our fair share, and given that we’re not getting our fair share now, it’s not a wholly unreasonable tactic.  It needs to be tempered though with a more positive message about what we can do, and about what Wales could be if we assumed responsibility ourselves.  And that’s the message which has been lacking for too long.

There’s more to economics than GDP, of course.  And the transition from where we are to where we could be will neither be quick nor easy.  But continuing to see ourselves as poverty-stricken victims is not the right starting place, when, for most of the world’s countries and population we look like a very wealthy country.  The question is about how we take control of the wealth we have and build on it by taking responsibility for our own future.  Arguing that we’re not ready to do that is simply perpetuating what we are.  We can do better than that.

Dismissive Labour

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I was more than a little disappointed with the Welsh government’s response to a question from Leanne Wood on procurement last week.  The question highlighted how much more successful some other EU countries are at ensuring their public procurement is 'internal' rather than 'external'.

That doesn’t mean that I was entirely convinced about all aspects of the question.  Whilst I have no reason to doubt the accuracy of the figures quoted (Germany 98.9%, France 98.5%, the UK 97%), the precise figures may not be particularly helpful.  I doubt that they tell us much more than that a larger country with a bigger population and a more diverse economy will be able to meet more of its needs internally than a small country.  And I wouldn’t be at all surprised if a breakdown of the German figures, for instance, by region and municipality showed an increasing level of external spend.

But it’s the principle rather than the detail which is important.  Every pound spent by Welsh public authorities outside Wales is a pound lost to the Welsh economy.  It represents a loss of GDP and wealth – it’s like passing that pound note out through the window.

Leanne is surely right to draw attention to that as an issue, and increasing local procurement is something within Welsh control which can help to boost our economy.  Local procurement also has environmental advantages, of course.

The Welsh government response was to say that setting a precise target for internal procurement would be against EU law.  Well yes, I’m sure they’re right – but is that really an answer to the question, or just the politicians' way of avoiding the issue?

Successive Welsh governments – involving three of Wales' four parties – have regularly talked about improving local procurement, but it’s been mostly talk with little action.  And whilst the Minister in one department talks about local procurement, his or her colleague in another has been busy pushing Welsh public authorities into bigger and more collaborative procurement arrangements which may well save money but would also make it harder for small local companies to compete.  Holding seminars to help those smaller companies to understand large and complex procurement exercises is a bit like trying to hold back the tide.  Like Canute, they merely demonstrate how ineffective the approach is.

There are things that the Welsh government could do, and it would have been better had their response demonstrated some understanding of that, and some willingness to act rather than an airy dismissiveness.

The first thing they could do is to simply stop doing those things which make it harder for local companies to supply goods and services.  Cheapest isn’t always best.

The second would be to look at what is being procured from outside Wales and ask why we can’t supply that internally.  There will always be some things that we can’t provide internally, but there are many which we can.  And targeting economic development resources at encouraging the production of goods and services for which we have a home market is probably going to give us a more sustainable economy for the long term than concentrating on activities which depend on producing and selling goods and services for which there is no – or only a very small – home market.

I was left with the impression that dismissing any suggestion from an opposition party was seen as more important than doing something positive.

Redistribution and subsidy

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Some interesting figures published today by the Centre for Economics and Business Research on the mismatch between taxation and spending across the ‘regions’ of the UK.  The Centre has looked at the revenue raised in each ‘region’ and the money spent there to come to a series of conclusions about the extent to which poorer regions receive a ‘subsidy’ from the richer ones.

The most obvious headline from a nationalist perspective is the conclusion that Scotland receives no net subsidy from the rest of the UK.  No doubt the SNP will be delighted with that conclusion; I certainly would be in their position.  It’s further evidence that there is no hard economic argument against Scottish Independence.

There are caveats, of course.  As I’ve noted before when discussing this sort of statistical analysis, the most important element is understanding what the underlying assumptions are; changing those could have a significant effect on the figures.  In this case, one key assumption, from a Scottish viewpoint, is about the proportion of oil revenues which would accrue to Scotland.  The authors have used the split suggested by Aberdeen University, which gives Scotland 83% of the total.  I think that’s an entirely reasonable basis for calculation – but it’s clear that many of those arguing that an independent Scotland would be near-bankrupt are using a very different basis.

The other big caveats are that these are figures at a point in time – reflecting a single year – and that they assume that expenditure patterns for an independent Scotland would follow a similar pattern to those of the UK.  Again, that’s an assumption which is open to challenge.  Still, it’s good news overall for Scotland.

The figures for Wales make for much more gloomy reading, however.  They emphasise yet again how poorly our economy is performing.  Whilst the North East of England is not far behind Wales, only Northern Ireland is in a worse position.  We have a lot of ground to make up.

What the figures also show is the extent to which the UK’s economy is skewed towards London and the South East, with the north and west of England uniformly failing to cover expenditure from taxes raised.  I don’t like the word ‘subsidies’ in the way it’s used here to describe the way in which expenditure is redistributed to enable public services to be maintained outside the south and east of England, but it’s not an entirely unfair word.

The real question is how we stop redistributing the proceeds of uneven GDP and start redistributing the GDP more evenly.  It’s not handouts or subsidies that we need; it’s a sound economy of our own.

Output, not profit

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It’s generally recognised that the biggest problem Wales faces – whether as part of the UK or as an independent country in waiting – is its relative economic poverty.  Or perhaps more correctly, its relative lack of economic wealth.  Putting that right ought to be pretty high up the list of priorities for Welsh politicians – nationalists and unionists alike; we should be aiming to support ourselves in either scenario.

For many, the answer is a simple one.  The private sector must be greatly expanded (although there’s less of a consensus as to whether the public sector needs to be shrunk in the process).

Anything which stands in the way of that – taxes, planning controls, regulations should be swept aside.  Oh, and the government should provide a generous scheme of grants and soft loans to enable those private businesses to set up and expand, and an education system which churns out people with the skills which ‘business’ needs.

That all of these things would help expand the private sector is probably beyond dispute (although whether they’re all desirable is another question entirely).  The underlying – and sometimes openly stated – assumption is that the private sector creates wealth, whilst the public sector spends it.  However, that view seems to be in danger of confusing profit and wealth (or perhaps social wealth with private wealth).  They are not at all the same thing.

It’s not that the quest for profit is irrelevant in this context; it’s just that there’s more to increasing social wealth than merely allowing some people to make profit.  Profit may well be the incentive which drives some people to borrow other people’s capital and invest it in businesses which provide goods and services which can be sold – but it isn’t the necessary or only driver.

Adam Smith – not generally known as an avid left-winger – described wealth as "the annual produce of the land and labour of the society".  That’s closer to a definition of GDP than profit.  And, since the measure on which Wales is failing is GDP per head, it’s actually a more relevant consideration than profit.

The CRESC report which I referred to a couple of weeks ago included the following comment in its concluding section:

“At this stage, what the UK economy needs from business (quoted and unquoted) is not profit but output because net output or value added at firm level provides the fund from which labour is paid and therefore sustains employment.”

In other words, an overall increase in economic activity is more immediately important to us than whether that activity does or does not generate profits for individuals.  And whether that activity comes from private business, social enterprise, state enterprise, or any other sort of enterprise is less relevant than that the activity happens.  It’s a different way of thinking about the question – and suggests that different solutions might apply.

One might think that a government which has done so much to identify the sorts of economic activity which it wants to see expanding in Wales might take a pro-active view of its role, but instead it seems to be largely reactive – when there’s any action at all.  It seems to be fixated on the idea that it can do little more than facilitate, encourage, urge, and incentivise private entrepreneurs to come along and solve our problems for us.  It's the same approach which has been tried and found wanting for decades, although it occasionally gets dusted off and presented as something new and different.

My thanks go to a pseudonymous commenter on a previous post who reminded me that it was not Einstein who said that “one definition of human madness is to do the same thing and expect different results”.  But the fact that it wasn’t Einstein doesn’t invalidate the sentiment.

Good GDP, Bad GDP

Tweet It is clear that the underlying problem affecting Wales' potential viability is the under-performance of the Welsh economy, and that to address that, we need to improve the level of GDP per head. But not all GDP is 'good' GDP; there are good ways and bad ways of increasing Wales' GDP, and chasing growth per se will not necessarily provide a sustainable long term economy for our country.

As an example, I'm sure that the oil spill in the Gulf of Mexico has led to an increase in GDP in some areas, as people have been employed in clean-up operations, in extra drilling operations to set up a relief well, and in manufacturing a 'cap' for the well head. Similarly, a major nuclear accident would boost GDP in managing the clean-up after the event. But I don't think anyone would seriously suggest that an oil spill or a nuclear accident would be good things for Wales.

It's even more subtle than that. When people think of creating wealth, they often think in terms of boosting manufacturing industry, and indeed, the front page of today's Western Mail draws attention to the slump in manufacturing in Wales. There's a problem with manufacturing though – making stuff almost invariably requires raw materials, as well as using environmental resources, and in the developed world, we are already using more than our share of both of those.

That doesn't mean that we don't need manufacturing, or that we should simply depend on other people doing the manufacturing, of course. The raw material cost and the environmental cost is still down to the ultimate consumer rather than the manufacturer; we don't escape those costs by simply 'exporting' manufacturing to India or China.

But we cannot continue to seek economic growth based primarily on an unfair share of the usage of finite resources, and there is no evidence to suggest that increasing efficiencies in the use of resources will square that circle.

'Good' GDP is GDP which requires no extra use of raw materials or environmental resources, or which involves investment in restoring the earth's environmental systems. It's likely to be more service based, more labour intensive and less profitable in the traditional sense.

Are we ready to embrace that sort of future, and accept that it means building a different type of economy?

Viability depends on GDP

Tweet A comment on a previous thread raised, once again, the old chestnut about whether Wales is viable or not as an independent country. My response was to say that the issue is a complex one, but I'm quite prepared to agree that, as things stand, with the current level of GDP per head in Wales, we could not afford the current level of public expenditure within the current level of taxation.

I think that that is probably a fair statement to make; but it does not prove, as opponents of independence might argue, that Wales is therefore not viable. Nor does it prove that Wales would either have to slash services or increase taxes dramatically if we were independent, which is the other common attack.

The point is that there were three variables in the statement I made, not two. The most important one is the part about our relatively low GDP; increasing that is key to our long-term viability as the sort of society in which most of us would want to live.

I don't think it's entirely fair to say, as some of my colleagues sometimes seem to be claiming, that Welsh GDP is at a low level as a deliberate result of the policy of successive governments; but the only part of that phrase that I'd delete is the word 'deliberate'. I don't think that anyone can really argue with the proposition that relative inequalities between different parts of the UK must be the result of the policies pursued by different governments, even if they were not the intent of such policies.

What I have never understood is why opponents of independence continue to rely on the relative underperformance of the Welsh economy to justify their stance rather than put all their efforts into eliminating that under-performance. Why wouldn't even the staunchest of unionists want to see Wales at least equalling the UK average?

Wealth, profit, and GDP

Tweet When I was at business school some years ago, one of the lecturers gave us a little demonstration of the difference between personal and collective wealth on the one hand, and GDP on the other. He took a £10 note from his wallet, passed it to the first person in the class, and asked that it be passed around from one to the other, until, after going through 20 pairs of hands, it returned, safely, to him.

His point was a very simple one, that if we assumed that the only money in the room was that solitary £10 note, then 20 separate transactions hadn't changed the amount of total wealth in the room by a single penny. It hadn't even made any of the individuals in the room any less wealthy or more wealthy than they had been at the beginning (although one bright spark did try to get away with only passing on £9.95 so that he could keep 5p profit…).

But the 'GDP' of the lecture theatre, during that few brief minutes, had been £200. And the fact that some of us worked in the private sector, and others in the public sector, hadn't made any difference to our contribution to 'classroom GDP'. GDP isn't the same thing as personal 'wealth', or even total 'collective wealth' – it's more a measure of how many times, and how quickly, money circulates in an economy.

What would have made a difference, though, would be if we had passed that £10 out through the window to the guy who happened to be cutting the grass at the time. It would still have continued circulating and adding to total GDP, but it would have stopped being counted as part of classroom GDP. And the lecturer as an individual, and the people in the room collectively, would have been £10 worse off as well.

It's an analogy for one of the reasons for the under-performance of the Welsh economy. Any economy with a disproportionate number of jobs in organisations whose headquarters are elsewhere will inevitably end up passing some of its wealth and GDP out through the window.

Interestingly, when the UK government passes some of it back to us, it's always called a subsidy or a handout.

Is small still so beautiful?

Tweet For years, opponents of self-determination for Wales and Scotland have pointed to the size of the two countries and argued that we were too small to be independent. The almost inevitable response of both Plaid and the SNP has been to point out how successful a number of small countries have been in recent decades. It was a sensible and logical counter argument – with the added bonus of being entirely true.

Does the collapse of Iceland's banking system, and the near bankruptcy of Iceland change the argument? I don't see that it does, although perhaps Iceland is less likely to feature as a specific comparator for a while!

The problems with Iceland's banks are not in any way the result of the small size of the country. Banks have failed in large countries; banks have failed in small countries – size per se hasn't really been a factor one way or the other. What has been more important in determining whether and to what extent any country has been affected has been the nature and extent of regulation and control of the banking industry.

Would a larger country have been better able to sustain the collapse, or rather the cost of the bailout? It seems to me that the real determinant of how well any country, regardless of size, could cope with the sort of bail-outs which are happening at present is more to do with the size of the banking sector as a proportion of GDP than with the absolute size of the country or its population.

For all the glee with which some seem to have seized on the problems in Iceland, claiming that they have 'proved' that small countries are worse off, I really don't see that anything has been 'proved' beyond the need for all countries to ensure that their banks behave in a prudent fashion. The real danger is that people who concentrate on the size argument fail to learn that simple lesson.