So we are to have a new industrial policy, this one courtesy of the coalition government and, more specifically, George Osborne and Philip Hammond, the Chancellor of the Exchequer and the Transport Secretary. Both are economically literate, professing faith in markets as allocators of resources; but they have found the lure of shaping the economy in their image irresistible.
The goals of the new industrial policy are two: to reduce the relative importance of financial services, and to disperse economic activity more widely throughout the nation. In pursuit of the first we have bank-bashing that will discourage the growth of financial institutions, limits on bonuses, an increase in the marginal tax rate to an effective 52 per cent, and acceptance of four new Europe-wide regulators just when our own regulators are least able to stave off expansionist Eurocrats.
No one can quarrel with the political wisdom of all this. Bankers are on everyone’s hate list, their industry did after all have to be bailed out, and it is a brave politician who might mention that, properly regulated, they are important contributors to economic growth as employers and exporters.
Nor should anyone deny that there are good economic reasons for some reforms. It is important to align bankers’ compensation schemes with the national interest in avoiding another financial meltdown. Short-term greed can be transformed into acceptable long-term profit by forcing something of a wait on high earners before they cash in on their performance; bonuses can be clawed back if they prove to have been ‘earned’ by creating profits that evaporate upon examination; payment in shares rather than cash might focus the mind on enterprise survival. And rating agencies can be forced to find some way to make a living besides fees from the issuers of the securities they rate.
But corrective regulation is one thing, an atmosphere of hostility to an entire industry is quite another — and a more unnerving one, as President Barack Obama has found out. American businessmen, who see themselves as Obama piñatas, are sitting on $2 trillion in cash rather than investing and creating jobs. The sight of Vince Cable, the Business Secretary deemed too big to fire, delivering his fiery speeches, does not sit easily beside claims that Britain is open for business. It might well be, but David Butler, founder of consultancy Kinetic Partners, tells me that 1,000 hedge fund managers have already left Britain, are in the throes of leaving, or are likely to leave within 18 months, costing the Treasury upwards of £1 billion in lost taxes. Add to that financial-sector firms which have decided not to set up shop in Britain because they can’t predict what additional horrors a hostile government might have in store for them, and Osborne will have achieved his goal of reducing the relative importance of the City in the UK economy — although not in quite the manner he might have wished.
Britain has carved out a dominant role in financial services. Yet its role is to be diminished in favour of… well, industries that make things that China also makes, such as green energy products.
Then there are the regions. No economist is surprised that the area that contains Britain’s most successful industry, sports, incomes higher than the national average. Or that an incentive-destroying welfare policy has left parts of Britain short of workers with experience in showing up for work, or that employers prefer well-educated immigrants to domestic workers failed by our schools.
How the plight of these citizens can be relieved by attacking the financial services sector is a mystery. Or significantly improved by funnelling taxpayer money into ventures that investors shun. High-speed rail, unlike the Channel Tunnel in Thatcher’s time, is to be financed by the taxpayers because private investors believe it uneconomic. Green energy projects are to be funded even though they require massive, unsustainable subsidies. Capital-guzzling projects such as these, beloved of politicians, rarely pay off as promised. But they do sop up funds that if left in the hands of private individuals — think lower taxes — might create real, durable jobs. That, of course, is of no concern to proponents of these projects: they know better what to do with taxpayer funds than either the people who earned the money, or investors who must make sure that outgoings produce goods and services that consumers are willing to buy.
Instead, the most competitive sector is to be attacked, the least competitive subsidised. That’s as good a definition of industrial policy as you will find in any textbook.