We all need something to believe in. Priests believe in God. Judges in the law. Bankers believe in money. Journalists believe in scoops. What do economists believe in?
Economists believe in maths. So right now, they share a simple numerical view about how to reduce government debt. Cut spending. Raise tax. This overlooks the power of human spirit.
The point was confirmed during a recent visit to the London School of Economics. I asked if any professors thought it was possible, by an act of will, to increase the long-run trend rate of growth of UK GDP.
The answer was: “It can’t be done.” Or at least that to do it would require preconditions so daunting that no realist could contemplate them — more investment, higher productivity, a different culture, a new education system, etc. That list is the dog-eared trump card of those who see such ambition as a touching illusion.
For them, the growth rate of the UK economy will always be the “trend rate”. It is like the weather. You can complain, but you can’t change it. For example, academic economists long ago gave up the “dynamic scoring” model of public sector finance, which held that a lower tax rate could yield a higher tax revenue.
Today the accepted method of public sector mathematics is the “static scoring” equation, in which a £1 cut in tax equals a £1 cut in public spending; ie, fewer doctors and nurses for you. Although voters agree that “there is too much government bureaucracy and waste” they have decided that the party most likely to reduce government waste is ... “neither”.
So tax cuts have become for Britain what the Vietnam War was for America. When President Johnson’s advisers in the Oval Office pressed him to speak up more about Vietnam, his reply was crisp: “If you have a one-eyed mother-in-law, and her one eye is in the middle of her forehead, you don’t bring her out of the kitchen.”
So don’t mention the tax cuts. The Left says that the banking crisis is a “failure of the free market”. The Right says that it is a “failure of regulation”.
Both are wrong. Banking does not qualify as a “free market”. Five companies now control 95 per cent of all our loans and mortgages, and 100 per cent of the Government’s own debt. No amount of regulation will overcome the imbalance of power in this un-free market. The only answer is the growth that comes from competition.
As Michael Forsyth argued in a Centre for Policy Studies pamphlet this week, the cause of the doubling of government debt in the next four years is lack of growth, which increases government spending on unemployment benefits and decreases government revenue from income and corporation tax. It follows that the cure is more growth.
A rising tide lifts all ships. If you want a bigger slice of cake, the best thing to do is to bake a bigger cake; then everyone gets a bigger slice. Lower tax is good — for moral reasons because it means more freedom and choice for individuals; and for economic reasons because, ironically, lower tax rates mean higher tax revenues in the long run. Caring that works costs cash — the Good Samaritan showed that first you need the money to do the good works.
As Sir Keith Joseph, the founder of the Centre for Policy Studies, said: “We believe in levelling up, in enhancing opportunities, not in levelling down, which dries up the springs of enterprise and endeavour and ultimately means that there are fewer resources for helping the disadvantaged.”
At its core, the idea is that there are no gods responsible for man and his fate; that mankind has a need to be responsible and master of his own destiny. And that men and women have the power, given the right social circumstances, to be masters of their social world, to take control of the social structures in which they exist — including the supposedly inexorable trend rate of UK GDP growth, and the over-concentrated banking industry.
Some say there are too many “barriers to entry” for competitors to succeed in the banking market. But technology makes that a dangerous assumption. In fact, the banking world has become a branch of technology, which makes it vulnerable to competition in a way that it never was before. We have all heard about the cashless society. With new payment technology, we could soon have the bankless society.
Technology means that there is no need for large iron vaults in basements to hold deposits of paper and gold. Technology means that banking is now in effect a data transmission business — in which computers speak to computers. No human beings are involved. Technology means there is no need for a global presence — a click can do the job. Technology means there is no need for a physical presence in the high street. In fact, the only shopping centre you need is your iPhone. A new App enables you to make or receive instant payment for goods or services, which in turn means the end of chip-and-PIN systems in shops. Who needs banks?
Some say this can never happen because the fear of default will frighten depositors away from any new entrant. The same was true when purchasing managers in large corporations would buy only IBM because they thought that was the only safe thing to do.
According to the conventions of the time, no new entrants could penetrate this market. Competition was over. But that was before the founding geniuses of Silicon Valley shared the irrational belief that “two men in a garage” could change the world. They made what seemed highly improbable happen.
In Britain, the record seems to show that we have not just slumped into the red, but into a frame of mind that can only lead to a return to our status as the sick man of Europe.
The next time that anyone tells you there is nothing that can be done about the growth of our economy, tell them what the US President Franklin D. Roosevelt said about the US Depression in the 1930s: “Belief is power ... it is a wicked thing to take away men’s hope.”
Lord Saatchi is chairman of the Centre for Policy Studies
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