Those Liberal Democrat economic principles

The Liberal Democrats issued the following press release yesterday after the publication of the latest employment data (which showed a decline in unemployment to a 28-year low):

759,000 manufacturing jobs have been lost since Labour came to power according to House of Commons library figures commissioned by the Liberal Democrats.

Paul Holmes MP, Liberal Democrat Shadow Minister for Work, said: "The manufacturing sector is sinking fast while the Government sits idly by.

"The Government has given up the fight to save manufacturing jobs and has left in the lurch the families dependent on those jobs to survive.

"Claims of record employment levels cannot mask the continuing decline in the manufacturing sector."

You have to admire the man’s willingness to brave derision for the number of cliches employed in making his point (‘sinking fast … sits idly by … given up the fight … left in the lurch … cannot mask’). Unfortunately I have no idea what point it is he’s making.

There is a serious economic critique that can be made of the Government’s record on employment, and it’s alluded to in The Telegraph’s report of the employment release:

But commentators said the headline figures masked the fact that, of the 200,000 jobs created during the year, 65pc had been in the public sector. In his pre-Budget report last week Gordon Brown raised his borrowing projections for the current year by £10billion - largely to fund extra jobs in education and the NHS.

The argument would be that such an expansion of government borrowing ‘crowds out’ private sector investment instead of having a multiplier effect on economic activity. But this reputable economic argument (which I’ll write about in another post) clearly isn’t the one being advanced by the Liberal Democrat spokesman Paul Holmes, of whom I’ve never heard. Holmes’s complaint consists instead in the belief that some sectors – specifically, manufacturing – are innately superior to others. The economic fallacy in this type of thinking has been aptly dissected (in another context) by Sir Samuel Brittan, economics columnist of the Financial Times:

Adam Smith might have lived in vain. For one of the key ideas of economics is that of the circular flow of income. There is a circular continuing flow between purchasers who desire to buy products, the income received from supplying their needs and still further purchases. Unfortunately public discussion is dominated by the opposite idea, the myth of irreplaceable sectors. It is assumed that if Britain loses, say an arms order, then the displaced workers will simply waste away in idleness. It is not asked whether there will be other purchasers at home or abroad to make up the difference….

If you do not like Adam Smith, examine what a supposedly more interventionist economist, namely John Maynard Keynes, taught. It was that the government has a role in maintaining the total flow of spending sufficient to maintain growth and employment. He did not say that it was the government’s duty to maintain people in the same specific employment for ever and ever.

Economists often term the notion of irreplaceable sectors the ‘lump of labour fallacy’ – the premise that there is a fixed amount of labour engaged in producing particular goods or providing particular services, and that if jobs are lost in those activities then they cannot be made up elsewhere. Yet this Liberal Democrat spokesman doesn’t even manage to articulate a coherent fallacy, for he advances his complaint about the decline in manufacturing employment specifically in the context of a decline in the overall unemployment rate. The only inference I can draw is that the man is a snob: whereas some people believe the law or investment banking is superior to, say, teaching or nursing, Holmes believes manufacturing jobs are somehow more elevated and proper than jobs in other parts of the economy.

Holmes’s predilections are an instance of the curious phenomenon of Liberal Democrat economic policy. He is ill-informed, inarticulate, incoherent and economically under-educated. Lacking a philosophy, he gets by on gut prejudice, in a party that manages to combine incompatible prejudices and indeed to alternate them according to whim. For example, and funnily enough (though in fact not funny at all) the Liberal-SDP Alliance manifesto in the 1983 general election explicitly advocated the policy of spending tax receipts to create administrative (not medical) jobs in the National Health Service and the social services:

There is a great need for extra support staff in the NHS and the personal social services. These services are highly labour-intensive and their greatest need for extra people is in regions of high unemployment. We propose the establishment of a special £500 million Fund for the health and social services in order to create an additional 100,000 jobs of this kind over two years.

(The same manifesto incidentally, also advocated directly subsidising jobs in the private sector, a statutory incomes policy, a substantial increase in public borrowing, active management of the exchange rate in order to boost exports, and membership of the European Monetary System. The notion that the last-named policy was incompatible with the others clearly didn’t occur to the manifesto’s authors – though the point was not lost on the former Labour minister, Edmund Dell, who was involved in SDP policy-making and much later commented that its economic deliberations were not the most glorious aspect of the new party’s activities.)

There has been on balance a shift in economic thinking among left-of-centre parties in most industrial democracies in recent years in favour of openness and deregulation. Labour governments in Australia and New Zealand in the 1980s were pioneers in this, and managed their respective national economies well. (The New Zealand Labour government also established the model of central bank independence that was later adopted in this country by Gordon Brown.) The process has been halting in some countries (such as Germany and France), but the trend is unmistakable.

I mention this because in the case of the Liberal Democrats, successor organisation to the Liberal-SDP Alliance, it doesn’t appear to have happened at all. The party is the principal exponent in this country of adopting the policies of the 1970s. It advocates increases in marginal tax rates without regard to how these will affect taxpayer behaviour, with assumed revenues allocated to different purposes at different times, and the choices foregone as a result of those allocations never made explicit. It is wedded to producer interests in the public services and advocates a taxpayer subsidy to the middle classes through the abolition of university tuition fees.

As I have commented before, the party’s Treasury spokesman, Vincent Cable, is an intelligent and able economist who has spent decades espousing sensible views. (As a Labour Party member and adviser to the late John Smith, Cable wrote an excellent Fabian pamphlet in the late 1970s opposing the then fashionable nostrum of import controls.) But his party, as evidenced by such nonentities as Paul Holmes, is exactly opposed to his approach. Watch this space, for I shall certainly be watching the Liberal Democrats’ bitter internal ructions over economics.

Comments

[Matthew]

Oliver,

That was very interesting. The only comment I would make is do you not think at some level it's a bit worrying that UK manufacturing output is basically the same as it was in 1980 (IIRC), wherea in the US, despite having a similar fall in manufacturing employment, output is vastly higher?

I guess the argument is that as long as GDP is increasing, who cares where it come from? However given the extent to which service sector jobs will come under international competition perhaps it would be better if our economy was as 'balanced' as the US one? On the other hand I don't know what proportion of our GDP comes from high technology manufacturing.

[Ben Keen]

Pardon if this is too basic a question, but where does R&D and software design activity count, economically? By which I mean does a company entirely engaged in building software count as manufacturing jobs or as something else?

[Tom Robinson]

Ben's question is pertinent because it blurs the distinction between services and manufacturing. Why is nobody still worrying about the decline in the number of farm workers which began over 300 years ago?

Manufacturing is going to become more and more software controlled, so the number of assembly-line workers and machine tool operators will likely continue to fall. This trend will eventually become a global one.

We can get in on the act (i.e. the next industrial revolution) here in Britain if, amongst other things, we:

(1) reduce taxation and public spending
(2) decrease the burden of regulation on business, particularly in the areas of planning and the environment
(3) drop the "50% must go to university" target (which is arbitrary and will not benefit our economy or the diversity of our culture)

One immediate way to help (1) and (2) along is to slam the brakes on with respect to European political integration. With Euro-MPs having just awarded themselves a 30% pay rise, the task has become more urgent.

[Simon]

I ownder is every Tory and Labour MP is au fait with every sophisticated economic idea...then again perhaps they are not all economists. As you mentioned, Dr Vince Cable MP is the Shadow Chancellor, David Laws MP is chief secretary and they both have excellent credentials. I am sure that they could discuss the work of Keynes, Smith, Lucas, Feldstein and others at great length if you care to e-mail them...

[Andrew Ian Dodge]

Tom, agree with you sentiments in full. That is exactly what I would have written.

[Mike Wood]

Simon, perhaps if Mr Holmes is not able to grasp basic economic concepts then he shouldn't highlight the fact by coming out with this level of drivel. It just highlights the folly of the Lib Dems' decision to appoint a full team of shadow ministers instead of a more limited number of party spokesmen. Obviously this was intended to make the public associate the Lib Dems with being the opposition. However, I don't think that many people actually do think that Holmes is a potential future Employment Secretary of Campbell a future Foreign Secretary unless one of the two main parties is so desperate for support from the minor parties that they have to resort to a coalition. The Lib Dems simply are not the opposition party.

Having said that, I think Oliver may be being slightly too dismissive of the statement. As someone who is a firm believer in the basic principles behind Adam Smith's writing, I agree with him that in the medium-term, if allowed to, the market will adjust to offset decline in some sectors with growth in others.
However, if we are to argue that belief, then we must be prepared to acknowledge the disproportionate effect that the decline in manufacturing has on some commmunities, in the shorter-term - just as the decline in the ship-building and coal-mining industries had a particularly severe effect on some parts of the country. Whilst many of those areas have since attracted investment from other sectors of the economy - notably electronics and car manufacturing - the process of moving from reliance on one industry to another caused significant hardship to those communities effected.
Finally, were he to be writing today, I am sure that Adam Smith would say that government policy (as has been the case - albeit to different degrees - with previous governments) makes the transition from declining sectors to growth industries more erratic than might have been the case in a genuine free market.

[Simon]

Mike,
I quite agree with your more substantial points re Adam Smith and the decimation of some communities. WHile agreeing with the fact that 'non-profitable' industries should not be subsidised, retraining, investment and the rest are high priorities for those affected by the decline in manufacturing. Can an economy operate on services alone, however?

Also, my point is not necessarily that Paul Holmes is talking rubbish, merely that so do a LOT of politicians from ALL parties. To point out merely Holmes without saying that this is a general problem is disingenuous. When Oliver says 'Those Labour Party economic principles' and thrashes a Patricia Hewitt speech or Byers from the backbenches, then I will call his commentary balanced.
Also, I think that you do some of the Lib Dem frontbench a disservice:
Rt Hon Ming Campbell QC MP is widely regarded as a first-rate commons performer and is rightly coveted by the other parties- journalists and opposition MPs will admit as much if asked- Dr Vince Cable is rightly praised as the man with possibly the most knowledge of economics of anyone in the Commons, Professor Steve Webb MP is one of the foremost thinkers either inside the House or within on pensions, David Laws MP, shadow chief secretary to the treasury, is an assured and engaged treasury spokesman. Simon Hughes knows the criminal justice system. Per capita there is a LOT of talent on those benches. Which appraisal do you disagree with?Also, watch out for Susan Kramer, Nick Clegg and Chris Huhne who will all be MPs after the next election.

[Daniel Rees]

Excellent analysis - I've added you to my blogroll at http:///www.point-of-information.co.uk.

At the moment I am a Lib Dem party member, but I think what you have described above is symptomatic of an underlying feature of the Lib Dems; they simply lack both talent and unity within the party. Policies are often inconsistent with other policies, and more importantly the party never seems to resolve the tension between the classical-liberal right of the party, and the left of the party who are members because the Labour party is too right wing. That is, there are some Lib Dems who are further to the right than the Labour party, and some who are further to the left. The Labour party is ideologically in the centre of the Lib Dems, and it is difficult to see why the Lib Dems should exist. Once the Tories recover their strength, the Lib Dems will weaken, at least at the Westminster level.

The only issue upon which I can see a fundamental difference between the Lib Dems and Labour is centralisation vs. decentralisation. I think the Labour party is moving increasingly towards the latter - one only has to look at their record on devolution and the NHS to see this.

I for one shall not be renewing my membership, and am considering joining the Labour party. Lib Dems would be better served working within the Labour party rather than trying to change its policies from a weaker position outside.

[Jonathan Hoffman]

Oliver
Vince Cable is sound on macro but when it comes to micro he still hankers after the days before free capital movements when governments could control the quantity of bank lending. See eg his recent pamphlet for the Cenre for Reform (Lib Dem think tank) where he proposes bank lending ceilings. These just wouldn't work, the banks would disintermediate and find a way around them.
Regards Jonathan