‘Inclusive Growth’ – My speech to the Oxford Martin School – 5 June 2014

by Liam Byrne | 05.06.14 | in: Economics, Labour's future, National news, Philosophy, Policy review

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Inclusive Growth: How New Ambitions and New Alliances Can Rebuild the Opportunity Economy

Speech to Oxford Martin School

Rt Hon Liam Byrne MP

Thursday 5th June 2014

 

It’s a real pleasure to speak here at the Oxford Martin School today.

In a short space of time you’ve put yourselves on the map as a place of people thinking deeply about the most important questions of our day.

We admire you not just for your search for truth, but your search for action.

You not just looking for ideas. You’re looking for answers.

And in politics right now we all need more answers.

 

The Crisis

You’ve quickly acquired a leading role in the chorus line that shaped up in the last four years, chanting for change

All crises expose the flaws in the political economy of the day.

And this one is no different.

But if we’re serious about answers then we need to recognise that change can only come from renewing an alliance that is now a century old.

This year we mark the hundredth anniversary of the Great War in which so many of our young men and women lost their lives.

The war was not simply an appalling human conflict – it was a crisis that revealed profound weakness in the British economy – a weakness that forced business and government to work together in radical new ways to first win the war, and then the peace.

When Queen Victoria came home from the Great Exhibition in 1851, she confided to her diary that her belief that ‘we are capable of doing anything’.

In 1897, hundreds of thousands had gathered in London to mark Queen Victoria’s Diamond Jubilee.

‘I remember the atmosphere’ said the young historian Arnold Toynbee;

‘It was ‘Well, here we are on top of the world, and we have arrived at this peak to stay there forever’.

Yet within two decades, World War One exposed Britain’s comprehensive failure to master the key technologies of the second industrial revolution.

As Correlli Barnett put it

“… British manufacturers were behind other countries in research, plant and method.”

We lacked machine tools, fuses, a coal-tar industry, ball-bearings, magentos, aero-engines, industrial gauges and optical glass.

Before the war, many had been calling for change, not least the appliance of science.

From the 1850s, scientists and engineers were agitating for reform; the ‘Cambridge network’ of scientists pleaded for more science on university curricula; Parliamentary committees were formed, the magazine Nature was founded in 1869, and a National Association for the Promotion of Technical Education (1887).

Some nineteen enquiries were undertaken into the state of elementary schooling, public schools, secondary schools, universities, scientific instruction and technical instruction.

 

Others made the argument free trade reform; Joe Chamberlain’s pronouncement in 1902, that

“The weary Titan staggers under the too vast orb of his fate”

sparked nationwide debate about free trade reform – an argument ultimately defeated by the Liberal landslide of 1906.

And the fiscal crisis that followed the South African war, coupled with rising domestic spending provoked a fundamental reappraisal of Britain’s global defence strategy, acquiescence in the Munro doctrine in the Americas and the Anglo-Japanese alliance (of 1901) – in essence, a retreat from the both the Western and Eastern hemispheres.

With the exception of the gold standard, the basic nostrums of the Edwardian political economy – the night watchman state, free trade, ‘splendid isolation’ – were all acute pressure in the years before World War I.

 

 

But it took the crisis of the war to fuse together government and business into a new alliance to drive Britain into the modern, industrial era where, as Alfred Chandler memorably argued, scope, scale, science and skill were the keys to success.

Back in the 1895, the Conservative prime minister, Lord Salisbury was all too clear that he;

‘detested the new plutocracy of industrial and financial wealth’.

Thus, there was only one man with an industry background – Joe Chamberlain – in the Cabinet; and only one industrialist – Vickers – on the board of the Bank of England between 1890-1914.

World War One changed all that.

It was the moment when Britain realised that business and government had to become partners if the country was to fulfil its promise, not waste its potential.

And for the last century we’ve trying to get that partnership right.

Today’s crisis is very different to the crisis of a century ago.

A century ago, we were debating how business and government could together build a different kind of economy.

Then we sought to make the second industrial revolution work in Britain.

Today, we’re trying to make the digital revolution work for Britain’s people.

 

 

A model of inclusive growth. 

Since the short, sharp financial crash and the long, deep ‘wage crash’ that has led to a cost-of-living crisis, consensus has grown about the need to re-connect wealth creation and social justice.

Both the IMF and the OECD have now warned of the economic risk of big, new inequalities.

In February, the IMF[1] reported;

‘We find that inequality is bad for growth…in and of itself. And we can say that redistribution by itself doesn’t seem to be bad for growth unless its very large’

Last week, Christine Lagarde argued that:

“[only] by making capitalism more inclusive [can] we make capitalism more effective”.

Business schools and academics, like my old teacher, Michael Porter at the Harvard Business School are making the case for ‘shared value’.

Business leaders like the Blueprint for Better Business group are arguing for reform to foster both a renewal of trust and new, long term horizons.

Around the G20, both business and labour organisations are now hammering out an agenda for reform.

Business finds its echo amongst faith leaders and trade unionists.

Both the Archbishop of Canterbury and Cardinal Vincent Nichols have called for a revived sense of the ‘common good’ between business and society.

Trade unionists like Frances O’Grady are arguing for a re-discovery of the inspiration of ‘progressive change’.

It’s the principle at the heart of Labour’s ‘Agenda 2030’ as set out by Chuka Umunna – our plan for long-term balanced and sustainable growth which works for all.


 

Rebuilding the Opportunity Economy:

In essence, when you boil down what everyone is saying: one challenge looms large.

How do we rebuild the opportunity economy, not just for some but for all?

The bald facts for families here in Britain are well known.

The great wage crash is now almost proving as damaging to workers’ livelihoods as the global financial crisis caused by the banks.

The wage crash has now destroyed 8 times more real income since 2008 than the financial crash.

Average earnings are now £1,600[2] lower per year than they were at the last election.

The average family has to work two hours extra each week, just to make what they did four years ago.

All these gains in productivity and creativity haven’t been fairly shared.

They’ve gone to those at the top.

At this rate, most households won’t win back their pre-recession living standards until 2020.

Now we can debate why:

The economics of super-star earnings are now much better understood.

Others argue that a global digital marketplace gives successful entrepreneurs the ability to sell in a multi-billion big market at almost zero marginal cost.

Thomas Pinketty argues that over the long term, returns on assets always outstrips the rate of economic growth.

But while we can debate the causes, the results are pretty clear:

Last month, the OECD confirmed that here in Britain, we’re now one of three countries in the OECD where the majority of wealth created goes to the tiny minority of people; an honour we share with the United States, Canada and Australia[3].

Back in 1981, just over 6% of pre-tax income went to the top 1% –

Now the top 1% has more doubled their share.

90% of Britons now only enjoy just over half [54%] of total income – this means that 44% of the country’s total wealth is owned by just 10% of people.[4]

If this is not fixed, we will confront not just a political crisis but a moral crisis.

 

 

Hard work isn’t just vital to the economics of our country, it’s vital to the ethos of our country.

The spirit and habit of hard work is deeply engrained

Not for nothing is Rudyard Kipling’s ‘If’, the nation’s favourite poem, with its call to

‘fill the unforgiving minute, with sixty seconds worth of distance run’

Today people feel like their run is like a hamster, sprinting on a wheel.

No matter how fast they run, they don’t get any further forward.

A few weeks ago, the Daily Mirror’s leader column had two stories; one about the record number of billionaires in Britain and the second about loan sharks preying on mums at school gates.

In cities like mine child poverty is spiralling.

I’ve just finished a major enquiry into child poverty in the city of Birmingham; the birth-place of the industrial revolution.

The stories I’ve heard are horrifying;

  • We’ve heard NHS leaders in the city tell us more children are presenting in A&E having tried to take their own lives, driven by the pressure of poverty and stress at home
  • We’ve heard how school secretaries ring the city’s food banks for mums in floods of tears who’ve dropped their children off at school without breakfast – and no food in the cupboards for dinner
  • We’ve heard how many families face ‘scrounge week’ at the end of every month as they beg and borrow from friends and families in order to make ends meet
  • We’ve heard of households where there are 3 or 4 people sharing a bed or a parent having to sleep on the sofa so that their child could sleep in the bed. Children going to school exhausted because there is no space for peace and quiet at home.

Yet most of the parents of these children are in work.

And, up the road, in Britain’s corporate bank accounts is sitting £440 billion in cash.

I ask you:

How did we create a country where corporate bank accounts are full – and childrens’ stomachs are empty?

Is it any wonder people feel ‘the deal has broken down’?

 

 

Peoples’ worries for their children and grandchildren are even more profound.

Young people today leave college with higher debts, take longer to find work, need to save more to buy an home, and then face longer to work before they retire.

The lack of good jobs today means that it is harder than ever to make a living by working hard.

Nearly 80% of the jobs created since the election are in low skilled sectors.

We’re becoming a low pay, low skilled, low value added economy, out-paced and out-boxed by new powers, rising around the world and old nations who, unlike us, have got their act together.

We can’t go on like this. We have to change course.

Our challenge is enormous: to rebuild the opportunity economy so that hard work gets you on in life once more.

 

 

The challenge of the future

If you are in any doubt about the need to get this done, then simply take a causal glance at the future….

Let me start with where you start; the future of work.

It’s no secret that there are some big forces at play.

Technology has now automated huge numbers of what were once, reasonably skilled, reasonably paid jobs.

And sometimes it feels like what technology hasn’t killed, trade has moved to those parts of the world where workers are cheaper.

In America, economists Autor & Dorn are amongst many who’ve reported there’s been massive substitution of those

‘low skill workers performing routine tasks – such as book-keeping, clerical work and repetitive production and monitoring activities  – which are readily computerized because they follow precise, well-defined procedures’.

It’s created what some call the hour-glass; high skill jobs, and low skill jobs and very little in between.

This is exactly what is happening here in the UK.

Indeed, the Resolution Foundation tells us that jobs in sectors with a high concentration of routine tasks fell by 5% between 2007 and 2012.

But guess what: there may be an awful lot worse to come.

 

 

A book that a lot of people are reading right now is the Second Machine Age.

It’s a positive book and its argument is simple:

Our ability to combine technology – processing power, cheap sensors, robotics, networks, social media, big data, means we’re now at an inflection point in our ability to combine and recombine technologies to do new things, revolutionising technology from Google’s driverless cars to better diagnosis of diseases.

  • There’s now enough technology in a Nissan LEAF to render the car a fly-by-wire robot, the kind of technology that could revolutionise the logistics industry.
  • GE already makes robots that can climb and repair wind turbines.
  • Future Advisor already uses Artificial Intelligence that’s strong enough to offer personalised financial advice.
  • Algorithms are taking on tasks once performed by para-legals, contract and patent lawyers.
  • Oncologists at Memorial Sloan-Kettering Cancer Care use IBM’s Watson computer to provide chronic care and cancer treatment diagnostics.

What’s does this mean for jobs?

Well, here at the Oxford Martin School, you estimate that as many of 47 per cent of the jobs in our economy today may be automated.

First technology took the blue collar jobs. Now it’s the white collar jobs as well. The challenge of building an economy of inclusive growth is about to get immeasurably harder.

Enlightened self-interest:

As someone who spent has spent half a career in business and half in politics, I happen to think business and government need to solve this together – with an awful lot of help from you.

What we need is enlightened self-interest from business – and determination from government to use it.

We need a new alliance between business, government, unions and civil society, to rebuild the opportunity economy so that it works for working people once more.

Once upon a time, this was a common place – especially for those non-conformist entrepreneurs who transformed Victorian Britain.

In my home city, the Cadbury brothers helped show the way.

And in the years before World War One, it was the founder of Britain’s first great multinational, William Lever, who took up the challenge; putting in place the 8 hour day, profit sharing, secondary and technical education, pensions, homes in Port Sunlight, health insurance, and half pay sickness allowance.

In his biography, William Lever’s son quotes his father:

‘The truest and highest form of enlightened self interest requires that we pay the fullest regard to the interest and welfare of those around us, whose welfare we must bind up with our own, and with whom we must share our prosperity’.

The expression said his son ‘crystallises his business philosophy’[5]

Putting ‘inclusive growth’ back at the heart of the opportunity economy can’t simply be left to business.

And it can’t simply be delivered by governments.

But together: we stand a fighting chance.

So the task of policy makers and profit makers today is to zero in the win-wins to build a settlement that is genuinely ‘pro-company, pro-worker’ (to use a phrase from my colleague Maurice Glasman).

So, to help the debate, I want to propose today five big win-wins we have to get right.

 


 

Win-wins:

First: We all have to recognise that inclusive growth is hard without growth.

So raising growth and raising productivity has got to be the first step.

Here, we’ve got to boost demand and supply-side measures that boost the markets we sell to, and second, boost the supply of science and technology which we know is good for productivity.

Countries that trade more grow faster.

So in this post-Doha world, we should set our sights on new, ambitious trade deals.

The EU-US free trade agreement could add an increase in UK national income of between £4-10 billion annually, or up to £100 billion over a ten-year period.

The EU-China Investment Agreement could up to £1.8 billion in growth every year to the UK economy.

And here in Europe, we need to be realistic that countries running big trade surpluses like Germany, do not need to suppress demand, they need to do more to reform their domestic services industry so there is truly an level playing field.

In short, we need to finish creating the Single Market, as writers like Charles Grant at the CER, have been arguing for years.

 

 

Now, if we’re to trade more, then we need trade-enhancing infrastructure; roads, ports, high speed railway lines.

Here in the UK, our infrastructure investment rate still lags the OECD average.

The World Economic Forum ranks the UK twenty-eighth in the world on overall quality of infrastructure.

Congestion on our roads will add some £10 billion of business costs by 2025

Our rail network is overcrowded at peak hours, especially in the south-east and north-west.

Demand for shipping is forecast to outstrip port capacity.

If we want to trade more, then quite simply we need not just trade deals but a new deal on infrastructure.

To these demand side reforms, we need to add some supply side changes.

Crucially, we need a bolder plan to boost the supply of innovation and science.

Let’s be blunt.

Innovation is the only way out of austerity.

The best way to raise average wages here in Britain is to grow the knowledge economy, the home of those jobs that pay on average £161 per week more than the national average.

And so, when we set out our policies for science and higher education a little later this year, you will see one lode-star: an ambition to build here in Britain a bigger knowledge economy.

That’s not something you can deliver by passing a law or raising a budget.

It can only be delivered by business and government working together in new ways. It is therefore a win-win that we have to work out together.

My third win-win is ‘Patient Capital’.

Reform of financial markets is widely regarded as critical to creation of inclusive growth.

On the one hand, the thirst for short term profits drives dysfunctional corporate behaviour which damages growth and jobs in the long term, and on the other limits the supply of capital for longer term investment in both infrastructure and innovation.

PWC recently forecast that globally assets under management will top by 2020, over $100 trillion. But as Michael Lewes’ recent book, Flash Boys, makes clear, predatory behaviour is still alive and well.

So how do change investor behaviour?

If anything, argue Dominic Barton and Mark Wiseman[6];

‘the shadow of short-termism has continued to advance’

 

 

In their survey of 1,000 board members, they found that nearly two-thirds reported that pressure to generate short-term results had increased over the last five years.

Nearly 4/5 said they were especially pressured to demonstrate strong financial performance over just two years or less – yet almost all said that a longer term horizon would be better for performance, innovation and financial returns.

It echoes the findings of John Kay here in Britain:

“We conclude’ wrote John, “that short-termism is a problem in UK equity markets, and that the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain.”

The key reform, argue both Barton and Wiseman, is to change the behaviour of the asset owners – pension funds, insurance firms, SWFs, and mutual funds – who in the US own 73% of the top 1,000 companies (in 1973, they owned 47%).

There’s a range of changes that make sense; defining long term strategy; allocating more to illiquid assets like infrastructure and housing; taking a bigger role in companies when things head off track, and crucially they need to start measuring different things – the kind of corporate performance that drives long term gain like staff turnover…

Now public policy has a part to play.

 

 

Ed Balls has called for:

A shift in the culture and professional standards in the banking sector; imposing duty of care across all financial services, and reform of remuneration practices.

That’s why Labour will call an end to mandatory quarterly company reporting, because we know this will curb short-termism in the City.

And Gregg McClymont has argued for a change in the rules of the game for our pension funds:

“If we want financial services that prioritise the savers’ interest, fiduciary obligations deliver these. Fiduciary obligations will most effectively be delivered in pensions where pension schemes are managed by independent trustees.”

Labour is also leading the drive for a British Investment Bank, supported by a network of regional banks, which will become a key source of investment for long-term innovation.

 

 

Our fourth win-win has to be around productive workers – and the restoration of a very simple deal: where workers do more to boost corporate profitability, then boards need to give them a pay-rise.

Work is key to inclusive growth – and skill is key to raising productivity and therefore wages.

The goal of full employment now has cross-party support and there is a widespread view that reform of the education and vocational education system is critical to closing the gap between the class-room and the successful career – in work.

Here in the UK, that means action to stop people falling too far from the labour market. That’s why we propose a jobs guarantee. We want more people to enjoy the right to go to university. But critically, we know that we have to build a vocational track to higher level skills.

All over the OECD, countries are modernising their apprenticeship system to help apprentices train to higher level skills.

Here in Britain, we send just 6% of our apprentices to degree level skills. That isn’t good enough and it’s why we’ll propose reforms of our higher education system to fix it, adding to the proposals we have already announced to boost quality apprenticeship opportunities.

 

 

More productive workers however, need to be better paid workers. And if they’re not then we have to ask ourselves whether corporate governance is in the right place.

Around the world, campaigners are fighting for a pay rise.  In China, last year. In Seattle. In Switzerland. In Germany. And here Ed Miliband is leading the charge with plans to strengthen the national minimum wage.

When productivity and profitability is rising – but wages are falling, then something is going wrong; and that’s why arguments for a Living Wage have such resonance.

I’m very proud that my home city of Birmingham is determined to become Britain’s first living wage city

If we can do it in Birmingham, then we can do it in Britain, and Alan Buckle’s report has shown the steps we can take to spread the idea nation-wide.


 

Fifth, we obviously have to look at the competitive intensity of markets, and the ease with which new high growth market entrants can challenge the status quo

Broken markets are markets that foster oligopoly.

They’re bad for prices, bad for consumers, bad for suppliers – and we have to fix them.

Sometimes that means upsetting incumbents – but competition is good for business – especially the new businesses which create jobs.

Competition and enterprise are good for jobs. That’s why we need a competition health check on all markets and that is why Labour have promised to act on the broken energy market.

Indeed, policy-makers are now much clearer about the huge impact that high performing entrepreneurial firms can have on jobs.

Not too long ago, in fact NESTA argued that ‘the vital 6%’ of new firms may account for upto half of net new jobs.

That is a very powerful case for supporting that handful of new challenger firms that can change the way we do business and employ an awful lot of people along the way.

There are then two further big issues which are key to inclusive growth.

First, we have to make sure that no place is left behind.

And second, we have to make sure that the burden of paying for all this is fairly shared.

 

 

Finally, there are two fields of policy where politicians are perhaps more important – but where companies have a big stake to getting the policy right.

Here in Britain, poverty is now more spatially concentrated than ever before.

We cannot create a country of inclusive growth if swathes of our country are left behind.

Fostering a better balance between rich and poor areas is critical to creating a country where wealth is better shared.

There are no signs that this too may be a matter of cross-party consensus – at least on paper.

Lord Heseltine’s review of growth was an admirable attempt to sketch out a practical plan for re-balancing growth across the United Kingdom by letting local areas take control of their own destiny.

It was simply a shame that the government which commissioned Lord Heseltine then did their best to ignore him.

I can assure you that when Lord Adonis presents his plan on many of the same issues, we won’t ignore him. We will turn his ideas into action.

 

 

Finally, we cannot ignore the question of tax.

As the OECD recognised in their survey of top incomes, tax policy absolutely plays a role in determining who profits from growth.

Quite simply, government cannot support policies for more inclusive growth – like good education systems, or tax credits, or regional economic development – unless people pay their taxes.

And business leaders know that a good level playing field on tax policy, where tax avoidance is not used to undercut competitors – is key to good business, and higher levels of public trust.

Conclusion:

Writing in 1926, JM Keynes in the End of Laissez Faire wrote:

‘Devotees of capitalism are often unduly conservative and reject reforms in its technique which might really strengthen and preserve it for fear that they may prove to be the first steps away from capitalism itself’[7].

A century ago, society, government and business came together to win the war.

And for all the mistakes, a very different kind of economy was born – and a very different kind of partnership between business and government.

It wasn’t strong enough to defeat old prejudices like protectionism or old ideas like the gold standard – that took the hard work of the policy makers at Bretton Woods.

Today, the debate about a new economy, a more inclusive capitalism, where work once again commands it’s just reward now has the potential to unite us, not divide us.

It’s time to get round the table and talk.

Ends


[1] http://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf

[2] IFS ‘Living Standards’ 2013 – http://www.ifs.org.uk/budgets/as2013/as2013_david.pdf

[3] OECD, Top Incomes and Taxation in OECD Countries: Was the crisis a game changer’ May 2014

[4] Distribution of Total Wealth, ONS May 2014

[5] Lord Leverhulme, p243.

[6] D Barton and M Wiseman, Focusing Capital on the Long Term, Harvard Business Review, February 2014

[7] JM Keynes, The end of laissez-faire, 1926

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