Friday, 25 May 2012

Why are the Tories failing to grow the economy?


The recent spat between the Tories and the business community is the result of the government’s growing realisation that the stimulus they are giving business is failing to deliver growth and jobs.
It is not enough simply to give business loans and orders … we need to build in economic growth as a contractual requirement.


It has always been that the Conservative Party is the Party of business.  To be fair, Tony Blair broke the monopoly for a while, but Gordon Brown and Ed Balls handed it back.  Business turned blue in 2010, and the Tories came in on a promise to ‘transform the British economy’ and ‘re-open Britain for business’.
Labour, we are still told, ‘lack economic credibility’ – even this week, at PMQs, Cameron labelled Mr Balls a ‘muttering idiot … who left us with an enormous deficit and a financial crisis’.
Conservatism, at least in the public mind, is back in bed with business.

The Tory model has failed
Or so it seemed.
To be honest, that relationship is beginning to look a little tetchy nowadays (indeed, the word in one Telegraph article was ‘poisonous’).  Big business, in the person of Justin King, the chief executive of Sainsbury’s, has recently launched a ‘stinging attack’ on the government for doing too little to support growth. 
In response, Philip Hammond has told businessmen to ‘stop whingeing’, William Hague has told them to ‘get on your plane’ … and even David Cameron has expressed exasperation that industry does not seem to be taking advantage of the opportunities the government is creating for growth.
In his turn, CBI president Sir Roger Carr has retorted that business did not appreciate the government cracking the whip – ‘there are no whingeing businessmen here’.  Instead, we learn from the FT, he called on the government to cut regulatory burdens, invest in infrastructure, clarify energy policy, eliminate queues at Heathrow airport and help to increase the flow of finance to small and medium-sized companies (SMEs).
Ouch.

To be fair, Mr Cameron might be forgiven for regarding business as a particularly unappreciative bedfellow.  The government has poured £_billions into quantitative easing.  ‘Project Merlin’ in February last year planned to loan £190bn to businesses during 2011 - including £76bn to SMEs.  Corporation tax has been reduced to the point where it is one of the lowest rates in Europe. 
Meanwhile, for all industry’s constant bleat about regulatory constraints, last year the government launched its Red Tape Challenge, as a result of which the Home Office is proposing cuts to our equality rights, and #Beecroft has proposed abolitions of workers’ rights so extreme that Vince Cable called them ‘bonkers’ … only to find the Institute of Directors saying the Tory's plan offers ‘little to satisfy those in search of worthwhile deregulation’.
Yet in March this year the government set up another loan guarantee scheme which will give access to yet another £20billion of cheap money.

All that stimulus, draconian deregulation … yet no growth!
What is going wrong?

An unrealistic expectation
The underlying problem is that the Tories have bought into their own propaganda.  They are acting on their own ideological myth.  They really believe that businessmen are the ‘wealth-creators’, and that – if you just give them enough financial motivation and enough freedom-- business will automatically create wealth for the nation.

It is, of course, in Mr Cable’s words, ‘bonkers’.
The business of business is not to create wealth for the nation.  The business of business, as the American automobile executive Alfred P Sloan said, simply, ‘is business’!
It is, therefore, simply naïve to believe that if you throw cheap money at industry in a time of recession, firms are going to go out and expand, and take on workers, and energise the economy.

If you are a firm with a debt of £100,000 at 7%, and the government offers you a cheap loan, you are going to take the money, pay off your expensive loan, and sit out the recession in a stronger position.
Much the same goes for the ‘investment in infrastructure’ that everybody is demanding.  If you are a firm, and you win a government order, you first thought is not: ‘Oh goody – now we can expand employment and revitalise the local economy’.  Instead, you use the order to take up the capital and employee slack in your own company, use the income to consolidate and retrench, and hope to ride the recession.
   
This applies to an even greater degree to deregulation.  I am not the first writer to point out that making it easier to sack people ... in the hope that it will increase employment ... is a complete non-sequitur. The simple reality is that making it easier to sack people is almost certainly going to lead to ... more sackings. 
If anything, firms want greater 'sacking’ powers, not because they want to take on more workers, but because they want to get rid of some of the workers they have … and hunker down to survive the recession.

Taking a more general view of #Beecroft, what the Tories have not realised is that a working business is a critical balance between capital and labour.  Yes, it is true indeed that an entrepreneur needs the prospect of profit to motivate his risk-taking.  But equally the workers need a feeling that they are genuinely benefitting from their labour to motivate them to work hard and accurately.  Giving the employer the whip hand not only fails to motivate growth, it demotivates the worker.  A scared and resentful workforce is not a healthy workforce, whatever the Tory right will tell you.
And, more relevantly to our current discussion, an employer with the opportunity to maximise his profit by screwing down his workforce will actually be less motivated to increase his profit by going out and growing his firm – he won’t need to.

I say all this without any malice.  I am not being bitter or angry when I acknowledge that the business of business is business.  That, to me is just common sense and in the right order of things.  If you have a business, OF COURSE your first responsibility is to that business.


It is simply not true that businessmen are only interested in profit, not growth.  It is simply not true that all they want to do is to bully and browbeat their workers into working harder for lower wages.
But until the government gets its head around the way businessmen work, businessmen will ALWAYS act first and foremost for the benefit of their firm – and that may or may not necessarily automatically be to the benefit of the economy.  And it almost certainly will include as few jobs as possible, not as many jobs as we might wish.

So the Tory plans for growth-through-helping-business are failing simply because businesses do not see it as their job to promote growth.  They see it as their job to safeguard and prosper their business … and at the moment you would have to be an idiot to undertake speculative growth and take on a lot of workers.  

Putting it another way and much more succinctly, supply-led growth is a non-starter in the present economic environment.

Labour’s lost opportunity
What about Labour, then?
Is there an opportunity for Labour to re-take the role of ‘industry’s-friend’?

Clearly, the answer is no.  Labour is nowhere near having a coherent or effective strategy for business or growth. 
‘Black Labour’ would merely echo the failed policies of the Tories.
Meanwhile, the Shadow Cabinet is saddled with a Five-Point Plan which nobody can even remember.
And even the Left – those who are prepared to go down the road of Keynesian stimulus either by borrowing or taxation (depending on author) – have little that takes into account the fact (as the Tories have demonstrated) that it is NOT enough just to throw money at industry and hope it will create growth.
   
The answer is contractual
So what IS the answer then?

In my humble opinion, it has to be that the government needs to learn how to do business with business.
And that involves learning how to make a tough deal.

Our government hands out each year literally £_billions of contracts.  Indeed, this Tory government intends to hand out more than ever, because it is busy marketising state provision – for example in the NHS.

At the moment, these contracts are required to demonstrate best value – basically, that we (as the client) are getting the best deal for the cheapest price.

What we need to do is to change the basis of the allocation of contracts, and to require that ‘benefit-to-the-local-economy’ be included as a determinant factor within the ‘best value’ process.

Thereby, in simplistic terms, a firm which offered a fabulous service for a low price via a call centre in India could lose out to a firm which offered a fabulous service for a perhaps slightly higher price … but via a call centre on the local industrial estate. 
Similarly – if we ever do introduce economic stimulus through investment in infrastructure – a construction project might be given to the firm which guaranteed to create so-many thousand jobs for young people and apprentices … as well, of course, as doing an excellent job for a competitive price.

The Tories have just abolished ‘Harman’s Law’, which required that procurement be done with an eye to social equalisation. 
What they need to do is to replace it with a law which makes it an audited requirement that all procurement takes into account also the benefit-to-the-local-economy.

There is nothing unethical or anti-competition about this.  At the moment, when it gives out the pitiful sums under the Regional Growth Fund, the government quite validly and legally requires that the applicant firms calculate how many short-term and long-term jobs will be created, and what will be the long-term effect on the economy … and only the firms which can demonstrate the best outcomes are given the funding.
So why, for goodness sake, isn’t the government building similar requirements into every government and local government contract it offers.

You will soon find companies, seeking access to those £_billions of contracts, coming up with all sorts of creative plans to source their supplies locally, find their labour locally, and contribute proactively to the local economy.

(And then, sharing a personal beef with you, government needs to learn how to build real, meaningful penalties for failure into contracts – but that’s another Rant).

Conclusion
Being realistic and really quite right-wing, I can accept that we do need to throw money at the businessmen, and to motivate them through profit-opportunities.
But, as we do so, we need to recognise that if we just throw money at them all that will happen is that they will take it.

If we are going to dole out the money, and inasmuch as we do, we need to make sure that business delivers, for every monitored penny of it, not just excellent services, but real, tangible, measureable outcomes in terms of jobs and growth.

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