Duncan’s Economic Blog

An interesting agenda

Posted in Uncategorized by duncanseconomicblog on June 12, 2009

The political debate about the economy is currently focused on the issue of spending cuts. Quite rightly so.

But in other policy areas – just below the surface, something quite interesting is happening.

As noted by Vino, Robert Peston, Stephanie Flanders, Charlie and Adam , George Osborne is currently setting out a new agenda.

The scary thing is – it’s quite an attractive one.


George Osbourne, has proposed that the tax system should be changed to make it less favourable to companies taking on more debt. If the Conservatives come to power and actually put this idea into practice, it would have some interesting effects. Hopefully, it should make the private equity model less profitable and discourage the short-term buying and asset-stripping of well-functioning businesses.


But here’s a striking insight into his instincts: “one of the most damaging impacts of the credit boom” he said “was that real venture capital in exciting new businesses was squeezed out by highly leveraged private equity”.
In other words, Osborne – unlike either Alistair Darling or Gordon Brown – has signalled strong distaste for the private-equity boom of 2005-7, when many of our biggest companies were taken private in deals that saw them loaded up with debt (if you go back to the archives of this blog for the first half of 2007, you’ll find a good deal about all this).


He has a list of ideas for boosting private savings, like abolishing the basic rate tax on savings income, which he’s raised before. But perhaps most eye-popping, for those of us who’ve been around for a while, is the shadow chancellor’s admission that Will Hutton was right all along.
You may remember that Will Hutton – now chief executive of the Work Foundation – wrote the 1995 best-seller The State We’re In which, for a time, was New Labour’s bible on all the things that were wrong with the UK economy under the Conservatives.
The book’s basic line, which its author has come back to lately, is that our economic system encourages short term rent-seeking and undervalues long-term investment in productive assets. It’s fair to say that it received pretty short shrift from Conservatives at the time.
Now, after years of Conservatives promoting a largely “hands-off” attitude to investment, George Osborne seems to have decided that Hutton has a point.
He says that he’s not talking about “picking winners and national champions”. Heaven forfend – no-one would admit to that these days. But he wants “a long-term and more strategic attitude to investment in infrastructure, skills and new technologies”.


Steph and Pesto are both carrying reports of Osbourne’s recent speech which, if they are to be believed, would place the Tory post election economic policy a couple of notches to the left of Labour’s. A end to bankers bonuses, tax breaks for equity not debt, priority given to long term investment, that sort of thing. Nothing desperately radical you understand – I think Steph is over-egging the pudding by drawing in Will Hutton as a comparator – but certainly a break from ‘the pro-financial markets at all costs’ approach which characterised the Brown/Darling policy line before the crash, and very distinct from their emergency programme of recapitalising the banks since.


We learned a lot more about Conservative economic policy today in a detailed (and annoyingly thoughtful) speech by George Osborne. There’s a lot in it which I may return to in future posts. But what struck me is how the speech seems to presage the emergence of a new consensus between the main parties only a few months after the last one collapsed in a heap alongside Lehman Brothers.
Osborne says it is time for a new “British Economic Model” based on three priorities: fiscal soundness; shifting the economy away from excessive debt towards savings and investment; and a new emphasis on long term returns and productivity rather than the short-termism that characterises the UK economy.

Tom adds a note of caution:

A few handfuls of salt to take this Damascene conversion with. One, it wasn’t so long ago that Osborne was brown-nosing the BVCA, and criticising unions for attacking private equity. Secondly, why keep the proposal to scrap duty on shares, since this will make trading more attractive (in fact the opposite of Keynes’ idea in the end of my previous post). Finally, the speech itself is detail free, and seems to do little more than restate existing or emerging best practice (apparently pay in the financial sector shouldn’t encourage short-termism for instance).

On the issue of spending and the need to pay down debt quickly I disagree fundamentally with the Tory line. And that’s a deal breaker.

But this new stuff is interesting. When I started arguing for a more active industrial policy a few months back, I assumed I would be called crazy and be asked why I wanted to return to the 1970s? (Newmania does this a fair bit in the comments).

But here we are with the centre-right party calling for essentially the same thing. The political space that makes this possible is opening up.

This should be our economic message – we prevented a slide in the economy and now we are going to help rebuild it.


6 Responses

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  1. Will M said, on June 12, 2009 at 10:22 am

    Hmm. Haven’t read the speech yet – will do so over the weekend. My initial thoughts though:

    1. This would have been a good speech to make 6 months ago – Labour would have no reply, the Tories would have looked like the only party of new ideas, and it could ahve been part of preparing the public for the scale of spending cuts (something they still aren’t really doing even now).

    2. If the speech is really all “venture capital’s all about long-term success and private equity’s all short-term and the companies fail”… well, we all know that’s rubbish. Lots of private equity investments succeed, lots of venture cpaital investments fail. To introduce a pro-venture capital bias only means that venture capital failures will be larger.

    3. If Osbourne wants a strategic investment in skills… how’s he gonna reconcile that with massive government cuts? And if he doesn’t see skills being a big part of this, isn’t this just proof of a continued lack of policy depth less than 12 months before the Tories enter government?

  2. newmania said, on June 12, 2009 at 11:09 am

    I can only say that in my business that makes great sense . We are still awash with silly fake amalgamations driven by absurd gearing ( Just been bitching about it in fact). I think on the matter of cutting spending there is far less control than you think , its more a matter of managing expectations both on the tax cutting side and the Public Sector .
    The money is already drying up Duncan, you have quite misunderstood what Cameron wants or any Conservative wants which first and foremost is stability. This has nothing to do with an industrial Policy its setting the framework for the market to operate in.
    A Conservatrive wants an orderly garden , not too orderly , a Jardin Anglaise you might say ( tra la ).Brown wants a East Germans Cabbage production unit but some of the New Labour Marketeers seem to think you can have a wilderness where the predators fight it out . Free markets were never an end , well not for ordinary Conservatives anyway. This will go down well but I will have to look at the details .

  3. Brian Hughes said, on June 12, 2009 at 5:15 pm

    The great problem with markets is that rewards tend to be short term. As anyone old enough and sufficiently interested in electronics to understand the design of an analogue hi-fi amplifier can attest, this sort of feedback leads to instability. It also means that analogies with evolution (survival of the fittest etc.) are codswallop. Evolutionary rewards come in hundreds of thousands of years not in next month’s bonus or dividend.

    But no one has yet found much a way to deal with this fundamental weakness apart from regulation, taxation or intervention. Whether Osbourne and his team, even with the help of all the Treasury’s great boffins, are capable of doing anything much better than previous Tory chancellors (which, given their dismal record, isn’t much of a target) is more than open to doubt.

  4. newmania said, on June 12, 2009 at 9:32 pm

    Evolutionary rewards come in hundreds of thousands of years not in next month’s bonus or dividend.

    Brian there is obviously something in what you say but the evolution , in this context, is not a metaphor drawn from the natural world it is mathematical fact . If take the words “ BROWN IS TOAST” and reduce it to its component letters at random “ WOASI WTSN…etc”, how might we find the correct order ? . Suppose by random mutation I create generations of the arrangement but at each point the element closer to the solution is retained I will quickly reach “ BROWN IS TOAST”. If ,on the other hand, I keep throwing my scrabble bricks in hope, the process will be endless . In fact the number of ‘goes’ will be counter intuitively astronomical , do the maths . You will notice in this thought experiment it is not necessary for the letters to know how to arrange themselves.

    The general ‘power’ of evolved solutions over one step solutions and the fact that individual participants need not know the solution can be a property of a market . It is also , plausibly , a property of evolved institutions or societies .If ,then, you view is that society and its interactions are impossibly complex , you will distrust solutions that are invented or imposed and trust what is there . You may not know why , which is why Conservatives look silly on question time. Nonetheless as the law of unforeseen consequences ?-( take devolved Parliaments ) ,shows us, Conservatives are often right
    When we considered the market however Conservative would not discuss it in isolation as economists and New Labour have done , this is why Hayek did not like Conservatives . It would be seen as dependent and interacting with institutions and society . When the state is defending such institutions or “Evolved solutions “ , Conservatives are relatively happy , even if that defence requires reform . When the state is gainsaying what has evolved then Conservatives will be worried . You can see that Global markets therefore pose a special problem in that they are markets acting outside the context of institutions and societies . In fact the market may destroy the very precious counterbalances that have evolved and act as destructively as the state

    I am not sure how clear I have made that but at least I hope you will see the concept of evolved solutions is far wider than Darwin.

    Take and example ; education . You have it the wrong way round . It is quite possible that the market interacting with social institutions (Institutions / traditions ,are the means whereby the better is retained ) will reach a better solution than state imposition. The problem is it is too slow not too fast . Schools will not arrive quickly enough in response to demand , and as we all need schools the state *( as Little as possible ) has to act to ensure a stable educational environment . If the state , by virtue of being a one step solver start to destroy the resources for real improvement , it becomes a problem . If the state is acting as the ritual expression of society, ie as a healthy institution itself ,then it is plausibly a good thing .

    This is not conservatism but it is a good way of providing a doctrinal frame work for conservative thought . Not all members of the “Conservative Party” are “conservatives “ of course .If you are interested in understanding the core beliefs of the coming administration ‘however ’ it would be worth making the effort to grasp what I may have most inexpertly tried to explain.. An appeal to such ideas is very much the way Cameron has , easily , reconciled Libertarians with the NHS , for example and even to some extent , Europe.


  5. Brian Hughes said, on June 13, 2009 at 8:35 am

    I must confess – I’ve only speed-read newmania’s response. I think he’s confusing education with training.

  6. […] This is a good position for the Tories to be in – they are slowly but surely developing an at times unlikely economics policy, and Nelson’s findings give them some room for maneuver. Brown will find […]

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