Productivity Growth is no mystery

From time to time I like to listen to left wing media, listen to their ideas and try to keep an open mind.

This month I had the displeasure of listening to FT correspondent Martin Wolf on Novara Media.

What rapidly became apparent in this episode is that despite his long history writing for the FT, this self styled “social democrat” has no idea why productivity has stalled so badly across Britain & Europe since 2008 compared to countries like the USA and S Korea.

Wolf attempts to clutch at straws like Brexit or austerity before eventually admitting he’s not sure what’s causing the stagnation because the same phenomenon is happening in countries who haven’t had Brexit.

Allow me to explain my analysis on the causes of stagnant productivity across the UK and Europe.

First of all, what is productivity?

Put simply, productivity is the ability to do more with less. Productivity gains therefore generally come from one of the following places.

1. The ability to leverage human endeavour using machinery and technology
2. The cost and reliability of energy
3. The skills and education of the worker
4. The infrastructure available to transport goods or services quickly and efficiently
5. The overall health of the nation through clean water, sanitation and health services.
6. The ability to access financing via loans or capital from equity markets.

So how have we in Britain fared against our competitor nations on these 6 fronts?

Machinery and Technology

Investment in machinery and technology has been woefully inadequate in the UK for many years. Countries like Ireland, South Korea and the USA have many more tax incentives for investment in capital. They have also had far more productivity growth than we have in recent years. The US and Ireland are famous for low taxes, but South Korea has achieved the same result via special incentives for investment in the form of rebates and deductions. You can see these in the table below.

If we are to increase productivity we will need to start by incentivising capital investment via the tax system. That should start with a low corporation tax but could be expanded to full expensing or even a return of the Pandemic Super Deduction. Enhanced R&D credits are another way to encourage the right type of investment. These deductions effectively lower the corporation tax rate but only for those companies that reinvest their profits.

Energy

The European obsession with virtue signalling Net Zero policies has driven energy costs through the roof in Britain and across the continent. There is a direct correlation between higher levels of solar & wind and higher prices for electricity as shown in the graph below.

Countries which combine clean nuclear with a simple straightforward planning system like France, S Korea and Sweden have far lower energy costs than the UK, Denmark or Germany. Indeed Germany has seen growth collapse since the loss of their gas pipeline with Russia, which has sent energy prices soaring, and is particularly harmful for their chemicals and heavy industry.

 

S Korea build their nuclear power plants for 75% less than it costs us. France was able to build 56 plants between 1975 and 1990. We, on the other hand, have to spend millions on paperwork and outlandish mitigation measures such as the Hinckley Point C fish radio station, because of our strict conservation laws, before a single spade has hit the ground.

We need to emulate their planning systems to ensure we can build at scale and at speed. The next revolution in AI requires cheap reliable energy and if it’s clean as well then all the better. Nuclear is the obvious answer, but only after we reform our planning laws.

Low cost energy drives investment in manufacturing and scalable industries like Artificial Intelligence. Without major investment in technology and manufacturing it’s impossible to have high levels of productivity. If we remain a ‘nation of shopkeepers’ nothing will change.

Education

When you challenge social democrats to explain the Irish (Celtic Tiger) economic miracle they simply cannot accept it is primarily down to low corporation taxes. They often claim that it’s due to a superior education system. Of course if it’s true that education matters so much that Ireland could become the fastest growing economy in Europe for most of the last 3 decades, then mass immigration from third world countries, with backward education systems, would clearly be highly detrimental to the economy.

In the UK mass unskilled immigration has coincided with declining productivity growth for the last 20 years. As the migrants have moved in, British people have moved abroad in record numbers.

Migrants moving here educated to degree level often find work in low skilled non degree related jobs, with depressed earning potential which reduces productivity when repeated across millions of people. To make matters worse we often subsidise, and therefore enable, these low pay choices with Universal Credit, which distorts the labour market, effectively subsidising low productivity employment, and propping up rents higher than they otherwise would be.

Furthermore, it tends to be our best and brightest who move abroad in search of a better life. So the net result of mass unskilled immigration is a lowering of skills and education in the UK workforce as we replace workers trained in the UK with those trained and educated in the third world.

Infrastructure

South Korea has 50% more miles of motorway than the UK, Germany has twice as much and France has three times as much. Railway miles show a similar pattern. This goes some way to explaining the high cost of transport in the UK and the hours lost to congestion. That has an obvious impact on productivity. It has been largely hampered by our planning system and the growth of quangos like Natural England. The nation which invented the railways now can’t build one line to Scotland for fear of disruption to bats, newts and jumping spiders. Until we fix this we won’t be able to use infrastructure to assist productivity growth.

For broadband speeds we rank 44th globally. With low broadband speeds and high energy costs how can we possibly expect to harbour a successful technology industry? Our dominance in European technology has relied on the English language and our cultural links with America. However globally we are well behind China and the USA and will soon fall behind India.

With the world class talent we have in our Universities we should be leading the planet in technological innovation. Instead, the UK and Europe are an afterthought in the technology sector. That means our productivity will continue to lag as the rest of the world dominates AI and robotics.

Health & Wellbeing

We’ve already achieved the basics in terms of clean water and sanitation, and we did so more than 3 generations ago. However the health of our nation is no longer improving. The rise of life expectancy has stalled. Young people seem to be facing a mental health epidemic. How will the health of our young people today affect our productivity in the future?

If you’re a social democrat you probably think our NHS, the pride of Britain, means we rank highly in health and wellbeing. Nothing could be further from the truth.

The UK has one of the highest reported rates of health limitations among those aged 16–64. About 24% of the UK working-age population is classed as disabled compared with less than 8% in France and 5% in S Korea. Many speculate this is due to the perverse incentives created by our increasingly generous disability benefits. However our NHS waiting lists could also be a factor. France, Germany and S Korea have far shorter waiting lists, access to better quality healthcare and the result is they have many fewer disabled people.

The Ipsos International Healthcare Report Card rated South Korea number one in the world for healthcare. France and Germany also rate highly for healthcare and all three have higher productivity than the UK.

Is it totally crazy to think we should look at these countries like S Korea to see how we might emulate the success of their health service?

Finance

Finally we come to finance. Traditionally our forte, the Citi of London famously financed the British Empire. London was the centre of global finance for centuries. All that has now been turned on its head. Tony Blair’s introduction of stamp duty on shares has effectively neutered the London Stock Exchange which now has a dismal record on IPOs and a stagnant stock market. The lack of access to capital has sent global corporations to the USA in search of ‘more bang for their buck’.

Since 2008 our access to capital has been hindered by increased regulations and a much more cautious financial industry. That change has exposed all of our other weaknesses in terms of productivity growth.

When it comes to innovation through startups the key is Venture Capital and in this space Britain doesn’t do too badly. However US investors tend to be more optimistic, aggressive, and quicker in their VC decisions, investing larger amounts and providing better capitalised rounds, which is a competitive advantage for US startups.

In conclusion it’s crystal clear what we need to do to fix our productivity problems but none of these options appeal to social democrats. So they dismiss them in an ideologically blind fashion which is dangerously damaging to our economy and our future prosperity. The next government of this country needs to act quickly to make these changes, before it’s too late.