Keeping ahead of China and India

John Redwood is comments that the Chinese and Indian economies will soon be larger than those of The EU or USA. The high growth rates, coupled with their huge populations means that this will happen quite soon. I believe that if the most advanced nations are not to stagnate they must accelerate the advance into higher value-added activities*.

 The government’s role in this should be, at minimum, to refrain from hampering the creativity and the flexibility that this requires. Further it should provide a structure to enhance the comparative advantages that the UK enjoys. For example, in no particular order:-

 1. In learning. Britain is probably second in the world (behind the USA) for attracting foreign students. For the size of population, we lead the world in world-class universities. The government should encourage/enable the universities to build upon this. Our comparative advantage is that we are the home of the English language, the World’s second language.

2. In Finance. Sorting out a proper structure for banking regulation that will both prevent the build-up of systemic risk, whilst at the same time encouraging/enabling future innovation. The apparent contradiction between these two aims is best resolved by emphasising general all-encompassing principles, rather than the detailed rules of the American’s or the detailed form-filling that was key feature of the last decade.

3. In Climate Change. The current aims to reduce CO2 emissions by 80% by 2050 are totally unrealistic. The attempts to do so will only serve to make Britain’s poorer and fail to meet our growing energy requirements. Roger Pielke Jnr explains why here.

* It is usual to say that higher productivity per person is required. From that tautologous statement the National Income = National Output, the way to increase income per person is to increase output person. As working time tends to decrease, more that 100% of this must come from higher output per unit of time. That is, greater productivity. However, the way to increase the income of a business is to increase the margins. The output of a university is not in the raw number of published papers, but the rare papers that create a seismic shift in out knowledge. In finance, it is not the quantity of deals done, but the large deals that create the most profit. For these reasons, I prefer the term more value-added rather than productivity as the driver of increased income per capita.

Risk, Volcanic Ash, Regulation and the Leaders debate 2

John Redwood today makes some brilliant observations on “Bash the banks and Praise the Regulators”. His comparison with the ash cloud and the banking regulation is particularly apt. But it is not just the cost of inappropriate regulation that there is a similarity. The leaders’ debate of tonight showed crystallised the issue for me. It is how do the authorities deal with an unprecedented situation? The risk-averse say let us do nothing until there is full information. On the financial system, nothing was done to control the excesses. On the ash cloud everything was stopped until the scope of the problem could be assessed by the experts.

There is a way of going into the unknown without full information. You set general rules and assess the magnitude of any problem.

–         On the ash cloud, you compare the risk with the size of the eruption, the size of the particles and the distance from the volcano. From this, you would have found no evidence of large jet aircraft getting into emergency situations 1,000 miles from an eruption, in an ash cloud that is hardly visible.

–         From the financial system, the situation was evident that house prices and consumer borrowing was going to unsustainable levels on an unprecedented scale from 2003 onwards. The 0% interest credit cards and the large discounts for changing mortgages were evidence of this in the UK. The sub-prime boom, with mortgages deals agreed whereby in 3 years the borrowers could not meet their repayments was evidence of this in the USA. It was the very magnitude of the problem that should have merited special attention. The action should have been to raise interest rates and increase cash requirements for banks.

On the surface the action was the opposite – One to stop what was already happening, the other that immediately stopped anything from happening. But the cause is the same – by requiring detailed rules and acting on how others will perceive our actions, the authorities took wrong course of action.

 The Leader’s debate crystallised it for me. There was one leader who stood out. His reaction to any problem is not to take any risks.

–         He will not risk safety by letting planes fly.

–         He will not start cuts now to risk the recovery.

–         He will not risk banks ever getting into trouble again.

–         He will not risk a foreigner being unidentified.

–         He will not risk existing jobs.

–         He will not risk offending our European neighbours by disagreeing with them.

–         He will not risk independent MPs, by banning them from second jobs and monitoring every penny they spend.

–         He will not risk independent thought, by stipulating what religions should believe.

–         He will not risk diversity in education by allowing independent schools to be formed in the state sector.

 In so doing, after another 5 years of his leadership we will have no recovery; we will have no decision-makers in government – just be taking orders from Brussels and the IMF; we will have no risk-takers in business as most will not want to overcome the ever-higher regulatory hurdles for achievements that are taxed away and vilified.

We will also have no future.