What politicians should be focusing on


There was an excellent article by Hamish McRae in yesterday's Independent, arguing that Britain needs to learn from the mistakes Japan made in the wake of its financial crisis in the early 1990s. The relevance is easy to spot:

It had experienced a huge speculative property bubble, built on borrowed money... Then the boom collapsed.

The result is that average Japanese living standards have barely risen for 20 years, while inequality has risen sharply. And this is despite them adopting the policies our government are now touting: low interest rates, increased government borrowing, and higher public spending to "prime the pump". If it didn't work for Japan, are we really to believe it will work for us?

Instead of simply attempting to re-inflate the economy, it would be much better to take a long-term approach, improving our economic fundamentals so that we come out of the crisis stronger than we went in. The key issue, ultimately, is getting our economy to generate wealth again. In policy terms, that means we should focus on increasing productivity. We need:

More competition. Rather than closing our markets to foreign competition (which seems to be on the cards in the US and EU) we should embrace it. Reducing regulation – particularly for small firms – also helps by making market entry easier.

More capital investment. One of the reasons we have traditionally lagged behind the US, France and Germany on productivity is a lack of capital investment. We should: (1) eliminate double taxation by abolishing tax on capital gains, dividends and so on; (2) let companies immediately expense capital spending against their corporation tax liabilities.

Less public sector. The public sector is less productive than the private sector and acts as a drag on the economy. Public spending needs to be brought under control and the state needs to be streamlined.

Better skills. Britain's workforce is less skilled than those of its competitors. More government programmes are not the answer. Injecting market forces into education is.

More innovation. This would be one of the main results of doing the things suggested above.