Economics is about people

The Purple Papers

The process of discussion and debate on the Purple Papers and The Purple Book that preceded it (of which this blog is part) is a welcome one. But in the sphere of economics, there is more to be gained from the essays that are ostensibly about other subjects than from the paper with that name.

Here’s the way I see it. Economic growth is good because it gives individuals more opportunities to pursue their dreams and live their lives in a positive way. It can also give more resources to governments who believe – as we do – that the state has an enabling role in allowing individuals to do this.

Growth, in turn, as the economists will tell you, can be thought of in a number of ways. The most useful in this context is as the product of the number of people in employment multiplied by their productivity. So, to maximise growth over the long run we should ensure that both the employment rate and the smartness of those jobs are both as big as they can be.

This is where the Purple Papers by Graeme Cooke (Getting Britain Working on reforming the welfare state) and Patrick Diamond (Tackling Britain’s ‘care crunch’ on child and social care) are particularly useful. They get to the heart of how we can raise the employment rate by pooling our resources more effectively – for example, eliminating poverty traps in the payment of housing benefit, and shifting child benefit towards childcare to raise the participation rate among parents. Nobody in this country should feel that they are prevented from working due to things outside their control. It’s demeaning for the individual and chokes off opportunities for the country.

The recommendations made in these areas are welcome. But we can go further. The Mirrlees Review of Taxation published by the Institute of Fiscal Studies a year ago demonstrated ways in which the tax system could support work for parents and those in their 50s without any loss in overall government revenues and do so in a way that supports higher levels of growth. A lot of brainwork went into that – we should be the people taking it up and running with it. More thought also should be given to the role of entrepreneurship in the economy as an important source of innovative pressure on established ways of doing business. This is a nebulous subject but if it were mainstreamed as an established option for individuals, despite our country’s history of specialising instead in the so-called ‘professions’, it could be a win-win for people and country alike. The role of insurance to alter attitudes to risk, and voucher-based savings schemes that pay out to meet particular needs, are also important in any discussion about social security.

This is where progressive debate has the edge over other sections of political discussion. We understand that, first and foremost, economic policy is about people, and about designing the enabling state that unleashes the potential of people to contribute – in their interests, and in the collective interest.

Which brings us to the Purple Paper that is ostensibly about economics, namely Steve van Riel’s paper on The economics questions no economist can answer for you. It is so named because it runs through some of the old controversies in macroeconomic policy: how much debt can you have, where should you cut, should you give money to industry and so on, which involve subjective questions that, he therefore concludes, cannot be technically answered. All of this misses the point.

If  in the medium term, as argued above, growth comes from increases in employment and productivity, in the shorter term it is cyclical. There is overexuberance followed by caution. Always. Because we are human. The only question is how dramatic these swings are. The role of government is to dampen them. So we should pay down debt when the economy grows above trend and borrow when it is below trend, keeping the average somewhere sensible. To achieve that from this starting point means we will need to save more once the recovery is established in the near future than will usually be the case. My contribution to the debate is that perhaps Labour should be committing now to saving more in the good times; it will be perceived (rightly or wrongly) as making a break with the past. As Philip Gould argued so clearly in his book The Unfinished Revolution, Labour needs to just box off the economics question so that we can start to be listened to on the other stuff.

Once we’ve made that clear, we can then focus our energies more on the supply-side reforms described elsewhere in the Purple Papers. Cooke is right to argue that government should ruthlessly prioritise capital spending so that productivity will rise when the mood improves. Even saying that would help confidence, and particularly if it were people-focused, for example, on skills. After all, politics is about people. But politicians gain when they realise that economics is too.

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Kitty Ussher is a research fellow at the Smith Institute and a former economic secretary to the Treasury. She writes the monthly Economy column on Progress and tweets @KittyUssher. You can see her own website here

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