Magazine article Management Today

Without a Plan to Boost Productivity, Whoever Leads Our Country after the Election Will Be Doomed to Fail

Magazine article Management Today

Without a Plan to Boost Productivity, Whoever Leads Our Country after the Election Will Be Doomed to Fail

Article excerpt

The General Election is in the offing and the outcome is, you could say, uncertain. David Cameron wants to reduce government debt.

Ed Miliband wants to improve the living standards of hard-working families. Nick Clegg wants to safeguard the NHS.

None of them will get his way unless he can solve the biggest economic problem facing this country - productivity. It determines our standard of living, and yet nobody has a plan for tackling it.

Without higher productivity, those other political ambitions have no prospect of being realised. But the UK's productivity performance is dire. There is no peacetime precedent for the falls we have seen since the recession.

It is easy to boost growth in the short term. The government can spend more or cut taxes; the central bank can loosen monetary policy. When demand is weak, such measures can be helpful. It is much harder for governments to influence long-term growth. That is determined by productivity.

Governments can boost productivity by getting out of the way of private industry, by supporting activities that generate big positive benefits to the whole economy - ideally without creating too many distortionary incentives - and by encouraging 'creative destruction', the reallocation of unproductive capital and labour. The US does better than the UK on all three, but it is the last that really matters.

Creative destruction is like decluttering your home. The book that has sat on a shelf untroubled for 20 years, the unread newspapers, the old clothes. Once in a while, you need to throw those things away to make room - room to think, and for new things that you might actually use.

But there's a bit of the hoarder in all of us. We watch them on those TV shows and see how it ends: you can't move in your own house. You've nowhere to sleep, nowhere to cook - no room to live, let alone to grow.

So we know rationally that this must be done, but these are the hard yards of economic policy and can conflict with goals such as fairness, insulation from global markets and job security.

In the decade before the recession, banks across the developed world - enthusiastically encouraged by policy makers - amplified the flows of cheap credit from China and Germany and channelled them into the ultimate unproductive asset: real estate. This was a colossal error.

A real-estate bubble ensued, with household debt and house prices rocketing compared with income, and credit-fuelled consumer spending flattering our growth figures. Then of course the bubble burst.

What happened next is crucial - a case study in the efficacy of creative destruction. …

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