Cheap and Costly Growth

Reversing deindustrialisation will be hard, but essential

Towering Columns

In The Times, Juliet Samuel says President Trump must forge a new post-Reaganite economic vision for America.

[D]espite the big spending of “Bidenomics”, one thing didn’t change. The US did not become a manufacturing economy. It still relied on domestic services for growth and on cheaper, better-run factories abroad to supply a vast portion of its goods. Industrial production might be up a bit, but it’s not much in the grand scheme of things. The old economic model of running vast trade deficits and financing it all by selling dollar assets has been left largely intact.

This brings us to the big questions about Trump’s second go. Is he really serious about “Made in America” this time? Will he go to war with the ideological dogma of the old-school Republican donors and think tanks? Is the whole thing a dangerous, pie-in-the-sky fantasy or can America once again become the world’s factory, and what would that look like? Fortunately, the debate about making America make stuff again is rapidly gaining in sophistication. An intellectual landscape of supposed kooks and fantasists has in fact brought to the fore serious wonks, historians and thoughtful scholars of experiments in other countries. They argue that the right agenda for economic nationalists isn’t autarky — the US does not need to become self-sufficient in toys and televisions — but neither is it sufficient to focus narrowly on “national security” industries, such as munitions factories. The problem of reliance on foreign production runs deep into the US’s economic foundations.

After all, if you and your allies have no refining capacity for rare earth metals or silica production, or the cost of your telecoms equipment is uncompetitive or your batteries are all made abroad, then you have no security in any real sense of the word. When push comes to shove, it is impossible to remain a superpower without being a major manufacturing power.

In The Spectator, Matthew Lynn warns that Britain is becoming a zero-industrial society.

Manufacturing and tech go hand in hand. Trump understands this: as one of his first acts this week he announced a $500 billion investment in building AI data centres, which will create 100,000 jobs. In 2005, Britain’s productivity growth started to fall off a cliff. It never recovered from the 2008 financial crash, which damaged overall economic activity, liquidity, risk-taking and investment. The country’s underlying deindustrialisation helped turbocharge this decline.

As we continue on the path of destroying our manufacturing industries, we will not only lose the 8 per cent of GDP that it contributes – although that will be catastrophic in itself. We will also lose the skills and technology that go with it. One consequence will be greater widening inequality: manufacturing industries are disproportionately concentrated outside the south-east. Losing more productive jobs from elsewhere in the country further widens the regional divide. Manufacturing jobs pay 12 per cent more than the UK average, controlling for qualifications, experience and seniority. They provide lots of well-paid employment, especially for the kind of blue-collar skilled manual (and often mostly male) workers who tend to struggle in a female-dominated services economy.

Manufacturing also powers exports, generating foreign currency and keeping the trade balance from sinking too deeply into the red. Brexit saw a small initial uptick in manufacturing as companies sought to reshore to avoid trade barriers with the EU’s single market, but this hasn’t lasted, due to energy cost-driven industrial collapse. There is a risk, too, that our manufacturing decline could harm national security. Yes, efficient global supply chains may keep prices low for consumers and businesses. But there are wider policy objectives at stake, such as the UK not being too dependent on China in the event of a global conflict, should Xi Jinping decide to invade Taiwan.

In The Times, Paul Johnson says this government has no coherent theory of growth.

[W]hat is this government’s “theory of growth”? In a brilliant piece published last week, the eminent Oxford political scientist, Professor Ben Ansell, posed that very question and concluded that there was no answer. This government has no consistent theory or ideology. Hence their pursuit of growth is “empty-minded”. They take a grab bag of policies which might help them “pull the growth lever”, to use the prime minister’s own somewhat absurd phrase, but without any coherence between them. Ansell attributes various theories, or mental models, to chancellors and prime ministers past. George Osborne, he contends, had a neoclassical model in mind, getting government out of the way, reducing the deficit through cutting spending, and encouraging free trade with, for example, the EU. Gordon Brown famously endorsed “post-neoclassical endogenous growth theory”, supporting a greater role for government through investment in education, innovation and infrastructure.

In my days at the Treasury, we churned out innumerable papers extolling these drivers of growth. New Labour added a belief in the importance of institutions — an independent Bank of England, devolution, the EU again. A much more interventionist model was favoured by post-war Labour governments, and by John McDonnell when he served as Jeremy Corbyn’s shadow chancellor. Liz Truss appeared to believe in a rather simplistic model in which big tax cuts could kick-start the economy. In truth, it was always more complicated than that. Brown also talked a good game on fiscal prudence, oversaw light-touch regulation of financial services, and cut rates of income tax. Osborne was as keen on policies to promote research and development — and as prone to allow fiscal targets to slip — as ever his predecessor was. He also demonstrated a belief in the importance of institutions by founding the Office for Budget Responsibility. Even Truss was not averse to massive government intervention when it came to subsidising energy bills.

Nevertheless, I think it is harder with this government than it was with some of its predecessors to work out any underlying guiding mindset. Liberalisation here, additional regulation there; belief in the power of government in one corner and in the free market in another; fiscally conservative rhetoric, tax, spend and borrow in practice. Do Reeves and Ed Miliband have similar mental models? Miliband’s energy plans seem to owe as much to the legacy of the McDonnell years as to the more recent Labour approach. If Keir Starmer has to adjudicate between different approaches, where does he stand?

For Commonplace, Henry Olsen says Trump’s GOP must embrace the priorities of their new working-class voters, most of whom voted twice for Barack Obama, and resist the temptation to pander to the old Republican base.

This conservative-populist coalition does not march in lockstep. The new voters mostly backed President Barack Obama twice, and remain more moderate and supportive of robust government action. The old voters have surely shifted on issues like free trade, but these McCain-Romney backers remain more economically and socially conservative.

Baked in the afterglow of triumph, Trump’s initial agenda will likely make all factions happy. Governing, though, doesn’t stop after the first bills are passed. Events always bedevil even the best politicians, and something is sure to arise over the next four years that will force Trump to choose between these two groups. When that time comes, Trump should look to what others faced with similar choices have done. For he is not the first leader of a conservative-populist coalition. Two others—Sweden’s Fredrik Reinfeldt and Britain’s Conservative Party—have tried to do what he now attempts. Both failed to meet the test when it came, destroying their new coalition in the process.

Both failed for the same reason: when push came to shove, the leaders chose the old base rather than the new converts. In so doing, they drove the new voters away, irrevocably splitting their coalition and allowing their leftist adversaries to regain power. Trump must do the opposite when the time comes, leaning into the new realignment by choosing the new voters’ desires over the old base’s wants. Only in this way can he cement their loyalty and truly build a new, lasting coalition that will endure and transform America.

Also in The Times, Matthew Syed says the West must stand up to the infiltration and corruption orchestrated by the Chinese Communist Party.

[T]he TikTok story is unfolding precisely as you might expect. The greatest achievement of Donald Trump’s first term was to take a scalpel to much of this corruption: kicking Huawei out of US infrastructure, putting an embargo on advanced semiconductors and initiating the US shutdown of TikTok, a company that has reams of data on 170 million American users, manipulates its news feed to favour the CCP and is proving a vital asset as the world moves towards hot war.

What was the CCP’s response? Peer-reviewed papers reveal covert manipulation of the TikTok algorithm — in which the CCP owns a golden share — to assist Trump’s 2024 victory by allowing more posts that questioned the 2020 election result and inflamed woke issues (it is remarkable how often key Trump acolytes cite TikTok as a key factor in the landslide). One also notes that Jeffrey Yass, who owns 15 per cent of TikTok, has given tens of millions of dollars to Republican candidates and is a key Trump donor. Trump now — surprise, surprise — professes himself “warm” towards the company and may reverse the ban. In other words, the gambit seems to have weakened the hawkish stance of this famously transactional president.

This isn’t just about the US, however. If anything, the UK has been even more open to Chinese manipulation, an iceberg of covert influence that one can only scratch the surface of in a column of this length. Note that David Cameron’s most ambitious commercial move after leaving office wasn’t the Greensill affair but his agreement to lead an abortive $1 billion China investment fund. Peter Mandelson, one of the leading pro-China voices in the UK and now (ludicrously) ambassador to Washington, is co-founder and major shareholder of Global Counsel, which — alongside other China connections — lists what company in its client list? That’s right: TikTok. You couldn’t make it up.

At UnHerd, Dan Hitchens expresses alarm at the secrecy of the Assisted Dying Bill committee stage and the apparently one-sided character of the witnesses.

Yesterday, the first meeting of the committee, was Leadbeater’s chance to show just how strong that scrutiny would be. First, we learnt that Leadbeater had introduced a last-minute motion: the crucial part of the meeting — the debate on which witnesses to call — would be behind closed doors. Journalists and the public would be asked to leave; Hansard would be left blank; those of us watching parliamentlive.tv would see a message reading “Terminally Ill Adults (End of Life) Bill is currently in private.” Leadbeater said this was to protect the “privacy” of witnesses, though other committee members responded that they couldn’t see why that would be an issue. But there was another aspect to the story.

As we discovered during the public parts of the meeting, a major row was breaking out within the committee. The root cause is the powers given to Leadbeater with a private member’s bill such as this. With a Government bill, the pro side and the anti side both pick witnesses. Here, although Leadbeater asked for suggestions, the list was all up to her; she sent round a provisional list last week, and then an updated version at 10 o’clock yesterday morning. While the committee had a chance to amend it, Leadbeater had picked the committee as well, and in yesterday’s votes all challenges to her were easily defeated.

So why all the debate over the list? Simply put, it contains a surprisingly large number of vocal advocates for assisted suicide, and a noticeably small number of opponents — or even neutral figures who might raise difficult points. There are eight witnesses from other countries, and they all back a change in the law. For example, there is no room for Theo Boer, a member of the Dutch Health Council who once enthusiastically worked for the euthanasia review board but now thinks his country made a terrible mistake.

Wonky Thinking

On the Consumer Surplus Substack, Sam Bowman and Sam Dumitriu lay out options for pro-growth policies that are “win/win”, and policies where a fight is worth having.

Britain’s borrowing costs have surged in recent months. Although much of this is driven by global factors, the UK’s performance has been particularly bad. One way to get borrowing costs down is to improve expectations about future UK growth: if lenders expect us to grow more quickly, they will be less concerned about our ability to repay our debts, and willing to lend to us more cheaply.

The Chancellor, Rachel Reeves, is reported to be preparing to back airport expansions at Heathrow, Gatwick and Luton, approve the Lower Thames Crossing, and use a Special Development Order to approve a Universal Studios theme park. The government has also announced that it will allow developers to offset environmental impacts by paying into a national fund instead of, say, building a £100 million tunnel to protect some bats from speeding trains. This is precisely what one of us recently said they should do to fix this problem.

These are promising moves and, if they happen, they show real seriousness about the situation Britain is in. But they can only be the start of a much bigger package of reforms.

One of the big problems with many ‘wishlists for growth’ is that they either (a) assume away political constraints, and propose ideas that would be politically very costly, without really explaining how a government is meant to be able to do them – or (b) they take political constraints as being so overwhelming that they rule out anything that is remotely controversial, dismissing moves that involve political battles that are winnable, with acceptable costs for their substantial benefits.

Labour is in an interesting position politically: its massive majority means it can probably pass any legislation it wants, but its position in the polls means that it has to be very careful about how voters view what it is doing. Since it likely needs to deliver economic growth for political reasons, we suggest that it should focus on politically low cost win/wins – involving small compromises to share some of the benefits with the people who would otherwise oppose them the most – and fights worth having – ones that take on small political costs, against relatively narrow interest groups, in exchange for large economic rewards that the electorate will eventually reward them for….

While Professor Sir Dieter Helm says the government’s energy transition strategy - or lack of it - is fundamentally unrealistic.

Contrast the UK’s energy policies with those of the US and Donald Trump. The US has cheap gas and abundant oil. It is the largest producer of oil in the world (roughly 13mbd versus 10mbd in Russia and 9mbd for Saudi Arabia). It has lots and lots of very cheap gas. Trump’s policies emphasise the fossil fuels not the renewables.

There are plans to add 80 new gas-fired power stations in the US by 2030, and big tech is turning to gas for AI and data storage in the short term, whilst exploring nuclear for the longer term. Data centres need firm power 24/7. Those who think, for example, that locational pricing will get data centres and AI to locate in the north of Scotland do not explain how the non-firm intermittent wind is going to deliver 24/7. Gas does this, and in the US gas is growing faster than ever before.

It is not good news for the climate. It’s doubly bad: more gas in the US improves US competitiveness and accelerates the exit of energy-intensive businesses from the UK and Europe. If the UK and the EU want to lead the charge to net zero, then they should focus on carbon consumption, not territorial carbon production, and make their citizens pay for it, rather than telling fairy tales that “it’s all going to be cheaper” here. Trying to unilaterally lead in a world that is not following its playbook is necessarily very expensive. This does not mean that the UK should not unilaterally push forward, but it does mean being honest with its voters and consumers. The result is that living standards will have to go down relative to, for example, the US for the foreseeable future. Unilateral net zero targets based on carbon consumption (not territorial emissions) would stop the UK causing more climate change, but this will not promote economic growth, as the existing generation is replaced by much more generating capacity to produce the same outputs. At best, it is capital maintenance – same output, different assets.

Who thinks that the future industrial giants of the coming decades are going to include the UK at the top of the leader board and the rest of Europe in its wake? Why aren’t the US financial markets falling back on the fear that expensive US energy is going to undermine its great industrial giants? The US’s problem is not that its energy costs for oil and gas are too high, but that coal-intensive countries like China and India are even cheaper. And so is the cost of labour. Like it or not, a fossil-fuel-driven US is not falling behind the UK and Europe on energy cost competitiveness. Quite the contrary, as the recent Draghi Report to the European Commission made so painfully clear. The gap is big and getting bigger. It is Germany that is in energy cost trouble. It is not growing. The UK has already lost most of its manufacturing, so arguably has less far to fall now. Unsurprisingly in the German election campaign energy costs are a core issue, in a German discussion about its lack of competitiveness. It is time the UK government woke up to this extremely inconvenient truth too.

What about the argument that renewables are getting ever cheaper and are “cheaper than fossil fuels”. It would be wonderful if it was true, but sadly it isn’t anytime soon. What is true is that the marginal cost of renewables is close to zero, and fossil-fuel prices are above zero. But this is to miss the cost point. An ever-cheaper solar panel is “a good thing” provided it is not made with coal, petrochemicals and exploited labour (which at least 80% of them are). From a competitiveness perspective, the costs of solar are not mostly about the panels. It is the system costs of solar – and wind – that matter, and these are clearly not zero. A zero marginal cost world is a capacity investment world. That capacity has to have a lot of non-zero marginal cost generation in the system and a much expanded grid and distribution system too. It needs batteries and pumped storage, and it needs lots of gas to handle the intermittency. These are the system costs of wind and solar. With a bit of wind and solar on the system, these costs are pretty small, but with 50GW of offshore wind, it is a different story. Intermittent renewables render everything else intermittent too. These destroy the economics of gas and nuclear too – because both become intermittent. The cost of holding the 35GW of gas on the “net zero” electricity system in 2030 when that gas capacity is assumed to operate (and hence get revenues) only 5% of the time is large and it is a cost of the sprint to net zero. The costs of rendering the new Hinkley nuclear power station intermittent would be extraordinary. If the “surplus” nuclear power when the wind is blowing is used for something else, this might mitigate the impacts. But there is no suggestion that these alternative uses will be able to take up Hinkley’s production at short notice and turn it into hydrogen, for example. In time possibly it will, but not by 2030. Moreover, it would require the coordination of investments in other energy-intensive activity, which is not a forte of the UK economy and UK governments to organise.

All of the investment for the net zero sprint is capital-intensive, and that adds another competitive hurdle. As we shall see, government policies are driving up the cost of capital. This cannot do other than further drive up the costs of the net zero sprint, and reduce competitiveness.

Book of the Week

We recommend Who Dares Wins: Britain 1979-82 by Dominic Sandbrook. The historian and The Rest is History podcaster paints a comprehensive picture of the first Thatcher government in the context of the profound turbulence rocking Britain at the time.

Perhaps it was not surprising that outsiders took such a dim view of Britain at the turn of the 1980s. Seen from abroad, the British experience since the end of the Second World War often looked like a long nightmare of imperial retreat, economic indiscipline and industrial decline, played out against a surprisingly catchy soundtrack. The last illusions of Empire had been blown away at Suez, while the short-lived bubble of Swinging London had been punctured by recurrent sterling crises and terrible trade deficits. Having initially sneered at the fledgling European Community, the British had suffered the humiliation of seeing Charles de Gaulle blackball their first applications. And by the time their neighbours agreed to let them in, the United Kingdom itself seemed in danger of breaking up. In the course of the 1970s, sectarian violence in Northern Ireland had claimed more than 2,000 lives, the vast majority of them civilians. During the worst of the Troubles, bombs went off in Belfast every day, while in 1974 a general strike brought down Northern Ireland’s power-sharing executive, forcing the government to impose direct rule from Westminster. Here, said some commentators, was a previous of the coming ideological showdown in Britain itself. Viewed from abroad, there could hardly have been a more damning reflection of a governing elite that had lost its authority and a disunited kingdom on the verge of disintegration.

And then there was the economy. On the face of it, the United Kingdom’s 56 million people were richer, healthier, better fed, better educated and better housed than ever. As recently as 1957 Harold Macmillan had boasted, with considerable justification, that most people had never had it so good. But even as homes were filled with the fruits of affluence, commentators were fretting that, in everything from profits to productivity to investment to industrial relations, Britain was falling behind its European competitors. By the turn of the 1960s, they were already asking, “What’s wrong with Britain?" and they never stopped. Nothing was right: the country was too old, too elitist, too complacent, too class-ridden; too slow to invest, too conservative to innovate, too lazy to compete.

So out went the tweedy Tory politicians of the Macmillan years, and in came the meritocratic modernizers. First was Labour’s Harold Wilson, promising a new Britain fired by the white heat of the technological revolution and the gleam from his Gannex raincoats. But strikes and sterling crises blew him off course, and in 1967 he was forced to devalue the pound. Next came the Conservatives’ Ted Heath, another thrusting technocrat with plans to reform everything from the trade union laws to the names of Britain’s counties. Although Heath managed to secure admission to the European Community, his premiership lasted less than four years, ending in the chaos of two miners’ strikes, rampant inflation, power cuts and a three-day week. So back came an increasingly hangdog Wilson, who fought off the unions with a series of pay deals that pushed inflation towards a record 26 per cent…

Quick Links

Donald J. Trump was inaugurated as the 47th President of the United States, promising to end illegal immigration, restore American manufacturing, impose tariffs and end DEI practices.

The Government borrowed £3.2bn more in December than expected, taking the deficit up to £17.8bn.

Deepseek-R1, a Chinese open-access large language model (LLM), has matched OpenAI-o1 in reasoning performance.

Southport killer Axel Rudakubana received a 52 year-sentence but cannot be given a whole life term as he was under 17 at the time of the murders. The Attorney General has been asked to review the sentence to consider whether it is “unduly lenient”.

Sainsbury’s will cut 3,000 jobs as consumer confidence falls back to its lowest since December 2023.

Labour will U-turn on parts of its Schools Bill, including headteacher freedoms over pay.

More than 18,000 foreign criminals are living in Britain - three times as many as eight years ago - according to Home Office figures…

…and a report commissioned by Thames Water found that 1 in 12 people living in London is an illegal migrant.

The children of US military staff will be exempt from Labour’s VAT hike on school fees.

Labour-led Wigan Council has voted for a national inquiry into the grooming gangs scandal, breaking with the national government’s position.

64% of Pakistani-heritage mothers were related to the father of their child in a study from 2007-10, in contrast to just 1% of white British mothers.

Blackstone, the asset management giant, is nearing a deal to take control of the UK’s railway arches.

UK computing consumption declined from 2018 to 2023.

China added 217GW of new solar capacity in 2023, double the installed solar capacity of the US.

The think tank British Future is working with a former immigration adviser to Kamala Harris to provide advice to the centre-left on tackling populism.

Labour MPs will be whipped to oppose a Bill that would make Britain’s climate and energy targets legally binding.

China has opened its first humanoid robot training centre in Shanghai's Pudong District.

Thames Water faces bankruptcy after a stalemate with the regulator.

The Government has refused to publish reported correspondence with the Muslim Council of Britain.