Is free trade dead?

How Britain can compete; death of free trade consensus; immigration and pay; Tories and the state; school inspections; reindustrialising the UK; plans for AI; the new geography of jobs

We think conservatives need to talk more and get better at sharing ideas. So here we share the best newspaper columns, policy reports and books that will stimulate thinking and promote new ways of doing things.

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Towering columns

On ConservativeHome, David Green says Britain “can uphold the abstractions of naïve capitalism and face economic decline, or we can compete”:

A strategy for the UK could begin with three questions: are government policies making matters worse? Is an industry already successfully exporting? And is an existing industry ‘retainable’? The most obvious example of making matters worse is the cost of energy, which is – almost entirely because of government policies – far higher in the UK than in our main rivals. As a result, we now import aluminium when we used to be exporters, and our steel industry has been brought to its knees.

Whether an industry is already exporting is not only about whether exports could be increased, but guiding public investment. Some upholders of naïve capitalism are quick to assert that governments can’t “pick winners”. But this argument misses the point.

Industrial policies have worked in countries such as Japan because governments let markets pick the winners in the first instance. Today we have heard of the successful Japanese companies, including Nissan, Toyota, Honda, and Subaru. But between 1945 and 1960 about 30 companies entered the Japanese domestic car market. Only a few survived, chiefly because Japanese governments, believing that foreigners would not buy Japanese cars unless they were the best, offered targeted assistance only to companies that were good at exporting…

On his Substack, Noah Smith says the old free-trade consensus is dead:

We don’t know exactly what will replace the free-trade consensus yet, but we’re starting to get a pretty good idea of what the Biden administration wants the next paradigm to be. Members of the Biden administration have made a number of important speeches about the new industrial policy, including a speech last October by former NEC Director Brian Deese about America’s “new industrial strategy”, a speech in February by Commerce Secretary Gina Raimondo about the CHIPS Act and a speech in April by Treasury Secretary Janet Yellen about China policy. But I think the most comprehensive statement yet was the recent speech by National Security Advisor Jake Sullivan at the Brookings Institution. If you want to understand why U.S. policy has changed, what the current administration thinks the new objectives are, and what methods they believe will achieve those objectives, I recommend starting with this speech…

The end of the free-trade consensus is also the end of the laissez-faire consensus — the idea that simply having the government stand back and let private companies do whatever they wanted was the optimal strategy for creating broadly shared prosperity. Laissez-faire — which some people call “neoliberalism”, “free markets”, “liberalism”, or “libertarianism” — was never anywhere near as much of a consensus as free trade was, but the pendulum is clearly shifting toward a more interventionist mindset.

And there’s an important lesson here for those who want to alter the direction of policy in America — a “theory of change”, if you will. Although inequality was a glaring problem for a long time, and although climate change was always a looming threat, it took a national security threat for the government to get serious about direct intervention in the industrial structure of the U.S. economy. In a way, national security is the ultimate pure public good — the clearest case for government stepping in and redirecting economic activity.

At American Compass, Oren Cass says governments must choose between open borders and the prosperity of workers:

Employers will tend to raise wages under one, and only one, condition: when they cannot hire the workers they need at the existing wage. All of labour economics turns on that simple fact. If you are happy with the workers you have at $16 per hour, you will not offer $17 per hour. If open positions at $16 per hour go unfilled, or workers earning that wage start to leave or threaten to strike, $17 per hour will be on the table. The average wage went from $28 in 1972 (in 2022 dollars) to… $28 in 2022, because employers did not have to offer $29. They could offer $29—after all, the corporate sector had roughly tripled its profit even after accounting for population growth. But they did not have to, and so they did not.

Rather than follow recommendations from pro-business groups to raise the unemployment rate, policymakers should row hard in the opposite direction, increase the pressure, and make clear that no relief from a tight labour market will come. What tools are at their disposal to make employers offer real wage increases to lower wage workers now and continue doing so for, say, the next 50 years? We have a lot of catching up to do. A wide range of policy options hold promise, but any discussion should start with the straightforward one: limiting the supply of workers available. Of course, this may not be as easy as it sounds. The goal is to ensure good jobs for American workers, so excluding some such workers for the sake of boosting the wages of others would be a pyrrhic victory. But there is another set of workers, not Americans, whose access to the labour market American policymakers could limit… Flooding the low end of the domestic labour market with foreign workers may boost production but it erases the incentives to produce in ways beneficial to the lower-wage workers already here, or to share the proceeds of rising output with them.

At Unherd Patrick Deneen says we should trace progressive intolerance to the liberalism of John Stuart Mill:

Mill’s case on behalf of liberty was not, as today’s conservatives and libertarians mistakenly believe, an argument for freedom of expression as an end in itself, but rather, a means toward a further end: regime change. The regime he hoped to overturn was the custom-bound society of Victorian England, as well as the traditional civilisation of the West more broadly, particularly its classical and Christian inheritance. The regime he hoped to usher in was none other than the progressivism that now dominates the major institutions of the West.

Throughout his text, Mill is clear that liberty is a means of displacing what he called “the despotism of custom”. Robert George is correct that Mill’s concern was less the narrowly legal defence of free speech, expression and action, and more a worry about the spectre of social conformity. Mill begins his text by arguing that an earlier generation of philosophers and political actors had secured formal liberalism — limited government and political representation of the demos. He observed that formal liberty was ultimately useless in a society that remained bound by traditional opinion — the social “tyranny of the majority”. His aim, then, was to secure the social conditions of liberty, aligning an increasingly liberal political order with what were less liberal civic, social and private domains.

Social conformity for Mill took a particular form: the untoward social dominance of the many over a small minority of people who were marked by distinctive features of “individuality”. The oppression he decried percolated from the bottom-up, an informal but nevertheless pervasive way of life that was reflected in society’s customary practices. In Mill’s Victorian era, such customs included what might still be categorised as “manners and morals”, regulating informally but powerfully everything from dress to forms of address, table manners to social comportment, expectations of church attendance to avoidance of visible vices. Of course, it also involved social conformity to traditional sexual roles and behaviour, distinguishing between men and women, exerting strong pressure toward marriage, and dispersing the norm that marriage was the necessary institution in which children were born and sheltered, provided for by the man and typically raised primarily by the mother. This web of social expectations constituted a form of “despotism”, and for Mill, its source and most powerful enforcer was everyday people.

In The Economist, Duncan Robinson says the Tories have failed to reform the state, and they have nobody to blame but themselves:

An advantage of the British system of government is that quick, sweeping change is possible. Armed with a majority and competent leadership, a government can do what it likes. It took New Labour little time to fundamentally alter the country’s institutions. Within its first few years Labour had passed the Human Rights Act and given the Bank of England its independence. It pushed through devolution to Scotland and Wales. New quangos, such as Ofcom, which regulated broadcasters, were created.

Labour managed to change both the shape of Britain’s institutions and the people running them. At the start of the Blair era, the establishment was still filled with patrician Tories. British society would have been recognisable to Peter Cook, a 1960s satirist who mocked the reactionary tendencies of its pale, public-school elite. By the end of the New Labour years, the people at the top of Britain’s institutions were, on the whole, far more liberal and diverse.

Skip forward 13 years and the Conservatives oversee institutions that are largely unchanged from the Blair era… The Tory party has no excuses. New Labour knew how they wanted Britain to work. The Conservatives have produced no such vision. Conservatism is in general allergic to big ideas and systemic thinking. Most Tory MPs are happier moaning about institutions than altering them. Instead of learning from its mistakes, the government has given up. Mr Sunak has neither the time nor the inclination to radically alter British institutions between now and the next general election. After more than a decade in power, the Conservatives have not figured out how to reform the state. They may not get another chance for a while.

In The Times, Danny Finkelstein defends Ofsted following the death of headteacher Ruth Perry:

However stressful a school inspection might be, a moment’s thought suggests it cannot alone be the cause of suicide. Mental illness is far more complicated than that. There is rarely a simple “single event” that is the cause. And arguing that it is uncomplicated, that Perry’s death was the “direct result” of the inspections, has consequences for other people. Yes, teachers have stressful jobs (my mother was a teacher) and feel keenly any criticism, but so, naturally enough, do inspectors. Those campaigning over Perry’s death are directly blaming it on the activities of those who inspected her school. And on the head of Ofsted, the chief inspector Amanda Spielman.

These were ordinary, well-motivated, conscientious officials carrying out their public duty in a professional way. Now they are being accused — very specifically, very personally — of killing someone by their actions. Surely some thought should be given to the mental health and wellbeing of those people? How fair and sensitive are the campaigners being to them? Don’t they deserve care too? Not, of course, if inspecting schools were an evil activity, a sort of instrument of torture. But Ofsted is nothing of the sort.

The Major government created Ofsted because it thought independence was essential in giving parents a measure of performance. Such a measure would help parents choosing schools and would drive up standards. On the whole — and nothing is perfect — it has worked well. Parents value the information it provides. If head teachers were the best judges of their own performance, and that of their schools, there would be no need for such an independent body. But it should be obvious why there is. And the fact that Ofsted highlights areas where standards need to improve doesn’t mean they are saying the teaching staff or leadership are bad, or failures. Just that there are things they may not have seen, that need to be put right.

Wonky thinking

In Reindustrialising the United Kingdom, published by the National Institute for Economic and Social Research, a group of academics including Xuxin Mao and Stephen Millard, explore how manufacturing in Britain might be revived:

The decline in manufacturing matters. Manufacturing is an important employment sector, with about 2.6 million workers in the United Kingdom, about 7 per cent of total jobs. Productivity growth is often faster in manufacturing than in services, so a small manufacturing share in GDP means slow overall productivity growth. From 1997 to 2021, output per hour worked in the manufacturing sector increased by more than 151 per cent, compared with only 31 per cent in the economy as a whole. Manufacturing accounts for about two-thirds of the private sector’s Research and Development. Manufacturing uses as inputs a large share of the outputs of other industries – the ratio of gross output to net output is around 2 ½ to one, showing that many other sectors depend on manufacturing as a customer. Other firms distribute manufacturing goods as well as providing inputs. Manufacturing is unevenly distributed across the country, employing a higher proportion of workers in the East and West Midlands and a much lower proportion of workers in London, so weak manufacturing can imply regional disparities in incomes, jobs, and prosperity. Finally, problems with global supply chains, together with the war in Ukraine, suggest a motivation for reshoring manufacturing activity in order to improve the resilience of the economy to such foreign shocks. If we wanted to reindustrialise the UK economy, how would we do it?

… We find that there may be a case that manufacturing may have shrunk too far as a proportion of the economy with a negative effect on UK productivity growth. But we found that attempting to reindustrialise solely via engineering a large sterling devaluation will, at best, only work in the short run. Specifically, although a large nominal exchange rate depreciation can lead to temporary increases in exports, investment and GDP, we found that, in a tight labour market, these gains would eventually be reduced by rises in inflation and, more importantly, unit labour costs. Further, the empirical evidence from the United Kingdom, and the experience of China and Singapore, suggest that it is not an overvalued exchange rate that explains deindustrialization but rather a general lack of investment that has led to deindustrialization, low productivity growth and falls in the real and nominal exchange rate… Our suggested answer to the problem of low productivity growth in the United Kingdom is that we need to increase business investment as a proportion of GDP, though this will require a change in the savings behaviour of both the private and public sectors.

In The Generative AI Revolution: Opportunities, Shocks and Risks, published by Onward, Shabbir Merali and Ali Merali make recommendations for Britain to negotiate the arrival of this transformative technology safely - while still making the most of its enormous opportunities:

Three areas - capitalising on the economic and geostrategic opportunity, managing the labour market and macroeconomic shocks, and navigating the risks around AI safety and alignment - should guide the UK policy debate…

Capitalising on the economic and geostrategic opportunity of generative AI means making the UK the home of AI labs, researchers, and consumer-facing applications and encouraging adoption. The Government should develop sovereign LLM capabilities - “GB GPT” - to improve the security of critical technology and support the diffusion of productivity benefits throughout the economy and public services. An AI fellowship programme should be launched to build expertise in the heart of government, alongside a bolstered incentive package to attract AI experts and entrepreneurs to the UK. And increased access to compute and a reformed IP regime can make the UK the best place to build and train foundational models.

Managing the labour market and macroeconomic shocks from AI will require early preparation for a potentially rapid transition. HM Treasury should prepare measures to shift the burden of tax from labour to capital in the medium term, and consider lessons from previous labour market disruptions such as the rapid rise of globalisation in the 1990s. The Department for Education should overhaul its insight capabilities, ramp up its retraining offer, and incentivise the supply of high level STEM skills.

Limiting AI safety risks requires multilateral solutions and leading these efforts should be one of the UK's highest foreign policy objectives. Solving AI alignment issues will become one of the most critical questions of our age and it is in humanity’s collective interest that we develop solutions. The Government should launch a UK Evaluations Framework, harnessing our academic and industry expertise to set standards the world will use. Regulators should monitor and better distribute compute access to support alignment research. And a single regulator should be created to ensure this work does not fall through the cracks - the Office for Foundational Models (OFFOM).

Book of the Week

Our chosen book this week is The New Geography of Jobs, by Enrico Moretti, who examines the changes taking place in the modern economy, revealing the kinds of jobs that will drive economic growth in future, and asking how communities can transform themselves into dynamic hubs of innovation:

In essence, a city stuck in a poverty … is trapped by its past. The only way to move a city from a bad equilibrium to a good one is with a big push: a coordinated policy that breaks the impasse and simultaneously brings skilled workers, employers, and specialized business services to a new location. Only the government can initiate these big-push policies, because only the government has the ability to coordinate the individual actors - the workers and employers - to get the agglomeration process going. The idea is to provide public subsidies for those who are willing to move first but then stop the subsidies after the process becomes self-sustaining… The benefits of big-push policies are potentially huge, because declining communities can, in principle, be brought back to life.

But the track record of these policies is mixed. To succeed, the push needs to be really big. It also needs to be decisive and sustained, and, most important, the subsidies must target the right beneficiaries…

Ireland used a deliberate big-push policy to build up human-capital-intensive sectors that previously did not exist. Through aggressive tax incentives and other enticements, it created important clusters in high tech and finance, although the country’s recent financial crisis throws into question the sustainability of such policies. Israel’s high-tech cluster, one of the most dynamic in the world, is highly dependent on the country’s military. Although the Israeli government did not set out to create a local high-tech sector, its need for innovative defense technologies and specialized human capital indirectly fostered a private sector that later became globally competitive.

Perhaps the clearest example of big-push success is Taiwan, which transformed its rural economy into an advanced one with a dynamic innovation sector through a large-scale policy of government-sponsored research in the 1960s and 1970s. The program succeeded in bringing top Chinese scientists back from the United States and establishing a cluster of publicly supported R&D that eventually became thick enough to sustain private companies. This is one of those rare instances in which policymakers turned out to be good venture capitalists. While they did bet on several failed technologies, they also bet on semiconductors very early on. Semiconductors quickly became the core of Taiwan’s high-tech sector and arguably one of its engines of prosperity. More recently, Taiwan’s high-tech cluster has been embracing newer technologies, including life sciences.

Quick links

Pollsters say key council gains for Labour and the Lib Dems may point to a hung Parliament.

Net migration for 2022 might exceed 700,000.

Government debt has reached 101 per cent of GDP.

A majority of Germans say immigration brings disadvantages and they want fewer refugees.

An academic paper saying science should be impartial was rejected by several major journals.

Heavy marijuana use increases schizophrenia in men.

India and China have proposed removing deadlines for debcarbonisation.

One in six civil servants say they have witnessed “bullying” by ministers.

Sue Gray refuses to cooperate with the inquiry into whether she broke the civil service code.

Keir Starmer has reneged on his promise to scrap tuition fees.

The PM joined Onward in celebrating its fifth birthday.

Tom McTague and Helen Thompson are launching a new podcast…

… and so is former No10 adviser Dan Korski - “Greater London”.

And finally, we join you in saying God Save the King.