It's time for a new economic model

Shrinking workforce; need for investment; US realignment; conservatism in crisis; punishing families; Budget verdict; the almighty dollar; falling inflation; NHS strike deal; SV Bank bailout

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.

The Conservative Reader is published every Friday lunchtime, so please do look out for it. And expect plenty of content about the things we think make conservatism such a compelling body of thought: identity and belonging, community and commitment, market economics, national resilience and good government.

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Best wishes, Nick and Gavin

Towering columns

As Chancellor Jeremy Hunt calls for “a new economic model” less reliant on immigration, businesses must invest in labour-saving technology, says Juliet Samuel in The Times.

Instead of asking how we bring wages down and fill the worker shortage, we should ask how we unleash the economy to fix this problem. If energy costs, poor access to training, shoddy infrastructure and planning regulations get in the way, the process of innovation could easily get stuck, replicating the barriers to progress that fed the 1970s wage-price inflation spiral. But that is not an inevitable.

In the mid 18th century, English and French glassmakers engaged in a competitive fight for market dominance. Delaunay Deslandes, the director of a French firm, thought his position secure because the English “could never make [glass] that would enter into competition with ours for the price. Our Frenchmen eat soup with a little butter and vegetables . . . Your Englishmen eat meat and a great deal of it and they drink beer continually.” English labour, in short, was just too expensive.

Deslandes was wrong. England’s high labour costs and cheap energy (coal) created the perfect incentive structure for innovation. Within a decade or so, English glassmaking was operating at a sixth of the cost of the French, despite paying workers more. What seemed to be our Achilles heel instead formed part of the formula for success. There is no reason why it should not be the case again today. If this government is serious about changing Britain’s economic model, now is its chance.

However, in The Telegraph Ambrose-Evans Pritchard says the hike in corporation tax may damage Britain’s already poor investment rates:

A macroeconomic historian looking back at Europe’s GDP figures for a century or more would see wars, oil shocks, recessions, and the pandemic, all leaping out of the chart. They would struggle to discern any effect from Brexit in the larger picture. What is true is that business investment has lagged badly, even if revised figures are not as disastrous as originally thought. We are living off the fruit of past investment. That disguises the underlying erosion of the productive economy, and bodes ill for the next decade.

On a note of optimism, Prof Devereux and colleagues have written the definitive book telling us how to fix a large part of the problem. 

We stop taxing multinationals where they produce. We tax the product where it is consumed. If Tesla wants to build EV batteries in Sunderland for export, the tax rate would be zero. If it located the plant in Dusseldorf or Zaragoza, the batteries sold in the UK would be taxed in the UK (via a modified form of VAT). That would be an electric shock for our dinosaur tax regime. It would radically shift the British economy from over-consumption towards export-led growth, and vice versa for mercantilist Germany.

On UnHerd, Michael Lind charts the continued shift of the American working class to the Republicans, including among non-white voters:

[W]e can see that affluent, college-educated voters and the donors in both parties are skewing American politics to the Left on social issues and to the Right on economics. This has left a substantial part of the American public unrepresented in our two-party system. Almost six years ago, the political scientist Lee Drutman … used voting data to show that very few voters were consistent libertarians (socially conservative and economically libertarian), while 40% were in the socially-conservative, economically-progressive category. To put it another way, the libertarians have many donors but almost no voters, while the communitarians are not represented by either mainstream progressives or mainstream conservatives.

…Over the past decade, the anti-establishment insurgencies of both Bernie Sanders and Donald Trump appealed to many of these people, particularly working-class voters in industrial states who supported the pro-worker, “bread and butter” politics absent from both parties. Since the 2016 election, however, instead of trying to win back former Trump voters, the Democrats have mostly doubled down on the identity politics and environmentalism favoured by their new, college-educated metropolitan social base. In contrast, with varying degrees of sincerity, Republican politicians, whatever their views of Trump, have tried to appeal to the new working-class voters, many of them former Democrats or independents, who voted for Trump.

The result has been an on-going realignment in the presidential and midterm elections since 2016. Growing numbers of working-class black and Hispanic voters have shifted to the Republican Party, while well-to-do, highly-educated white voters continue to leave the Republicans for the Democrats. These trends refute the standard Democratic narrative that the Republicans are a dying party of authoritarian white nationalists who want to overthrow democracy and re-establish racial segregation. Rather, it reflects an increasing polarisation along class lines, as measured by education. In 2022, the Republicans won more of the non-college vote (55%) than they had in 2016, while the Democratic share was only 43%, something unthinkable in the days of Franklin Roosevelt or Lyndon Johnson.

Conservatism and liberalism are both undergoing a crisis of ideological coherency, argues Sam Mace on his Substack:

The gradualism that defines conservatism socially and democratically contrasts with commitments to a free market economy that have increasingly defined modern-day conservatism. The free market economics, which defines the Republican Party’s platform in America, sits uneasily with the demand for social and communal cohesion on the other. Marrying up enterprise, liberty, and economic progressiveness with a call for organic ties among communities is, at best paradoxical; at worst, it is fundamentally incoherent.

…However, there is increasingly a fear of what conservatism is set to become. The American empire is not just an economic hegemon but a cultural one too. Whether that is in TV that we watch or the topic on the news, no one can escape America. The UK’s strange but not special relationship with the US perhaps extends to domestic politics. Some fear the GOP’s current trend towards election denying and culture warrior Trumpism is migrating over to the United Kingdom given its charge on migrant boats, supposed ‘woke universities’. Unable or unwilling to pursue an ideological agenda outside of parroting their American cousins, some are concerned that conservatism is going to destroy the very thing it's supposed to protect: its institutions and small ‘c’ values that are the bedrock of UK conservatism.

Our tax system is grossly unfair to families with children, says Dominic Lawson in the Mail:

[I]t is shameful that our system, unlike those of Germany, France or, indeed, the United States, discriminates against families with children; and, in particular, those where there is a single earner, with one parent staying at home to look after those children.

That has been true for many years, and, because they have been in government for longer periods than Labour, mostly so under the Conservatives. It is a betrayal of the Tories’ perennial claim to be ‘the party of the family’.

…Obviously, there would be a cost to the Exchequer if transferable allowances were introduced. Don Draper estimates that it would be in the region of £6 billion a year. And, on the classic Treasury assumption that the money would have to be raised in a different way, it might well mean taxing single person households more.

A friend of mine — a former senior Treasury official, in fact — told me he got an unwelcoming response when he advanced a proposal along these lines to his own MP (a Conservative). The MP also happened to be single, without children, and she exclaimed to him: ‘But people like me would pay more tax!’ Well, yes.

The Government’s childcare subsidy policy is nationalising childhood, argues Miriam Cates in The Telegraph:

Fundamentally, the belief behind offering work-dependent, state-funded childcare to all babies is that mothers are more valuable to society in the workplace than looking after their own children. As a Conservative I reject this and as a mother I know it to be untrue.

Many women want to go back to work when their children are young, and all women should have that choice. But it should be a choice based on what is best for each family, not based on economic necessity or on a mistaken understanding that a person’s value derives principally from their contribution to GDP. Raising children is an investment in society.

The Chancellor is right to support families and invest in the early years. A far more Conservative policy would be to offer families vouchers to use as they wish, some for formal or informal childcare, and others to reduce their working hours. As Conservatives, we should be seeking to strengthen the ties that bind families together.

Wonky thinking

Over at the Institute for Fiscal Studies, Paul Johnson gives his verdict on the Budget, welcoming the new investment incentives, but also making the case for a more stable corporation tax regime:

From April, and for the next three years, businesses will be able to deduct 100% of all plant and machinery investment spending immediately when calculating taxable profits. This increased generosity of capital allowances will boost business investment in the short run.

The UK needs an investment-friendly tax system for the long term, not just for the next three years. Without certainty that the new regime will continue, the timing of investments will be distorted and the overall boost to investment lower.

The government says the policy will cost an average of around £9 billion for each of the three years. But most of that cost will be recouped in future years. This is because the investment spending that firms will be able to deduct immediately during those three years would otherwise have been gradually deducted over a longer period.

There are many benefits to allowing investment spending to be deducted immediately. As a permanent policy, it would be an improvement, though not without drawbacks. Limiting the allowance to plant and machinery means corporation tax continues to distort asset choices. And more generous capital allowances interact with the treatment of financing costs to increase the subsidy for many debt-financed investments. That’s not a good thing. What matters is not only how much firms invest overall, but what they invest in. Economic growth is not well served by subsidising unproductive investments. 

Book of the week

This week we recommend The Almighty Dollar by Dharshini David, which charts the journey of a single dollar around the global economy to illustrate how global markets really work:

Have you ever wondered why we can afford to buy far more clothes than our grandparents ever could but are less likely to own a home in which to keep them all? Why your petrol bill can double in a matter of months, but never falls as fast? Why our governments ignore some atrocities around the world, but don’t hesitate to wade into other conflicts?

…The dollar is…the face of American might, and American interests. A dollar doesn’t just bring spending power; it brings influence. Having a dollar - or not having a dollar - can dictate the way people live on the other side of the world. Dollar diplomacy - the use of American investment or loans to influence policy overseas and access foreign markets - has famously been deployed across Latin America, but it’s made its presence felt across the world for as long as America has been independent.

…These days, George Washington’s face is probably the most reproduced on the planet. It’s on the 17 million $1 notes printed every day. ‘Dead president’ is just one of the many names a dollar bill answers to. Singles, bucks or greenbacks, call them what you will, more than 11.7 billion of them are floating around right now, in wallets, in ATMs, under mattresses or in shop tills - not to mention all the dollars held electronically in banks. Given the dollar’s global pre-eminence, perhaps it’s not surprising that half the dollar notes in circulation are outside the USA.

Quick links

Inflation is set to fall to 2.9% by the end of 2023.

The IMF has forecast the UK economy to be the worst performing developed economy this year.

HSBC took over Silicon Valley Bank at no cost to the taxpayer.

A deal has been struck to end NHS strikes.

Britain and Canada have broken an impasse over Trans-Pacific Partnership accession.

Pay fell in real terms by 3.2% between November 2022 and January 2023.

UK payments to the EU budget are finally slowing.

A parliamentary committee says Royal Mail should face an Ofcom investigation.

South Yorkshire and West Yorkshire mayors will start devolution talks this year.

California will pay $5m to black residents in “reparations”.

Chinese companies have sent 1,000 assault rifles to Russia.

Xi Jinping introduced a new 24-character political soundbite.