The Chancellor, Jeremy Hunt, is an optimist, happy to believe that “when it comes to the innovation industries that will shape and define this century, the UK is powerfully positioned to play a leading role”. His speech at Bloomberg on Friday was full of enthusiastic references to digital technology, life sciences, clean energy and the creative industries. Hunt’s vision is to “turn the UK into the world’s next Silicon Valley”, attracting the best innovators from all over the world.
He is also, however, a realist, admitting that the UK suffers from “poor productivity, skills gaps, low business investment and the over-concentration of wealth in the South-East”. He intends to guide us from a downbeat present to a prosperous future by embracing the “Four ‘Es of economic growth and prosperity”: Enterprise, Education, Employment and Everywhere.
Other commentators have focused on the “Employment E”, wondering how Hunt will persuade those who “retired early after the pandemic or haven’t found the right role after furlough” to come back to work. I don’t think, however, it is Hunt’s fundamental challenge.
The original Silicon Valley may have produced huge gains in US GDP and massive increases in technological know-how, but the US has persistently been unable to bridge the gap between Hunt’s first and fourth Es, namely Enterprise and Everywhere.
To understand why, we need to travel back to America in the Fifties, when huge numbers migrated from the poor southern states to the more prosperous North. The post-war economic boom meant labour-intensive Detroit-based car factories, for example, had to hire a lot more workers. The work itself may not have been terribly inspiring but if the alternative was the grinding poverty of rural underemployment, it’s easy to see why so many people moved.
The same cannot so easily happen today. Compared with Fifties automakers, Silicon Valley employs relatively few people. Those it does employ are typically very highly educated and paid a lot. Their success leads to rapidly rising property prices in the Bay Area which, in turn, make it less likely that others will be able to follow in their footsteps. Meanwhile, further east, deindustrialisation has afflicted the old rustbelts, leading to falling wages and underemployment alongside declining property prices. As housing wealth in these areas erodes, so the ability to escape recedes.
Meanwhile, advances in AI and robotics have meant many jobs across both manufacturing and services have fallen by the wayside. Those whose skills are now redundant end up competing for jobs below their previous paygrade. The extra competition, in turn, leaves wages acrossmany industries largely stagnant.
What is often termed the “fourth industrial revolution” creates relatively few well-paid jobs. Admittedly, we cannot hope to become richer without technological advance. Yet the nature and pace of today’s “revolution” has left many people behind, either replaced by computers or because the telecoms revolution has made it easier to exchange expensive western workers for cheaper workers located elsewhere.
This, in turn, raises a rather large political problem. How does a country continue to advance economically if, at the same time, the pool of “losers” or those “left behind” threatens to rise? There are ways around it: build cheap social housing to allow those who would otherwise be unable to move to seek productive opportunities; fund retraining schemes for those whose skills become redundant in mid-career; tax companies earning supernormal profits in a bid to compensate the “losers”; or find a way for those firms to pay for the data they harvest from us for free.
These last two options, however, do not sit easily with Hunt’s ambition “to have nothing less than the most competitive tax regime of any major country”. He wants to persuade “the world’s tech entrepreneurs, life science innovators, and green tech companies to come to the UK”.
Yet if the UK can go down the tax-cutting path, so can many others. And, as Hunt admits, a competitive tax regime implies “restraint on spending”, code for more austerity. For all his talk of “investment zones, mini-Canary Wharfs” and so on, Hunt will struggle to persuade the people of “Everywhere” that they really all can benefit.
Stephen King (@kingeconomist) is HSBC’s Senior Economic Adviser. His forthcoming book, We Need to Talk About Inflation, is published in April.
