Finance and economics: what we have learned, and what still needs to be done – part 6

This week Liberal Democrat Voice is running a series of articles from Tim Leunig about the economy – how we got here and what we should do next. So far the series has covered bank bailouts, bank lending, fiscal policy, interest rates and tax policy. Today’s final part looks to the long term future.

Getting the long term picture right

In its panic and determination to “do something now” government must not forget its role in securing the long-term underpinnings of the economy. There are three areas in which Britain has serious problems.

Our education system fails individual citizens and the country, whose only decent long-term future is to have a very highly skilled workforce. There is little correlation between parental income and intelligence at age 3, 80% of people whose parents went to university go to university, and going to university is the best thing you can do financially. It seems likely therefore that the long-term outcome is for 80% of people to go to university whatever their background, and perhaps half the population to do a graduate degree. We need expand universities and more importantly give kids from poorer backgrounds a decent education so that they can go to university. Failure to do so will increase income inequality: high skill employers will raise wages to compete for the limited number of people with degrees, while low skill employers will offer low wages, as the number of unskilled people competing for those jobs will be very large. Getting education right makes us richer, and more equal.

Britain’s infrastructure is creaking, particularly in the southeast. Our motorways are clogged, our most important airport is full, and twice out of the last three times that I have tried to get on the tube at Holborn station the station has been closed completely owing to overcrowding. We need to invest more, particularly in congested areas, otherwise internationally footloose businesses will move elsewhere and we will end up a second-rate economy.

Finally, and not withstanding recent falls in house prices, housing is too expensive. Millions growing up in Britain cannot expect to buy or rent without government benefits. Few people aspire to live on benefits, and when life on benefits is inevitable no matter how hard you work at school is it any wonder that so many young people feel so alienated? We must reform housing supply so that house prices do not rebound dramatically after current falls. Housing needs to be once more for the many and not the few. That would ensure that a much higher proportion of people, whatever their natural ability or educational attainment are able to choose a place to live of their own, and to live in it without involvement from the state. As liberals that should be a priority.

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  • Legal challenged launched against Mandelson.

    As their release says: ‘Lord Mandelson, in our view, is acting unlawfully.’

    There’s a previous comment from Vince Cable on their website here

    I assume Tavish will be backing strongly.

  • Thanks for the thoughts Tim.

    Mark – I agree.

    Tim – one thing you haven’t mentioned is the need for a real change in the way (some, many) people live their lives. Debt should be, and is likely to be, less available than it has been. This has impications for individuals and for business.

    Do you have a sense as to the impact this adjustment may have on our politics?

  • I would be surprised were debt to become significantly less important in the medium term. That would only be the case were the proportion of people who get into trouble with debt in this recession to be out of line with the early 80s or early 90s recessions. If it doesn’t, then I don’t see debt becoming less culturally acceptable (so demand stays at a similar level) or profitable (so supply stays at a similar level). The phrase “this time it’s different” is common, but rarely true.

    As to the effect on politics: you would need to ask a political expert, not an economist. My guess is that if people dislike debt, they are more likely to vote for the party opposing debt (the Tories), which is in line with the recent ICM/Guardian poll.

    BTW on Scandinavia, Stockholm is home to more than 1 in 5 Swedes, and generates more than a third of Swedish GDP. Sweden points to the benefits of agglomeration and the cost of population dispersal. London is not nearly as a big as a share of population or of GDP – we have a lot of agglomerating to do to match the Swedes!

  • I am not sure why Geoffrey Payne thinks I favour cutting taxes. I opposed cutting taxes in one of the earlier articles!

    Nothing here is about spending money that will not be covered in the short to medium term. Road and aviation expansion would be covered very quickly: petrol is highly taxed already relative to the cost of providing roads, and aviation just about covers its costs (and should cover them properly). These things can therefore be done pretty easily at costs that are entirely covered. I have put forward other proposals to make these carbon neutral, which is important.

    The tube is slightly different, and more work needs to be put into recovering more of the cost from beneficiaries.

    Education is costly in the short run, but does anyone think creating another generation of kids without the skills to get a job that keeps them off benefits is a cheaper option? Much of the welfare budget is indeed the cost of failure.

    There are all sorts of ways to save money, including eliminating subsidies that go disproportionately to the middle class (% rate loan subsidies to graduates, rail subsidies – half of train travellers are higher rate taxpayers, 40% subsidies to rich people for childcare, ditto bicycles, the tax free lump sum, child benefit for the first child, tax credits for people earning over £30k, and of course housing benefit and social housing subsidies will fall if housing supply is reformed). Plus abolishing silly scheme – the Prime Minister’s Top Management Programme last week asked civil servants to draw pictures encapsulating leadership, work life-balance, and regional policy. Is that useful?

    I don’t think I would have any difficulty finding enough things to cut to double education spending within a parliament!

  • “Housing needs to be once more for the many and not the few.”

    You presumably mean “home ownership”.

  • Dsq: I meant housing, not home ownership. There are all sorts of households sharing housing – kids who want to leave home, flat middle aged sharers, people in HMOs. And there are lots of people in unsuitable housing – kids in flats, that sort of thing.

    Neale U. I have never once seen a credible set of figures by land tax enthusiasts that would have dampened the recent house price boom. Also the ratio of empty houses in the UK is low by international standards. If you want to come up with a credible set of figures, do send them to me. Remember as a rule of thumb, you need a £1 tax to prevent a £10 house price rise.

  • Well once more you’ve either expressed yourself unclearly or made a simple mistake and once more, I don’t really care which. “Housing” is something that all of the people in your example are consuming. They don’t own it, and they might not be consuming as much of it as they want, but this is not expressed at all well by talking about “the many rather than the few”. Nearly everyone in the UK consumes housing. You presumably mean either that you want home ownership to be for the many, or for housing to be cheap rather than expensive.

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