Queen’s Speech — House of Lords, 2015-06-04
Topic: Macroeconomics
John Reid (Labour, Centre-left): My Lords, I am genuinely delighted to welcome the Minister to the Dispatch Box, for three reasons. First, he deserves it. Indeed, he deserves to be in the premier league on this side but at least he is on the red Benches, which should be some consolation to him. Secondly, it enables us to continue our occasional discussions on the great affairs of state, which of course involve the future of Manchester United Football Club. Thirdly, he majored on the truth that up to this stage dare not speak its name—productivity We are seven years on from the biggest recession in modern times—seven years during which we have had the slowest recovery—and five years of that, courtesy of the blessed Fixed-term Parliaments Act, have effectively been a general election campaign. I listened to the speeches, I read the articles and I looked at the manifestos and there was a great deal of advice on how to spend money, how to allocate resources and how to distribute wealth but nothing—nothing—on how to create wealth, from any of the parties, incidentally. So I am glad that the Minister is now majoring—now that the Government are safely berthed, as they see it, for another five years—on how to face the storms ahead, not least of which is productivity I want to make three points specifically on productivity and I do so from a background that has nowhere near the expertise that the Minister brings to the subject. First, there seems to be a danger of exploitation squeezing out exploration when it comes to productivity. Productivity has to do much more than just find more efficient ways of doing the same things. It needs exploration as much as—perhaps more than, in the present circumstances—exploitation. Sacrificing one for the other is not only unproductive but strategically very dangerous In that context, how productivity is measured therefore matters a lot. The Minister mentioned his scepticism about some statistics. I also have a great deal of scepticism about the means by which we measure productivity: the rate of output per worker per unit time, or labour productivity; and the residual of output not explained by the amount of inputs used in production—that is, the total factor production. These of course feature large in debate among the experts but they tend to assume that radical changes in modes of production do not need to be matched by radically improved means of measurement. I doubt that is the case The practical results of inadequate measures are real enough, though. Ordinary people feel the spectre of labour being substituted for technology and vice versa as exploitation far more widely than high-priced experts who are often indulging in groupthink—the very phenomena which enabled us to stumble into the recession last time around. As a result, people’s job anxieties are needlessly provoked and capital is poorly invested. Exploitation squeezes out exploration at all levels. It is remarkable that rather than investing capital surpluses in necessary innovation, last year share buybacks —buying back our own shares—amounted to $903 billion for the S&P 500. The failure to reinvest capital manifests itself in all sorts of small but significant ways: for instance, in unproductive labour being employed in the revival of hand car washes because of the failure to invest in highly successful technology, which is also, by the way, environmentally very sound These examples evidence two major failings sapping productivity. First, there is the failure to invest in research-intensive innovation that is vital to our competitive future—for instance, in UK biotech. Secondly, there is the failure to liberate labour for more productive endeavour by withholding capital investment, even in exploiting well-established technologies. Both are of course linked. Productivity measures are—to coin a phrase—not entirely fit for purpose, given the strategic challenge ahead of us. They are skewed to exploitation squeezing out exploration. The Chancellor, or the Minister, may well be spurred into action at long last on productivity but would be well advised to assure himself that he is using instruments calibrated for the real economy, not financial groupthink Secondly, unless we learn to innovate at the pace, intensity and scale fit for the strategic challenges ahead, our problems will grow, not our productivity. For centuries, British ingenuity and innovation have enabled us to sit astride the spokes at any given contemporary period of the globalised world. The shipping lanes we opened were complemented by financial services that underpinned confidence in growing trade. We constantly evolved, building coaling stations and laying submarine cables, which in turn allowed us to dominate the world’s communications, and developing engines to propel ships, trains, planes et cetera. At the heart of that is a language and ethos for pragmatism, which we share for the better conduct of business and science the world over. However, something has stalled. A deep, wide and persistent productivity disease has taken hold and we cannot afford that The third and final point is the advent of cyberspace. Success in the cyber environment, an environment characterised by constant entrepreneurial innovation, makes this issue more essential than ever. Yet according to the European Union Innovation Union Scoreboard 2014, despite the fanfares for Shoreditch and the Silicon Roundabout, the UK is an EU follower in cyberspace, not a leader. The evidence suggests that however world-class our research and education are, they simply fail to translate into innovation that sells. In particular, I say to the Minister that this includes an overweening financial services sector, which the Bank for International Settlements and the IMF warn can undermine productivity severely because its interests are served by generating short-term transactions, not investment in research and development or capital-intensive industries in the real economy If we are honest, we may be able to face these things. If we are dishonest and ignore these productivity inhibitors, as all parties did in the election, things will only get worse. Our fitness for the cyber environment is a benchmark that we must set for ourselves at "excellent" and "world-leading". Reaching such benchmarks needs some very practical and sustained effort, and that effort needs to start now.