Thursday 26 April 2012

Three simple policies to nudge the UK economy back to growth

Yesterday the news broke that the UK’s GDP shrank in Q1 2012, meaning the country is back in recession. Given the scale of public sector spending cuts a double dip recession was rather predictable. Put in perspective, the 0.2% decrease in GDP represents stagnation more than serious decline, but it is worrying nonetheless. However the negative growth was so small that even some relatively small policy changes might be able to reverse it. 

While I often write about quite abstract ideas, in this post I will put forward three concrete, low-cost, easy-to-implement policy proposals which would help to improve the economy. 

1.) Regulate the Scrap Metal Industry 

To me, this one seems like a ‘no-brainer.’ When a scrap metal thief steals electrical cable from a railway to sell for £60 to a scrap metal merchant, he causes thousands of commuters hours of delays. The economic value of that lost time is tens of thousands of pounds, plus thousands more for repairs. These thefts happen all over the country on a daily basis, costing the economy tens of millions every year in lost productivity. Furthermore, scrap metal thieves desecrate our monuments, our churches, our public artwork, destroying our cultural heritage as well as costing large sums of money. Some thieves stoop so low as to rip cables from a generator at a hospital, thereby endangering lives. 

Much of this damage could be swiftly curtailed if we required scrap metal merchants to keep records of the origin of all the material they buy and who they buy it from. Stolen goods could be traced to their seller, and strict enforcement would, I believe, deter many would-be metal thieves. Any metal thieves who persist should be subject to severe legal penalties. 

The increased burden of this system would fall largely on scrap metal dealers, and given the trouble that this industry causes for the rest of society, I would see it as completely justified. 

2.) Accelerate the issuance of licences for 4G mobile spectrum*

Why is the UK set to be one of the last countries in Europe to get 4G mobile? Why are we so far behind the USA and Japan? Norway and Sweden have had LTE since 2009. Up to the end of 2011 there were over 40 deployments of LTE worldwide, in 24 countries, including Uzbekistan, Belarus and the Philippines. In the UK, the auction of 4G spectrum has not even occurred yet, after repeated delays. The valuable spectrum which is being freed up by the switch-off of analogue TV will be sitting mostly idle for at least a year. 

 Issuing licences would have multiple economic benefits. First of all, it would trigger a wave of private sector investment in telecoms infrastructure (and Vodafone’s purchase of Cable & Wireless will start to look pretty smart). Second it would increase the productivity of people (such as myself) who use mobile broadband as their main internet connection. Third it would position the country for the next generation of mobile handsets and tablets, which will be powered by 4G technology and be capable of things that will make the iPhone4 look like a 1980s ‘brick.’ Fourth, it would position the country for an explosion in Machine-to-Machine (M2M) communications which could revolutionise our power grids, our roads, our medical devices and much else (much of which has yet to be invented). 

The next generation of smartphones will make the iPhone4 look like this

3.) Deregulate Sunday trading hours for shops 

This may be the most controversial of my three suggestions, but I believe a review of our archaic laws on Sunday Trading Hours is long overdue. For any readers from overseas, I should mention that British stores larger than a local corner shop are currently allowed to open for no more than 8 hours on a Sunday. 

At one level, my views on this are guided by personal frustration at going out to shop on a Sunday and having to head home at 6pm when I’m only half done because everything has closed. But I doubt if I am alone in my frustration. There are plenty of people who Monday to Friday at their desks, for whom Saturday and Sunday are the only opportunities for ‘shopping as leisure,’ who would welcome longer hours. I believe that if stores opened longer, people would buy more, and stores would make more income.

The major resistance to longer trading comes from shop workers themselves. The unions believe Sunday evenings should be ‘family time’ and resistance to changing the rules is so strong that even a temporary waiver during the Olympics caused an outcry

But retail workers who oppose change are being short-sighted. The retail industry is in crisis. High streets up and down the country are becoming increasingly deserted as retailers go bankrupt. Tellingly, new shops are not taking their place. It’s important to remember that by freeing up the rules the government would not be forcing any shops to open longer than they currently do, just giving them the choice whether or not to. And business flexibility is something retailers need more of if they are to increase their contribution to the economy instead of continue in their decline.

A lot of options for stimulating the economy are bigger, bolder and more expensive than the ones I’ve outlined. But the strength of these three is that they require little cost to implement: they simply unlock the potential of the economy that was there all along. 

*I realise that accelerating the auctions at this stage may be impossible, in which case the key point is that the auctions must not be delayed again, as they have been many times in the past 

Wednesday 11 April 2012

The Infrastructure Dilemma: How a shock for visitors to London hints at greater changes to come

The hot weather in London the weekend before last got me thinking about how unpleasant the London Underground can be at the height of summer, and what a surprise this might be to visitors coming to London for the first time to attend the 2012 Olympics. The London Underground is one of the oldest subsurface railways in the world, with deep and narrow tunnels that are impossible, as yet, to keep cool. The carriages are not equipped with air-conditioning and even if they could be, the existing tunnels don’t allow sufficient ventilation to dissipate the heat to the surface.

In contrast, many ‘developing’ countries have modern metros with fully functioning air-conditioning. They also have wider tunnels and wider trains, which do not require that tall passengers stoop to fit in. Unlike the London underground, many of these metros also support underground mobile phone reception. Visitors from Beijing, Bangkok, Kuala Lumpur and Shanghai may get a shock to find themselves disconnected and in sweltering conditions as they travel on the Central and Bakerloo Lines this summer.

This particular example seems to me to be part of a broader problem facing the ‘developed’ world. Countries in Western Europe and North America were comparatively early in building a lot of the core infrastructure that supports our daily lives. Roads, railways, water networks, sewerage networks, and electricity grids were installed decades or centuries before the rest of the world. This is a big part of the reason ‘developed’ countries got a headstart on the rest of the world in developing industrialised economies. Economic growth theory suggests that a country’s asset base is a key determinant of its labour productivity, so a large asset base (of both physical assets and knowledge) has a positive feedback effect. A classic example is factory tools: investment of capital can improve the tools, which makes the factory more productive and so increases the capital available for further investment.

For most kinds of physical and knowledge-based capital, this dynamic allows whichever country is in the lead to stay at the forefront. However with infrastructure things are different. Unlike other kinds of assets, such as factory tools, computers or science textbooks, infrastructure cannot simply be ripped out and replaced when a new, better version becomes available. Our roads, railways and water networks are in constant use, and in the case of water pipes and the London Underground are buried beneath our streets so that they are costly or impossible to access. For this reason, countries which put in place infrastructure later will have a distinct advantage: they will be able to build better networks than we have. As a result they will gain greater productivity advantages from it – and since they can also upgrade non-infrastructure assets, the ‘emerging’ countries which are currently underdogs could end up leapfrogging the West. They may end up with higher productivity, higher GDP per capita and higher standards of living than what we currently call the ‘developed’ countries.

This process has already begun. Already, Singapore has among the highest GDP per capita in the world. And already, the high costs of maintaining and upgrading hundred-year-old infrastructure are weighing heavily on the city of London. As I’ve previously argued, developed countries need to come up with innovative solutions to their infrastructure dilemma. Furthermore, government planners and civil engineers in less developed nations must learn from what is happening in the West, and design their infrastructure with future change in mind.