Would it be wishful thinking to hope that that there is a silver lining to the Covid-19 cloud hanging over the world? The current crisis is only a prelude to the future. A time for us to learn to adapt to probable unemployment rates of 10 to 15% and possibly even 20% or more. No event is ever so bad, that there is absolutely no good that comes from it, let us try and find the potential good.
Our politicians from, both parties, have often spoken of a need to re-balance our economy. What does this actually mean? All economic systems suffer distortion over time but how do we re-balance them?
Re-balancing and economy, implies equalising average per capita incomes throughout the regions, which means that short of physically moving a large proportion of London based financial services businesses and government departments into the regions, we can never achieve a regional re-balancing. The ‘Northern Power House’ is fine rhetoric, but infrastructure developments take at least 20 years to start giving a real payback. Taking concrete action to correct the regional imbalance would, mean that there will be a collapse of London property prices accompanied by rising property prices and development in the regions. Ultimately re-balancing requires an increase of trade in the regions, which is a function of income within that region.
Re-balancing is also looked at in terms of reducing the dependence of the economy on Financial Services, with a greater emphasis on manufacturing and other types of service, for example the digital or IT sector. This is a far more complex problem, as we are dealing with people’s natural aptitudes combined with education and upbringing. There is little gained in attempting to re-train people for a job function where they have little or no natural aptitude. However, in this area, our biggest problem relates to the country’s cost equation, can we be price competitive against manufacturers in other countries where they have a better cost equation? (Cost equation = Labour + Rent + Interest + Profit and Tax). To a small degree we can influence the development of different sectors with tax incentives, but that is never going to bring about re-balancing without attention to our cost equation.
For a moment I would like to refer to Adam Smith, who together with Ricardo can be considered the father of classical economics, being supply and demand coupled with free markets. In his ‘Wealth of Nations’ he pointed out that the primary reasons for faster growth in the economies of the colonies, was due to the attitudes of the ‘Landlords’ in the UK. They would charge rentals that sought to squeeze virtually all of the profit from the use of the land, resulting in what we today call a ‘trickle down economy’ with real wealth concentrating in the hands of the landlords. In the Colonies where Land was abundant these high rentals were not possible and instead they paid higher wages in order to work the land and thereby earn income. This resulted in much more of the overall income ending in the hands of the general population, stimulating trade and thereby growth of the economy or a ‘bottom up economy’
As you can see the question of rental levels has existed in our economy for a long time. Today it is still one of the primary factors squeezing our ‘High Streets’ to death. Perhaps Covid-19 will start bringing about the change that was first called for in the 1700’s, and is one of the keys to re-balancing our economy, by starting to address our cost equation. To a degree there will be market pressure on rentals as many businesses will simply not reopen and many companies will have a bigger proportion of staff working from home reducing the overall demand on office space. It could however be helped by a change in government policy with actual regulation of rents as well as a change in taxation policy regarding business rates (which might also be forced with holidays being granted).
The problem of an economy distorting over time, is as old as history itself. The earliest attempt I know of, that tried to solve the problem, is the Judaic ‘Year of Jubilee’.
In Leviticus 25, God commanded the House of Israel to observe a *year of Jubilee* every 50 *years*. The *Jubilee year*, the Bible explains, was to be a *year* of rest, including the forgiveness of all debts, and the liberation of slaves and servants to their native lands.
While it is feasible to see this being workable in a relatively closed economy, (apart from, as one my sons says, “the number of people who lose their knee caps in the 49th year”) the modern economy poses many problems, but, it might be feasible to devise a revised version that can work in the modern economy, provided we can overcome the issues arising from our monetary system.
Our monetary system is now solely based on debt with no physical asset to back it, Gordon Brown effectively completed what Margaret Thatcher began, when he disposed of most our gold holdings and removed the regulation of the banking sector from the Bank of England. We should indeed be looking at our monetary system as it has weaknesses that give a lot of cause for concern.
I will consider the monetary system again when I deal with globalisation and other international factors.
Re-balancing our economy could be one of the silver linings, but, we need to understand that re-balancing will always have an element of adjusting the disparity between those that ‘have’ and those who ‘have not’, and cannot be achieved without a level of pain. Regardless, of whether our route is wholesale decentralisation or fixing our cost equation, there will be a proportion of people adversely affected.