Policy Innovation Blog

In a PICL

Stian Westlake - 22.06.2012

Where are the new ideas for UK economic growth?

The debate on how to help the UK's economy recover is changing gradually.

For a long time, it seemed to be mostly about macroeconomics: Plan A vs Plan B, and the big-picture business of how to get demand and confidence going again. But in recent months, there's been growing interest in microeconomic policy: everything from regulation and productivity to (whisper it) industrial policy.

This is a good thing - we at Nesta believe that there's plenty that can be done to help make the UK a more innovative place, and innovation is largely about micro, not macroeconomics. But there seems to be something missing from the debate.

The standard refrain seems not to have changed much from the balmy days before 2008, when the world of economics seemed a more sensible place. "PICL" to me sums up the sort of sensible but hardly unfamiliar policies that tend to get proposed:

Planning reform

Immigration

Competition

Labour market deregulation

None of these are bad policies in their way. And they are all evidence-based. It's difficult to get things built in the UK, and this affects everything from how productive our supermarkets are to how easy it is to grow tech clusters in places like Cambridge. Making it easier for highly-skilled people to work here is also an economic no-brainer: I'm not sure I've ever met an economist who is against highly skilled immigration. Most economists will also sign up to having strong competition policies and not overly tight labour regulations. And you'll find these recommendations repeated in lots of very sensible publications about the UK economy.

But how far do these recommendations get us? Planning reform and more liberal highly skilled immigration policy face political opposition, not economic opposition: in both cases, voters dislike them for reasons not much to do with economics. As far as competition policy and labour market deregulation are concerned, it's a different problem: we may simply have done about as much as is useful in these areas. We already have quite good competition policy and one of the world's more deregulated labour markets, and turning the dial even further may have little effect (or even a negative one).

So where do we go from here? A manifesto that consists of things that are politically impossible and things that have already been done is none too helpful, even if they are robustly well evidenced. But we don't want to spend large amounts of public money on policies that don't work.

One worthwhile avenue is to look at the emerging evidence for other types of policy. Researchers like John Van Reenen, Philippe Aghion and others are steadily building the evidence base for other sorts of micro policy, like business grants and sectoral subsidies - and in some cases they seem to work.

The other choice is to accept that we don't know exactly what works, but that we will experiment. Most countries that implemented apparently successful industrial policies, like Finland or Korea, had to try things out. But experimentation must be just that - a combination of trying things out and careful observation, with effective evaluation where possible, and a willingness to stop things that don't work. It's not economic policy as we know it. But it might just get us out of the PICL we're in.