Policy Innovation Blog

Plan I

Stian Westlake - 11.10.2011

As the Eurozone drifts towards a reprise of the crisis of 2008 and export-led growth looks increasingly difficult, we're seeing renewed debate over the merits of an economic "Plan B".

Should the government throw austerity to the wind and stimulate credit and demand in the economy? Should it stick to Plan A of deficit reduction and supply-side reform? Could it be implementing Plan B on the sly, for example through its newly announced policy of credit easing? And various pundits have been throwing Plans C and A+ into what increasingly looks like macroeconomic alphabet soup.

There's something a little worrying about this debate, especially if you're not a macroeconomist. The prescriptions being offered by the Plan A-ers and the Plan B-ers require you to believe two things: that we know what macroeconomic tools work, and that this particular economic crisis can be fixed with macroeconomic tools at all.

There doesn't seem to be much evidence for the first proposition, given that very distinguished economists can't agree on what might work, and that the people who are most sure of the answers tend not to be trained economists.

And the idea that macroeconomic solutions will work is also being called into question. Techno-pessimists like Tyler Cowen, Neal Stephenson and Peter Thiel, who claim that innovation is slowing down, are describing a problem that neither stimulus nor austerity can solve. We know that innovation is the main source of productivity growth in developed economies like the UK's, so if it is indeed slowing down, this is a serious problem.

This raises an important question: if we took innovation seriously, what would our response to the ongoing economic crisis looks like. Or to put it another way, what is "Plan I"?

The world has been here before. Finland's response to its own mini-meltdown in the early 1990s was an austerity package coupled with investment in innovation and R&D; this is widely credited with its healthy economic performance in the last two decades. Countries like South Korea redoubled investment in innovation in the aftermath of the 2008 crisis (in Korea's case, with a focus on green technologies). And S&P's recent commentary (£) on the UK highlighted the importance of innovation in ensuring a healthy recovery.

Of course, this is as much about politics as it is about policy. Unless you're a convinced Keynesian, spending significantly more public money on innovation means spending less on something else. William Cullerne Bown, editor of Research Fortnight, recently asked how politicians could build a consensus for more spending on innovation. And Mark Henderson, Science Editor of the Times, is writing a Geek Manifesto to give voice to at least one important constituency.

But with public interest in science, technology and innovation on the increase, and a deepening concern over how the UK will make its way in the world, perhaps now really is the time for Plan I.