Britain’s deputy PM Nick Clegg yesterday delivered the opening keynote speech at the International Economic Conference in Leeds in which he summarised government action taken to promote growth and employment in northern England.
“How do we build on the strengths in the north to create an economic core in the heart of the region that can compete with the biggest cities and regions in the world?,” Clegg asked. He said the government is launching the Northern Futures Project, which initially will aim to gather ideas about how to promote the economy of north England.
If you feel you’ve heard similar calls for extra effort and investment in the regions of the UK before, you are right.
In 1921, Britain’s coalition government secured parliamentary approval for The Safeguarding of Industries Act, the first legislation designed to promote through protection the manufacturing industry of the UK, most of which was then based in Northern England, Scotland, South Wales and Belfast in Northern Ireland.
It constituted a radical rejection of Britain’s commitment to free trade since protectionist laws against imported grain passed to help domestic farmers were repealed in 1846.
Every British government after 1921 acted to stimulate the economies of the regions and this reached a climax during the Labour governments of 1974-79.
The election of a Conservative government under Margaret Thatcher in 1979 was a turning point in policy thinking. It declared attempts to prevent the decline of manufacturing industries to be ineffective and mainly counterproductive. If manufacturing was contracting, this was the judgment of the market expressed through price that should not be resisted. Whether it was replaced by services became a matter of indifference. The policies pursued since 1921 were deemed to have failed.
The rise of industries making intangibles, despite many years of government action to promote domestic tangible production, is a satisfying confirmation that you can’t buck the idea of the market-clearing price. The fact that the UK economy retained its place in the global economic pecking order in the past 30 years, despite the relative decline in manufacturing, has also disproved dire warnings that an economy without mines and factories couldn’t flourish.
This approach has been replaced since the 2008 crash by a more activist approach to promoting regional economic development. It’s inspired in part by worries that the UK had become over-dependent upon financial services as well as by accusations the banking boom of the previous two decades had been at the expense of manufacturing.
The figures provide support for this argument. The ONS published at the end of last year estimates of regional GDP in the UK which showed that more than 22 per cent of the British total originated in London compared with about 19 per cent in North-West England, North-East England and Yorkshire and Humberside combined. London and the South-East of England, with about one-fifth of Britain’s population, produced 37 per cent of total UK GDP in 2012.
The imbalance was at least partly due to the relative decline of manufacturing in UK GDP, which now accounts for less than 20 per cent of output and employment. Between 1997 and 2011 the contribution of manufacturing to total GDP fell in all regions of the UK.
The buoyancy of the London economy reflects the growth of service industries. A report in January this year said 30 per cent of 22- to 30-year-olds move to the capital after graduating from university. This is part of the reason for the strong increase in the city’s population which is now more than 8.3m compared with 7.8m in 2020. On present trends, London’s population will rise above 10m by 2030.
These developments explain the perverse nature of the UK’s property market with the average home in London now costing more than twice what it does in the rest of the UK. London is on a property spiral where its growing labour force is demanding homes, thereby sending up the cost of housing which in turn fuels wage inflation and all told produces an ever greater gap between the capital and the rest.
Clegg’s response is at least partly-motivated by feelings that the coalition government is dominated by a metropolitan London elite out of touch with the rest of the country. But the Northern Futures Project has secured broad support.
The sad truth however is that the rhetoric and the studies that inspire it will do nothing to alter the balance in the UK economy unless fundamental causes are identified.
A century ago, the majority of British workers were employed in farms, factories and mines producing tangibles. These had to be located close to where the raw material was: coal, and hydropower for factories and land and water for farms. These were spread across the UK and concentrated in random locations. If you wanted work, you had to go where production occurred. It explains the emergence of Birmingham, Liverpool, Glasgow and Belfast in the 19th century.
For many service workers, where you are based is becoming increasingly irrelevant. The capital of knowledge workers is their brains and their bodies can go anywhere. If you are a computer programmer, you can be based in any location with good communications.
So why should so many bright people choose to move to London where property prices are twice the rest of the UK and rents often several times higher to live in shared accommodation and spend at least 90 minutes commuting to and from work each day.
Is London that compelling? Or is the rest of the UK so unappealing young people can’t bear the thought of living there for a minute longer?
Economists argue there are virtual knowledge networks in cities attractive to brain workers through which people interact informally in the evening and at the weekend. But these don’t have to be in London. They could be in Bristol or Blackpool.
Economics2030 argues that a large part of dominance of London can be explained by the rise of intangible capital and the fact that it accounts for the majority of the balance sheets of every major company in the UK. Intangible capital is, essentially, a figment of your imagination. Unlike a machine or a farm, it can be moved instantly at any moment to anywhere on earth. Companies constructed on intangible capital therefore don’t have to be based where they don’t want to be.
For many advanced intangible producing companies, like Google, incorporation is motivated more by tax considerations and this has encouraged them to domicile in low tax environments like Luxembourg, the Cayman Islands and Dublin.
But where their operational head offices are based is another question.
To a greater extent than business leaders are prepared to acknowledge, where a company is based is heavily influenced by the prejudices of top management. Warren Buffet likes Omaha and lives there, so his company is based there. High-earning senior managers like living in London. It has prestige, excellent cultural facilities and good international transport links including a direct train connection to Paris and Brussels. The clincher is that only high-earning senior managers can bear the extraordinary cost of buying a family home in central London, can often cost more than five million pounds.
Once a chief executive decides where to be, he or she appoints his or her support people, all of whom either live or want to live in London. A centripetal impact then gets under way that sucks people into the city.
This makes no sense. Most companies could cut their operational costs by at least 50 per cent by moving to Leeds or Newcastle. Their employees could afford a decent home and enjoy closer proximity to the countryside. But no, the figures suggest the opposite is happening.
To reverse this process requires a fresh approach which involves focussing on the distorting impact on company behaviour of intangible assets. Making it harder to incorporate intangibles on balance sheets would reduce the power of the corporate centre. It would also contain the growth of large companies that, through their marketing and purchasing power, make it difficult for small and employee-owned businesses and the self-employed to increase their share of service markets.
By containing intangibles on corporate balance sheets and the scale of large companies, space would be created for a new generation of small businesses and the self-employed. They are less likely to be suborned by the lure of the capital. Quality of life and cost matters a lot to the self-employed. They will prefer to have a larger home in the provinces with space for friends and family than a pokey flat in London.
Part of the solution to the London effect is therefore within the grasp of people prepared to think critically about economics generally and the idea of capital in particular. It should lead to a creative debate about policies that will make a difference to the majority rather than the few.
And if it is fruitful, the north of England will be among the main beneficiaries.