Labour has a terrible productivity idea

According to an article for Bloomberg View by Ferdinando Giugliano, one-time member of the Financial Times editorial committee, the UK’s Labour Party has come up with a ‘terrible idea’ for sorting out the country’s current productivity problem

John McDonnell, Shadow Chancellor, proposes giving the Bank of England (BoE) a yearly 3% productivity growth target to sit alongside its current 2% inflation target and requirement to ‘smooth economic fluctuations by boosting output and employment’ when needed

This wheeze is apparently based on a report by a Graham Turner of GFC Economics, a think-tank not well known to most

What seems to have been overlooked is outcome targets should only be set for people who have a considerable degree of control over the drivers involved – for example, re national productivity, the result of waste and efficiency levels, labour-saving investments, innovation or use of new technology

But all such areas are under the control of internal management – they alone determine the great majority of any national productivity improvement – say 80% – with the other 20% being dependent on population growth and governments, not central banks, for vital investment in infrastructure (e.g. HS2, HR3), R&D and skills training as well as legislation and regulation

The BoE not only lacks expertise and experience in these areas – they also have little, if any, influence over them

Worse still, this new target would be in conflict with its other ones

Whilst organisations seek to minimise all costly inputs, including labour, nations, aided by central banks, seek to maximise employment levels as well as national output (i.e. GDP) to improve standards of living for all

One wonders how this big idea from McDonnell and Turner arose

Presumably, they’ve spotted that national capital investment is currently well below historical norms, with some bigger organisations preferring to divert more net profits into share buybacks and senior managers’ pockets than the long term futures of their companies – and they feel more capex per company would lead to more productivity and so more prosperity for all – and BoE muscle could be applied on those companies to encourage their managers to increase their capex

But making the BoE carry the can for achieving the nation’s most important peace-time aim is a sure-fire recipe for chaos and failure



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