Nick Clegg trashes Liam Fox’s economic policy demands

During yesterday’s Radio 4 interview with Nick Clegg there was a feisty exchange over why so much time in the interview was being taken up with the details of when and to who Jeremy Hunt should next answer questions to about his conduct, rather than issues such as the state of the economy.

Certainly the media loves investigatory process stories. Not only the Clegg interview but the subsequent coverage of it neglected the economy, even though Clegg had some choice words to say about former minister Liam Fox:

Martha Kearney: Liam Fox recently accused the Liberal Democrats of being a brake on economic recovery through your resistance to economic deregulation.

Nick Clegg: Look, I just plainly disagree, and I think most economists frankly disagree with Mr Fox’s recipe, which seems to be even deeper cuts immediately and the removal of employment rights for millions of ordinary working people up and down the country.

I don’t think any serious economist thinks that is a recipe for growth.

What we need to do is fix the banking system so money flows into the real economy. We need to provide support for skills, which is why we – this government, not the previous government – are providing funding for more apprenticeships than any other government in the post-war period.

We’ve not only maintained but increased in important respects capital investment in housing, in transport, in infrastructure, the Green Investment Bank – the first of its kind, starting lending as of last week. We’ve set out ambitious plans for High Speed 2 to link north and south in this country.

I suspect many Liberal Democrat members will have not only be cheering on the frank disagreement in Nick Clegg’s opening, but also wishing that it was the tone heard more frequently on other issues too.

Meanwhile, The Guardian has run an interesting piece from Ha-Joon Chang about deregulation and economic growth:

The government’s approach to renewing the [manufacturing] sector is to repeat the same old, failed strategy of cutting (personal and corporate) taxes and “red tape”. The theory behind it is that wealthy people and corporations need to be given more incentives to invest and create jobs by making it easier for them to do business (deregulation) and to keep more of the income they generate through their businesses (tax cuts). If only it were that simple.

Those who think taxes are hindrances to business do not realise that taxes do not just take but also give resources to the potential investors. With taxes, the government can (and does) provide benefits that all businesses need but are unable to provide individually, except at prohibitive costs – infrastructure, skilled workers, basic research and development, export marketing (for smaller firms) and so on. The fact that “wealth creators” do not rush to open business in Jamaica, with its 5% top personal income tax rate, or Albania, with a 10% corporate tax rate, shows that the crucial question is how a government spends its taxes, not how much it taxes.

Would-be red tape cutters believe that the more regulations there are, the less investment there will be. However, regulation is only a minor factor in investment decisions. Things like growth prospects, technological progress, quality of labour force and infrastructure are far more important. The truth is that, if there is money to be made, businessmen will invest regardless of the level of regulations. This is why the 299 permits that were needed to open a factory in South Korea in the early 1990s did not prevent the country from investing 35% of its income and growing at 10% per year at the time.

More importantly, many regulations are there to help business as a whole by restricting what individual firms can do … regulations on environmental pollution or on excessive bank lending have long-term collective benefits, even if they may hurt individual firms or banks in the short run.