Brexit led to the (deserved) demise of the Cameron government. Rapidly, the new prime minister, Theresa May, abandoned Goerge Osborne’s austerity commitment, delaying his cherished balanced budget objective beyond the envisaged 2020 date, and, maybe more importantly, calling for a new „industrial strategy“ in order to get the economy moving again. She proposed to make the economy work for all of society, not only for the „1%“.
The most recent assessment of the British economic situation after Brexit has led the Bank of England to announce a cumulative -2.5% deviation from its previous (May 2016) growth path until 2019 , with the economy not growing at all in 2017. This might be an over-optimistic forecast, as the deputy governor stated on August 4, when the Bank lowered its policy interest rate to 0.25% (from 0.5%) and resumed a 60 bn GBP quantitative easing program, accompanied by a 10 bn GBP program to make sure that banks would on-lend this money to the „real“ economy.
By now we all should know that the welcome activism of national banks, like the Bank of England and the European Central Bank in fighting deflation and recession, are not enough. World output is expanding only slowly (3%), the European economy is growing only at a bit more than 1%, unemployment is excessive, disaffection by voters with their governments is increasing and leading to an upsurge of (mainly right-wing) populist activity and fragmentation of society (this does not list the severe problems of terrorism, civil wars, migration, and more). Fiscal policy, the Siamese Twin of monetary policy restrains itself either by ideological infatuation (Osborne) or self-administered fiscal rules (EU), which single-mindedly pursue budgetary balance and allow only very limited expansion of budget deficits even in times of quasi-recession.
But the revival of thinking and even talking about „industrial“ strategy is welcome. We should all have learned by now that government involvement in the economy towards a sustainable growth strategy is needed, that sustainable growth does not come by itself. Vested interests for a wasteful, self-serving economy are too strong. In times of dormant „animal spirits“ when innovation activity is low and investment is lagging, well-chosen government interventions must stimulate demand, but demand of the right kind. During the stagnation of economies since the onset of the financial crisis (2008) much industrial capacity has been destroyed or become obsolete. Thus, government policy is needed to stimulate all societal capacity (both private, public and in-between) to get moving again. This would call less for what used to be called „sectoral“ industrial policy where individual sectors, e.g. ICT are stimulated, but rather for what in a 1994 blueprint for an industrial/innovation strategy we called „mission-oriented“ strategy. Such a strategy would define „missions“ (the Apollo Mission to put a man on the moon is the most-often quoted, if too heroic, example) and activate many sectors, many actors to cooperate towards fulfilling this mission. Today’s „missions“ could be combating climate change, solutions towards old-age care in our ageing societies, fighting unemployment, etc. Mariana Mazzucato, the Italian economist teaching in Britain, has convincingly laid out the argument for government involvement in industrial/innovation strategy in her pathbreaking book „The Entrepreneurial State“. She shows that most major innovations were spill-overs from government-led initiatives, even in entrepreneurial and anti-statist United States. Getting firms and experts to cooperate across sectors, getting long-term stable financing in place, marshalling government procurement strategy towards nurturing innovation, connecting research institutions with business, re-thinking patent protection to promote innovation – and setting standards – are some oft he instruments she proposes.
In the seminal Welfare, Wealth and Work for Europe project, led by the Austrian Institute of Economic Research with 32 European research institutions, an industrial strategy combining economic, social and environmental objectives is proposed, by renewed efforts to promote innovation, improve education efforts, marshall all available resources in an effective way, with the aim to achieve long-term improvements in „beyond-GDP“ objectives, i.e. in human well-being encompassing social, environmental and economic aspects.
A more instrumental approach has recently been proposed by Keynes biographer Robert Skidelsky („A tweak to helicopter money will help the economy take off“, Financial Times August 5, 2016). He refers to the 110 year old idea of Silvio Gesell, who proposed to get the economy going by giving each citizen a certain amount of money (e.g. € 1.000) and require the balance of money to be stamped at the local post office every month, for which the citizen would have to pay (an implicit tax). Thus, there would be an incentive to spend this money quickly, thereby enhancing monetary circulation and effective demand. In this manner, money would not be hoarded as it is now when Quantitative Easing money languishes in the banks or gets „invested“ in non-productive assets (e.g. real estate, or stocks) driving up their value. Today, this effect could be achieved by giving each registered voter a pre-paid debit card containing e.g. € 1.000, programmed to have its balance automatically reduced by a certain percentage („Gesell’s Schwundgeld“). Skidelsky would go beyond Gesell, however, and accompany such a program with a monetary-financed („horribile dictu“ in ECB jargon!) public investment program, improving Britains’s infrastructure. Skidelsky would additionally use the leeway Britain gained by the Brexit vote by giving preference to British businesses competing for such public procurement contracts. In this way, there would be a boost to consumer demand, investment demand for British producers (do they exist?) and – a possibility Skidelsky does not mention – a Mazzucato-like boost to innovation. As the Germans would say, such a program is an „eierlegende Wollmilchsau“, a pig which gives milk, eggs and wool – a synonym for „getting your cake and eating it, too“.
The renewed interest and pursuance of an „industrial strategy“ is welcome. It aims to overcome the ideology-driven abhorrence of government intervention, espoused by neo-liberal thinkers and practitioners. Cleverly designed, it can be an „optimal“ combination of monetary policy, fiscal policy and supply-side Structural policy, with the intended effect to lead our fledgling economies to a long-term sustainable path and to eventually overcome the devastating effects on our societies of the persisting financial crisis and the supply-side shock of Brexit.