Lots of little things: what if there are no big answers to productivity growth?
The UK’s productivity puzzle is well into its second decade, and is no closer to being solved. Back in the early 2010s, when it first became apparent that employment was growing very strongly but GDP was not, most economists assumed it would be a temporary blip, either to be revised away by the ONS or corrected. That has not happened.
Healthy productivity growth had been a constant feature of the economy ever since the second world war, and we assumed it was here to stay. Even during the bouts of inflation and rising unemployment in the 1970s and 1980s, productivity generally continued to grow at a fairly healthy rate.
No longer. Productivity growth slowed down abruptly after the 2008 financial crisis and has shown few signs of recovery. Along with the obvious challenges this has caused, it has caused us to think differently about productivity growth. It is no longer something to be taken for granted; it is now something that an economy has to nurture.
The UK has been doing a spectacularly bad job of this. While productivity growth has slowed down in all advanced economies, nowhere has it slowed more dramatically than in the UK. It went from having the fastest productivity growth in the G7 before 2008 to having one of the slowest rates since.
What went wrong? There is no single, satisfying answer, but there are many competing explanations. The UK relied too much on finance. The flow of oil and gas from the North Sea dwindled. London grew but the second tier of cities were held back. An overheated housing market choked the productive parts of the economy. Austerity throttled Britain’s already weak investment performance. Brexit imposed barriers to trade and made the UK a less attractive prospect for investors.
There is probably some truth in all of these explanations, but none can account for the whole problem. Even Brexit, which is perhaps the most obvious theory, struggles to explain anything before 2016. This can make proposals to fix the UK’s productivity problem seem either anodyne (if they focus on lots of different issues) or naive (if they focus on just one problem as the solution to everything). There does now seem to a reasonable degree of consensus on the key things the UK needs to address — investment, infrastructure, trade, housing and planning — but these issues are a lot easier to identify than to fix. If there were obvious solutions, why haven’t they been done already?
This leads me to point of this piece: what if we’re looking at this the wrong way round? What if, rather than looking for the few big ideas that will turn around the UK economy, we need to focus on fixing lots of little things?
What do I mean by little things? Let me give some examples.
Take transport investment in our second-tier cities. Some of this is about major infrastructure projects — sorting out HS2, fixing Trans-Pennine rail services and all the other things the government has promised to do about 74 times. But most of the stuff that really matters is at a smaller scale. Sorting out buses. Building local transport networks — often including trams and light rail — that connect the big train stations to places where people actually live. Complementing public transport with congestion charges, better cycling infrastructure, more low-traffic neighbourhoods. Even just sorting out bottlenecks such as narrow staircases at busy stations. Fixing transport in Leeds and Manchester is mostly not about new, fast railways. It’s about connecting each city up effectively, getting the right services in the right places. Little things.
Take housing and planning. There are clearly problems with the planning system in England, and reforming it should be near the top of any government’s agenda. It’s not going to solve everything — I’m afraid I have the “housing theory of everything” in my “naïve” bucket — but it could help, a lot. The problem is, you can’t just rewrite the Town and Country Planning Act 1947 and expect everything to sort itself out. Planning is an active process. We need to work out where homes, business premises, energy infrastructure and so on should go. We need to fund the infrastructure to support them. If you want denser cities (we should!), you have to plan that. If you want new towns or urban extensions to have transport links and GP surgeries, you have to plan that and make sure the funding is there. All of this is very hard to do when local government — which does most of the planning — has so few resources. Planning reform is not just about sweeping legislation — it is about lots of individual bits of planning and funding and building. Little things.
Take the diffusion of technology to small businesses. One of the key drivers of productivity growth is getting hundreds of thousands of smaller businesses to adopt widely used technologies. We aren’t talking about cutting edge technologies here — we’re talking about relatively basic systems, sometimes as basic as switching from analogue to digital systems. But persuading small businesses to adopt technologies is hard — more of a social challenge than a technological one. And it is hard to design a single, sweeping programme to help all businesses to switch. More likely, what’s needed is many smaller interventions targeted at different places and types of business. Lots of little things.
There are plenty more examples I could go through, but I’ll spare you on this occasion. We could do energy — the need to get low carbon generation, storage, the electricity grid and energy demand all lined up. We could do open data — drawing on James O’Malley’s wonderful campaign to open up the Postcode Address File, for example. The list could go on. There are a lot of little things that need doing.
At this point, I should add that I think some big things matter too. I think demand and macroeconomic policies affect productivity, and the UK has often got these wrong over the last decade. I think the UK’s fiscal policy needs to accommodate more investment. I think removing trade barriers is crucial, and that the UK needs as much access as possible to its large neighbouring trade bloc.
But the underlying point is that the economy is not some big, homogenous mass that has a few big levers marked “productivity growth” sticking out of it. It is made up of lots of individual industries and lots of individual places — all interconnected of course, but also separate. A growing economy needs enough of these industries and enough of these places to be expanding, innovating, becoming more productive over time to sustain its growth.
And some of the things that make an industry tick — particularly newer industries — are specific to that industry. Whether it’s regulatory changes, supporting institutions, specific bits of funding support or something else, there are always things that can support an industry (that’s why they employ lobbyists, although sadly lobbyists often focus on protecting incumbents rather than productivity growth). Even when you look at the many generic things that all industries need to thrive, a lot of them are place-specific: affordable rents, transport links, access to a skilled workforce and so on.
Now you might read my argument and think: this is just an appeal to complexity. You’re making everything sound complex to avoid doing anything. But none of these things are that complex. There are just lots of them. It only becomes complex if your model of policy making involves a single, heroic person having to completely solve the problem by themself. If you accept that each of the little things can be done by different people, each specialising in their own area, the problems become much easier to solve.
One of the core problems with UK policy-making is that it is dominated by a quest for big, elegant, all-solving ideas that can fix our problems in one go. And of course these ideas can only be the preserve of a select few people, capable of holding every problem in the UK economy in their mind. We might debate who the people who really drive the UK’s economic policies are — some say Treasury officials, others the think tank to special advisor pipeline — but no one would pretend it is a large group of people.
Our politics are partly to blame for this equilibrium. Politicians are expected to offer big, comprehensible solutions to fixing our problems. Keir Starmer is unlikely to go on the BBC and say “I’m going to pursue bus franchising in city regions, strengthen how the planning system funds infrastructure and do a thousand other things that most people won’t even know what I’m talking about.” (Actually, I think he should do exactly that — place-based politics remains underrated — but that’s another story)
I’m loathe to criticise the Office for Budget Responsibility in budget week, but the framework we have for assessing growth policies also doesn’t help. It is very difficult to persuade the OBR that new policies will shift the UK’s long-term growth rate — which is crucial, because it affects how much “headroom” Chancellors give themselves. Big, expensive policies — like corporation tax cuts — have some chance of moving the needle in the OBR’s model. A bundle of smaller policies have no chance. This is not really the OBR’s fault — they have to have a model, after all — but it helps to reinforce our bias towards big ideas.
The cycle of big ideas can also be self-reinforcing. When one big idea fails to tackle the productivity slowdown (or any other policy problem), the temptation is to reach for another big idea and start again. And then on to the next big idea when that fails. In many policy areas, the big ideas end up on a big policy wheel, with each idea resurfacing every 20 or 30 years or so — just long enough that no one is around to remember the last time it didn’t work. And in the process of all this policy churn, the little things either get ignored or get messed up. Business lobbyists complain of a lack of certainty, and can’t make any progress on the little things that need fixing. Sound familiar?
So what should we do about it? After all, the first rule of this blog is that it is never a counsel of despair.
One natural response is to reach for “technocratic” solutions — moving these boring-but-important questions out of the hands of politicians and into the hands of experts. On the whole I am sceptical, though I am open to exceptions for genuinely big topics, like fiscal and monetary policy. Technocratic solutions inevitably mean pushing decisions into the hands — and minds — of a few experts, who are not always well-suited to the little things approach.
What I’d rather do is push more decision-making power down to people who are closer to the little things. This is especially true in place-based policy, where I am convinced that devolving powers to local areas remains a key route to strengthening local economies. If you want to sort out the transport system in Leeds, give the leaders of Leeds the tools to do so (hello again bus franchising). If you want more homes in London or Bristol, give the tools *and* incentives to London and Bristol to build them. You might worry about local capacity (it’s not great because Whitehall took so much of it away) or postcode lotteries (sorry, we’ve already got them), but ultimately it would be hard to do much worse than our current system.
Beyond devolution to local areas, solutions get harder to come by. You can hardly let each industry establish its own governing council — it would end up run by lobbyists. Instead, I think what’s needed is more specialised, more engaged civil servants and junior ministers. The truth is that governments can deliver a lot when they let capable, committed people get on with the job. Encouraging civil servants to specialise within their fields more would help, but even more important is for them to understand the services or industries that they work with deeply. I’d like to see more civil servants talking to heating engineers or nurses or whoever best understand the little things they need to fix. A lot of this comes down to career structures within the civil service.
This applies even more strongly to junior ministers, who can have a tremendous impact within their fields if they do the job well. The more that junior ministers stay in their briefs and focus on doing their job effectively, the more it becomes possible to fix the little things. This would mean prime ministers prioritising competence over political expedience in allocating ministerial briefs. That is perhaps a tough ask — and I’m not sure how I’d make it stick — but it would no doubt vastly improve the operation of government.
Of course, my suggestions are not big ideas, and nor are they anything new. But that is exactly the point. All of the things we could do to raise the UK’s productivity growth are pretty well known. The challenge is actually doing them, little by little.
