What’s your plan for economic growth? This is the question most often asked of Chancellors. It’s particularly acute in London as we adjust to Brexit and the home working revolution. In the wake of the pandemic, this Government has understandably pointed to the UK’s vaccine success story as an optimistic model — a 21st century version of Harold Wilson’s “white heat of technology”.
The vaccine roll-out is a good model for where the growth will come from, but mainly because of the complex logistics involved, not the cutting-edge science. Modern economies are structured very differently from Wilson’s Sixties. Look around you — almost everyone works in a service sector role, some in finance and professional services, but mostly in big sectors like hospitality, retail, distribution, construction, care, health and education.
This has at least three important implications for economic growth. First, there is likely to be less of it than in the past. Second, growth will come overwhelmingly from new ways of working in service sectors. And third, our policy debate is focused too much on the wrong measures of success.
The reason why modern service sector economies mean less growth is set out in a provocatively titled book by US economist Dietrich Vollrath: Fully Grown: Why a Stagnant Economy is a Sign of Success. Thanks to incredible productivity improvements in manufacturing, the price of goods has plummeted. As a result, we now spend the majority of our incomes on services such as healthcare and leisure activities.
The crucial difference is that service activities have mostly proven far harder to automate. This is why their prices haven’t fallen in the same way and why most of us now work in providing them. And it’s a big part of why productivity growth in advanced economies around the world has fallen noticeably since around the turn of the century. As Vollrath concludes, that’s not likely to change any time soon. Though it’s now possible that labour shortages and new post-pandemic working practices could trigger a step change in some sectors.
This growth pessimism might seem hard to square with optimism about new technology. That’s where implication number two comes in: innovation is not the same thing as economic growth. Cutting edge technologies like mRNA vaccines, artificial intelligence and quantum computing will almost certainly be sources of higher global living standards over the long term. Where these innovations take place — and who controls the intellectual property — is also hugely important. Witness the current tech-driven rivalry between the US and China. But they actually have very little to do with the year on year increases in productivity and wages that drive higher living standards for most people. Instead this is about the steady process of adopting existing technologies and improving working practices.
That’s why a plan for growth really needs to focus on changes that can transform the productivity of people working in service sectors — from smart warehouses and remote care delivery to modern construction methods like prefabricated buildings. A modern economy needs high quality leisure and tourism options, an effective focus on prevention in healthcare and a highly efficient logistics sector. All of these require a skilled workforce and can in return deliver well-paid and fulfilling careers for millions of people.
The third implication of our modern service economy is that we’re too focused on measuring the wrong things. Accounting for quality improvements over time when measuring inflation and productivity is already a difficult enough science when applied to cars or TVs. But how do you measure the economic value of a free video call that allows grandparents to meet their new grandchild in lockdown? The modern service economy has given us unprecedented options, power and information that are largely missing from the economic statistics.
Our obsession with “hard” data like GDP or real, inflation-adjusted incomes is a bit like trying to measure your health using the number of steps you take each day. It’s relevant and you can measure it, but it only tells you a fraction of what you’d like to know. In a service driven economy our policy debate should pay just as much attention to “soft” data like wellbeing. In London’s case, that might highlight some of the vulnerabilities masked by higher average incomes.
Rupert Harrison is a multi-asset portfolio manager at BlackRock