Back in March, just as lockdown was beginning, I wrote an article on how government could return the economy to normal once the Covid crisis was over. I commended Rishi Sunak, the Chancellor of the Exchequer, for his bold and swift action in implementing the furlough scheme to protect employment during the lockdown period. Indeed, I compared him to Lucius Quinctius Cincinnatus, the 5th Century BC Roman statesman who on two separate occasions took on power to deliver Rome from crisis, only to return to a quiet life on his farm when the crisis was over. I also looked at the lessons we could learn from previous major economic crises, the First and Second World Wars.
A little over six months on, and Covid still very much with us, how different does the landscape look now?
One thing that’s become clear is that some of the changes brought upon society by Covid will be permanent, and many technology-driven trends have been hugely accelerated by it. Rory Sutherland, writing in his regular ‘The Wiki Man’ column in the Spectator, has stated it well:
“We have, after all, made exceptional non-medical discoveries in the past few months. By being forced to adapt simultaneously, we have discovered better forms of collective behaviour which might never have emerged independently. I was an early convert to video-conferencing, yet even I was astounded at the extent to which the world can function remotely. We may soon look back upon commuting and the endless slew of physical meetings in the same way we view the practice of dressing for dinner in the 19th century: a time-consuming and costly potlatch ritual undertaken in the bizarre belief that the world would end if people no longer performed it.”
Therefore it’s important that we don’t just seek a return to the status quo ante, as though Covid had never happened. Society, industry and the economy at large will need to adapt to a new environment in the post-Covid world. And there’s no mechanism known to man which is better at adapting economies to new circumstances than the free market.
A clear danger
The essence of the furlough scheme is that government relief for those unable to work is channelled to them via their employers. In cases where those employers themselves may no longer be viable in a post-Covid world, the danger is that it will fossilise outdated practices and economic models – and prevent the market-driven adaptations that are the best hope for a rapid economic recovery.
In Wales we know better than anyone how destructive this can be. The story of a large part of the Welsh economy, certainly from the 1960s onward, has been the collapse of heavy industries which had previously been the mainstay of their local areas for over a century, to be replaced by – all too often – not very much. At best, low-value employment in foreign-owned businesses attracted by generous government subsidies. How exactly did that happen?
I find it instructive to compare Wales’s recent history with that of other countries and regions which were similarly dependent on heavy industries, but which made the transition to a modern diversified economy much more successfully. The examples I know best are the steel industry in Luxembourg, and the coal industry in the Limburg province of the Netherlands.
The right way to do it
The Luxembourg steel industry – dominated by a company called ARBED (‘SA des Aciéries Réunies de Burbach-Eich-Dudelange‘, and by a strange coincidence the Welsh word for ‘rescue’) – accounted for 30% of the country’s GDP in 1960. Even so, it was hit heavily by the energy crisis of 1974 and by the late 1970s it was obvious that the disruption was not a temporary phase but a permanent economic change.
The government then acted quickly, but crucially did not seek to keep the steel plants open and preserve employment in them at any cost. Rather, they allowed many plants to close while encouraging ARBED to modernise the others (which often included the introduction of much less labour-intensive working practices). Crucially, though, they ensured an adequate social safety net for workers as they sought opportunities in other industries. At the time the effective production subsidy on a ton of Luxembourg steel was 13 francs (roughly 25 pence), compared to the equivalent of 1500 francs (nearly £30) on a ton of steel produced in the UK.
Today steel production accounts for around 2% of Luxembourg’s GDP; while Luxembourg’s GDP is the highest per capita of any Western country.
In Limburg, as of 1960 the coal industry employed 55,000 people directly and it was estimated that 70% of the population depended upon it directly or indirectly for their livelihoods.
Yet in 1965 the Dutch government declared that the industry was no longer viable and announced its intention to close it in its entirety. The last mine closed its doors in 1976. But over this period the government was immensely successful not only in bringing new industries into the area from outside, but in allowing companies that had formed the infrastructure around the coal industry – engineering companies of all kinds – to diversify. Today the area is a hub of high-value manufacturing, specialising in areas such as automotive, life sciences and medical devices.
Contrast all of this with Wales, where the embedded power of the trade unions and the Labour Party made it practically impossible to reform these industries until it was far too late. Outdated, uneconomic mines and steelworks were kept alive for years by ever-increasing subsidies until their eventual, disorderly collapse.
So the lesson to be learned here is that when the world is changing, maintaining the old order via government subsidies is absolutely the wrong thing to do. Instead, the market must be allowed to operate in order to re-shape the economy for the new realities. There is a real danger, however, that the Westminster government’s current approach of subsidising employers first and foremost will unintentionally repeat the mistakes of the 1960s and 70s.
What should be done instead?
Fresh thinking, not wishful thinking
The lesson that shines through from the successful transitions of Luxembourg and Limburg are that if government subsidies are to be paid at all during a time of transition, then it is better to pay them direct to people rather than to their employers. Doing so gives people the flexibility to seek new opportunities or to start up ventures of their own, rather than being tied to their employers and perhaps, ultimately, going down with them.
It gives individuals more autonomy and so enables the market to operate more efficiently, drawing on ‘the wisdom of crowds’ rather than top-down government economic planning to regenerate regions and industries.
It also gives companies, relieved of the social responsibility of employing people whether the business needs them or not, the freedom to adapt their businesses rapidly to changing circumstances and to modernise, thereby maximising their chances of surviving and prospering in future.
The astute reader will have noticed that, if this line of argument is followed to its logical conclusion, then it results in a Universal Basic Income (UBI). The Centre for Welsh Studies, of which I’m also a member, has argued eloquently against this idea – especially in the form that it’s usually espoused by the political Left, as an add-on to the current tax and benefit system, and with its overall objective being the redistribution of wealth.
But here at Gwlad we have a different approach. We believe that a basic income – we prefer the term “Citizens’ Income” – when combined with a Flat Tax (i.e. one paid at the same flat rate on all income regardless of source, and with no tiered thresholds) can be made affordable. Indeed, we find that there are combinations of income level and tax rate that give overall net tax rates very close to those in force today (i.e. within a percent or so over most of the income range). Such an arrangement would not be at all redistributive, and is entirely consistent with a fiscally responsible, low-tax and free-markets view of the world.
Yet we believe that by getting rid of most if not all of the kinks and traps that currently prevent people from taking up or changing employment – or that keep them tied to failing businesses, when they could be moving on to better opportunities in new industries – it would free up the labour market and give the wider economy a significant boost.
We think that this approach would be better than the current furlough arrangements over the UK as a whole; but we’d particularly like to see it rolled out in Wales. Here in Wales we’ve suffered more than anywhere else in these islands from the effects of misguided industrial subsidy, top-down economic planning and suppression of the market by people who think they know better. It would be fitting that we should lead the way in showing how a blighted economy can be rebuilt by lifting the dead hand of government planning and unleashing the force of the market.
We hope that, in the short term, Rishi Sunak doesn’t unwittingly repeat the mistakes of the Harold Wilson and James Callaghan governments, from which Wales hasn’t fully recovered to this day. But in the medium term, nothing is more important for the future of Wales than breaking the stranglehold of the Labour Party over its national life, and over the Senedd in particular, and charting a different course.
In our view, at Gwlad, that course should ultimately lead to independence: but independence based on a flourishing free market economy run on conservative principles.