Trickle down and out, time for trickle up!

Unemployment on the increase, poverty growing, local economies in melt down.  I am tired of hearing the descriptions, and disappointed by the lack of real policy action.  In particular, I am disappointed by ongoing orthodoxies in economic development, which are hampering new thinking as regards addressing unemployment. With Local Enterprise Partnerships (LEPs) in particular, there is too much of a focus on austerity, trickle down and supply-side economics, when they should be thinking about trickle up and stimulating local demand.

Its time economic development stepped up to the mark.

I know it is difficult times for economic development.  The abolition of the Regional Development Agencies, and a drop in significant regeneration and area based funding, has seen a loss of institutional heft and resources.  Nevertheless, we do have a growing Economic Localism and freedom to do more locally.  Even if economic localism proves to be a false dawn, we should be testing how far BIS and the Treasury are prepared to go.  After all, what is the point of economic localism anyway, if it can’t tackle unemployment or link economic activity with social need.  So we should not rely on singular approaches or tired economic development orthodoxies.

I tried to expose these orthodoxies a few months ago when I described a growing approach to economic development as being ‘voodoo’.  We’ve all heard the voodoo argument, in some guise and has trickle down economics at its heart.  It’s simple in its logic and ludicrous in how far its taking hold in prevailing austerity and economic development thinking.  It goes like this.  Let’s grow our economy and address unemployment by focusing on increasing supply of goods and services.  So let’s lower taxes (like business rates), remove barriers and regulations (including employment restrictions), and create a more ‘flexible’ workforce.  Getting rid of these barriers will mean businesses will produce more, and the market will get more goods and services, which will induce lower prices, as companies increasingly compete for business.  These cheaper prices, will result in people buying more, there will be an increase in tax revenues, and an increase in employment as demand for products goes up.  Hoorah!  Socially- a ‘rising tide will lift all boats’.

However, whilst supply side thinking has some merit, it ain’t enough.  It will not solve the deep systemic problems of unemployment on its own.  There is a paralysis in the logic of supply, driving by austerity and fear.  In the austere economic world we are in, businesses are reluctant to invest in producing more stuff, they are risk averse, fearful that people may not want it.  Even when there is some growth, businesses are wary of taking on staff and being exposed to the potential cost burdens.  So supply side thinking may not bring growth or tackling unemployment.  We need to do something about demand.  We must hone in on policies which focus on increasing local spending power and stimulating demand for local goods and services.

So that is why LEPs, working with businesses, must start looking at local living wage, an hourly rate, above the minimum wage, which is the minimum pay rate required for a worker to provide their family with the essentials of life.  Furthermore, local wage subsidies, are vital in ensuring local demand is supported.  This is also why LEPs and economic development practitioners, need to get behind the Liberal Democrat policy and Deputy Prime Minister, Nick Cleggs’ proposal to substantially increase the personal allowance (the amount of money everyone can earn before having to pay tax), to £10,000.  This would remove many low earners from the income tax system altogether and significantly ease the tax burden on those whose incomes are not much greater.

All of this demand side activity, works on the basis that the poorest have a higher propensity to consume.  That is they will spend a higher proportion of their income.  Importantly they are also more likely to spend their wages on local goods and services (no tax havens for them, or weekend trips to Dubai!).  This is a stimulus.  With more demand comes more spending, comes more profit, comes the need for more staff.  This is classic trickle up, because the benefits for the poor also trickle up to the business owners.

It is now clear, that we will not tackle unemployment and grow our local economies through supply side ideas and trickle down.  Austerity is compounding the problem and many areas are spiralling rapidly downward.  LEPs and economic development practitioners must step up to the mark and advocate and introduce local demand policies.  Trickle up is the future.