Larry Elliott, regional policy and crowding out

I think this is rather cute really.

Fourth, reform of the banking sector is needed to prevent finance \”crowding out\” the other sectors of the economy. For manufacturing to become relatively stronger, the City needs to become relatively weaker, but that won\’t happen if the response to the financial crisis is pusillanimous.

So, we\’ve an agreement that crowding out can happen, is indeed potentially a problem.

To be sure, the coalition\’s austerity programme will bite more deeply in Wallsend than in Woking because state spending accounts for well over half the output of regions such as Wales and the north-east, and job creation in the decade up until the financial crisis was driven by increased investment in schools, universities and the NHS.

OK.

The same three northern regions have also seen a bigger decline in new business start-ups since 2004, an 18.8% drop as opposed to 16.6% for the UK as a whole. London has the highest rate of business start-ups of any region in the UK (11 per every 1,000 members of the adult population in 2009), while the north-east (5.7), the north-west (7.6) and Yorkshire and Humberside (7.1) are all below the UK average (7.9).

Erm, wouldn\’t it be interesting to at least consider the possibility that what\’s happening to those government dependent regions is crowding out?

Finance is some 8, 9% of the economy. The bit that everyone whines about, The City (ie, wholesale and international finance) is about 4%. Manufacturing is around 13 to 14%.

So, if 4% is crowding out 14%, shouldn\’t we at least consider the idea that \”well over half\” (in fact, in some areas, 70-75%) is crowding out the private sector?

No?

5 thoughts on “Larry Elliott, regional policy and crowding out”

  1. Also there are two sides to crowding out:

    1) the sector doing the crowding does the same thing as those other sectors it is crowding out – this is what happens when the public sector starts doing (or subsidising things) that the private sector would typically do. It is very difficult to claim that the finance sector is doing this type of crowding out…

    2) the sector doing the crowding out attracts capital that could instead have been used in another sector. Again, it is very difficult to claim that finance is doing this as it creates capital for these other sectors

  2. ‘Crowding out’ can also involve the supply of suitable labour in a region. With its salaries and benefits, the public sector soaks up talent. An engineering graduate might well prefer to be an Assistant Chief Strategic Outreach Policy Advisor (£50k + generous holidays and pension + flexitime) with the local Council than take her chance with a local manufacturer.

  3. Yes, and standardised national pay levels in the public sector mean that the crowding-out effect on labour is even greater in poorer areas, which would normally have lower wages.

    If the politicians won’t slash the public sector, they at least need to break it up and really end national pay bargaining.

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