22 July 2013

Economic Policy or Business Policy

A story in today's FT illustrates something I have been thinking about recently. Policies which are good for business are not normally good for the economy. Too often governments present their business friendly measures as boosting the economy. Policies to promote business usually serve the interests of the incumbents. The upstarts and the new businesses which economy friendly policies would encourage have no voice, because they don't yet exist.

The Economist newspaper understands this distinction, although it tends to couch the argument in free market terms. Governments, it argues, should promote competitive markets; businesses prefer markets distorted to give them the sort of advantage that allows them to collect extraordinary profit.

Today's story concerns a falling out between the telecoms industry and Neelie Kroes, the European commissioner trying to update telecoms regulation.
Chief executives from some of the biggest telecoms groups in Europe will meet Ms Kroes today to give their views with Etno, the trade body for the incumbent operators.
Ms Kroes wants to end roaming charges in the EU (an obvious single market measure) and make changes to the way network operators sell space to other phone companies. The industry is furious. I should say "the corporations who benefit from the current arrangement are having a tantrum." They claim that without the profits the current setup provides they will not be able to pay for investment in new generation networks.

(A economist would point out that it is not current profits which incentivise investment but the prospect of future profits as a return on the investment. The source of finance for the investment - retained earnings, new equity or borrowing - is irrelevant. If the incumbents don't want to do it they should move over. New entrants will make the investment and reap the reward.)

What caught my eye was this comment by an unnamed EU official:
"One of the things that is very hard for us to illustrate is that this package will be helpful for thousands of companies that don’t exist yet – even will help them come into existence."
Ms Kroes was particularly blunt:
“There are several stages of grief – from denial to anger to bargaining to acceptance. That applies equally to a person facing a divorce or a company facing the loss of a cash cow," Ms Kroes told the FT. “What will improve investment are measures to improve wholesale price stability and regulatory certainty and measures to remove single market barriers.” 
Neelie Kroes gets the difference between a policy for business and a policy for the economy.

My reasons for thinking about the subject have more to do with British politics. The Conservatives are firmly in the camp of business friendly policies. This should open an opportunity for Labour to position itself as pro-economy not pro-incumbent. Sadly it seems that this opportunity is being missed. I would argue, for example, that the BIS department should become the department for economic development. I favour a dynamic economy of change, challenging the monopoly power of incumbents, removing barriers to entry, facilitating the access of upstarts and mavericks and increasing consumer power in the market.

If a Dutch liberal can get it, can't Labour?