By JP Floru.

Lord Heseltine proposes to shift £49 billion from national to local government to encourage investment and growth.  His report No Stones Unturned is a classic tale of “government knows best”: of politicians taking economic decisions about which they know little; and of a belief that local politicians are somehow better suited at this than national ones.  The report further fails to appreciate that the £49 billion came from taxes on healthy companies – which can therefore invest £49 billion less.

According to the report, people think that the UK does not have a strategy for growth.  The veracity of this attack on the government is debatable; it has already been welcomed by the Labour Party.  I, for one, think the spending cuts and the deficit reduction are a good start.  

More to the point is what is understood by a “strategy”. There are two ways of interpreting the word.  Heseltine aims for a government-steered, political can-do attitude; a bit like Roosevelt’s New Deal.  Politicians chair Growth Councils; infrastructure projects are pushed forward; politicians sit around the table with businessmen and tell the latter how they should create growth.  It was tried during the Great Depression in the United States, and in the 1960s and 1970s in Britain – periods which did not exactly illustrate success.

There is an alternative.  A growth strategy can consist of … not having one.  This revolutionary, novel idea would leave people free to decide where they invest, or don’t.  A bit like during the industrial revolution, Britain’s longest economic boom period ever.  People know their individual situations best, and are therefore much better placed than politicians to decide on investments to create growth.  Hayek called this “The Knowledge Problem”: Politicians can never have all the individuals’ knowledge – and that is why political investments usually end in tears. Moreover, if people take the wrong decisions, the consequences are less catastrophic than when central or local governments make mistakes.

Lord Heseltine’s report contains three further fallacies.  The first is the belief that investment by local government is somehow more likely to create growth than investment by the national government.  Governments of all levels invest by “picking winners”: politicians doling out subsidies to those they deem worthy of receiving them.  There is a long history of governments picking losers instead.  Individuals base their investment decisions on the highest potential return.  Politicians supplant the profit motive by political motives.  Typically this includes subsidies to one’s constituency; one’s backers; and to the politician’s vanity and pet projects.  An individual seeks growth; politicians seek votes.  At local level, politicians’ investment decisions are probably even worse than at national level: the decisions are less in the public eye; and the politicians are sometimes of a lesser calibre.  

The second fallacy is the behemoth of infrastructure projects.  Large infrastructure projects take years to come to fruition; and are therefore unsuitable to fight current economic woes.  They are also insufficient to create growth.  I recently enjoyed miles of all-singing-and-dancing stretches of empty motorways in Portugal.  Paid for by Europe.  One can see the same in Greece and Spain.  Billions of investment …yet no growth.  One does not set up a factory in the jungle because there is a road leading to it.

The third (and most important) fallacy is the apparent belief, shared by socialists the world over, that money grows on trees.  Lord Heseltine tells us to turn over stones, but does not tell us where they came from in the first place.  Did they fall like manna from heaven?  The £49 billion “investment money” comes from thriving taxpayers.  Healthy companies pay tax; and the government re-distributes it to the “winners” it picks.  In other words, the taxes mean that thriving private companies have £49 billion less to invest.  A phenomenon famously described by the French (!) politician (!) Frédéric Bastiat in his pamphlet That Which is Seen, and That Which is Not Seen (1850).

Why not leave wealth creation to those who know how to do it?