Products matter

Summary

• Europe wants more growth
• There’s no blueprint for success
• The product range may hold the key

Away from my day job, I have been involved for the last ten years or so with economic development in South East Wales, where I grew up. Most of the time I'm offering macro perspective to my regional colleagues, but the regional experience can sometimes inform the day job. The current European growth debate is a case in point. The lesson? Products matter.

Governments across the continent – including the UK's – want more growth. Bigger economies boost living standards, reduce social tensions and generally make for less unhappy voters.

It has to be the right sort, of course. We don't want growth which pollutes, benefits only a lucky few, or contributes to a hotter planet (in South East Wales, we aim for a regional economy which is 'bigger, fairer and greener'). Nor do we want a brief uplift followed by slowdown or even reversal – a short party followed by a hangover.

But economies which produce, on a lasting basis, more of what we want, and do so inclusively and sustainably, are the ultimate aim of economics ministries across Europe – and are promised by many of them.

The problem is that there is no blueprint for delivering it. We know that certain things are essential: inputs, or what we used to call 'factors of production', such as natural resources, labour, capital, technology, institutional infrastructure (such as a legal system and a role for markets). But these necessities don't seem to be sufficient.

What else might there be? The conventional macroeconomic debate is framed almost entirely in terms of the demand side of the economy and its drivers: consumer spending, for example, and real wages and interest rates. If we can get demand growing, the argument goes, then provided you have enough of those inputs, growth may follow.

Unfortunately, this sort of approach can end up being circular. For sure, if real wages grow faster, so too will spending. But where will those wage gains come from if there is no spending to start with?

Meanwhile, the output side of the economy is overlooked. When did you last hear a national politician, or even an economic broadcast, discuss what goods and services are being produced and why?

Maybe this is because, as economic statisticians like to remind us, total spending, total incomes and total output each add up to the same amount. If you've spent a lot of time building your national accounts around spending and income, perhaps influenced by a 'defunct economist', why bother with a third viewpoint? (We could call output the 'supply side', but that phrase is associated with policies focusing on incentives, usually tax cuts for the better paid – 'supply' here being the supply of labour, not output).

By neglecting output, however, we are likely missing a trick. Not because it can grow at a difference pace to spending and incomes, but because often the nature of output itself – what it is that we're making and consuming – is what drives that pace. The evolving product cycle can be a source of growth.

Ironically, this is especially visible now. Even as Europe frets about its lacklustre growth, we're watching, on the other side of the Atlantic, an exuberant stock market toasting breakthroughs in Artificial Intelligence, and a US economy again growing more briskly than ours as it invests in them.

Now, as we note elsewhere, we do have some misgivings about the scale of the AI surge. Expectations of what it can do, and soon, for wider business productivity, look rather naïve. And just as tax cuts or government spending can give an economy (and stock market) a sugar rush, so too can over-ambitious momentum-driven investment.

But the AI surge is only the latest episode in which US technology has led the product cycle. Arguably, for a century or so it's been not so much a case of the US satisfying consumer demand, as creating that demand to begin with – whether for consumer appliances, mass transportation and entertainment, personal computing, mobile telecommunications, digital media, a virtual world or whatever it is that will come next.

In regional development, products have to be a key focus. In South East Wales we may not compete directly with the US titans – though we do sell compound semiconductors to the world, cyber security to California, sustainable cups to a global coffee-shop chain – but we can try to reinforce clusters of local success.

Having a product-minded approach still leaves room for a government role (and not just as a provider of finance). The US' success in key sectors – including the development of the internet and today's technology boom – owes a lot to active but targeted government support (such as the activities of its fabled 'Advanced Research Projects Agency', ARPA, launched in 1958). Free enterprise matters hugely, but it is far from the whole story.

The good news is that Europe may now 'get it'. Last year's Draghi report for the EU, and this year's 'Modern Industrial Policy' in the UK, at last show an interest in what we make and sell, and perhaps a willingness to intervene in a targeted fashion. Europe may have missed the early IT boats, but there is surely room to innovate and invent – in the energy transition, defence procurement, cyber security, financial services (not necessarily crypto…) and elsewhere. What we make matters more than what we spend or owe.

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