New shocks and old sins: economic adjustment in the age of automation and Brexit

Gavin Kelly - Chief Executive of the Resolution Trust & member of SPERI's International Advisory Board

It shouldn’t be too hard, you might think, to reason our way towards a clear answer. We’ve got statistics and studies a plenty, it’s just that our tendency is to isolate issues rather than look at them in the round. Want to know who wins or loses from a specific tax or benefit change? Analysts can arm you with a chart. Ask about the regional breakdown of public spending and a spreadsheet will be found. Interested in the types of worker who do, and don’t, get training in contemporary Britain? Fine. But attempt to divine the mix of policy ingredients that help workers and their local economies ride out inevitable economic bumps and bashes? That’s difficult.

That the answer to this question feels shaky matters. It might, for instance, help explain why workers in some advanced nations face the future with great anxiety, while others appear to do so with a degree of resilience. More to the point, knowing the answer would help us prepare for the shock next time. New economic jolts will always occur, even if the form they take is never exactly the same over time. And we’ve learnt the hard way that when we fail to adequately help those affected both they — and the rest of us — pay a heavy price stretching over decades.

Our understanding of how places adjust has come a long way. Cast back and the prevailing mid-20th century economic mind-set was that, over the long-run, adjustment should mostly take care of itself. Workers would move to growth-areas and capital would flow into cheaper regions with spare resources — often expedited by government incentives. Eventually, the argument ran, the tendency towards self-correction would prevail.

For a while this story had at least a ring of plausibility. In the US for much of the 20th Century there was a great convergence as the gap between rich and poor states steadily declined. In the UK, too, there was a fall in the gap between typical incomes across different regions through the 1960s up until 1980. Any underlying dynamic towards convergence broke down in both nations when deindustrialisation hit with a vengeance. Areas hit by structural change in the late 1970s and 1980s struggled to get back on their feet, while those that had already started to adapt to knowledge based services kept moving ahead. In the UK there was a particularly sharp spike in measures of regional inequality, which then fell somewhat after the 1980s, but remains very high compared to other countries. In the US, divergence is the new normal.

Contrary to the traditional story of adjustment, workers proved to be ‘stickier’ than expected: falls in employment in depressed areas of the UK often surpassed declines in the local population levels. In the 1980s unemployment, and particularly the scandal of mass economic inactivity, took the strain. Deindustrialisation cast a shadow not just over the Thatcher era but through the 1990s and into the 2000s — it conditions political identities and attitudes today (not least on Brexit).

Part of the animating social purpose of the early Blair years was to seek to respond to the shocks of the 1980s and improve the plight of struggling post-industrial communities. Yet by the time it was established in power a new wave of economic disruption was breaking in the form of the ‘China shock’ (when it joined the WTO), reinforced soon after in some communities by the opening up to competition from A8 countries. While there were clear benefits from this liberalisation of trade, a little noted recent study by NIESR, replicating seminal US research by David Autor and colleagues, illuminates how these developments greatly accelerated the ongoing shakeout of manufacturing in the UK. Specifically, it pin-points the communities that were hit hard: places like Hawick, Greenock, Bridgend, Telford and the Wirral to name a few. The overall impact is estimated to be broadly commensurate with that experienced in America — accounting for between a fifth and a third of all manufacturing jobs lost in the UK between 2000 and 2015 (a parity that isn’t reflected in the slice of national conversation dedicated to the issue).

Trade was only one part of the story. Over the same period we learnt more about the ongoing impact of economic shocks arising from technological innovation and how they vary across different types of local economy. Areas with a slacker jobs market, more intermediate skills, and greater specialisation in particular sectors were more vulnerable and paid a bigger price in terms of employment.

We’ve also gleaned more insight into how adjustment does or doesn’t work. On the one hand, new research has also shown that workers have become less, not more, geographically mobile since the 1990s. In the UK, that decline has occurred despite the fact we’ve seen wider shifts that should, all else equal, boost mobility (more graduates, renters and migrants). In the US, the same trend is evident and is particularly dramatic among the young.

But we’ve also witnessed places making successful transitions. A favourite example is the ‘renaissance’ of some of our main cities outside London. Improvements have been put down to a multiplicity of factors: the physical transformation of city centres and expansion of universities and associated spin-offs (as Senator Daniel Moynihan once quipped: “If you want to build a great city, create a great university and wait 200 years”). Others highlight the emergence of vibrant cultural quarters, an influx of foreign students and labour, greater connectivity via regional airports and, more recently, new forms of visible city leadership. For a multiplicity of reasons civic self-belief replaced self-doubt.

Yet a balanced account must recognise underlying weaknesses alongside this rejuvenation. Creaking public transport systems within cities are matched by woeful links to overlooked hinterland towns as well as to other urban centres. What should be expansive travel-to-work areas are too often splintered into narrow jobs markets shrinking the already limited options available to workers. Add to this weak R&D, entrenched under-performance in schools in many urban areas, and still under-powered city authorities (despite recent devolution), and the contrast with the London story sharpens. Our cities may be a magnet for the young and well-educated, but they typically remain less productive than the nation at large (London and the M4 corridor apart). The ‘success’ story is real but partial — it also serves to remind us quite how weak some cities had become and the extraordinary extent to which the capital continues to dominate.

How this recent history is likely to relate to shocks coming down the track is a moot point. There is certainly much to learn from recent experience, but the past won’t be repeating itself. The stand out shift in global trade since the millennia — the China shock — has occurred. When the next generation of rising economies enters the global trading system there may be reverberations, just far smaller ones. Automation will bring new challenges for millions of workers (even if claims of mass robot-induced redundancy are flaky and far-fetched). What’s more, the geography of industrial concentration in Britain has changed. Notwithstanding the importance of specialised clusters, fewer local economies are now at the mercy of a single industry: there are just seven local authorities in which one industry accounts for more than a fifth of employment (mostly big university towns).

How the shocks of the next decade will reshape the economic geography of Britain is a question gaining more attention. Important new analysis argues that, assuming automation bites hardest in routine occupations, post-industrial towns in the north and midlands will see their existing problems compounded as they will be disproportionately affected by any threat to low-paid jobs in retail, call centres and warehouses. Others suggest, however, that over the medium term it could be mid and high level services, where the potential savings from labour costs are greater, that might be most exposed.

And then there is Brexit. While other nations are increasingly focussed on preparing for the age of automation and ageing our policy-makers, uniquely, are overwhelmed with the task of unpicking our settled trading and regulatory order with our most important economic partner. Again, the geography of the resulting dislocation is unclear. Some prominent economists argue that exiting the single market will be most damaging for the more service-intensive south of England. Others claim that former industrial regions will be hardest hit.

Uncertainty over the nature of the regional and sectoral footprint of economic shocks, let alone the precise policy stances that will best underpin successful 21st century adjustment, can reinforce a sense of policy-passivity. But we can do better than bemoan what we don’t know: some things should be clear.

To state the obvious, the legacy of deindustrialisation and entrenched regional inequalities, reinforced by the hugely skewed geography of austerity, won’t fade away anytime soon. Whatever new shocks come along we can’t overlook the consequences of the old ones — they should be a priority, not least in periods of growth. We also know, more positively, that, in one crucial respect, the UK is well positioned: our jobs market not only generates high levels of employment, but does so across nearly all of the UK’s nations and regions. A real achievement.

We’ve also, though, got a pretty clear sense of where we’re heading in the wrong direction. Rather than crafting a solid safety-net that helps workers ride out economic change while offering proactive support to those people — especially the young — seeking to move to new jobs, our welfare system is ever weaker and patchier. Rather than elevating workplace training and universal life-long learning to a national priority — and in doing so disproportionately benefitting communities with the highest concentration of low-skilled workers — adult skills and FE colleges are sporadically invoked in rhetoric while steadily cut in reality. (Though if anyone is feeling giddy about the potency of ‘retraining’ to serve as a catch-all way of reversing the fortunes of, say, displaced manufacturing workers they’d do well to sober up by reading Amy Goldstein’s Janesville). And rather than embracing the glaring opportunity of the era of near-zero interest rates to create what has been dubbed ‘universal basic infrastructure’ — creating a vital form of economic and social insurance for overlooked communities — the UK has perpetuated its longstanding record of underinvestment (though the government now says it plans a significant rise). Retrenchment can all too often be the enemy of economic dynamism.

The consequences of old shocks are still playing out in our communities while new ones come into view. More people and places will need help riding them out. Our already sour politics could become more bitter yet if new economic dislocation deepens problems that originated a generation or more ago. Those of us who still believe in embracing new technology and open trade need to think far more ambitiously than in the past about what it takes to support adjustment. Not as an afterthought but in advance of the waves breaking. Success or failure in this regard will shape not just the economics, but also the politics, of the post-Brexit era.

This article was first published on Gavin Kelly’s website and is republished here with permission. The author writes in a personal capacity.