‘He’s one
of the best’: the economist shaping Rachel Reeves’s growth plans
John Van
Reenen believes he can help Labour solve the ‘peculiar British problem’ of
chronically weak productivity
Heather
Stewart
Heather
Stewart Economics editor
Fri 17 Jan
2025 14.13 CET
The
economist John Van Reenen lacks the public status of Gordon Brown’s “two Eds” –
Balls and Miliband – who ranged across Whitehall in New Labour’s first term,
enforcing the Treasury’s will. But ask today’s Labour apparatchiks about Rachel
Reeves’s approach to growth, which she will set out in a speech later this
month, and they often point to the chair of her council of economic advisers.
Currently on
leave from the London School of Economics (LSE), where he ran the Centre for
Economic Performance, Van Reenen has spent his professional lifetime probing
the weak spots of the UK economy.
Now he is
based in an office next to Reeves’s at the Treasury, with his three fellow
advisers. One Labour source says they struggle to remember a consequential
meeting at which Van Reenen has not been present. Another identifies him as a
critical figure in this summer’s spending review.
Tall,
affable and whip-smart, he did a four-year stint at the Massachusetts Institute
of Technology in the US, where he remains a “digital fellow”, has published
more than 100 academic papers and comes highly recommended by colleagues.
“If you were
going to choose somebody to advise the chancellor and the Treasury on a
strategy for growth, John would almost certainly be your number one candidate,”
says Prof Jonathan Portes of King’s College London, who co-authored a paper
with Van Reenen in 2012 attacking the coalition government’s austerity
policies.
Mike
Emmerich, the chair of the consultancy Metro Dynamics and a key figure in the
economic regeneration of Manchester, says: “It’s a sign the Treasury still has
the ability to get good people. He’s definitely one of the best economists of
his kind anywhere.”
Much of Van
Reenen’s published work focuses on identifying the factors behind the UK’s
chronically weak productivity growth, which has never recovered to levels seen
before the 2008 financial crisis. This is precisely the problem Labour must
solve if it wants to create the stronger economic growth it has promised.
Prof Wendy
Carlin of University College London, who has collaborated with Van Reenen, says
the longstanding lack of investment in the UK, which has tended to lag behind
similar economies, is at the heart of the problem.
“The focus
of John’s diagnosis, and I agree with it, is that the peculiar British problem
is low investment – low capital accumulation,” she says. “So you can say: ‘What
is it that makes companies unwilling to commit to capital investment in the
UK?’”
Part of the
answer is what she calls the “self-inflicted, UK-specific policy mistakes” of
sustained austerity under the Conservative-led coalition and Brexit.
Van Reenen
co-authored a paper on wage inequality in UK firms, published last year, that
called for the UK to rejoin the EU single market, “as an effective spur to
competition and productivity”. The authors added that if this was ruled out
because of “political constraints” then the government should seek to reduce
trade frictions to the absolute minimum.
Given
Labour’s rejection of free movement, it is the latter approach ministers are
pursuing, with Reeves leading the charge through a recent speech in Brussels.
Increasing
public sector investment, including in the new technologies needed to achieve
the transition away from fossil fuels, is another element of Van Reenen’s
worldview (as it is for his fellow economic adviser, Anna Valero, also of LSE).
This is one
of the areas where Labour has been most active in power, under Ed Miliband –
though in scale it is a fraction of the £28bn a year “green prosperity plan”
Reeves once promised.
Prompting
the private sector to invest more is another aspect of Van Reenen’s
prescription – borne out in changes to planning and plans aimed at ensuring
pension funds direct more capital to UK projects.
While Labour
rarely spells it out for fear of being seen to applaud job losses, there is
also a hope that a higher minimum wage, better workers’ rights and even the
£25bn rise in national insurance contributions (NICs) will incentivise
companies to invest more in productivity-enhancing technology, rather than
relying on low-cost workers.
Some
retailers have said they will accelerate automation as a result of higher
labour costs, for example. At a recent meeting with Reeves, where a business
leader warned they would have to use more artificial intelligence and
computerisation as a result of the NICs rise, her response was along the lines
of: “Let me know when there’s a problem,” according to one person present.
Another
aspect of the UK’s economic malaise that Van Reenen has studied closely is poor
management. With the economist Nick Bloom, who is from the UK but based at
Stanford, he published work on management quality at different kinds of
companies – finding, for example, that multinationals tend to be better run,
and family firms take a dive when they hand over to the second generation
(especially the eldest son).
Van Reenen
told a 2020 podcast hosted by the innovation agency Nesta that he thought
perhaps 40-45% of the productivity gap between the UK and US may be explained
by these management differences.
“This is
where politics and economics bump up against each other,” says Portes, pointing
out that, in a thriving economy, poorly run businesses will fail, to be
replaced by more productive ones.
Van Reenen
co-edited a book on the idea of “creative destruction” developed by the
20th-century Austrian economist Joseph Schumpeter, to describe this process of
unproductive companies being swept away by innovative new ones.
As he put it
in a 2023 article about the book: “Entrepreneurial new entrants generate new
jobs and sources of wealth – a light side. But the dark side of innovation is
that it is also destructive – these new ideas make old ones obsolete, and in
the process, incumbent older firms go bankrupt and workers lose their jobs.”
On this view
of the world, a successful economy is a dynamic economy, but also a dog-eat-dog
one, where only more productive companies survive. That helps to explain Reeves
hauling in regulators this week and urging them to show what they are doing to
increase competition – and thereby support economic growth.
Given how
heavily this approach to growth relies on private sector investment, the
pessimistic mood that has hung over the economy in the past six months has been
unhelpful.
And some
Labour insiders with long memories warn that shaking up the notoriously
cautious Treasury and rolling out Reeves’s plans across Whitehall will be too
much for Van Reenen and his three fellow economic advisers. “If I added up all
the people Gordon had working in the Treasury, it would add up to more than
four,” says one.
But Portes
says that, contrary to much recent criticism, there is a coherence to much of
what the new government has done, which aligns with Van Reenen’s work – it just
may not amount to one big idea. “There is no one answer,” Portes says. “There
is really no substitute for doing lots of things, somewhat better.”
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