More savings increase real economic growth, not higher aggregate demand. After all you need to produce stuff before you can have any demand for it in the first place.

“1. What policy levers – other than bog-standard fiscal expansion – are there that could transfer incomes to the low-paid?”

Would cutting Corporation Tax and increasing the Minimum Wage help?

Your argument boils down to a case from a single time series when what you really need is panel data: http://www.econlib.org/library/Columns/y2010/Sumnerneoliberalism.html

In other words, you need to have some idea what might have happened had Thatcher NOT engaged in labour market reforms, not what happened after those reforms. It might turn out that those reforms were necessary but not sufficient for long term growth.

I could suggest something like a weldon/thatcher combo though which might help. Flexible labour markets plus cash transfers to those on low incomes (but not through state wage controls, just top up low wages out of taxation, or through a basic income grant).

Yes let the tax-payer fund private business, this is pure Thatcherism, it’s just a shame that there aren’t that many publically-owned, taxpayer financed industries left to sell-off. Oh, but wait a minute, what about the NHS?

There is a few things missing from this article that would help to explain why investment has fallen. Services require a lower level of fixed capital investment, which is why services return a higher rate on capital invested than manufacturing returns. As services have grown and manufacturing as a share of GDP has declined the required level of investment has also declined.

I think there is a danger of confusing nominal wages with real wages. The success of the central banks over the last twenty years in driving down inflation expectations has come at the cost of holding down workers nominal wages. However, workers have benefited in terms of the purchasing power of their real wage. Workers is probably too generic a term as low inflation expectations has not affected all equally. Low inflation expectations have probably affected negatively those at the bottom in terms of nominal and real wages. It would benefit the economy and workers if the central bank abandoned inflation targets altogether and targeted NGDP. Inflation is a meaningless concept that has such negative connotations now that people freak out at the thought of higher inflation expectations being good for them. Sell NGDP targeting to the public as targeting higher incomes and all the negative connotations go away.

There is no compulsion to invest in Britain, it’s as easy to invest from Britain in Canada and Chile as it is in Carlisle. For multiple reasons there are just some things that are not profitable to do in Britain. Higher investment will not just happen. The government could improve things on the supply side by investing themselves in the universities. Moreover, there are lots of tax incentives that they could offer to encourage new investment.

Fiscal expansion through transfer payments to the low-paid tends to only raise consumption and there is no guarantee that it would raise the productive capacity of the economy. Lefties are resistant to this idea but cutting business taxes will also raise incomes for the low-paid.

[5] Some good points there, Richard, to which I hope Chris will reply. In the meantime (and because quoting oneself is such a wicked pleasure) here is a (partial) cross-post from something I wrote on Labour Uncut last night:

the big change economically seems to me to be the global labour market, in which Brits can only compete in the financial services industry and those jobs which can’t be globalised (e.g. transport, personal services). Tory Mayor Boris Johnson reckons the London living wage to be £8.30/hr – I would estimate that as approximately ten times the global rate for semi-skilled manual work.

It’s probably true that a Beveridge-style safety net is never going to be affordable again, given the lock the global banking system has over fiscal policy. It’s pretty much a given that over the next few years income inequalities will rise to Brazilian levels, and it may well be an even bet that life expectancy will start to fall, as it has in Russia.

@1: “More savings increase real economic growth, not higher aggregate demand. After all you need to produce stuff before you can have any demand for it in the first place.”

Says Laws rides again despite Keynes’s lethal lance.

The trouble is many services can only be consumed at the very time the services are provided – manicures, gardening, and retailing can’t be stored. About three-quarters of Britain GDP comes from services nowadays – manufacturing is now down to about 12% of GDP.

What happens if I as a manicurist decide to put aside £500 from my annual income?

That means the incomes of others folks – here or abroad – will be lower by that amount unless someone else decides to invest an extra £500 to make up the gap. What ensures that will happen? The old story was that interest rates would change unless someone invested that extra £500. But suppose that will only happen if interest rates go negative – when nominal interest rates can’t fall below zero? The fact is that the acts of saving and investment are usually made by different people and income adjusts so that actual saving is identically equal to actual investment.

@6

Interesting point – the question is will the majority of people who are going to be forced to lower their life and lifestyle expectations in order to meet the goals of the global banking industry go down without doing something about it? We’re talking about an unelected global body with unprecedented power basically writing off a significant chunk of the world’s population here.

If the UN had made a blunder that affected people on a global scale in the way that the failure of the banking system did, we’d see the world’s press clamouring for a clearout at the top – or the dissolution – of the entire body. Yet less than 2 years later we’re seeing a press that looks the other way with bankers crowing that “bonuses are back, baby!” and Osborne declaring the financial sector basically sound and no changes need to be made. The double standard involved is flabberghasting.

@7

The point is that to the people making the choices, anyone making less than, say, six figures a year basically doesn’t count as an economic unit and are left to fend for themselves. This is the result of at least 3 decades of a global financial system that openly subscribes to the theories of Ayn Rand, and their enablers in government.

@8: “The point is that to the people making the choices, anyone making less than, say, six figures a year basically doesn’t count as an economic unit and are left to fend for themselves. This is the result of at least 3 decades of a global financial system that openly subscribes to the theories of Ayn Rand, and their enablers in government.”

I agree that’s where we have got to except that I don’t blame Ayn Rand for the inspiration: “Almost four-fifths of the new cabinet are millionaires, according to an analysis by The Sunday Times. As the government prepares to wield the axe on public spending, research reveals that 18 of the 23 full-time cabinet members have seven-figure fortunes, collectively worth about £50m.”
http://www.timesonline.co.uk/tol/news/politics/article7133943.ece

Alistair Darling’s modest fiscal (keynesian) measures, announced in his PBR of November 2008 to boost Britain’s economy out of recession, were promptly denounced by the Conservatives less than two months later – long before the data were available for a technical diagnosis of whether the measures were working:

“‘The government’s attempts to boost the economy by temporarily cutting VAT have been an ‘unbelievable and expensive failure’, David Cameron has said.” [2 January 2009]
http://news.bbc.co.uk/1/hi/uk_politics/7808634.stm

?The Centre for Economics and Business Research (CEBR) says that the cut, which took effect on 1 December 2008, has led to £2.1bn of extra sales.? [12 April 2009]
http://news.bbc.co.uk/1/hi/business/7995850.stm

@9

I’m going back beyond the current shower, and across the pond – to the late ’70s and early ’80s when Rand disciples like Alan Greenspan got their hands on the levers of the Federal Reserve:

http://www.nytimes.com/2007/09/15/business/15atlas.html

The idea that the wealthy are somehow automatically a better class of person, and that noblesse oblige is a form of weakness does not originate with Rand, certainly – but Rand is the nexus of ideas from which the most modern generation to express that belief derive their position.

@10: “but Rand is the nexus of ideas from which the most modern generation to express that belief derive their position.”

I’m not convinced that is so. With high-profile economists such as Bohm-Bawerk, Schumpeter, Von Mises and Hayek, the influence of Austrian School economists long pre-dates the influence of Ayn Rand. Indeed she was probably influenced by Austrian school economists:
http://en.wikipedia.org/wiki/Eugen_von_B%C3%B6hm-Bawerk

Even Trotsky in exile was eventually influenced by the Austrian school:

“If a universal mind existed, of the kind that projected itself into the scientific fancy of Laplace—a mind that could register simultaneously all the processes of nature and society, that could measure the dynamics of their motion, that could forecast the results of their inter-reactions—such a mind, of course, could a priori draw up a faultless and exhaustive economic plan, beginning with the number of acres of wheat down to the last button for a vest. The bureaucracy often imagines that just such a mind is at its disposal; that is why it so easily frees itself from the control of the market and of Soviet democracy.”
http://www.marxists.org/archive/trotsky/works/1932/1932-sovecon.htm

Quoted by Abba Lerner: The Economics of Control (1944).

As I’ve just discovered, The Economics of Control, a seminal text, is accessible online in PDF format.

@11

The Austrian School was certainly the origin within economist circles. But Rand was the person who put the “moral” argument into the mainstream.

It’s rare indeed when the person who comes up with an idea is the same person who can sell it. Selfish buggers don’t want to wade through hundreds of pages of dry economic theory to justify their position, but when it’s condensed into the format of a novel – however atrociously written – the idea starts to gain traction in the general populace.

@12: “But Rand was the person who put the ‘moral’ argument into the mainstream.”

I doubt many read or talk about Ayn Rand nowadays in Britain, especially not academics, policy makers and think-tankers.

OTOH Hayek’s The Road to Serfdom is still read and talked about – it is often added to undergrad reading lists, along with Axelrod: The Evolution of Cooperation (*):
http://www.tfasinternational.org/aipe/academics/morriss2008/hayekroadtoserfdom.pdf

In Britain, the Institute of Economic Affairs (IEA) has taken on the task of relating the message of the economics of the Austrian and Friedmanite-Chicago schools to a wide spread of contemporary economic issues through its publication of new monographs, symposia and pamphlets:
http://www.iea.org.uk/

FWIW I suspect that the IEA exercises a great deal more influence over public policy development in Britain than Rand does or ever did.

(*) Axelrod: The Evolution of Cooperation:
http://www-ee.stanford.edu/~hellman/Breakthrough/book/pdfs/axelrod.pdf