British Steel is beyond saving

With the announcement that Tata is looking to sell its British plant in Port Talbot, South Wales (a decision which also affects its plants in three other U.K. cities) the great rebalancing project for the British economy looks in danger. The temptation will be to find some way to rescue the steel plants in the name of the broader goal; but that would be a mistake.

Since the financial crisis, the British government has been hoping to see some of Britain's output move from finance to manufacturing, from the prosperous south of the country to the ailing industrial north, from consumption to investment and from imports to exports. Chancellor of the Exchequer George Osborne noted back in 2014 that "the recovery is not yet secure and our economy is still too unbalanced." Britain, he argued, was not investing enough and not exporting enough. "We can't be passive observers of the forecasts. We need to roll up our sleeves, get to work and make it happen."

So how will the government, given this commitment, approach the steel plant closures? Finding another buyer won't be easy and certainly it won't be a quick fix. With up to 15,000 jobs at stake, the prospect of state aid is already being mooted.

Of course, unless Britain votes to leave the European Union in June, any state aid would need to conform with EU rules. But those constraints aside, the the economic case for intervention depends on whether the difficulties being faced by the industry are temporary or long-term. In its decision, Tata points to a global oversupply of steel, high costs and currency volatility.

Having looked at future prospects, Tata concludes that current circumstances "are likely to continue into the future and have significantly impacted the long-term competitive position of the UK operation."

Steel output is now a half of what it was at the peak of British steel-making in the 1970s and employment has fallen to around a tenth of the level seen at that time. Even if the industry continues its path of refocusing on high-end steel products, and even if productivity growth increases, the long-term trend is unlikely to reverse.

As even the left-wing Guardian notes "the problems of the steel industry will not go away." Pouring millions of pounds of British taxpayer money into the industry to support jobs may not be well-advised. Tata are said to be losing up to a million pounds a day on the Port Talbot plant alone, which employs around 5,500 workers, equating to a loss of around £180 per worker per day. Subsidies are all very well if they help to place an industry in a strong enough position to save jobs in the long-term. However, if they merely postpone an inevitable shake-out, they are a waste of money.

The rise and decline of individual sectors of the economy is an inevitable part of economic growth. To stand in the way of such creative destruction is rarely growth enhancing. However, that doesn't mean that the state has no role to play. There are still important lessons to be learned from the decline of steel's old industrial sister of the north, the cotton industry.

Like steel, cotton was a leading sector in Britain's Industrial Revolution, and it's an industry that faced severe decline in the 1960s and 1970s, bringing significant job losses to the Lancashire region in and around Manchester. Had the state chosen to subsidize cotton producers, it would likely still be pouring money in today, 50 years on. Instead what the region needed was funds to adjust to a life beyond cotton.

It is a policy response that would have not only avoided shifting large numbers of people onto welfare, but that would also have helped place the north on a more sustainable growth path - one that would have avoided the government's call to "rebalance" the economy.

There is a clear alternative to subsidizing jobs in the steel industry: helping Tata's workforce - and the next generation of young people growing up in the regions affected - retrain and reskill for a life beyond steel. Whilst the decline of British steel will inevitably cost the state money, it needs to be careful what form its spending takes. The obvious "solution" is not necessarily the best solution.