Gerry Holtham, left, and John Mills
In his very critical article on the proposals I have put forward for getting the UK economy to perform better Gerald Holtham begins by stating that growth at 4 to 5 per cent per annum is “a rate never sustained in the whole of our peacetime history”. Now, as it happens, this is not true. The UK economy grew at a cumulative rate of 4.4% per annum between 1932 and 1936, following the big devaluation of sterling in 1931. If Mr Holtham is wrong about this, could he also be in error as regards some of his other assertions?
Mr Holtham says that exchange rates are all driven by “relative monetary policy, the expected return on assets in different currencies and the expectation of markets about those things.” I have no doubt that these are important factors but I do not think that they have anything like as much influence on exchange rates as capital flows. The main reason why sterling is so over-valued, in my opinion, is because of the huge capital inflows there have been as we have sold off vast quantities of UK assets especially over the last few decades – most recently huge quantities of property assets in London. During the 2000s, for example, total net sales of UK portfolio assets – shares, bonds and property - at £615bn, were more than twice the cumulative balance of payments deficit during this decade. Is it surprising that sterling was then so strong?
Mr Holtham also appears to think that the only acceptable way of getting the parity of sterling down is by lowering interest rates, which of course is difficult when base rate is as low as it is now. There are, however, plenty of other ways of getting this done, as Japan has found recently as it got the parity of the yen down by about 30% over the past year. Exercising some control over capital inflows and widening out the balance of payments gap by reducing taxation and increasing government expenditure are two strong starting points, as well as making it clear what the government’s intentions are. Recent economic history is awash with of examples of governments manipulating exchange rates. If Japan can do it, why can’t we do the same thing ourselves?
Mr Holtham sneers at my contention that the proportion of GDP which we invest rather than consume needs to rise from its pitiful 14% in 2013 to somewhere near the world average of 24%. How else does he think that the growth rate can be raised to match what are regarded as routine rates of economic growth elsewhere in the world? Does he really believe that output per head will increase with no net investment taking place, which is close to where the UK economy now is by the time you take off depreciation from new investment? To achieve large increases in investment we need both to make them profitable and to achieve a growth environment which makes them feasible. This is exactly what a major devaluation would do as it did in the UK in the 1930s, and as has happened in many other parts of the world, as the creation of the right conditions for investment in manufacturing, exporting and import substitution has led to massive improvements in living standards.
Mr Holtham argues that manufacturing is now of so little significance that it does not matter how small a proportion of our GDP comes from this source. Of course services are important but so is manufacturing because half our exports are still manufactured goods and without them we cannot pay our way in the world, because productivity increases are much easier to secure in manufacturing than in services, and because manufacturing produces a much better geographical and socio-economic spread of economic opportunities. It is also an illusion to believe that manufacturing cannot provide large scale employment, provided the cost base is right. It cannot do so if an over-valued pound prices the product of non-skilled labour out of the international market, but if the exchange rate is competitive there is no reason why millions of new manufacturing jobs should not be created – as indeed they were in the UK in the 1930s. Between 1932 and 1937 manufacturing output grew by 48 percent and employment rose by 2.7m, half of the new jobs being in manufacturing. Nor would it be impossible to recreate the conditions when we had average unemployment of 2%, as we did for all the 25 years between 1945 and 1970. There is no reason why, with the right policies—which incidentally certainly do not require “a dirigiste war economy”—we could not get back to this level of productive job creation if the right policies were in place.
As to there not being enough world demand to keep everyone employed, this may well be true, but the main reason why we have this problem is lack of effective demand in economies with over-valued exchange rates which are then forced into operating deflationary policies. The real international culprits—Germany, Switzerland, China, Taiwan and Japan, for example—are all economies which have run massive balance of payments surpluses which have to be matched by deficits elsewhere. It is competitive exchange rate imbalances—sterling being a prime example of a currency which is too strong rather than undervalued—which are responsible for millions of people quite unnecessarily not having a decent job.
Let me, as a more general riposte to Gerald Holtham, say this. In my opinion, his comments on my proposals exhibit all that is most disappointing in British economic policy formation. He criticises all that I have to say without putting forward any detailed constructive proposals of his own. His reaction to the radical changes which I suggest are to attempt to dismiss them without engaging in a rational and statistically-backed argument. I have set out in the publications I have written recently, especially in the pamphlet There Is An Alternative, published by Civitas, a carefully quantified, evidence based series of proposals for shifting the UK economy into a much higher growth path, accompanied by falling unemployment and other benefits. This work sets out a series of policies, based on cautious estimates of both export and import elasticities and returns on investment in the most productive parts of our economy. These show how it would be possible to avoid the UK shortly sinking back into what could then easily become a decade with virtually no net investment, no growth, stagnant incomes, rising inequality, increasingly unsustainable debt and relative if not absolute national decline. Here is my plan, laid out in detail and open to scrutiny. I look forward to seeing Gerry's.
This article is part of the There is an Alternative series. An economist and entrepreneur, John Mills is Chairman of JML. He recently established The Pound Campaign to raise awareness of the uncompetitive exchange rate and the effect it is having on UK manufacturing and the wider economy.
John Mills is a donor to openDemocracy.