13 July 20l2
Dear Mr Mills
I am still unsure of how the $/£ rate could be managed down by some 25% nor what other policies would be needed to boost our industrial output?
16th July 2012
Dear Lord Tebbit
Let me try to provide you with some answers.
Here are the policies which I suggest we should follow to get the exchange rate down to, say, £1.00 = $1.20:
1.a) The government and the Bank of England should publicly announce that they thought that the current exchange rate was much too high for all the reasons set out in the material I have sent to you and that they were determined to get the rate down to $1.20.
1.b) To add to the strength of this signal to the markets, the government should cut taxation and increase expenditure, announcing that the expected result would be a further widening of our current account deficit.
1.c) The money supply should be increased and firm action taken, especially with the banks owned or controlled by the public, to get them to lend to businesses at low rates of interest and without the heavy up front charges which they are far too inclined to levy at the moment.
1.d) The Bank of England should adopt a policy of selling sterling and buying other currencies.
1.e) Portfolio inward investment should be strongly discouraged. One of the major reasons why sterling has been so strong in recent years is because there has been a huge inflow of foreign money to buy sterling assets. Apart from any economic implications of allowing this to happen, do you really think it makes sense for our airports, power companies, water utilities and even our chocolate factories all to be owned and controlled by companies headquartered outside the UK?
In my view, these kind of policies would soon get sterling clown to where we wanted it to be. In the UK We have been incredibly good at keeping the exchange rate far too high. If we reverse all the policies which have kept it so strong, logic and international historical experience tell me that it would not be a big problem to get it to fall.
If all these policies taken together failed to get sterling down to where we wanted it to be, however, personally I think we would be better off with some capital controls if the alternative was unending deflation, low or negative growth, very high unemployment, stagnant living standards and relative and perhaps absolute national decline. I would not welcome capital controls, however, and I think that they should be avoided if at all possible. I think that the sort of policies I have outlined above would do the trick without the kind of intervention which I am sure you would want to avoid.
What other policies would be needed to boost our industrial output? Can I suggest that the first and really vital thing to do is to make exporting more profitable than importing, to make it possible to make money out of manufacturing and generally to provide economic incentives through the price mechanism to get talented people to make and sell things instead of going into the City or working for advertising agencies. There are, however, quite a number of complementary policies which would clearly help such as:
2.a) Making sure that the planning system does not get in the way of industrial expansion to any undue extent.
2.b) Providing skills training targeted towards clearly identifiable skill shortages.
2.c) Making sure that funding is available for manufacturing on favourable market terms.
2.d) Providing tax breaks to encourage industrial investment.
2.e) Encouraging much larger wage and salary increases in manufacturing than elsewhere in the economy, to attract talent to where it can be most usefully employed and away from the service sector where productivity increases are much more difficult to secure than in manufacturing and which has a much lower potential for exporting.
Here are also a number of things which I would not advocate:
3.a) Improving infrastructure on its own, because this does nothing to increase exports in relation to imports. It makes importing easier just as fast as exporting.
3.b) Encouraging high tech industry at the expense of more run of the mill manufacturing industry. If you want the manufacturing sector to grow fast it is much more likely to do so at the low tech than the high tech end, once the right economic incentives are in place.
3.c) Getting the government or anyone else in the public sector involved in picking winners. The market is much better at doing this than well meaning civil servants or academics.
3.d) Introducing more regulations than are absolutely necessary.
The big problem is to persuade a generation of civil servants, politicians, academics and commentators that they have been chasing the wrong target. Inflation at 2% is not the holy grail of economic policy. Far, far more important is to get the exchange rate right so that we can develop and retain sufficient manufacturing industry to be able to pay our way in the world. This is the only way in which we will ever get on top of our economic problems.
23rd July 2012
Dear Mr Mills
I can follow well enough much of your argument, however there are some points on which I would have concerns.
1c) This causes me to ask if it is best that politicians should lean on banks to lend money to those they would rather not lend to at rates below what is commercially prudent? Has that not got us into trouble in the past?
1e) How does government “strongly discourage” portfolio inward investment? We are in a global economy subject to WTO requirements. The UK owns, wholly or in part, many foreign companies. Is that a bad thing?
2c) Why should Government "make sure funding is available on favourable market terms"? Why is it good to make ladies home perm kits but bad to run a hairdressers? Did we not go through this with SET years ago?
2e) What business is it of government to decide pay differentials between people who make ploughs and workers who use them and how would that be done? Anyway is it compatible with our manufacturing businesses being competitive?
3b) Surely it would be better to be in high-tech industries, eg aerospace, than low tech eg making saucepans, if we are to compete with third world producers?
I hope you do not think I am nit picking but if you want to gain support from a wider audience than old fashioned union leaders who believe there is a soft answer to hard questions then the questions I pose need to be dealt with.
29th July 2012
Dear Lord Tebbit
Let me respond to the points you make in this letter:
1.c) I am no more in favour than I am sure you are about forcing banks to lend money for projects which would not be capable of supporting themselves on commercial grounds. This does seem to me, however, to be a different matter from where we are at the moment where the collective unwillingness of UK banks to lend to many businesses except at very high rates of interest and very heavy up front commitment costs, often buttressed by onerous personal guarantees, is starving the economy of liquidity. My extensive commercial experience is that banks have now veered from being recklessly willing to lend to being unnecessarily over- cautious, while using the shortage of finance as a pretext for very high charges, to repair their depleted balance sheets.
1.e) On portfolio investment, there seems to me to be no other country in the world prepared to sell off key industries to foreign buyers with such abandon as we have shown. Of course I agree with you that we should not go back to a situation where there is no inward or outward investment. This seems to me to be a different matter, however, to taking no view about the cumulative dangers of this sort of policy getting out of hand.
Take our power companies. Two are owned by German companies, one by a French company, one by a Spanish company and the fifth is only partly British owned. All these companies now have major problems in their home markets, leaving investment in power generation in the UK way down their list of top priorities, as we move towards a very dangerous risk of shortage of power generation capacity. Does this make sense to you? It doesn’t to me.
This seems to me to be yet another example of a sensible policy approach in moderation being pushed beyond the bounds of reason. Can you imagine France or Germany allowing this to happen? If they can stop this sort of excess occurring, surely we can too?
2.c) There is a long standing difficulty for British manufacturing companies, especially small and medium sized ones, in obtaining finance on a reasonably long term basis at reasonable cost. Most other countries have much stronger institutions than we do which channel funds to industrial undertakings, partly because they have a much wider variation of different types of bank and finance institutions than we do.
Of course, I agree with you that you do not want to push this kind of policy too far so that large numbers of poor investments are made, but surely it is worth removing unnecessarily onerous obstacles from encouraging the sort of manufacturing investment which any well run economy needs. Incidentally, I was a significant campaigner against SET years ago when Lord Kaldor persuaded the Treasury, in my view very unwisely, to introduce it and I was very pleased to see it dropped.
2.e) I agree with you that there is a limit to what the government can do directly to encourage higher wages and salaries and better working conditions in manufacturing than in other occupations, but until this happens you are never going to get the talent needed into industry to enable us to compete in the world. Getting the exchange rate down would be the governments best contribution, because this will make manufacturing more profitable and thus better able to outbid other occupations to attract the really able people needed to run enough strong manufacturing operations to enable us to compete in the world.
I think that one of the biggest illusions is to think that the way to prosperity is to concentrate on moving up market to high rather than tow tech industries. Here is why:
3.b) The reason why the industries at which we currently do best are aircraft engines, arms, pharmaceuticals, for example, are high tech industries is that these involve years of accumulated management skills and intellectual property rights. It is therefore much more difficult and takes more time for China to dislodge us from markets for these products than for simpler ones, although mark my words, this will happen before long if we carry on theway we are.
As our markets for high tech industrial products and services get eroded away, following the same pattern as happened earlier for other simpler industries, it will become more and more impossible to rely on them to provide us with enough export demand to keep the current account in reasonable balance. We will then have to start producing other products.
If we have to get into new areas of manufacturing, it is much easier to do so in markets for simpler products, because they involve less accumulated knowledge and less intellectual property protection. Provided the cost base is low enough, it is not that difficult to compete - and make money - in the sort of industries in which I have spent my life: injection moulding, fabrication, metal pressing, assembly, etc.
If the exchange rate is too high, you have no chance, as I found out to my huge cost in the 1980s when the company I was running got to a stage where we could not buy the raw materials we needed for much less than we could buy the finished goods
from China, after shipping them half the way round the world. Incidentally, you might be interested to know that aerospace, which you advocate in your letter, is not, believe it or not, a particularly high productivity industry (at least in the USA, and I suspect the same applies in the UK).
I think if we carry on as we are, we are in for years of decline, stagnant or falling living standards, very high unemployment and no end to borrowing. Is this really what you want, especially if there is an alternative which would produce a growth rate of 3% or 4% per annum and unemployment running at perhaps 3% – with little inflationary penalty to pay? I think all of this could be achieved if we did what I advocate and I hope that I can persuade you that this is the case.
17th August 2012
Dear Mr Mills
On the matter of foreign ownership of important British companies we are of course now largely powerless in the face of the authorities in Brussels. Nonetheless I should say that I am not entirely without sympathy for your case.
In my day at DTI, I ensured that the Articles of BT required a British majority on the board and created similar defences for Rolls-Royce. Indeed I had some correspondence over the latter with Gordon Brown when he became Prime Minister.
Had my colleagues in more robust I would have used "golden share" provisions more widely. However the record of Jaguar/Land Rover under Indian control suggests that in medium level technology industry there are not many impediments to success here at present.
On the general matter of managing the parity of sterling I think you might find it interesting to read the relevant sections of Margaret Thatcher's memoirs – volume 2 – The Downing Street Years and Nigel Lawson's memoirs – The View From No 11 – when they were at odds over the issue in the late 1980s.
In retrospect I think Alan Walters was right and Nigel Lawson wrong.
1st September 2012
Dear Lord Tebbit
I have indeed read both The Downing Street Years and The View From No 11, and I agree with you that Nigel Lawson's policy of shadowing the DM to keep inflation down was not a sensible policy.
As regards portfolio investment, I have done some research over the last few days which I think may well interest you. Attached is a spreadsheet showing two different ways of accounting for the UK total inward and outward portfolio investment – one from the IMF and one from the ONS between 2000 and 2010. Although the figures are clearly compiled on a different footing, the overall outcome is clear. Inward portfolio investment vastly exceeded outward portfolio investment – by $700 billion according to the IMF and just over $600 billion on the ONS figures.
I think the enormous net sale of UK assets which these figures represent largely accounts for the paradox that sterling was extremely strong during the first decade of the 21st century despite our poor trade performance over this period. Our total current account deficit was about $500 billion during these years but this was massively outweighed by the net inflow of funds as we sold our energy companies, our water facilities, our airports, our chocolate factories – and many other companies as well.
The net result was that we sold a huge proportion of our key strategic industries to keep the pound high enough to run a large proportion of the rest of our manufacturing industry out of business – leaving us now with a huge ongoing deficit, grossly excessive borrowing, combined with no domestic control of many of the economy's key companies.
I must say I find it hard to think of a more irresponsible way of running our economic affairs, although what was done was supported at the time by almost everyone, including the leadership of both the Conservative and Labour parties. I wonder what you think!
14th September 2012
Dear Mr Mills
You make an interesting point about the sale of commercial businesses to overseas buyers which produced a capital inflow to counterbalance the deficit on goods and services, which maintained the exchange rate at a level which made it difficult for our exporters to compete in world markets.
Of course, had the exchange rate been lower, it would have made it even more attractive to buy those businesses as well as easier for them to export.
I find it of concern that a good number of our business problem children – notably in the car industry – have been turned around by foreign management such as Land Rover Jaguar.
Perhaps one could take powers to prevent export of key companies, but that would be messy and invite retaliation.
Finally, I ask myself, which is the chicken and which the egg in this affair?
John Mills is a donor to openDemocracy.
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