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Response to Mills: the 1930s are the exception that proves the rule

Logo-There is an alternative

That Britain achieved such growth rates only once in a hundred years, in extraordinary circumstances, is telling enough. But furthermore, competitive manufacturing is by nature an area of shrinking headcount, not growing.

Gerald Holtham
18 August 2014

John Mills economic plan for Britain can be read here, followed by Gerry Holtham's response, and Mills' reply to Gerry here. This is Gerry's latest response. The whole series, There is an Alternative, can be read here.

John Mills has produced a spreadsheet to show that his proposals respect national account identities. I do not dispute that nor that if a growth of 4 to 5 per cent were ever to be achieved a sharp rise in investment ratios would be needed. The fact that a configuration could arithmetically exist does not mean it is achievable in practice. It should give him pause for thought that the growth rate he projects was achieved once in well over one hundred years for a period of just four years in what was a cyclical recovery from the deepest depression the country has experienced.

The notion that it could be established as a trend and achieved by a devaluation is far-fetched. We have had a number of devaluations or depreciations since 1931. Some did indeed boost growth but not to the extent John Mills projects. Others, like Anthony Barber's or Reginald Maudling's "dashes for growth" had unfortunate consequences. Let me be clear. It would be a good thing if the exchange rate were durably lower. That is not in dispute but John Mills overestimates the ability to maintain a much lower real exchange rate in a world where everyone wants to be competitive. Of course capital flows drive the exchange rate but they are in turn driven by the factors I listed. If the market believed the UK was going to hit 4 per cent growth for any prolonged period, the exchange rate would appreciate very rapidly - guaranteed.

It would also be a good thing if we regenerated manufacturing in this country; I did not deny that, though it is merely part of generating more successful businesses producing marketed output. And a lower exchange rate is probably a necessary condition for encouraging manufacturing but it is not a sufficient one. Yet the idea that more manufacturing would make a big contribution to employment is quite simply anachronistic. The proportion of employment, as distinct from output, derived from manufacturing is low and falling in all developed economies, including those like Germany and Japan where manufacturing is relatively strong. The more competitive manufacturing is, the fewer people it employs. Employment responses in the 1930s or 1950s are not a good guide.

John Mills criticizes me for not producing a counter proposal, given that I regard his as unrealistic. I am not holding out on you! If I had a Big Bang solution that would solve the UK's economic problems in one Parliamentary term, I would be sure to let you know. I don't. I am on the record for being one of the earliest supporters of a state investment bank to provide patient debt and equity to business. I have also argued for a Community Fund, hypothecating capital taxes, to finance our key public services. The overseas investments of such a Fund would tend to depress the exchange rate. I have argued for a nominal GDP target instead of an inflation target for monetary policy and I think it is urgent to improve education and training in this country, though I am not sure I know the best way to do that. I would however abolish student fees for post-graduate degrees in approved subjects. If all of those things were done, I believe it would be better for the economy and society but the changes would be incremental and accrue over the long haul. That may not be good politics but I don't think promising the moon on the basis of policies inadequate to the purpose is particularly good politics either.


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