John Mills https://www.opendemocracy.net/taxonomy/term/10302/all cached version 18/04/2018 13:03:08 en John Mills, chair of Labour Leave, explains his hopes for Brexit https://www.opendemocracy.net/can-europe-make-it/looking-at-lexit/opendemocracy-john-mills/john-mills-chair-of-labour-leave-explains-his-hopes-for- <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>John Mills, entrepreneur, economist, and Labour donor, defied the party leadership and campaigned for Britain to leave the EU. We ask the chair of Labour Leave what he wants from Brexit.</p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/548777/PA-22268525.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/548777/PA-22268525.jpg" alt="" title="" width="460" height="324" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_xlarge" style="" /></a> <span class='image_meta'><span class='image_title'>John Mills campaigning in the run-up to the referendum. Paimages/Jonathan Brady. All rights reserved.</span></span></span></p><p><em>The CEO of successful retail business JML, which makes consumer products for UK and worldwide markets, is a veteran Labour donor<strong>. </strong>As a longstanding Eurosceptic, however, he defied the party leadership to campaign for, and fund, the Leave campaign. Eighteen months on, we asked John Mills about what he wants from Brexit.</em></p> <p><strong>Looking at Lexit: First, then: why did you do it?</strong></p> <p><strong>John Mills:</strong> I have never been violently against the EU, but I campaigned for Leave rather than Remain because, on balance, I thought that in the long-term the UK would be better off outside the EU than as a member of it.</p> <p><strong>LaL:</strong> <strong>You’re a businessman, and an economist: most of your peers thought the opposite. Why were they wrong, do you think?</strong></p> <p><strong>JM:</strong> I think their models were largely wrong. Most economists endorsed the views put forward by the Treasury, the Bank of England, the OECD and the IMF that the UK economy would tank if the referendum vote resulted in a Leave outcome. When this materialised, the anticipated downturn did not happen.</p> <p><strong>LaL:</strong> <strong>You’re also a loyal Labour donor. When you left the official Vote Leave campaign to chair Labour Leave, you said there needed to be “a distinctive voice” making the Labour case for Brexit. In the cacophony of the Brexit debate, do you think this voice was heard?</strong></p> <p><strong>JM:</strong> I think it was. There is considerable evidence that during the two months running up to the referendum, when Labour Leave was active, about 10% of the 9.3m people who voted Labour in 2015 switched from Remain to Leave when voting in the June 2016 referendum.</p> <p><strong>LaL: Some Leave voters define themselves as “lexiters”; they regard the EU as a malign institution, whose consumer and workplace regulations merely mask the lubrication of the wheels of capital. Do you see the EU as an obstacle to the pursuit of a more responsible capitalism?</strong></p> <p><strong>JM:</strong> Broadly speaking, I don’t. However, I am not sure how much sense some of the four freedoms make, especially unrestricted migration across a very steep economic gradient between eastern and western Europe.</p> <p><strong>LaL: What positive outcomes of Brexit have you seen so far?</strong></p> <p><strong>JM:</strong> I think the main one has been <a href="https://www.ft.com/content/59f58aa8-7cea-11e7-9108-edda0bcbc928">some resurgence</a> of manufacturing industry as a result of the depreciation of sterling triggered by the EU referendum result.</p> <p><strong>LaL: You have long been a strong advocate for a large devaluation as a way of fixing the UK's economy. In broad-brush terms, your view is that we will get good jobs in industrial heartlands and productivity growth if we rebalance towards manufacturing, and that a devaluation of sterling is needed to do this. Do you think of your Leave and Devaluation campaigns as being linked?</strong></p> <p><strong>JM:</strong> Essentially, there are two separate issues here – rebalancing the UK economy seems to me to be pretty urgently required whether or not Brexit was taking place. The two issues do merge together though in that the prospect of Brexit&nbsp;brought sterling down, following the EU referendum, from around $1.45 to $1.25, although it is now back to around $1.35, and if there is a hard Brexit I have little doubt that it will fall again.</p> <p><strong>LaL: You think that we will “better-off” outside the EU. Other than devaluation, are there other long-term economic benefits of Brexit?</strong></p> <p><strong>JM:</strong> In my view, whether we are in or out of the EU won’t make nearly as much difference to the future of the UK economy as the choices we make on domestic economic policy – and what happens in the rest of the world. There will eventually be some gain to the UK economy from paying less into the EU budgets and perhaps from the UK having more free trade agreements, although these are two-edged swords. We won’t gain from mutual tariff reductions unless we are competitive enough to hold our own.</p><p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/548777/PA-33847573.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/548777/PA-33847573.jpg" alt="" title="" width="460" height="306" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_xlarge" style="" /></a> <span class='image_meta'><span class='image_title'>Since the referendum, some UK exports, including cars, have done well. Others have struggled. PAimages/Anna Gowthorpe. All rights reserved.</span></span></span></p><p><strong>LaL: How might a Labour-led Brexit differ from a Tory-led Brexit? And with the Tories likely to remain power until 2019, what role do you see for Labour in influencing the negotiations?&nbsp;</strong></p> <p><strong>JM:</strong> I think there is some danger that a Labour Brexit would be more expensive than a Conservative one as a result of Labour being exceptionally unwilling to contemplate trading with the EU on WTO terms, thus significantly weakening the UK’s bargaining position. Because of the narrow and relatively unstable government majority since the 2017 election, Labour may even weaken this bargaining position from the opposition benches.</p> <p><strong>LaL: So you see WTO terms as an option, at least for bargaining purposes. But what would be your preferred outcome for the UK? Single Market, EEA or EFTA status? Or something else?</strong></p> <p><strong>JM:</strong> I think the best outcome would be for the UK to be out of the Single Market, the European Economic Area and the Customs Union but with a comprehensive Free Trade Deal in place between the UK and the EU27.</p> <p><strong>LaL: A trade relationship that <a href="https://iea.org.uk/publications/is-sterling-devaluation-the-path-to-prosperity/">you have argued</a> is currently very bad for the UK economy. You are worried that we are living off either borrowing from abroad or selling "family silver" to pay for our imports.</strong></p> <p><strong>JM:</strong> Yes, I am.</p> <p><strong>LaL:</strong> <strong>You point out that our biggest trade deficit is with the EU.</strong></p> <p><strong>JM:</strong> Almost all of it.</p> <p><strong>LaL:</strong> <strong>You also argue that the main tool for tackling this problem should be the exchange rate. But what about import tariffs? In a Labour Brexit future, might such tariffs, above single market levels but below WTO standards, be used to boost domestic production?&nbsp;</strong></p> <p><strong>JM:</strong> As a very general rule, I think that devaluation is a much better solution than tariffs or quotas. Tariffs and quotas do nothing to make exports more competitive – indeed the reverse if they make inputs more expensive, thus making much more difficult for them to satisfy the Marshall-Lerner condition for improving net trade. They involve collection expenses and market distortion – and once they get above a fairly low level they encourage evasion. For all these reasons I think we should avoid this kind of protectionism like the plague.</p> <p><strong>LaL: You’re against protectionism, then?</strong></p> <p><strong>JM:</strong> Yes - and that’s one of the reasons I’m eurosceptic. I think the EU is a protectionist and over-regulated organisation and that much damage has been done to the world economy by the Common Agricultural Policy and the Common Fisheries Policy.*</p> <p><strong>LaL: Do you have misgivings, then, about Corbyn’s industrial strategy? Since the summer, Corbyn has repeatedly proposed “a Brexit that <em>uses powers returned from Brussels</em> to support a new industrial strategy [and] upgrade our economy in every region and nation.”</strong></p> <p><strong>JM:</strong> I have always had serious reservations as to whether policies like this deliver the hoped-for results.</p> <p><strong>LaL: Why?</strong></p> <p><strong>JM:</strong> I don’t think that either the interventionist industrial strategies favoured by the left, or the deregulation and more competition favoured by the right will do much good. On the contrary, I think we need to use market forces, targeted by the government, to make investment in manufacturing profitable again, to provide a foundation for the restructuring which I think the economy so badly needs.</p><p>----</p> <p>*We will be investigating the CAP and CFP as part of a later article in the <em>Looking at Lexit</em> series. If you’d like to contribute, please get in touch!</p> <p><em>This article is part of our&nbsp;</em><a href="https://www.opendemocracy.net/freeform-tags/looking-at-lexit">Looking at Lexit</a><em>&nbsp;series, examining the left case for exiting the EU.</em></p> <p><em>Disclaimer: John Mills sits on the openDemocracy board, and is donor to the website; however, he has had no involvement in the funding or commissioning of this series.</em></p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/can-europe-make-it/looking-at-lexit/christian-wolmar/lexit-on-rails">Lexit: on the rails</a> </div> <div class="field-item even"> <a href="/looking-at-lexit/julian-sayarer/is-lexit-centrist-fantasy">Is Lexit a centrist fantasy?</a> </div> </div> </div> </fieldset> <div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> <div class="field field-rights"> <div class="field-label">Rights:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> CC by NC 4.0 </div> </div> </div> Can Europe make it? Can Europe make it? uk UK Brexit2016 Looking at Lexit Looking at Lexit John Mills Sat, 16 Dec 2017 09:49:19 +0000 John Mills and Looking at Lexit 115320 at https://www.opendemocracy.net Why Trump won https://www.opendemocracy.net/uk/john-mills/why-trump-won <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>Globalisation's losers are biting back. The introduction to <a href="http://www.labourfuture.org.uk/why_trump_won">John Mills' pamphlet</a>.</p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/553846/Donald_Trump_(8566730507)_(2).jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/553846/Donald_Trump_(8566730507)_(2).jpg" alt="" title="" width="460" height="307" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_xlarge" style="" /></a> <span class='image_meta'><span class='image_title'>Donald Trump, by Gage Skidmore.</span></span></span></p><p>Against all the odds, Donald Trump won the 2016 US presidential election. Something new, important and disturbing has very clearly been happening recently right across the West, with ominous implications especially for the political estab-lishment. In addition to the astounding recent election outcome in the USA – very largely unexpected by those who thought they were in the know either side of the Atlantic – not long ago UKIP won more votes than any other party in the 2014 UK election to the European Parliament. More recently, the result of the June 2016 EU referendum in the UK was clearly substantially a vote against the establishment. In France, the <em>Front Nationale</em> is very likely to do well enough in the French presidential elections in 2017 for Marine Le Pen to be in the final ballot. In Germany <em>Alternativ für Deutschland </em>surprised Angela Merkel by beating her party’s CDU<em> </em>candidate in September 2016 in her own home state. In Spain, in December 2015, <em>Podemos </em>won 69 seats out of 350 in the Spanish general election. In Greece,<em> Syriza </em>has since January 2015 been the largest party in the Greek parliament. In Italy, in June 2016, the <em>Five Star Movemen</em>t won control of Rome and Turin1.</p> <p>There are evidently overlapping reasons for these developments, although all the political movements involved are not, by any means, the same. Some are of the right and some of the left. Some have authoritarian streaks which others lack. Some are relatively liberal and outward looking while others are more orientated towards protectionism. All of them, however, share some common features. They are patriotic rather than internationalist. They all have varying concerns about immigration, reflecting the nativism – the feeling that indigenous residents ought to be given more consideration and support than immigrants – of a majority of their supporters. They all exhibit distrust and a measure of contempt for the established political systems. </p><p>Above all, supporters of all these parties feel let down by the way they have been treated economically. Nearly all of them have, at best, seen little or no increases in their living standards, some since 2008 but many – especially in the USA where the median wage is no higher in real terms now than it was in the 1970s – with no improvement for much longer. Others have seen major reductions rather than just no rises. In the UK, according to a recent TUC report, for those in work the median wage dropped as sharply as it did in Greece – by 10.4% in each case between 2007 and 2015 – although Greek unemployment is much higher than in the UK. By contrast, those in the upper income brackets in the West have all done much better while those in the top 1% have done better still. Those still employed in the upper echelons of banking and financial services continue to earn massive sums while practically no-one has been brought to book to account for the chicanery, misjudgements and bad management which were the proximate causes of the 2008 financial crisis. </p><p>How should we explain what is happening? What has caused protest and populist parties to emerge and flourish right across the western world? Some of it has to do with social media. Some of it has to do with the increasing strains that mass migration has generated. But it is globalisation, and all that is encapsulated by it, which almost certainly has more to do with it than anything else. If a line needs to be drawn between those who are attracted to the new parties and those who are not, as good a place as any for it to be located is between those who, on the one hand, have done well out of globalisation, internationalism, increased travel and trade, rising migration and the increasing dominance of financial interests, and those, on the other hand, who have found themselves on the wrong side of the tracks.</p> <p>It is no coincidence that all the protest parties referred to above were formed relatively recently. Nor should it be surprising that, as discontent has mounted, they have become more prominent. Although during the Great Moderation of the 1990s and the 2000s up to 2008, there were underlying economic trends developing which were dangerous and in the end very damaging, most people during this period experienced rising living standards and were reasonably contented. When the crisis hit in 2008, therefore, by and large people turned to their established political leaders for succour and support. It was politicians of the moderate left and moderate right – indeed the political establishment everywhere – who were regarded initially as the most likely people to find solutions to the problems then confronting everyone. Unfortunately, eight years later, those in charge have failed to deliver a substantial economic recovery to benefit everyone and patience has run out, especially among those at the wrong end of globalisation. This is why so many centrist political parties, especially those of the moderate left, are now in such decline and disarray, and why those that remain are being pulled strongly in directions with which many of their members feel unhappy. </p><p>For protest sheers very easily into populism and over-simple solutions to complicated problems. This is why trust between the governors, who have to find their way through complex and intractable reality, and the governed, who have to feel confident that their interests are being protected, is so important. Once this bond fractures, it becomes increasingly difficult to get rational decisions taken, for politicians to hold enough respect from the electors to be able to face down multiple powerful self-serving interests, and for the political process to work sufficiently well for stable and effective governments to be formed and then to provide stable administrations. The danger across large swathes of the western world at the moment is that we may be getting far too far from comfort as these conditions fail to be fulfilled.</p> <p>The question is whether there is some fundamental reason why the malaise described above – globalisation hugely benefiting some groups but disadvantaging others – has spread across the West and, if so, what can be done about it. The case put forward in this pamphlet is not that there is a simple silver bullet which will cure all the West’s ills. It is, however, that there are some clearly identifiable mistakes, made by western policy makers over the decades since the post-war Bretton Woods consensus broke up in 1971, which have led to the benefits of globalisation – great as in many ways they are – being much too unevenly spread, and that this is the sources of a very large proportion of the discontent which is now so manifest.</p> <p>For it is not the case that the world as a whole is a much worse place than it was 45 years ago. On the contrary, in many ways it is immeasurably better. It is cleaner, healthier, better fed, longer lived and freer. Millions of people have been lifted out of poverty. The problem is that average improvements across the world have left large swathes of people, especially those on medium and low incomes in the West, little or no better off, especially recently, while almost everyone else has seen his or her lot vastly improved. Identifying and avoiding some of the mistakes made since the 1970s, when the post-World War II international settlement broke up, may not on its own be a sufficient condition for improving the prospects, life chances and hope for those who have missed out on the benefits of globalisation but it is a necessary requirement for getting any real improvements in their circumstances being achieved.</p> <p>And what, essentially, are the key mistakes which the West has made? Essentially they revolve round competitiveness and, in particular, the ability of the West to compete commercially with the East on reasonably level terms. The charge-sheet is that we have completely failed to do this. We have allowed the East – which, in this context, is shorthand for the countries on the Pacific Rim but particularly China – comprehensively to outflank the West – the USA, Europe and Japan – by allowing them to run their economies on far more competitive lines than ours. As a result, while we have de-industrialised, their manufacturing has gone from strength to strength. On the back of strong export-led growth, their economies have grown much faster than ours and their average standards of living have risen by a large multiple of those in the West. They invest far more than we do in the future; they are not dogged by balance of payments and government deficits rising far faster than their capacity to service or repay them; and their growth is sustainable because it is fuelled by net trade and investment and not just by ultra-low interest rates, asset inflation and consequently rising consumer demand.</p> <p>It is because of these mistakes that so many of our people have done badly out of globalisation. Of course, increased international trade in services as well as goods has certainly not been disadvantageous to everyone in the West. Those in the upper ranges of the service industries, in particular, have done phenomenally well out of it and they are in a very powerful economic and political position to influence public opinion and policy development. Understandably, perhaps, they think that what has been good for them ought to be fine for everyone else – and if it isn’t this is because of failure by the losers to take advantage of opportunities which they ought to have been able to grab. What these people fail to recognise is that the other side of globalisation is good manufacturing jobs disappearing in the face of unmanageable competition from the Far East, leaving a large percentage of the population dependent instead on much less productive, lower paid and less secure service sector employment. The powerful position occupied by those who have done well out of globalisation means that there is a huge amount of inertia which is inclined to keep the status quo broadly maintained in policy terms. Recent political developments in both the USA and Europe, however, suggest that time may be running out, that discontent is materialising on an unmanageable scale, and that expectations that we can go on as we are with impunity may be wide of the mark. </p><p><strong><em>Read John's full pamphlet "Why Trump Won" <a href="http://www.labourfuture.org.uk/why_trump_won">here</a>. John is a generous supporter of openDemocracy.<br /></em></strong></p><div class="field field-rights"> <div class="field-label">Rights:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> CC by NC 4.0 </div> </div> </div> uk uk John Mills Fri, 11 Nov 2016 15:21:20 +0000 John Mills 106706 at https://www.opendemocracy.net We need to rebalance the British economy https://www.opendemocracy.net/uk/john-mills/we-need-to-rebalance-british-economy <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>Britain's economy has deep, structural problems. Investment The proportion of GDP invested by the UK is lower than almost anywhere else in the world. Excluding intellectual property, the ratio ...</p> </div> </div> </div> <p>Britain's economy has deep, structural problems. <strong>Investment </strong> The proportion of GDP invested by the UK is lower than almost anywhere else in the world. Excluding intellectual property, the ratio for the last quarter of 2015 had dropped to 12.7%. The world average is about 24% and in China it is little short of 50%. Fixed asset depreciation in the UK is running at about 11.5% per annum, so our net investment as a proportion of GDP is barely 1%. Just to avoid our accumulated capital assets being diluted down by our rising population we need to invest approximately 4% of our annual GDP. Furthermore, of the very low total we do have, barely a quarter is spent on machinery and technology, which are the only real drivers of increased output per head. This is why productivity in the UK is almost static. <strong>Deindustrialisation </strong> The proportion of UK GDP arising from manufacturing is now barely 10%, having been almost a third of GDP as late as 1970. Almost all low- and medium-tech internationally tradeable manufacturing activity has been wiped out. As a result we have lost very large numbers of good quality blue collar jobs; we have enormous regional imbalances in incomes, wealth and life chances; we have lost out on the productivity gains which manufacturing is much better at producing than services; and – perhaps most crucially of all – as most of our exports are goods rather than services, we do not have enough to sell to the rest of the world to enable us to pay our way. <strong>Balance of Payments </strong> Partly because of our large and rising trade deficit, we have the biggest balance of payments deficit of any advanced industrialised economy. It is not just our trade performance, however, which is a problem in this regard. We also now have a very substantial negative investment income position with the rest of the world, further aggravated by large transfers to the EU, net remittances abroad and on our aid programmes. By the last quarter of 2015, our balance of payments deficit was running at 7% of GDP and it appears still to be on a rising trend. <strong>Debt </strong> Both as a nation, through our government and as individuals, we are piling up debt far faster than our capacity to repay it. Our balance of payment has to be financed by the UK either selling assets or borrowing more money and we have been doing both. A major reason for our worsening balance on income from abroad is that every £100bn deficit financed by the sale of assets or borrowing – typically at the rate of about 5% per annum – adds another £5bn to our income deficiency cumulatively each year. Because the government deficit is largely the mirror image of our trade deficit, there is no prospect of the government ceasing to have its own very large deficit unless our foreign payments position is brought back under control. <strong>Growth </strong> What relatively little growth we have achieved in recent years, compared with the experience in many other parts of the world, has been driven very largely by ultra-low interest rates and asset inflation pushing up consumer demand rather than by growth being led by net trade and investment. We have seen a welcome reduction in unemployment but no increase in average incomes, partly as a result of our rising population and partly because any increase in household expenditure has been financed by rising debt. The questions which need to be addressed, in the light of these imbalances, are: </p><ol> <li>Are current slow growth trends sustainable or is there – at best – going to be a long period of very low GDP increase, especially per head of our rising population, leading to static living standards for the foreseeable future or – at worst – a downturn in performance making conditions for many people even worse?</li> <li>Are there any policy prescriptions which could reverse the imbalances, to enable the UK economy to perform much better? Would it be possible to do this without getting investment up from well under 13% to perhaps 20% of GDP or more? Could we get our balance of payments position into manageable condition without something like 15% of our GDP coming from manufacturing? What would a model of the main UK economic aggregates look like if we were to aim to get back to a sustainable growth rate of 3% or 4% per annum?</li> <li>If the economy is to be rebalanced, how are the financial incentives to make this happen going to be created and what should the role of government be? How much would depend on demand side changes being made on monetary, fiscal and exchange rate policies and how much on supply side initiatives on training, planning. Would this need to be accompanied by some kind of industrial strategy?</li> </ol><p> - <em>Keep a look out for our upcoming pieces examining&nbsp;how to rebalance the British Economy.</em></p><div class="field field-rights"> <div class="field-label">Rights:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> CC by NC 4.0 </div> </div> </div> uk uk Rebalancing the British Economy John Mills Tue, 01 Nov 2016 13:37:25 +0000 John Mills 106378 at https://www.opendemocracy.net There is much upon which we can only speculate, but the hard facts tell us to leave https://www.opendemocracy.net/uk/john-mills/there-is-much-upon-which-we-can-only-speculate-but-hard-facts-tell-us-to-leave <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>No one can predict the future. But based on the information we have, Britain should vote for Brexit.</p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/553846/John Mills leave.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/553846/John Mills leave.jpg" alt="" title="" width="400" height="400" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_xlarge" style="" /></a> <span class='image_meta'><span class='image_title'>John Mills is a donor to both openDemocracy and the campaign to leave the EU</span></span></span></p><p>As the debate on Brexit hots up it is increasingly clear that many of the issues in contention are generating a great deal of heat but not much light. So many of the assertions made depend on the assumptions behind them on which there are – quite legitimately – widely varying views.</p> <p>Will every family in the country be £4,300 worse off per annum if we leave the EU, as the Chancellor alleges? Very probably not, but this does not stop a plausible case being made that it will if the markets all turn against the UK, as we were told would happen just before we left the Exchange Rate Mechanism in 1992. In fact, exactly the opposite occurred, inflation fell and the economy started 15 years of unbroken growth.&nbsp; </p><p>Will the UK be safer in or out of the EU? Border control may be tighter if we leave. Liaison on anti-terrorism might be a bit more difficult but it is hard to see that it would be in anyone’s interest not to continue with the high levels of co-operation which are already in train. On balance, it is difficult with any certainty to see any clear advantage or disadvantage. </p> <p>Would trade treaties with major countries with which we do not yet have them – China, India, Australia and the USA – be easier or more difficult to secure with the UK in or out of the EU? We are told that the EU would have more negotiating heft, and perhaps this is true, but progress is bound to be slower if the needs and interests of 28 countries have to be taken into account rather than one – as indeed it has been.</p> <p>Would trade between the UK and the rest of the EU diminish if Brexit went ahead? As it is in everyone’s interest to retain free trade throughout Europe the answer is very probably not. There is, however, a possibility that the other EU countries would not play ball, but the worst that could happen then is that World Trade Organisation tariffs would be applied both ways. As these only average about 3.5% on industrial goods, this is unlikely to make much difference, especially if sterling falls a bit on the foreign exchanges, as many people think will happen. Trade in services may be a bit more tricky but we do pretty well on sales of services to other EU countries, as well as outside the EU, despite the many non-tariff barriers which are still there.</p> <p>If we leave the EU, would we, like Norway, still be members of the Single Market and thus bound to accept free movement of labour as part of the package? Not necessarily. If we remain members of the European Economic Area, we would be locked into the EU’s free movement of people, but if, instead, we stayed outside the EEA and joined EFTA (the European Free Trade Association), we would then be outside the Single Market, as is Switzerland. No-one knows how negotiations might finish up but there is clearly a range of outcomes with different trade-offs which might materialise, some of which some people would welcome while others would not.</p> <p>So don’t be surprised if lots of people feel confused by all the claims and counterclaims which fill the airwaves and our newspapers. Does this mean that there are no firm facts on which to base a view on Brexit? No – there definitely are some and really the case for Brexit lies in the hard facts on which there can’t realistically be any dispute. </p><p>First, we have a very heavy net contribution to the EU every year. The Office for National Statistics tells us that in 2015 the total gross figure was just under £20bn<strong> </strong>and the net figure, after all rebates and expenditure by the EU in the UK was £11.1bn. Lower figures are often quoted but these tend to be for the EU revenue budget only and not for other heads of expenditure such as capital costs, fines which are not in the budget and some CAP and aid payments.</p> <p>Second, if we stay outside the EEA, we can secure much better control of who comes to work and live in the UK. Particularly with the rising Living Wage in prospect combined with the poor employment and remuneration prospects in much of the EU, we really need to contain immigration to a lower figure than the 330k it was in 2015 rather than to allow it to rise.</p> <p>Third, the EU has experienced no growth in median incomes for nearly a decade, the euro is clearly in trouble, the Schengen agreement is under huge pressure, nearly 40% of the EU still goes on subsidies for agriculture, there are huge levels of unemployment, especially among young people. Do we really want to tie ourselves to a project which manifestly has so many downsides?</p> <p>Fourth, there is very clearly both a democratic deficit in the EU and a widespread feeling that the political elite in the EU are being driven by two factors. Firstly, by the travails of the euro and secondly, out of conviction that in any case this is the right thing to do: to create a United States of Europe. This is not what the vast majority of the electorate want to see being created, not only in the UK but throughout the EU. Taking back control of our destiny by re-establishing the primacy of parliament is the way for us to get this done.</p> <p>It is very clear where the vast majority of the UK electorate would like to be. We would like to have free trade with the other EU countries and we would like to co-operate with them in every way which makes sense – but on an intergovernmental basis rather than as part of a political union. How are we going to get there? We need to Vote Leave and then negotiate the deal we want. Would we achieve everything we would like? Probably not, but we would be able to get a great deal closer to what we – and indeed most other people in Europe, if they were given the choice – really want.</p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/uk/anthony-barnett/blimey-it-could-be-brexit">Blimey, it could be Brexit! Introduction</a> </div> <div class="field-item even"> <a href="/uk/enrico-tortolano/as-trade-unionist-this-is-why-britain-must-vote-to-leave">As a trade unionist, this is why Britain must vote to Leave</a> </div> <div class="field-item odd"> <a href="/uk/caroline-lucas/its-time-to-make-progressive-case-for-staying-in-eu">It&#039;s time to make the progressive case for staying in the EU</a> </div> </div> </div> </fieldset> <div class="field field-rights"> <div class="field-label">Rights:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> CC by NC 4.0 </div> </div> </div> uk uk Brexit2016 John Mills Mon, 25 Apr 2016 23:00:07 +0000 John Mills 101611 at https://www.opendemocracy.net Why the UK’s economic policies will fail by 2020 https://www.opendemocracy.net/uk/john-mills/why-uk-s-economic-policies-will-fail-by-2020 <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>The government doesn't seem to grasp that the foreign payments deficit has a direct impact on its ability to get the national budget back into surplus. Unless it changes tack it will continue to fail. </p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/osborne4_0.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/535628/osborne4_0.jpg" alt="" title="" width="460" height="345" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_xlarge" style="" /></a> <span class='image_meta'><span class='image_title'><a href=https://www.flickr.com/photos/number10gov/4724397422/sizes/z/>Flickr/The Prime Minister's Office</a>, <a href=https://creativecommons.org/licenses/by-nc-nd/2.0/>CC BY-NC-ND 2.0</a></span></span></span></p><p>The Bank of England, the Office for Budget Responsibility and many commentators all appear to be reasonably confident that the UK economy will grow at a little under 2.5% between now and the next general election in 2020, with consequent favourable impacts on incomes. Yet it is unlikely that this relatively benign outcome will be achieved for all the reasons set out below.</p> <h2><strong>The economy is extremely unbalanced&nbsp; </strong></h2> <p>The UK economy has at least six major imbalances. First, the proportion of our GDP which we invest rather than consume is so low – currently at 12.5% excluding intellectual property – that, allowing for depreciation and our rapidly growing population, there is no net investment in physical assets per head of the population now taking place at all. Second, we have allowed the economy to deindustrialise to a point which, with only about 10% of our GDP coming from manufacturing, means that we cannot pay our way in the world. Third, for this and other reasons, we have an increasingly unmanageable balance of payments problem. </p> <p>Fourth, because the government deficit is now largely the mirror image of our foreign payments deficit, with sterling as strong as it now is, we currently have no chance of reducing the government deficit significantly from where it is at present. Fifth, because of both our government and foreign payments deficits, we are running up debt much faster than the economy is growing. Sixth, what growth we have seen recently has been achieved very largely as a result of ultra-low interest rates and consequent asset inflation, which have drawn more people into the labour force without increasing output per head – which again is unsustainable.</p> <p>Because current government policies are not oriented towards dealing with any of these imbalances, the scene is set for a variety of adverse consequences which are very likely to undermine the forecasts on which it appears the authorities are currently relying.</p> <h2><strong>Productivity will increase very little, if at all </strong></h2> <p>It is only since the Industrial Revolution began that average living standards have risen significantly and virtually all the increases in real incomes which have resulted have come from the application of machinery and technology. Almost all the rest of the economy has simply adapted to the huge rises in output per head which mechanisation and technology have made possible. The problem in the UK is that we are now investing far too little in the future. While we invest barely 12.5% of our GDP each year, the world average is about 25% and in China the figure is around 46%. Of the total we do invest, barely a quarter – currently 28% – goes towards manufacturing and when depreciation is taken off this low figure, on average, nothing is left. This is why productivity is not increasing. Between 2008 and 2014, output per head in the UK rose by no more than 0.1% per annum, while physical investment as a percentage of GDP remained static.&nbsp;&nbsp; </p> <h2><strong>The foreign payments balance will act as a constraint&nbsp; </strong></h2> <p>The UK’s foreign payments balance has become a major problem, as can be seen from the table below:</p> <p><strong>UK Balance of Payments Breakdown – net figures, all in £m</strong></p><p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/mills1.JPG" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/535628/mills1.JPG" alt="" title="" width="460" height="172" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_xlarge" style="" /></a> <span class='image_meta'><span class='image_title'>CLICK TO ENLARGE</span></span></span></p><p><em>Source: ONS BNBP Balance of Payments Quarterly First Releases and 2015 Q2 Balance of Payments Report. London: ONS, 2015.</em></p> <p>Between 2008 and 2011, the total balance of payments deficit sustained by the UK averaged about £40bn per annum. It is now averaging about £100bn a year and it is likely to be on a rising trend. The trade deficit is static at best but will probably increase if sterling retains its current value. Our net income from abroad is likely to become more and more strongly negative as a result of the continuing sell-off of UK assets which is keeping the value of sterling up. If the return on borrowing or the sale of assets is about 5% and we have a foreign payments deficit of £100bn per annum, our net income from abroad can be expected to go down by about £5bn every year. UK net transfers abroad are increasing both as a result of rising contributions to EU budgets and its other institutions and because of remittances increasing as the number of migrants settling in the UK goes up. </p> <p>£100bn a year represents approaching 6% of the UK’s GDP. Is the rest of the world going to continue forever allowing us to live at a level of expenditure which is 6% higher than we are earning, while we run up more and more net liabilities to finance a level of spending which we have not earned?</p> <h2><strong>Incomes may remain static even if GDP is increasing </strong></h2> <p>From its peak during the first quarter of 2008, UK GDP had risen by the second quarter of 2015, net of inflation, by 5.6% - an increase in 2015 prices of £110bn. Over this same period the population increased by 4.0%. On this basis GDP per head rose by 1.6% or £31bn. Incomes, however, did not rise by this amount because significant proportions of the increase in GDP were not paid to UK residents but went abroad.</p> <p>The sums involved can be seen from the UK’s balance of payments accounts.&nbsp; These show that between 2008 and 2015, the UK’s net income from abroad went from a positive £3bn in 2008 to a negative annualised rate of £30bn in 2015.&nbsp; Similarly, the UK’s net transfers abroad, in the form of payments to the European Union, migrants’ remittances and the UK’s aid programmes, rose over the same period from £14bn to £24bn. Adding the swing on these two figures together produces a total of £43bn. If this figure is subtracted from the £31bn calculated in the previous paragraph, less than nothing is left. </p> <p>What has happened is that expenditure per head of the population has risen but not incomes. The gap has been filled by a combination of consumer borrowing and the government spending more than it has raised in taxes, fees and charges. If we carry on as we are with increases in GDP per head continuing to be diluted on the present scale by our rising population and leakages abroad, by 2020 we will have experienced more than a whole decade where average incomes have failed to grow. If, during this period, inequality in incomes increases, as may well happen, a substantial proportion of the population will still be worse off in 2020 than in 2008.</p> <h2><strong>The government will fail to eliminate its deficit and may not be able to get it down at all&nbsp; </strong></h2> <p>It is a central plank of government policy, supported by most of the Opposition, to reduce the government deficit to zero by the time of the next general election. The table below shows why this target is extremely unlikely to be met<strong>&nbsp; </strong></p> <p><strong>UK</strong><strong> Net Lending (+) and Net Borrowing (-) by Sector- all figures in £m</strong></p><p><strong><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/MILLS2.JPG" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/535628/MILLS2.JPG" alt="" title="" width="460" height="201" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_xlarge" style="" /></a> <span class='image_meta'><span class='image_title'>CLICK TO ENLARGE</span></span></span></strong><em>Source: Table I. Net Lending by Sector in ONS Statistical Bulletin – Quarterly National Accounts 2015 Q2 and previous editions of the same table. Figures for 2014 and 2015 are still being reconciled by ONS and the net totals will also be very close to zero when this process is complete.</em></p> <p>As a matter of accounting logic, all borrowing in the economy has to equal all lending, and all deficits have to be exactly matched by surpluses. As borrowing by households at present is fairly similar to lending by corporations, the foreign balance has to be close to the government deficit. On current trends, it seems likely that the total 2015 government deficit will be about £80bn and the foreign payments deficit about £90bn</p> <p>The only way in which the government deficit could be reduced to zero by 2020 would be as a result of some combination of a huge reduction in the foreign payments deficit or much more borrowing by both corporations and households. On current trends, none of these developments looks remotely likely. It is therefore very probable that the government deficit will be similar in 2020 to what it is now or possibly even higher. Attempts by the government to reduce the deficit by cutting expenditure or increasing taxation will founder on the fallacy of composition entailed in assuming that what would work for an individual whose expenditure was greater than his or her income would work for the government as a whole. It will not do so. Government cuts, in these circumstances, will simply tend to tip the economy towards recession. </p> <h2><strong>Policy Implications&nbsp; </strong></h2> <p>Because the UK economy is now so unbalanced and distorted, it is much more vulnerable than it should be to other events and developments which may well tend to derail the trajectory of the UK economy between now and 2020. These include the introduction of domestic policies which may cause major political problems, such as the implementation of the current tax credit policies which adversely affect millions of low-paid families. They also include external threats such as the current slowing down of world economic expansion; the travails in the Eurozone which looks likely to achieve, at best, very slow growth but with the possibility of the Single Currency breaking up threatening a much bigger negative impact at least in the short term; the possibility of a banking crisis probably caused by excessive public sector lending against weak or non-existent security; and the election of governments with incoherent policies in reaction to endless austerity and economic failure, leading to weakening world trade. </p> <p>The UK badly needs to recognise how poorly positioned its economy is to provide satisfactorily for the future needs of the UK population on a sustainable basis. On present trends, on the contrary, by 2020 the UK economy may well be seen to be in deep trouble.</p><p>&nbsp;</p><p><em><strong><span>Liked this piece? Please donate to OurKingdom </span><a href="http://www.opendemocracy.net/ourkingdom/donate"><span>here </span></a><span>to help keep us producing independent journalism. Thank you.</span></strong></em></p><p><em><strong><span>&nbsp;</span></strong>John Mills is a donor to openDemocracy.</em></p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/john-mills/neither-corbyn-or-others-will-end-austerity-in-britain-unless-they-unleash-gro">Neither Corbyn or the others will end austerity in Britain unless they unleash the growth of manufacturing</a> </div> <div class="field-item even"> <a href="/ourkingdom/adam-ramsay/osborne%27s-long-term-economic-plan-is-neither-long-term-nor-plan">Osborne&#039;s &quot;long term economic plan&quot; is neither long term, nor a plan</a> </div> <div class="field-item odd"> <a href="/uk/graham-peebles/austerity-and-rise-of-poverty-in-britain">Austerity and the rise of poverty in Britain</a> </div> <div class="field-item even"> <a href="/uk/katherine-wedell/real-life-damage-of-local-authority-cuts">The real life damage of local authority cuts</a> </div> </div> </div> </fieldset> <div class="field field-rights"> <div class="field-label">Rights:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> CC by NC 4.0 </div> </div> </div> uk uk There is an Alternative John Mills Fri, 11 Dec 2015 00:11:11 +0000 John Mills 98371 at https://www.opendemocracy.net Britain will vote for Brexit, because the EU cannot give us the Europe that we want https://www.opendemocracy.net/uk/john-mills/britain-will-vote-for-brexit-because-eu-cannot-give-us-europe-that-we-want <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>Britons want a free trade, inter-governmental Europe - yet this is not what the EU is, and it's certainly not where it's headed. Because such fundamental reforms would be needed, Brexit will be the result. </p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/map.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/535628/map.jpg" alt="" title="" width="460" height="357" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_xlarge" style="" /></a> <span class='image_meta'><span class='image_title'>Flickr/Jon Ingram. Some rights reserved.</span></span></span></p><p>There is little doubt what most people in the UK would like to have as our relationship with the other EU member states. They would like to have free trade and to co-operate with everyone on the continent in all the ways which obviously make sense - on crime and terrorism; on global warming, and on all the other issues where we have common interests - but on an inter-governmental basis rather than as part of a steadily evolving political union.</p> <p>It is equally clear that the vast majority of UK voters do not like paying nearly £300m a week to the EU, net of any money coming back; they don’t like decisions on social and employment legislation being taken in Brussels rather than in Westminster; they would like us to have more control over our borders; they don’t support either the Common Agricultural or the Common Fishery Policies - and they want to make sure that, if we are the only major country in the EU but not in the euro, that we are safeguarded against being out-voted every time their interests diverge from ours. </p> <p>The problem is that the scenario which almost everyone would really like to see is not going to be on offer to us. This is not what David Cameron and George Osborne are trying to negotiate. Instead, they are pressing for very minor changes, which are going to make little or no long-term difference. These now amount to no more than trying to obtain commitments by the EU against anti-competitive labour legislation, pressing for some restriction on benefits paid to EU immigrants, asking the EU to accept that we do not want to be part of “ever closer union”, and securing some limited protection from the UK being outvoted on the eurozone.</p> <p>This leaves those, like myself, who are moderate Eurosceptics, with no choice but to be on the Vote Leave side of the argument. We would not be against staying in the EU, very probably on associate rather than full membership terms, if genuine and enforceable radical change along the lines outlined above was on offer, but we recognise that this isn’t going to happen. </p> <p>What would we settle for? What changes would have to be made to our relationship with the other member states to make people like me vote to stay in? This is a key question and the way in which I and other people like me answer it may well be an important factor in determining the outcome of the forthcoming referendum.</p> <p>The key issue is that all the changes which we would like to see accomplished, to tempt us to stay in, involve treaty changes rather than just cosmetic statements of intent. These include primacy of UK over EU law on our own territory, freedom to sign bilateral trade deals with non-EU states, and the right to determine who can settle in the UK. To this I would also add a significant reduction in the cost of our membership which - net of all money coming back - came to £11.4bn in 2014 and which is currently on a strongly rising trend. </p> <p>The problem is that treaty change is exactly what the EU leaders want to avoid. They know that, if referendums are held - which would have to happen in several countries if treaties were changed - they would very probably be lost. This is because there is no appetite among the EU electorate for the greater and greater degree of integration which the EU leadership fervently wants, and which cannot be avoided if the single currency is to survive. </p> <p>This must be one of the main reasons why the present government is asking for so little. They know that if they ask for anything more radical, the answer will be “no”. To present whatever they do manage to achieve as the triumph required to try to persuade a sceptical UK electorate to go along with it, they therefore have to ask for very small changes, because these are the only ones with any chance of being agreed. </p> <p>So this is the dilemma we and the UK voters face. As things stand now, we can either opt for staying in with very little change – although this will not be the status quo because the EU is rapidly evolving towards being a federal state to save the euro. Or we can vote to leave, thus clearing the decks for renegotiating our relationship with the other EU member states much more along the lines we want. It is because voting to leave is the only way to outflank the treaty change barrier that this looks the only option available. If we are going to achieve the stable inter-governmental and free trade long-term relationship with the EU which we would like to have - we have to leave.</p> <p>It must also be in the interest of our current EU partners as well that this should happen. We are bound to be in a different place from the other member states, because we are not in the euro and almost certainly never will be. It is not to their benefit to have us holding the EU leadership back from forming a federal state, if that is what they are determined to achieve. But if this is where we are going to be, we need to make sure that we have enough freedom of manoeuvre to avoid getting sucked into a United States of Europe as second class citizens. </p> <p>So really the bottom line is: how can we shape our future so that we can play a constructive role in Europe without getting caught up in the construction of a federal EU state involving far more political integration that nearly everyone in the UK wants? The answer is that, to do this, we need much more change than can be accomplished without the EU treaties being substantially revamped. It is because this now looks out of reach that very probably a majority of the UK electorate – supported by moderate eurosceptics like me – will vote for Brexit when the time comes.</p><p><strong><em><br /></em></strong></p><p><strong><em><span>The Economist requires you to pay a pound a week to use its website. We’ll never charge for our content, but that doesn’t mean it’s free to produce. If you can chip in a pound a week, </span><a href="http://www.opendemocracy.net/ourkingdom/donate"><span>please do</span></a><span>.</span></em></strong></p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/gerry-hassan/scotland-and-britain-have-changed-%E2%80%98big-bang%E2%80%99-of-indy-ref-and-after">Scotland and Britain have changed: the ‘big bang’ of the indy ref and after</a> </div> <div class="field-item even"> <a href="/ourkingdom/vicky-cann/cameron-and-european-commission-doing-business-of-business">Cameron and the European Commission: doing the business of business</a> </div> <div class="field-item odd"> <a href="/ourkingdom/thomas-g%C3%B6tz/power-sharing-deal-between-westminster-and-home-nations-is-needed">A power sharing deal between Westminster and the home nations is needed.</a> </div> </div> </div> </fieldset> <div class="field field-rights"> <div class="field-label">Rights:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> CC by NC 4.0 </div> </div> </div> uk Can Europe make it? Brexit John Mills Mon, 19 Oct 2015 23:11:11 +0000 John Mills 96951 at https://www.opendemocracy.net Why the UK’s housing market is in such disarray https://www.opendemocracy.net/ourkingdom/john-mills/why-uk%E2%80%99s-housing-market-is-in-such-disarray <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>The dramatic drop in private and public house building in the UK rests on a significant imbalance between supply and demand.</p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/557839/USE THIS HOUSE ARTICLE scaled.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/557839/USE THIS HOUSE ARTICLE scaled.jpg" alt="" title="" width="460" height="322" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_xlarge" style="" /></a> <span class='image_meta'><span class='image_title'>Demotix /Jonathan Nicholson. All rights reserved.</span></span></span></p><p><span>The market for housing in the UK is evidently badly out of balance. This Bulletin highlights with statistics and commentary the problems which have developed, and puts forward suggestions for policies to improve the situation which might be more successful than those being implemented at present.</span></p> <p><strong>House Construction&nbsp; </strong>Set out below are the numbers of dwellings built in England per year on average during the decades since World War II:</p> <p>&nbsp;<span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/557839/USE THIS AS FIRST GRAPH NOW.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/557839/USE THIS AS FIRST GRAPH NOW.jpg" alt="" title="" width="460" height="178" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_xlarge" style="" /></a> <span class='image_meta'><span class='image_title'>Click to expand.</span></span></span></p> <p><span>These figures highlight the problem of supply. The average number of dwellings constructed per year recently is now hardly more than a third of what it was in the 1960s. Part of the reason has been the 50% fall in private sector but much more of the problem stems from the public sector, where output has fallen from its peak by about 80% as the contribution made by housing associations has done nothing like enough to make up for the collapse in local authority provision. Faced with these figures, it is hard to avoid the conclusion that, if residential construction is to be dramatically increased, the public sector will have to play a much larger role in this process than it has done recently.</span></p> <p>Local authority construction has clearly fallen because of lack of funding, but why has private sector house building also dropped so dramatically? Planning permission problems are often cited as a main reason but it is difficult to believe that these are substantially much greater now than they were forty years ago when we were building about two and a half times as many new dwellings per year as we are now. There is still plenty of land available in the UK, where only about 7% of the total land area is urbanised. House builders tend to make money out of appreciation in value of their land banks as well as out of housing construction, but again this has always been the case and does not provide a convincing reason why so much less construction is taking place. Much more significant are two recent factors which have come together to slow down the construction of dwellings in the private sector at the same time as there has been continued to be relatively little increase in activity in the public sector. These are:</p> <p><strong>The 2008 Crash&nbsp; </strong>It is no coincidence that house construction fell dramatically after the late 2000s financial crash. Consumer confidence plummeted and mortgage finance became more difficult to find as banks restricted lending and borrowing criteria were tightened. As a result, demand fell.</p> <p><strong>House Prices&nbsp; </strong>A number of factors then came together to push up house prices in real terms, making it much more difficult to match demand with supply. The table below shows that, having been reasonably stable from the 1960s to the 1990s, since the 2000s there has been a very large increase – rather more than 40% - in the ratio between house prices and GDP per head of the population. No doubt very low interest rates are partly responsible but shortage of supply of dwellings in relation to the growing number of people living in the UK must also have been a major factor.</p> <p><strong>&nbsp;<span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/557839/use this second graph scaled.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/557839/use this second graph scaled.jpg" alt="" title="" width="460" height="216" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_xlarge" style="" /></a> <span class='image_meta'><span class='image_title'>Click to expand.</span></span></span></strong></p><p><span>This is further emphasised in the table at the top of page 3 which shows the falling number of persons per dwelling over recent decades and the enormous increase in the ratio between earnings and house prices for first time buyers over the decades since 1981, but particularly recently. &nbsp;&nbsp;&nbsp;&nbsp; </span><strong>&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;&nbsp;</strong></p> <p><strong><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/557839/USE THIS THIRD GRAPH.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/557839/USE THIS THIRD GRAPH.jpg" alt="" title="" width="460" height="164" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_xlarge" style="" /></a> <span class='image_meta'><span class='image_title'>Click to expand.</span></span></span>&nbsp; &nbsp;</strong></p><p><strong></strong><span>What are the policy implications to be drawn from these figures, especially looking at the economy not only from a housing but also from a macro-economic standpoint?</span></p> <p><strong>More House Construction&nbsp; </strong>The combination of rising living standards over past decades, rapidly increasing population, some tendency for household size to fall and falling housebuilding figures has left the UK very short of the quantity of houses and flats which needs to be provided. The only way to get house prices down to more manageable levels is to increase the supply in relation to demand.</p> <p><strong>The Public Sector</strong>&nbsp; The biggest single reason why completions have fallen so much is that the public sector, particularly local authorities, have been starved of funds for housing construction. This could be made to change with more funding but doing so would increase public sector borrowing at a time when there is heavy emphasis on getting it down. One possibility would be to use Quantitative Easing to fund public sector house construction instead of lending the money to banks.</p> <p><strong>Housing Subsidies&nbsp; </strong>The effect of shortage of supply has been to drive up prices, thus rapidly increasing the amount of current subsidies going to support tenants who would otherwise be unable to afford the rents which they have to pay. In 2013/14 Housing Benefit cost the Exchequer £23.8bn, about 30% of the entire welfare budget. This compares with the total cost of constructing the roughly 25,000 dwellings produced by the public sector in the same period which, at about £150,000 each including land costs and fees, came to less than £4bn. Clearly it would make sense, over a period, for the public sector to reduce revenue subsidies by producing more dwellings, thus reducing rent levels and consequently releasing more funding for public sector new build.</p> <p><strong>Constraints on Expanding Supply&nbsp; </strong>There have always been complaints that the planning system makes house building more difficult than it should be, and it may well make sense to make it easier to obtain planning permission for housing, although this is unlikely to be a panacea. A big increase in construction would almost certainly cause skill shortages and shortfalls of inputs such as bricks, which would take time to overcome, but achieving a big increase in construction rates would be bound to involve delays for all sorts of other administrative and planning reasons, thus providing time for physical and training bottlenecks to be overcome. None of the supply-side constraints looks impossible to resolve if the demand was there.</p> <p><strong>Demand for Housing&nbsp; </strong>Whether a big increase in housing construction takes place or not would therefore very largely depend on the extent for which demand for it materialises. For the public sector, this is very largely a question of making the money for new build available. There is every reason to believe that many local authorities, supplemented by housing associations, would be only too willing to start building again on a large scale if provided with the opportunity to do so. For the private sector, the position is more complex. House builders would need to be sure that they would make more money out of construction than by holding onto appreciating land banks. For this to be possible, they would need to be reasonably certain that there would be strong demand from purchasers capable of paying the prices for new housing being built on the required scale, either as owner-occupiers or as buyers for rent. If the rate of building of new dwellings expanded very rapidly, house prices should trend downwards as supply begins to catch up with demand, making construction more attractive than holding land banks in the hope that they will increase in value. &nbsp;&nbsp;</p> <p><strong>Mortgages&nbsp; </strong>Currently about 40% of property purchasers are cash buyers. The remaining 60% need to raise a mortgage to complete their purchases, so the availability of sufficient funds to support the volume of house purchases required is clearly crucial. Especially with the prospect of interest rate rises in the offing, for there to be a sufficient number of house purchasers<strong> </strong>capable of meeting the criteria required for them to qualify for the required finance, taking account of realistic ratios between income and house prices, house prices would need to fall, at least in the areas of the country where they are highest.</p> <p><strong>Foreign Purchasers&nbsp; </strong>One significant way of getting house prices down would be to make it less attractive for foreign buyers to pre-empt so much of the housing which comes on the market in the UK. About 75% of all new build housing in London is currently sold to foreign interests as are half the properties sold for more than £1m. Steps along these lines could supplement the reduction in house prices to be achieved by much more building of social housing via the public sector.</p> <p><strong>Aggregate Saving&nbsp; </strong>Stepping up substantially the amount of house building in the UK would involve both a real resource shift away from consumption to a higher proportion of our national income being invested, an increase in the savings ratio to make this possible, and sources of finance to make this switch achievable. All these three aspects of the transition required highlight the fact that it would be much easier to get the housing market in the UK back into better balance if we could increase the overall rate of economic growth in the economy as the Pound Campaign believes is possible.</p><p><em>John Mills is a donor to openDemocracy.</em></p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/laird-ryan/new-housing-bill-people-planning-or-productivity">The new housing bill: people, planning or productivity?</a> </div> <div class="field-item even"> <a href="/ourkingdom/nick-pearce/bubbling-up-is-there-strife-ahead-for-uk-homeowners">Bubbling up: is there strife ahead for UK homeowners? </a> </div> <div class="field-item odd"> <a href="/article/the_end_of_neo_liberalism">The financial crisis: burst bubble, frayed model </a> </div> </div> </div> </fieldset> <div class="field field-rights"> <div class="field-label">Rights:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> CC by NC 4.0 </div> </div> </div> uk uk John Mills Mon, 14 Sep 2015 07:01:03 +0000 John Mills 95844 at https://www.opendemocracy.net Neither Corbyn or the others will end austerity in Britain unless they unleash the growth of manufacturing https://www.opendemocracy.net/ourkingdom/john-mills/neither-corbyn-or-others-will-end-austerity-in-britain-unless-they-unleash-gro <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>None of the Labour candidates has an economic approach that will prove viable but it is essential to oppose austerity, what is the solution?</p> </div> </div> </div> <p>The Labour leadership campaign came alive when Jeremy Corbyn's candidacy threw down a gauntlet. To be a genuine opposition the Labour Party has to oppose austerity when it means cutting welfare and increasing inequality, while supposedly eliminating the budget deficit as the number one economic policy objective. So is there an anti-austerity policy which the Labour party could adopt which would actually work?&nbsp; </p><p>The answer is that there could be. It does not mesh in easily with what is currently being advocated by Jeremy Corbyn, but nor do the 'austerity light' policies being advocated by the other more mainstream Labour leadership contenders have any likelihood of success. </p><p>The only way to get rid of austerity and all its hugely damaging consequences for the young, the disabled, the poor, those on low wages, those dependent on social services, the sick and those on meagre pensions, is to get the economy to grow much faster and more sustainably than it is at the moment. </p> <p>This is the only way to ensure that more resources are available, so that public expenditure does not need to be cut and incomes can rise. </p><p>The fundamental problem that the Labour Party has at the moment is that it has no credible way of getting the economy to expand fast enough for these objectives to be achieved.</p> <p>To win elections Labour has to convince the electorate that it will be able to look after the disadvantaged generously without penalising and losing the support of those who are doing better but who are not prepared to see their reasonable ambitions and standard of living blunted by levels of taxation which they do not think are fair or effective. At the moment none of the policies advocated by either the left or the right of the Labour Party looks like achieveing this. </p> <p>The hard left approach is to increase public expenditure, but in ways which are very likely to run into unmanageable constraints. The soft left stance is essentially to continue with austerity but to reduce its current impact by spreading it out over a longer period. Unfortunately, neither policy has any realistic chance of getting the economy to grow fast enough to enable Labour to achieve its goals and to retain electoral support.</p> <p>The hard left advocates getting the economy to grow by organising a big net increase in demand, coming primarily from the public sector, by increasing expenditure and maybe reducing taxation. </p> <p>There are, however, huge constraints on getting this to work, especially on any major scale.&nbsp; One constraint is the size and nature of our foreign payments deficit, which is already 6% of our GDP and rising sharply. Expanding domestic demand is likely to worsen this and increase imports but not exports. Another is the already very large gap between government income and expenditure. Both these deficits are bound to increase with more net state spending. The UK economy is too unbalanced and too uncompetitive to take this kind of strain, which means that financing and borrowing constraints are likely to make this kind of expansionist policy impossible to implement. </p> <p>The soft left advocates an approach that is equally problematical. Giving pride of place to austerity policies to get the government deficit down will not get the economy to grow and – worse still – they very probably will not get the deficit down either. </p><p>The excess of government expenditure over its income is not driven by too much state spending, and it is a fallacy to believe that it is. </p> <p>The real reason for the government deficit is that it is largely the mirror image of the foreign payments deficit. This deficit, the sum of what we sell to the world and buy from the world, is negative. To pay for this deficit it has to be matched by a surplus somewhere else in the economy, to make the accounts balance. There has to be lending from abroad to finance the balance of payments deficit. Obviously, what is lent has to be be exactly matched by borrowing. If this is not done by consumers or by the corporate sector, it defaults back to being done by the government. <a href="https://opendemocracy.net/author/john-mills">I have set out this argument frequently</a> and in depth. &nbsp; </p> <p>If we can't get growth by simply increasing government expenditure or by cutting it, however slowly, what is the way out of austerity? How can we get the economy to grow fast and sustainably, so that austerity policies are not necessary? </p><p>The solution is for the state to harness domestic manufacturing, encouraging market forces to rebalance the UK economy. To enable us to pay our way in the world, we need to expand our manufacturing base from around 10% to at least 15% of GDP.&nbsp; </p><p>To do this, we need to make it possible for a substantial volume of low- and medium-tech – as well as high-tech - industries to become viable again in the UK and for this to happen we need a much lower exchange rate. The increased profitability thus generated in the most productive sectors of the economy – light manufacturing and technology-driven industry – will then drive up investment at the same time as increasing our exports and reducing import penetration. </p> <p>This is the policy which will get the economy to grow at a fast and sustainable rate, reducing both national and government borrowing to a level which we can easily afford. As I have shown, the numbers hold together, so that it is both possible to reduce borrowing, to increase investment and to raise living standards all at the same time. These are the conditions Labour can seek to achieve and needs to advocate. </p> <p>The problem will then be to persuade the electorate to trust Labour, if one of its main policy planks is to use a competitive but realistic exchange rate strategy to rebalance the economy and to get it back on track.&nbsp; </p><p>Perhaps this is impossible. Devaluation is a dirty word and a very hard sell. But if Labour shies away from articulating rational if difficult policy options, it may be doomed anyway. And it could be that an approch that aims to encourage manufactring by putting the financial sector second will prove popular. Anyway, there appears to be no other policy on the horizon which has any realistic chance of actually getting rid of austerity, and Labour must clearly seek to achieve this or it will continue to drive away Labour voters and alienate Party supporters.&nbsp; </p> <p>This is then the dilemma. Should Labour continue to advocate either its current hard or soft left economic policies which, for different reasons, have very little prospect of being successful? Or should the Party look to an approach which will have a much better chance of working if put into practice, even if it may be hard to persuade the electorate that it should be adopted?</p><p><em>John Mills is a donor to openDemocracy.</em></p><div class="field field-rights"> <div class="field-label">Rights:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> CC by NC 4.0 </div> </div> </div> uk uk Austerity and Recovery There is an Alternative Devalue or Else! John Mills Wed, 09 Sep 2015 18:25:13 +0000 John Mills 95821 at https://www.opendemocracy.net Why the UK’s economy is still grossly out of balance https://www.opendemocracy.net/ourkingdom/john-mills/why-uk%E2%80%99s-economy-is-still-grossly-out-of-balance <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>Investment is low, the trade deficit is growing, and what growth we have is largely driven by ultra-cheap money and asset inflation. This is unbalanced and unsustainable.</p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none caption-xlarge'><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/555395/14842338124_673f9c6ec1_z.jpg" alt="Image of the Bank of England." title="Bank of England" width="460" height="307" class="imagecache wysiwyg_imageupload caption-xlarge imagecache imagecache-article_xlarge" style="" /> <span class='image_meta'><span class='image_title'>Consumer demand has been propped up by low interest rates. Flickr/Bank of England. Some rights reserved.</span></span></span></p><p>On 30th June 2015, the Office for National Statistics published key figures – set out below with comments – for the first quarter of 2015.</p><p><span class='wysiwyg_imageupload image imgupl_floating_none caption-xlarge'><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/555395/Table 1_0.png" alt="" title="Table 1" width="460" height="194" class="imagecache wysiwyg_imageupload caption-xlarge imagecache imagecache-article_xlarge" style="" /> <span class='image_meta'></span></span></p><p class="MsoNormal"><span><em>Source: ONS BNBP Balance of Payments Quarterly First Releases.&nbsp; All figures are in £m</em>.</span></p><p><strong>Trade Balance&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </strong>The trade balance shows a modest improvement on previous trends but it is questionable whether this will be maintained with sterling at its current strength.</p> <p><strong>Net Income from Abroad </strong>The latest statistics show a substantial worsening of recent already highly adverse trends. The 2014 negative total has been sharply increased from previous estimates – from £38,754m to £44,976m – and, at an annualised rate, the 2015 figure may well finish up in excess of £50bn, a huge swing from the position less than five years ago. It is impossible not to associate this vast deterioration with the massive sell-off of UK assets which is currently financing our balance of payments deficit.</p> <p><strong>Net Transfers Abroad&nbsp; </strong>Our Net Transfers Abroad have fallen back slightly in the first quarter of 2015 compared to previous levels but are unlikely to reduce significantly on an annual basis.</p> <p><strong>Net Totals&nbsp;&nbsp; </strong>Mainly because of previous underestimates by ONS of the rate at which our Net Income from Abroad has deteriorated, the total Balance of Payments deficit for 2014 has also been sharply uprated from the 2014 Q4 ONS estimate of £97,920m to £105,651m – an increase of almost 8%. On present trends the 2015 overall foreign payments deficit is likely to be at least £100bn and may well be even higher. &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p> <p>The next table shows the position on borrowing and lending in the UK economy, with figures going back to 2000 to provide context for what is happening now.</p><p><span class='wysiwyg_imageupload image imgupl_floating_none caption-xlarge'><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/555395/Table 2.png" alt="" title="Table 2" width="460" height="337" class="imagecache wysiwyg_imageupload caption-xlarge imagecache imagecache-article_xlarge" style="" /> <span class='image_meta'></span></span></p> <p><em>Source: Table I. Net Lending by Sector in ONS Statistical Bulletin – <em>Quarterly National Accounts 2015 Q1 </em>and previous editions of the same table. All figures are in £m. Figures for 2013, 2014 and 2015 are still being reconciled by ONS and the net totals will also be very close to zero when this process is complete.</em></p> <p><strong>Public Sector&nbsp; </strong>Public sector borrowing fell back during the first quarter of 2015 to an annualised rate of about £70bn as a result of much more borrowing by both the corporate and household sectors.</p> <p><strong>Corporations&nbsp; </strong>Increased borrowing by the corporate sector reflects greater levels of investment in relation to retained profits and is generally to be welcomed. Total investment as a percentage of GDP (excluding R &amp; D) rose from 13.5% in 2014 to 13.7% in 2015 Q1, although the proportion of this total devoted to manufacturing remained at no more than just over a quarter, confirming that most UK investment is not concentrated in the sectors of the UK economy where it is likely to be most productive.</p> <p><strong>Households</strong>&nbsp; &nbsp;Consumer borrowing rose sharply in the first quarter of 2015 and at an annualised rate is now running at about £20bn per annum. This is £80bn a year<strong> </strong>– nearly 5% of GDP – more than it was five years ago. Especially with the prospect of interest rate rises not being too far away, it is highly questionable whether this rate of increase in consumer borrowing is either desirable or sustainable.</p> <p><strong>Foreign Balance</strong>&nbsp; Our balance of payments deficit has to be financed by selling assets or borrowing from abroad as the money sucked out of the economy by the current deficit has to be matched exactly by inflows of funds from overseas. In turn, our lending from abroad has to be matched pound for pound by either corporate or household or government net borrowing. &nbsp;</p> <h2><strong>Policy Conclusions</strong></h2> <p>The UK economy is extremely unbalanced. Total investment as a percentage of GDP, at less than 14% (excluding R&amp;D), is one of the lowest in the world, and much too little of the total is investment in seriously productivity enhancing assets. Manufacturing as a proportion of GDP, now barely above 10%, is far too low to avoid our having much too little to sell to the rest of the world to pay for our imports. On top of a chronic trade imbalance we have net income from abroad becoming more and more strongly negative and net transfers abroad on a generally rising trend, providing us with an annual balance of payments deficit now running at over £100bn a year – over 6% of GDP. In consequence, both as a nation and through our government, we are running up debt at an unsustainable basis. What growth we have is very largely consumer led, largely driven by ultra-cheap money and asset inflation, both of which are also unsustainable in anything but the relatively short term.</p> <p>Unfortunately, the figures in the tables above do nothing to indicate that any of these chronic problems are being addressed successfully – or indeed are being tackled at all. In particular:</p> <p><strong>Investment and Productivity</strong> &nbsp;&nbsp;With investment as low as it is and so little of it invested in the most productive parts of the economy, where depreciation now probably exceeds new investment, there is no prospect of any significant and sustained increases in output per head and no way in which we are therefore going to see any appreciable rise in living standards.</p> <p><strong>Balance of Trade&nbsp; </strong>If we continue with an exchange rate which makes almost all internationally tradable low and medium tech manufacturing uneconomic, we will never raise the proportion of out GDP devoted to manufacturing to a level – probably around 15% – which would enable us to avoid unending trade deficits.</p> <p><strong>Net Income from Abroad&nbsp; </strong>If we continue to live beyond our means to the tune of 6% plus per annum, selling assets or borrowing from abroad on which there is a return of some 5% per annum, our net income from abroad will deteriorate at about £5bn per annum every year for the foreseeable future.</p> <p><strong>Transfers Abroad&nbsp; </strong>We have net transfers abroad in the form of payments to the European Union, net remittances by those who have migrated to the UK and foreign aid programmes which, taken together, cost sums of money which we are currently incapable of funding other than by selling assets or borrowing from abroad.</p> <p><strong>Balance of Payments&nbsp; </strong>Overall, we have balance of payments deficits every year whose total value is now spiralling up to levels which are becoming more and more unsustainable.</p> <p><strong>National Solvency&nbsp; </strong>As a country, we are becoming deeper and deeper in debt as our total assets become worth increasingly less than our total liabilities, as a result of the relentless sale of assets which we have allowed to take place, to finance a standard of living which we are not earning and which we cannot afford.</p> <p><strong>Government Deficit&nbsp; </strong>The government deficit is very largely the residual left over when household and corporate borrowing is deducted from the proceeds of selling assets overseas and borrowing from abroad to finance our balance of payments deficit. If our foreign payments deficit continues to be in excess of £100bn per annum, there is not the slightest chance of the government deficit falling to zero, or even being reduced to a significantly lower but more manageable level.</p> <p><strong>Consumer Borrowing&nbsp; </strong>Yet again, we are falling back on rising consumer debt to fuel demand whereas actually what we need is for consumers to save more to finance much higher levels of productive investment.</p> <p>The overall conclusion is that the recent GDP expansion we have seen – at last at a rate sufficient to begin to bring average living standards up to where they were in the 2000s – is very unlikely to be sustained. We have seen some growth as more and more people have been pulled into the labour market and this is very much to be welcomed. But it is not sustainable. Growth is much more likely to peter out as a result of a combination of turmoil in the EU, government expenditure cuts, our worsening balance of payments position, and no net investment in the crucial sectors of the UK economy that are capable of producing significant productivity increases.</p> <p>The sad truth is that our unbalanced and uncompetitive economy is simply not capable of achieving any worthwhile sustained growth. This is why we face years of stagnating living standards, as whatever growth we do achieve is diluted by our rapidly rising population. Projections that we will continue to see the UK economy growing at up to 3% per annum will, unfortunately, turn out to be sadly misplaced. The economic strategy currently in vogue is absolutely no way to run the UK economy.</p><p><span>This article is part of the </span><a href="https://www.opendemocracy.net/ourkingdom/collections/there-is-alternative">There is an Alternative</a><span> series. An economist and entrepreneur, </span><a href="http://www.john-mills.info/" target="_blank">John Mills</a><span> is Chairman of JML. He recently established </span><a href="http://www.poundcampaign.org.uk/" target="_blank">The Pound Campaign</a><span> to raise awareness of the uncompetitive exchange rate and the effect it is having on UK manufacturing and the wider economy. John Mills sits on openDemocracy's board.</span></p><p><em>John Mills is a donor to openDemocracy.</em></p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/john-mills/uk-isnt-investing-anything-in-its-future">The UK isn&#039;t investing anything in its future</a> </div> <div class="field-item even"> <a href="/ourkingdom/john-mills/britain%27s-dysfunctional-economy-cannot-last-but-we-can-fix-it">Britain&#039;s dysfunctional economy cannot last - but we can fix it</a> </div> </div> </div> </fieldset> <div class="field field-topics"> <div class="field-label">Topics:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> Economics </div> <div class="field-item even"> Ideas </div> </div> </div> <div class="field field-rights"> <div class="field-label">Rights:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> CC by NC 4.0 </div> </div> </div> uk uk Economics Ideas There is an Alternative John Mills Thu, 30 Jul 2015 08:33:55 +0000 John Mills 94850 at https://www.opendemocracy.net High-tech isn't enough: Britain needs to stop pricing its low-tech goods out of the world https://www.opendemocracy.net/ourkingdom/john-mills/hightech-isn%27t-enough-britain-needs-to-stop-pricing-its-lowtech-goods-out-of-w <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>The new book <em>Progressive Capitalism in Britain</em> encourages a narrow focus on high-tech exports. Instead, Britain must allow its medium and low tech exports flourish too.</p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/553846/1114699_9da0afe2.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/553846/1114699_9da0afe2.jpg" alt="" title="" width="460" height="399" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_xlarge" style="" /></a> <span class='image_meta'></span></span><em>© Copyright <a title="View profile" rel="creator" href="http://www.geograph.org.uk/profile/3176">Hugh Venables</a> and licensed for <a href="http://www.geograph.org.uk/reuse.php?id=1114699">reuse</a> under this <a class="nowrap" title="Creative Commons Attribution-Share Alike 2.0 Licence" rel="license" href="http://creativecommons.org/licenses/by-sa/2.0/">Creative Commons Licence</a>.</em></p><p><em>Progressive Capitalism in Britain</em> summarises much of the progressive thinking which is currently taking place in the UK on how we should try to shape our economy over the coming years. How should we get it to perform both better and more fairly? How is an economy which suffers particularly from both static productivity and a large structural balance of payments deficit to be galvanised into delivering higher living standards not just for those who are already well off but across the board?</p> <p>The answers provided are familiar. We need to reform our financial and governmental institutions to make them better at supporting high tech industry. There needs to be much more of a focus on our vocational educational system. Companies need to take a longer term view. Financial services need to be better geared to supporting industry rather than the housing market. The crucial issue, however, is whether changes along these lines, however desirable they may be in themselves, will make any real difference to our economic prospects.</p> <p>First, does it really make sense to see the future in high rather than medium and low tech manufacturing? It is true that a lot of our industry which sells abroad is high tech but this is largely because its output is both not generally very price sensitive and – partly for this reason – difficult but not impossible to attack from much lower cost base economies. This is why it has survived while industries which are more vulnerable have all gone under as the proportion of our GDP coming from manufacturing has gone down from about a third as late as 1970 to barely 10% now. The problem with relying on high tech is then twofold. First there will never be enough of it even in the best of circumstances and second, just because it is more difficult to attack, it does not mean that it is not vulnerable to lower cost competition. Relying on high tech thus poses both a short and a longer term problem of vulnerability.</p> <p>If this is true, however, it leads to a very awkward conclusion. We are never going to be able to pay our way in the world unless we can also compete - at least on import substitution if not always on exports – with enough low and medium tech manufacturing, so that we can get the proportion of GDP coming from manufacturing as a whole up to about 15% of GDP. Without this, we will never stop the balance of payments being a heavy disinflationary burden. For this rebalancing to be achieved, we will, however, need to be competitive across a much wider range of manufacturing output than we have at the moment. For this to happen, we need a far lower exchange rate – a factor not mentioned anywhere in <em>Progressive Capitalism in Britain.</em></p> <p>The fact that the cost base in the UK – all the components of cost in sterling that are charged out to the rest of the world via the exchange rate – is so high also bears very heavily on another of the issues raised in the booklet. The main reason why we have so many people on low wages is that, via our over-valued currency, we try to charge out our labour costs at a higher price than the rest of the world is prepared to pay. This and the extreme difficulty of making any money out of manufacturing for export means that investment in the potentially most productive part of our economy is exceptionally low, making it impossible to price ourselves back into the market by increasing output per head. &nbsp;This is why we are currently locked into a vicious spiral of pitifully low levels of investment, static productivity and low wages.</p> <p>The solution advanced in <em>Progressive Capitalism in Britain</em> is to concentrate resources on increasing the education and skill levels in the UK labour force. Other things being equal, of course the higher the qualifications that the workforce has, the better, but many jobs which are well worth doing – especially outside high tech industries - do not require either high levels of education or training. More important are workforces which are punctual and reliable - qualities available across all socio-economic groups. Higher productivity can then come from investment in labour saving machinery rather than enhanced brainpower. &nbsp;The danger in concentrating on higher and higher skill levels, which are actually only appropriate for quite a narrow range of jobs especially outside high tech industries, is that far too many people get left out because there are too few employment opportunities in the sorts of activities where very high skill levels count. </p> <p>This analysis suggests that – leaving aside whatever else is done on the supply side to improve the competitiveness of the UK economy - concentrating resources on high tech and better education and training is going to be much less effective at getting the UK to pay its way in the world than making the whole economy more competitive by going for a much lower exchange rate. This is not a perception which is widely shared, but as long as all the available intellectual horse-power is deployed into advocating plying resources into too narrow and vulnerable a sector of our economy, we will go on losing ground in world markets, the balance of payments will be a constraint on expanding the economy and living standards and job opportunities will stagnate. This is surely not what the authors of <em>Progressive Capitalism in Britain</em> want to see happening.</p> <p><em><strong>John Mills is a funder of openDemocracy.</strong></em></p><p><em><strong></strong></em><em>John Mills is a donor to openDemocracy.</em></p> uk uk There is an Alternative John Mills Wed, 25 Mar 2015 00:11:11 +0000 John Mills 91489 at https://www.opendemocracy.net Britain's dysfunctional economy cannot last - but we can fix it https://www.opendemocracy.net/ourkingdom/john-mills/britain%27s-dysfunctional-economy-cannot-last-but-we-can-fix-it <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>Because sterling is much too strong, manufacturing as a percentage of GDP in the UK has shrunk from 32% as late as 1970 to the unviable level of barely 10% now. </p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/mills3.JPG" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/535628/mills3.JPG" alt="" title="" width="460" height="301" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_xlarge" style="" /></a> <span class='image_meta'><span class='image_title'>CLICK TO ENLARGE</span></span></span></p><p>Most manufacturing operations, as is confirmed by the Office for National Statistics, (ONS) have a cost structure which clusters round about one third of charges being those for which there are world prices while two thirds are determined by local cost conditions. Typically there are world prices for raw materials and plant and machinery and locally determined prices for more or less everything else. The cost base comprises all of the charges which are incurred in the local currency. In our case, of course, this is sterling. </p> <p>The cost base is made up of a very wide variety of charges – including everything from travel expenses to audit costs, from fuel bills to cleaning charges, from repair bills to postage costs, from insurance premiums to printing and stationery. It includes direct labour costs but also interest charges, rent and the need for a level of profitability. Rather more than half these charges are essentially labour costs because compensation for employment represents about 55% of our Gross Domestic Product (GDP). The remaining 45% is made up of what is received as unearned income in the form of payments for inputs such as rent, interest and dividends.</p> <p>There is a stark contrast between those costs which are determined by world markets and those incurred domestically. Measured in an international currency such as dollars, everyone all over the world has to pay more or less the same amount for inputs, particularly raw materials and plant and equipment, for which there are world markets. The charges for domestically incurred costs, however, can and do vary enormously, measured in international terms, such as in US dollars. The rate at which all these domestic costs are charged out to the rest of the world depends almost entirely on the exchange rate. If the currency is strong, measured in international currencies these costs will be high and the price for goods to be exported will seem to foreign buyers to be expensive and, conversely, if the domestic currency is undervalued they will seem cheap.</p> <p>Some simple maths shows how powerful influence of the exchange rate is on export costs. Between 1977 and 1981, the UK’s exchange rate rose by about 60%. Measured in world prices, the costs of raw materials and new machinery stayed the same but all the cost base costs rose by 60%. This meant, as a first approximation, that UK export costs, measured in international currencies, rose by two thirds of 60% - about 40%. This did not affect some export industries very much because they were in non-price sensitive markets such as aerospace, arms, pharmaceuticals and perhaps vehicles. All these industries are protected by long and complicated supply chains, high levels of expertise and experience which take a long time to accumulate, patents and other forms of intellectual protection, strong brands and sometimes competitors in other countries, such as the USA, where exchange rates also strengthened enormously. It did, however, have a devastating impact on manufacturing which was not protected in these ways and where therefore sales were much more price sensitive. </p> <p>The situation was then made much worse by what happened in the East. Whereas most countries in the West, heavily influenced at the time by monetarist doctrines, adopted policies which greatly increased their exchange rates, very different policies were adopted round most of the Pacific Rim. In China, there was a huge devaluation of the renmimbi, by about 75% between the 1980s and the 1990s, as the graph shows.</p><p>Big exchange reductions were also implemented by many other Asian countries, following the 1997 Asian financial crisis. The Korean won, for example, fell by about 50% and the Malaysian ringgit by 35%. Because, as the graph shows, countries such&nbsp; as the UK, far from taking action to ensure that their economies remained reasonably competitive, allowed – or even encouraged – their exchange rates to become &nbsp;ever higher; their industries exposed to price competition were completely unable to compete.&nbsp; As a result, most countries in the West rapidly de-industrialised.</p> <p>This matters hugely for three reasons. The first is that productivity in much easier to increase in manufacturing than it is in most service industries. If you replace a machine which makes one unit with one which produces two, you double productivity whereas changing organisations to make them even five or ten per cent more efficient is extremely difficult. Second, manufacturing produces a far better spread of high quality and well paid jobs both regionally and in socio-economic terms than is the case in services. Third – and perhaps most crucially – most international trade is in manufactured goods, even for a country such as the UK with a very weak manufacturing base, and if we do not have enough to sell to the rest of the world, we cannot pay for our imports. This is exactly what has happened to us.&nbsp; We have not had a visible trade surplus since 1982 or avoided an overall balance of payments deficit since 1985 – now 30 years ago. The resulting deficits have sucked demand out of the economy causing slow growth, rising unemployment, increasing inequality and ever rising debt. </p> <p>The consequence is that the UK economy is now almost incredibly unbalanced. As a result of slow growth feeding on itself the proportion of our national income which we invest in the future – at barely 14% excluding research and development – is now one of the lowest in the entire world, where the average is 24%. In China it is 46%. We now have too little manufacturing in the UK for us to be able to pay our way and as a result we have a massive balance of payments deficit - about £100bn in 2014 with a higher figure still expected in 2015. To make up for the national income which we enjoy spending but which we are not earning, we continue to sell off vast quantities of national assets and to borrow huge sums from abroad, which is why both the UK economy as a whole - and the government in particular - are getting deeper and deeper into debt. What growth we have is very largely driven by consumer demand, fuelled by asset inflation on a scale which is completely unsustainable and cannot last.</p> <p>What can we do to remedy this situation? There are plenty of things which need to be done on the supply side of the economy – to improve our education and training, for example, and to upgrade our infrastructure, to install faster broadband, and to update our planning procedures. But we also need to act on the demand side. We need to provide the right economic incentives to get people to invest on a big scale where investment is really needed – and the place where the highest returns are to be found, given the right conditions, is in light relatively low tech industry. To make this occur, we need to ensure that investment of this type is highly profitable – and to do this we need to make sure that the cost base is low enough for UK pricing – both for exports and for import substitution – to be competitive.</p> <p>How much lower would the exchange rate need to be to make this happen? It depends on what we want to try to achieve, and there is a simple trade-off. The lower the exchange rate, the more competitive the cost base will be, the more response there will be from both exports and imports, and the faster the economy will grow. Careful modelling of the economy shows that if the exchange rate stays at $1.50 to $1.60 to £1.00, the economy will barely grow at all for the foreseeable future. At $1.00&nbsp; to $1.10 to £1.00, with an equivalent reduction in the exchange rate to other currencies such as the euro, within five years the economy could be growing at a sustainable rate of 4% to 5% per annum. </p> <p>Is this possible? You have only to look round the world to see that it is. The common factor between all the economies which have grown fast since World War II has been that they have all had low exchange rates, competitively priced cost bases and successful exports. Outstanding examples include most of Western Europe during the 1950s and 1960s, Japan through until the 1980s, the Tiger economies (Singapore, Hong Kong, Taiwan and South Korea) right up to now, and of course China, which has grown by around 10% per annum for every decade since the 1980s. Why has the UK missed out? Because we have always tried to keep our exchange rate as high as possible rather than realising how crucial it is to keep it down to a competitive level.</p> <p>It is not an exaggeration to say that it is perverse attitudes to the exchange rate – either ignoring it completely or favouring it being maintained at completely unrealistic and uncompetitive levels - which have very largely been responsible for generating the chronic weaknesses from which the UK economy suffers. If we deliberately – or by default – continue to charge out our cost base to the rest of the world at levels which are far above the world average, then the consequence will be continuation of our all too obvious decline in share of world trade, constant balance of payments problems, slow or non-existent growth, rising inequality, increasing debt, and relative if not absolute national decline. Relatively developed and well diversified economies like that of the UK need realistic exchange rate policies just as much as they need stable fiscal and monetary strategies. When all three economic policy components pull in the same direction, spectacularly successful economic outcomes become relatively easy to achieve. When the crucial cost link between our economy and all the rest of the world is either ignored or misjudged in the way we have seen in the UK, the inevitable consequence will continue to be the kind of desperately poor economic performance we have seen as our political institutions slowly fragment under the strain of completely unnecessary austerity, stagnant living standards and the inability of our political leadership to achieve tolerably successful economic outcomes.</p><p><span>This article is part of the </span><a href="https://www.opendemocracy.net/ourkingdom/collections/there-is-alternative">There is an Alternative</a><span> series. An economist and entrepreneur, </span><a href="http://www.john-mills.info/" target="_blank">John Mills</a><span> is Chairman of JML. He recently established </span><a href="http://www.poundcampaign.org.uk/" target="_blank">The Pound Campaign</a><span> to raise awareness of the uncompetitive exchange rate and the effect it is having on UK manufacturing and the wider economy. John Mills sits on openDemocracy's board and is a supporter of OurKingdom.</span></p><p><em>John Mills is a donor to openDemocracy.</em></p> uk openEconomy uk There is an Alternative John Mills Mon, 02 Mar 2015 09:18:24 +0000 John Mills 90870 at https://www.opendemocracy.net Why it is much easier than most people think to fix the UK economy https://www.opendemocracy.net/ourkingdom/john-mills/why-it-is-much-easier-than-most-people-think-to-fix-uk-economy <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>We need to move investment to those areas with the highest returns for society as a whole. The best way to do that is to fix our over-valued currency. </p> </div> </div> </div> <p>The reason why most people believe that it is impossible for economies such as ours to grow faster than 2% to 3% per annum at best - and why it is likely that we will not even do as well as this over the coming years - is that these beliefs are largely founded on two assumptions which are simply not correct. These are:</p> <p>1.A&nbsp;&nbsp;&nbsp;&nbsp; It does not make much difference what we charge the rest of the world for the goods and services we sell to them. They will always sell in roughly the same quantities whatever price we ask our export customers to pay for them, so the exchange rate makes little difference either to our competitiveness, our trade balance or to our growth prospects and its level does not therefore matter much if at all. Anyway, the exchange rate is fixed by market forces over which governments have little or no control.</p> <p>1.B&nbsp;&nbsp;&nbsp;&nbsp; All types of investment produce roughly the same returns to whoever finances them. It does not therefore make much difference where within the economy investments are made. The returns for the economy as a whole tend to be more or less the same for all sorts of investment projects, so there is no great benefit in prioritising some forms of investment over others.</p> <p>It is because both these assumptions are wholly unfounded that there is so little understanding either among politicians, the civil service, commentators or the academic world as to why the UK economy has for a long time performed so relatively poorly and what needs to be done to make it achieve much better results. </p> <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <strong><span>Competitiveness</span></strong></p> <p>The reality is that most international trade, although not all, is hugely price sensitive, particularly the majority of it which consists of relatively low-tech manufactured goods. Some manufactured products are not very price sensitive – including most of those the UK now exports, such as arms, aerospace, pharmaceuticals and vehicles. This is because they are protected by a combination of complex supply chains, large amounts of accumulated development and production expertise, first mover niche protection, extensive intellectual property rights, highly developed brands, politically determined procurement policies – and sometimes by exceptionally good management. It is for these reasons that they still exist in the UK. Industries without these advantages have nearly all been driven out of business. Most manufacturing in our globalised world is not, however, protected in any significant way. The production techniques employed are widely known and available. The key expertise involved then lies in developing and distributing the products which are manufactured. Where they are made depends very largely on where they can be produced at the cheapest price, allowing for quality and reliability. </p> <p>Typically for most manufacturing operations, about one third of costs are raw materials and depreciation. For these inputs there are world prices. The remaining two thirds of total costs – the cost base - are incurred in the domestic currency, which of course in the UK’s case is sterling. These cover everything from labour costs to charges for premises, from bought in services such as cleaning and accountancy to transport and energy costs, from interest charges to the profit needed to keep businesses viable. The price we charge the rest of the world for all these costs is almost entirely determined by the exchange rate. If we want to keep up with the rest of the world and to avoid our economy stagnating, we therefore have to ensure that we have an exchange rate which allows us to charge out our cost base at a competitive rate – allowing for the productivity of our labour force compared to those in other countries.</p> <p>There are at least three immediate ways of telling whether our economy has a competitive cost base or not. One is to observe the trends in our share of world trade. The second is to measure directly the cost of producing a wide variety of manufactured goods in the UK compared to the prices at which they are available on world markets. The third is to observe the proportion of the UK economy devoted to the types of manufacturing which do not have the forms of protection described above.&nbsp; </p> <p>Readily available statistics then tell the story. Our share of world trade, which was 10.7% in 1950 had fallen to barely half this figure by 1980 and has now halved again, as uncompetitive export pricing has dragged down our growth rate. Direct measurement of the costs of a wide range of manufactured goods suggests that they cost at least 20% more to produce in the UK than on world markets, if we can still produce them at all. As a share of our economy manufacturing – over 30% as late as 1970 – is now down to barely 10%, and of this percentage well over half is taken up by output of goods whose markets are in one way or another protected. What has gone from the UK is nearly all the production which does not fall in this category. </p> <p>The reality is that we have been trying for far too long to sell our output, especially of manufactured goods, at far too high prices on world markets and we have priced ourselves out of the market by charging much too much. In particular, we have tried to sell our labour inputs, allowing for productivity which is a combined factor of education, training, and the capital equipment we have available for it, at far above world prices. This is why we have so much of our labour force which is either employed at very low wages or out of work altogether. Those lucky enough to be endowed with sufficient skills and connections can still compete but millions of people who could, given the right exchange rate, be gainfully employed are consigned – completely unnecessarily - to life without high quality work.</p> <p><strong><span>Returns on investment</span></strong></p> <p>As to investment, far from all of it producing roughly the same return to the economy, the reality is that there are huge variations. Most public sector investment – housing, schools, hospitals, roads and public buildings – produces barely sufficient returns to cover the interest charges involved in financing it. Investment in the service sector is more variable but the total returns to most of it is still very modest. Nowadays, a high proportion of business investment is being deployed on projects such as building office blocks and opening new restaurants, none of which produce huge returns to the economy as a whole. The difference between investments of this sort and those in light industry – and some parts of the service sector such as those producing innovative IT applications – is that they largely depend on doing what was done before more efficiently, which is possible but incremental in scale. Improvements in output of this sort are, however, quantitatively different from what happens when technology, usually embodied in machinery, is employed to produce perhaps twice as much as was produced before with the same inputs. </p> <p>The key to getting the economy to grow faster, therefore, is to get as much investment as possible concentrated in sectors of the economy where the application of technology can produce the highest returns to the economy as a whole. This tends very strongly to be in light manufacturing – and also in related parts of the service sector - where big productivity increases are spread out not only in returns to those who provided the necessary financial resources, but also in higher wages, larger profits, more taxable capacity and better products. The key to getting investment of this sort carried out – and on a sufficient scale – is to make it highly profitable: exactly opposite to the condition which prevails at the moment in the UK. </p> <p><strong><span>How to get this done</span></strong></p> <p>The problem is how to make the sort of investment we need most profitable enough to ensure that it is undertaken on a sufficient scale and – where there is competition for resources - in preference to other forms of investment with much lower rates of return. The answer is that investment in manufacturing, particularly light industry, which would then be capable of increasing both exports and import substitution to the extent we need, has to be made much more financially attractive – and by far the most effective way to do this is to have a much lower exchange rate. This automatically reduces all the costs in sterling – typically about two thirds of the total - which have to be charged out to the rest of the world in export prices, or which inhibit goods currently being bought from abroad being made in the UK because it is so much more expensive to produce them here than in other countries. </p> <p>If we are going to be able to pay our way in the world, and to avoid the endless balance of payments problems we have, which suck demand out of our economy, encourage borrowing, and constrain the rate at which our economy can grow, we have to increase the proportion of our GDP which comes from manufacturing from around 10% to 15%. About 60% of all our exports and 75% of all our imports are goods rather than services and for both exports and imports about 80% of all these visible goods are manufactures rather than fuels or raw materials. Thus the only practical way to get our foreign payments back into balance is for us to sell more manufactures overseas and to produce more in the UK of those we need for our own consumption.</p> <p>How much adjustment to our exchange rate would be required to bring about the changes in profitability incentives we so badly need? Because sterling is still so over-valued, to make major investments in manufacturing capacity viable financially, sterling would have to come down to about $1.10 or about €0.85. Is this possible? It certainly would be if the government realised what needed to be done and was sufficiently determined to make sure that it happened. Some fairly simple calculations then show what could be achieved between, say, 2015 and 2020 with a competitive exchange rate instead of what we have at the moment. Economic growth over this period would be 4% to 5% per annum instead of 1% - a cumulative increase of over 25% compared to 5%, allowing us to keep up with the rest of the world instead of constantly falling behind. Gross investment as a percentage of GDP would rise by about 10% of our national output. Unemployment would fall towards 3% and living standards would increase by about 3% per annum instead of stagnating as they are now. The government deficit would fall from close to 6% of GDP to an easily manageable 3%, so that total government debt would fall over the next decade to about 60% of GDP instead of rising to more than twice this percentage as will happen under current policies. Government expenditure as a percentage of GDP would fall from its current 45% to about 40% but there would be much more to spend on providing services instead of paying interest charges. Inflation would probably be slightly higher – averaging around 3% rather than 2% - while the Gini coefficient, the most widely used measure of inequality, would drop from its current 36 to about 30 as both regional and socio-economic inequality fell towards the sort of level seen in the 1950s and 1960s.</p> <p>All of this is possible. Why don’t we make sure that it happens?</p><p><strong><em><br /></em></strong></p><p><strong><em>This article is part of the <a href="https://www.opendemocracy.net/ourkingdom/collections/there-is-alternative">There is an Alternative</a> series. An economist and entrepreneur, <a href="http://www.john-mills.info/" target="_blank">John Mills</a> is Chairman of JML. He recently established <a href="http://www.poundcampaign.org.uk/" target="_blank">The Pound Campaign</a> to raise awareness of the uncompetitive exchange rate and the effect it is having on UK manufacturing and the wider economy.</em></strong></p><p><em>John Mills is a donor to openDemocracy.</em></p> uk uk There is an Alternative John Mills Tue, 10 Feb 2015 00:11:11 +0000 John Mills 90289 at https://www.opendemocracy.net The 2008 crisis and the role of exchange rates and trade flows https://www.opendemocracy.net/ourkingdom/john-mills/2008-crisis-and-role-of-exchange-rates-and-trade-flows <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>The 2008 crash wasn't simply a financial crisis. We must also look at the wider economics imbalances which had built up and which directly contributed to the unstable state of the world's finances.</p> </div> </div> </div> <p>Most people believe that the economic crisis which peaked in 2008 was caused by deficiencies in the banking and financial system and that reforms to stop another similar crisis occurring should therefore concentrate on changing the ways in which banks and the financial sector operate. There is no doubt that there was an unsustainable boom in the 2000s across most of the western world, feeding on very loose credit conditions and asset inflation, and that huge increases in bank lending, some of it involving very dubious financial engineering, contributed very substantially to the financial disaster which subsequently materialised. The issue raised in this Bulletin, however, is whether it was faults in the financial system which were the fundamental cause of what went wrong or whether there were deeper reasons for the debacle which meant that the financial system was the conduit rather than the <em>causa causans</em> for the huge loss of output and the social distress which the crisis brought in train.&nbsp;&nbsp; </p> <p>The starting point for an alternative view about the events which peaked in 2008 is to look at trading patterns over the preceding two or three decades. Here is what happened:</p> <p>In the 1970s the Keynesian approach to economic management broke down, to be replaced by monetarism. The result was a huge increase in interest rates and tightening of the money supply across most of the West, which generated very large increases in exchange rates. In the UK, for example, the real effective parity of sterling rose by more than 60% between 1977 and 1981.</p> <p>At the beginning of the 1980s, by contrast, China began to engineer an enormous reduction in the external value of its currency, the renmimbi. According to IMF figures, between 1980 and 1985, the renmimbi was devalued by 37%. This, however, was only the start. Between 1985 and 1993, a further devaluation of over 60% in its real effective exchange rate took place, leaving the cost base for manufacturing in China massively lower than in the West.</p> <p>As a result of the Asian crisis in 1997, many other Pacific Rim countries also devalued their currencies by very large amounts, the Korean won, for example, by about 50% and the Malaysian ringgit by 35%.&nbsp;&nbsp; </p> <p>The result for the West was that large swathes of manufacturing became uneconomical as production migrated on a huge scale to the Pacific Rim. In the UK, for example manufacturing as a percentage of GDP fell from 32% in 1970 to barely 10% now. </p> <p>As a high proportion of foreign trade is in manufactures rather than in services or raw materials – typically about 50% - the inevitable result was that the East began to pile up enormous balance of payments surpluses while the West went into deficit. The UK has not had a balance of payments surplus in manufactures since 1982 or an overall surplus since 1983.</p> <p>It took a few years for the scale of China’s increase in manufacturing output to develop its full impact, but by 2008 China’s trade surplus in manufactured goods peaked at $421bn, with its average surplus across all of its current account transactions in the mid-2000s averaging about $250bn per annum. These huge sums had to be mirrored by capital exports, much of which took the form of China buying western government bonds, particularly US Treasuries as well as a range of other assets.</p> <p>In the West, the effect of their massive balance of payments deficits with the East was to suck demand out of western economies, which the authorities somehow or other had to replace. This was done in two main ways, these being:</p> <p class="ListParagraphCxSpMiddle">A Governments ran deficits to keep up demand, partly because they had little alternative but to do so. This is because government and balance of payments deficits are to a large extent mirror images of each other. </p> <p class="ListParagraphCxSpMiddle">Increasingly lax monetary policies were introduced, encouraging asset inflation, particularly in housing and stocks and shares, which encouraged consumers to keep spending. At the same time, credit conditions were relaxed, encouraging consumers to spend more than they were earning, thus enabling them to maintain or increase their living standards, supported by increasing debt.</p> <p class="ListParagraphCxSpMiddle">Given that, at the time, as now, no western government had an explicit exchange rate policy which might have tackled the root cause of trade imbalances which was the fundamental reason for the problems they faced, there was little policy alternative to what was done.</p> <p class="ListParagraphCxSpMiddle">At the same time the enormous influx of funds from the East, which was used to buy up assets in the West, kept western exchange rate far too high while the export of capital funds from the East kept their exchange rates far too low for most western manufacturers to be able to compete against their industries.</p> <p class="ListParagraphCxSpMiddle">The result was that conditions were created where a major boom, driven by excessive credit creation was virtually inevitable. It is the continuation of the same imbalances which has been largely responsible for the slow recovery which we have seen in the West from the crisis which materialised at the end of the 2000s.</p> <p class="ListParagraphCxSpMiddle">If this analysis is correct it has a substantial bearing on both what now needs to be done to get western economies growing again at reasonable speed on a sustainable basis and what is required to avoid an extremely damaging repetition of what occurred between 2007 and 2009. In particular we should consider:</p> <p class="ListParagraphCxSpMiddle">If the root cause of the 2008 crisis and the West’s slow growth especially recently is trade imbalances caused by exchange rates which leave some economies with far lower cost bases than others, then the most important objective should be to tackle this problem. If the fundamental reason for the 2008 crash was excessive trade surpluses and deficits rather than serious defects in the world’s financial structure, then it is the trade problems which need to receive the main focus of attention rather than financial reform.</p> <p class="ListParagraphCxSpMiddle">Broadly speaking, the target should be to achieve exchange rate adjustments which would enable all the world’s diversified economies to have a sufficient share of manufacturing – whose exports still make up such a high percentage of world trade -&nbsp; to be able to pay their way in the world, to avoid excessive and highly destabilising surpluses building up.</p> <p class="ListParagraphCxSpMiddle">It would be rational for all countries to participate in the parity adjustments which would be required, to produce a much more stable world economy capable of reasonably fast and sustainable growth. It is in fact no more in the interest of surplus countries to curtail their living standards so that they can lend vast sums to deficit countries which are never going to get repaid, than it is for deficit countries to maintain exchange rates which ensure that they are permanently constrained by balance of payments problems.</p> <p class="ListParagraphCxSpMiddle">If much more balanced trade conditions were in place it would make it much easier for the financial system to be operated and controlled so that it ran on a stable basis. Deficit countries would no longer be forced into creating excessive both public and private debt to sustain demand. Governments could easily run deficits – if they needed to do so at all – which were small enough to be easily sustainable. The financial conditions leading to boom and bust would be much easier to avoid. </p> <p class="ListParagraphCxSpMiddle">In particular, the two main thrusts of current financial reform would become much less pressing. These essentially fall into two categories. One is to insist on banks having much larger capital reserves in relation to their lending. The second is to increase very substantially the extent to which banks and other financial institutions are regulated. </p> <p class="ListParagraphCxSpMiddle">The problem with both these approaches is that each of them adds significantly to the cost of finance while at the same time discouraging lending, making funding harder to obtain particularly by the sectors of the economy – manufacturing, exporting and import saving – which it is most in the interest of western economies to encourage. It is not possible for banks both to deleverage and to increase lending at the same time without massive increases in the capital they have available to absorb losses. This is not an argument for doing nothing to reform the financial sector but it does make a strong case for not trying to put all the weight of economic reform on finance rather than trading, if the result is to make the financial system significantly less responsive to the more pressing needs of the rest of the economy.</p> <p class="ListParagraphCxSpMiddle">Getting exchange rates aligned in the way which needs to happen to spread prosperity much more evenly across the world would also enable a better balance to be achieved between the interests of borrowers and lenders. Ultra-low interest rates are unfair to savers, encourage asset inflation, and lead to misallocation of resources. The world’s economies would be better served by interest rates moving to low positive rates net of inflation. </p> <p class="ListParagraphCxSpLast">None of these comments indicate that steps should not be taken to improve regulation and control of the financial sector where this can be done economically and efficiently. It does, however, strongly point towards much more effort being put behind world financial reforms which would make the conditions which precipitate financial crises much less likely to occur. The time when western economies can be run with all control of the economy being achieved by fiscal and monetary policies while the exchange rate, as a policy instrument, is ignored, must surely pass. Floating exchange rates, left entirely to market forces, are not the answer. Every country’s exchange rate provides a crucial relationship with every other country in the world and getting this in the right place is just as important as the adoption of sensible and realistic fiscal and monetary policies.&nbsp;&nbsp; </p> <p>&nbsp;</p><p><em><strong>This article is part of the <a href="https://www.opendemocracy.net/ourkingdom/collections/there-is-alternative">There is an Alternative</a> series. An economist and entrepreneur, <a href="http://www.john-mills.info/" target="_blank">John Mills</a> is Chairman of JML. He recently established <a href="http://www.poundcampaign.org.uk/" target="_blank">The Pound Campaign</a> to raise awareness of the uncompetitive exchange rate and the effect it is having on UK manufacturing and the wider economy.</strong></em></p><p><em>John Mills is a donor to openDemocracy.</em></p> uk uk There is an Alternative John Mills Tue, 20 Jan 2015 02:55:31 +0000 John Mills 89583 at https://www.opendemocracy.net 6 arguments against devaluation that don't stack up https://www.opendemocracy.net/ourkingdom/john-mills/6-arguments-against-devaluation-that-don%27t-stack-up <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p> There is nothing to stop us reviving the UK economy via resurgent performance in manufacturing, exporting and import substitution provided we get the cost base charged out to the rest of the world on a competitive basis.</p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/pound.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/535628/pound.jpg" alt="" title="" width="460" height="307" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_xlarge" style="" /></a> <span class='image_meta'><span class='image_title'>Flickr/PhotoGraham</span></span></span></p><p>The Pound Campaign believes that the main reason why the UK economy is in its current dangerously unbalanced state is that the exchange rate is far too high. If sterling was at a much more competitive level, combined with all the supply side remedies which would need to be implemented at the same time, about which there is little dispute, the economy would do very much better The growth rate could be raised to 4% to 5% per annum on a sustainable basis; unemployment would fall towards 3%; investment as a proportion of&nbsp; GDP would rise from the current pitiful levels – barely 14% - to around the 24% world average; the economy would be rebalanced towards 15% of GDP coming from manufacturing rather than the current 10%, enabling us to pay our way in the world; neither the balance of payments nor government borrowing would continue to be a problem as we stopped accumulating debt at an unsustainable rate; and both regional and socio-economic levels of inequality would be reduced.</p> <p>Why, then, are so few people considering getting the exchange rate down to a competitive level? It is partly because most people seem to think that international trade is not very price sensitive - although most of it in fact is highly price critical – so therefore it doesn’t matter what the exchange rate is. It is also, however, because of a widely held belief that pursuing an active exchange rate policy is unachievable. This Bulletin looks at each of the arguments put forward for this second proposition and shows how weak each of them is.</p> <p><strong>Devaluation causes Inflation&nbsp; </strong>It is very widely believed that moving to a lower value for the pound must increase inflation. Monetarists have always claimed that any gains in competitiveness from a weaker currency must be offset in short order by more rapid price increases. Everyone can see that a lower pound entails higher import prices and more expensive foreign holidays and thus – apparently - more inflation. But what seems obvious needs to be checked against the facts – and economic statistics – of which there are large amounts available – tell a very different story. Sometimes devaluations increase inflation; sometimes they decrease it; but most of the time inflation stays much the same as it would have been anyway. The reason is that a lower exchange rate also brings many costs down as well as putting some up. Tax and interest rates can be lower; investment rises, producing better and cheaper goods; production runs increase giving increased economies of scale; productivity increases, soaking up wage rises; domestic suppliers not affected by higher import prices become competitive. For all these reasons, devaluations do not necessarily increase inflation. Indeed they do not usually do so at all. Increased inflation as a result of a devaluation is simply not what generally happens. That it does is a myth as any careful look at economic history shows.&nbsp;&nbsp;&nbsp; </p> <p><strong>Governments can’t change the exchange rate&nbsp; </strong>There is a widely held perception that governments cannot change exchange rates. Currency parities are thought to be fixed by market forces, which cannot be bucked. The mistake here is to fail to recognise that there is much which can be done by governments to affect the way in which markets behave, making it unnecessary to fight against them. Historically, for example, we have tended to have higher interest rates than elsewhere in the world, thus pushing up sterling’s value.&nbsp; A major reason why sterling has been so strong especially in recent years is that we make it far easier than in any other country for foreign interests to buy UK assets, increasing the demand for sterling dramatically in the process. This could – and should – be changed. We benefit from foreign investment in factories and machinery but selling off portfolio assets such as shares, bonds and property, to finance living standards which we cannot really afford, does nothing to improve our economic prospects. If policy changes in areas such as these are implemented by a government which is clearly minded to get the exchange rate down, while co-ordinating fiscal and monetary policies in the same direction, the exchange rate will fall just as it did in Japan recently, where the government got the yen down against the dollar by a third in a year by&nbsp; implementing similar policies to those we need in the UK. </p> <p><strong>There would be retaliation&nbsp; </strong>Nobody wants to get involved in a currency war but there is no reason why this should happen. This is partly because there is so much objective evidence that sterling is grossly overvalued, making it irrational for other countries to oppose getting it to a more competitive level; partly because, if we had a much lower exchange rate, it would still be rational for us to continue running a balance of payments deficit, to keep it down; partly because our share of world trade is now so low – at barely 2.5% - that what we do does not make much difference to everyone else; partly because the dollar is the world’s reserve currency and the Eurozone has many other problems to contend with, so neither of them would be in a good position to retaliate even if they were minded to do so; and finally because it makes no sense for the UK to run up larger and larger deficits and debts, as a result of our currency being too strong, which we are never going to be able to repay. When the pound fell between 2007 and 2009 from its peak of $2.10 to its trough of $1.36, there was no sign of any retaliation. Why should the future be any different?</p> <p><strong>A lower pound would make us all poorer&nbsp; </strong>If the pound had a much lower foreign value than it does now, enabling us to sell all our goods and services at much cheaper prices on world markets, it seems at first sight as though – if we are charging out our labour costs to the rest of the world at lower prices than before – we must be making ourselves poorer and lowering our living standards. This is not, however, what actually happens. Of course, if UK incomes are measured in dollars and sterling is devalued, then measured in dollars our incomes will indeed have gone down. People in the UK, however, do not do their shopping in dollars, except perhaps if they are on holiday. They pay for almost all the goods and services they buy in sterling and the volume of goods they buy is almost certain to increase with a lower pound. This is because a more competitive currency tends to increase exports and reduce imports, thus making the economy grow faster. If GDP is larger and the population stays the same as it was before, as a matter of logic, GDP per head must go up and not down. This indeed is what all the international measurements of GDP after devaluations tend to show happens. Scare talk about “races to the bottom” if sterling had a much lower value are therefore completely misplaced. The problem at the moment is that we are failing to provide jobs for everyone because large sections of the UK labour force are priced out of world markets as a result of sterling being much too strong. We need to price all our labour force back into the world market, thus increasing productivity and living standards.&nbsp;&nbsp;&nbsp; </p> <p><strong>We have tried devaluations before and they do not work&nbsp; </strong>It is, of course, true that, although there have been fluctuations up and down, on the whole sterling has fallen significantly in value against most other major currencies since World War II. There is, however, a very obvious reason why this had to happen. Inflation in the UK has been substantially higher than it has been in most other developed countries and in these circumstances the devaluations which took place in 1949, 1967, 1992 and between 2007 and 2009 were inevitable. The issue is not, therefore, whether no exchange rate changes should have ever taken place. Clearly they had to happen. The key question is whether the devaluations which occurred were early enough and on a sufficient scale to deal with the lack of competitiveness which forced them to take place. Unfortunately, the evidence is that all of them were too little and too late. Instead they only happened when they were forced upon us by doubting markets. The parity reductions were then kept as low as possible. The result has been that for many decades our economy has been uncompetitive; our share of world trade has steadily shrunk; our manufacturing capacity and our ability to pay our way in the world has gone down; and we have not had a balance of payments surplus since 1983 – over 30 years ago.&nbsp; </p> <p><strong>The UK is incapable of responding to manufacturing opportunities&nbsp; </strong>Finally, it is argued that providing new profitable opportunities in manufacturing, exporting and import substitution in the UK is a waste of time because we would be unable to respond.&nbsp; The British, we are told, are no use at manufacturing and would be unable to take advantage of the highly profitable new opportunities opened up for them. Perceptions of this sort, however, are surely wrong at every level. We may not be that good at manufacturing at the moment, but the main reason for this is that most of it is so unprofitable that few talented people choose this career path. If there was money to be made, all the evidence suggests that there would be ample entrepreneurial talent in the UK which would be only too happy to take advantage of new money-making opportunities. What could we make? The quickest and simplest answer is, as well as promoting exports, to produce in the UK a reasonable proportion of the goods we currently import from the Pacific Rim which are only manufactured there rather than here because the cost base there is currently so much lower than it is in the UK. How would new industries get started? All the necessary machinery and raw materials are readily available on world markets. Would there be enough skilled labour available?&nbsp; The answer is that some highly skilled people would be needed, but not that many. If the cost base is in the right place, new manufacturing opportunities would provide large numbers of jobs which of course require thoroughness and careful attention but which involve operations which can be taught in many cases in only a few days. At present, all the bias is towards highly skilled, high tech operations because low-tech ones have been priced out of the market and cannot compete – but high tech is intrinsically risky and there is never enough of it. The way to an industrial revival in the UK is to make plenty of relatively low-tech and low risk manufacturing activity viable – and creating these conditions is almost entirely an exchange rate issue.</p> <p>The conclusion is that there is nothing to stop us reviving the UK economy via resurgent performance in manufacturing, exporting and import substitution provided we get the cost base charged out to the rest of the world on a competitive basis. Nor is there anything to stop us achieving this competitive level if we were seriously minded to do so. That is not the problem. Where the problem does lie is in perceptions about how the economy should be run. Everyone involved in economic policy knows that we have to have a reasonably well ordered fiscal policy, to provide a manageable balance between government spending and the sources of funding to pay for it. Everyone also agrees that we need monetary policy to provide the financial stability necessary for our economy to function efficiently. What almost everyone seems to have forgotten, however, is that we also need to have an exchange rate policy which enables our economy to function in a reasonably balanced way with the rest of the world. At the moment we are totally failing to do this – which is why our rate of investment is so low; why our industrial base has withered away; why we cannot pay our way in the world; why we are consequently running up debts on an unsustainable basis to pay for standards of living which we are not earning; and why our economy will be facing years of stagnation once our current upturn dies away – which it will – as a result of a mounting balance of payments crisis and rising interest rates. As long as this goes on, the future ahead of us will be one of little or no growth, stagnant living standards, high unemployment, mounting debt, rising inequality and declining national significance. All unnecessary and avoidable.</p><p>&nbsp;</p><p><em><strong>This article is part of the <a href="https://www.opendemocracy.net/ourkingdom/collections/there-is-alternative">There is an Alternative</a> series. An economist and entrepreneur, <a href="http://www.john-mills.info/" target="_blank">John Mills</a> is Chairman of JML. He recently established <a href="http://www.poundcampaign.org.uk/" target="_blank">The Pound Campaign</a> to raise awareness of the uncompetitive exchange rate and the effect it is having on UK manufacturing and the wider economy.</strong></em></p><p><em>John Mills is a donor to openDemocracy.</em></p> uk uk There is an Alternative John Mills Mon, 27 Oct 2014 23:11:11 +0000 John Mills 87046 at https://www.opendemocracy.net Is Piketty right, is growing inequality inevitable? https://www.opendemocracy.net/ourkingdom/john-mills/is-piketty-right-is-growing-inequality-inevitable <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>Reducing inequality is a complex task and will required a broad mix of reducing unemployment, increasing manufacturing jobs, lowering debt and cracking down on tax avoidance.</p> </div> </div> </div> <p><span><span class='wysiwyg_imageupload image imgupl_floating_right 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/537772/piketty.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_medium/wysiwyg_imageupload/537772/piketty.jpg" alt="" title="" width="240" height="363" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_medium" style="" /></a> <span class='image_meta'></span></span>Professor Thomas Piketty sets out in his book “Capital in the Twenty-First Century” an essentially simple proposition. It is that if the growth rate, which currently averages about 1.5% per annum in advanced western economies, is substantially lower than the return on capital, which is typically about 5% a year, the capital stock will increase faster than GDP. Since ownership of capital is always unevenly distributed, those who already own above the average will gain at the expense of those less fortunate. The distribution of capital will become increasingly concentrated and inequality will become more and more pronounced, especially if this is accompanied by wider differentials on income from employment.</span></p> <p>To be sure, there are offsetting factors. Taxes on income streams from wealth may amount to as much as about 30%, reducing the gross return from 5% to 3.5% net, although much wealth is taxed much more lightly than this or not at all. Furthermore, not all the income which is left will be saved as some of it, at least, will be spent on current consumption. Nevertheless, the historical evidence strongly supports the basic thesis. Just before the outbreak of World War I, after many decades of accumulation among the advanced economies in Europe, the total capital stock was worth about six times national income, with the top 10%, on average, owning about 90% and the top 1% owning around 50% of it. The top decile received about 50% of GDP as income and the top percentile 20%.</p> <p>The hundred years between 1914 and now can then be split into three periods during which dramatically different trends became manifest. Between 1914 and 1945, there was massive destruction of capital, especially in Europe, while at the same time strong social and political pressures materialised everywhere which made incomes more equal, especially after tax. As a result, inequality dropped substantially. In Europe, the capital stock fell to being about three times national income with the top decile owning 75% of it and the top percentile just under 40%. The share in national income going to the top 10%, dropped from about 50% in 1910 to a little above 30% in 1945. For the top 1% the drop was from about 20% to 10%. </p> <p>World War II was followed by a second period, lasting about 30 years to the mid-1970s, when economic growth in the West was much higher than it had been before or since, redistributive tax policies were widely in vogue and there was almost full employment. As a result, although the ratio between the capital stock and GDP started to rise again, inequality broadly stabilised at the levels achieved by the end of World War II. The proportion of national income going to the top 10% was stable at a little over 30%.&nbsp; </p> <p>The third period, from the mid-1970s until now, has, however, seen a marked reversal back towards the levels of income and some of the wealth disparities seen at the beginning of the twentieth century, caused by three major factors. Growth has slowed, raising the ratio between the value of the total capital stock and GDP and increasing the proportion of income arising from capital rather than earnings. Effective levels of taxation have gone down partly as a result of pressures from globalisation and partly driven by politics. At the same time, the distribution of income, particularly in the USA but to a lesser extent everywhere, has become markedly less equal. The result is that there has been a huge increase in inequality, especially in the Anglo-Saxon countries. By 2010 the proportion of national income going to the top 10% had risen to about 48% in the USA and 42% in the UK, with a much more modest – but still significant - increase to 35% in continental Europe. The spread of capital ownership, however, had changed in a different way. On average across the western world in 2010, the top decile owned about 65% of the capital stock and the top percentile 30%, which are lower percentages than in 1950. This was because, by 2010, a much wider share of capital assets, particularly in the form of housing, was in the hands of those in the 50% to 90% income categories. The bottom 50%, net of liabilities, however, still owned almost nothing.</p> <p>If there are no significant changes to the way in which western economies, in particular, are run, the trends towards ever increasing inequality look inexorable. Nowadays, as the discontent and the unpalatable political and social trends thus generated become ever more apparent to people across almost all of the political spectrum, at least in the UK, this does not look like a remotely desirable prospect. Disparities in wealth and especially in income are already clearly uncomfortably too wide. What can be done?</p> <p><strong>Combatting Inequality</strong> </p> <p>Professor Piketty suggests that the only solution may be very high levels of income and capital taxes. Some tax changes may well be part of what needs to be done. This Bulletin suggests, however, that there are several other ways of mitigating the impact of the trends which are identified in Capital in the Twenty-Frist Century which would not involve what many people might regard as punitive and counter-productively high levels of taxation and which are therefore unlikely ever to be implemented. These are:</p> <p><strong>Increasing the rate of economic growth&nbsp; </strong>Much of the force of Professor Piketty’s argument stems from the gap between his projected rate of growth for mature economies, estimated to be about 1.5% per annum, and the gross returns on investment of 5%. If, however, the growth rate could be increased to 4% to 5% per annum, which the Pound Campaign believes would be just as possible for a mature economy such as that of the UK as for developing economies, the crucial gap between the percentage rates of growth and returns on investment would disappear. Professor Piketty assumes that this will never happen because he believes that developed countries’ growth rates will always slow down once they stop being able to catch up with the technology already deployed in the most advanced economies. While this perception is widely believed, Professor Piketty provides no growth theory to support it. On the contrary, the available evidence strongly suggests that the returns to investment in manufacturing and services do in fact remain more or less constant as living standards rise. Provided, therefore, that sufficient investment takes place, there is no reason why growth cannot continue at the same rate as before, as indeed it has done in countries such as Singapore, which now has substantially higher GDP per head than most of the West.&nbsp;&nbsp; </p> <p><strong>Rebalancing the economy towards manufacturing </strong>The real reason why mature economies growth rates slow down is that, under pressure from established interests who benefit from a strong currency, they allow their exchange rates to become too high for their manufacturing industries to flourish. Investment in them then falls and skilled management is attracted elsewhere while the uniquely strong capacity of light industry, in particular, to produce high returns on investment is lost. The growth rate for the whole economy consequently slows up. Part of the battle against inequality, therefore, needs to be fought by ensuring that mature economies retain sufficient manufacturing capacity both to be able to pay their way in the world, thus avoiding the deflationary conditions caused by weak balance of payments positions, and to grow output per head by reaping all the benefits of increasing productivity which manufacturing industry can provide.</p> <p><strong>Reducing unemployment&nbsp; </strong>Much of the increase in inequality which we have seen over recent decades comes from the much higher levels of unemployment across the West which have prevailed since the 1970s. Between 1945 and 1970, about 2% of the labour force, on average, was out of work. Nowadays, including everyone who would be willing to work if jobs were available at reasonable wages, the true unemployment rate fluctuates between about 10% and 15%. As a result inequality increases both because joblessness reduces incomes and because it weakens the bargaining power of labour generally. This is a major why the proportion of GDP going to wages and salaries has declined so sharply in the UK from 64% in the early 1970s to about 54% now. If unemployment could be reduced towards 3%, which the Pound Campaign believes would also be possible, this would do more to reduce inequality than any feasible tax and redistribution system or any likely changes to the pre-tax distribution of income.</p> <p><strong>Reducing indebtedness&nbsp; </strong>One of the main generators of inequality is increasing debt, the interest on which gets paid mostly to those who are already well off. Government debt, which is created partly because the rich use their influence to enable them to lend money to the government rather than paying it over in tax, is particularly pernicious, partly because of its scale and partly because the interest paid on it has to be funded by taxation much of it, at the margin, falling on relatively poor people so that it then finishes up by being highly regressive. With the growth proposals put forward by the Pound Campaign, government debt would fall over the next ten years to about 60% of GDP whereas with current economic policies in operation it may be as high as 125% of GDP by 2025. Especially if, by then, interest rates are significantly higher than they are at the moment, other headings of expenditure will be squeezed even more severely, at the same time as vast additional wealth in the hands of the already rich will be generated by the creation of more government debt. </p> <p><strong>Toughening up on tax avoidance&nbsp; </strong>There are many well known problems about wealth taxes which makes them much less practical to collect than taxes on income or consumption. One of the main reasons why inequality has become so much greater is that so much of the income from capital is not taxed the way it could be either because of legitimate avoidance schemes or because of illegal evasion. In these circumstances, tightening up on existing tax avoidance and evasion country by country looks a more promising approach than establishing a world wide capital tax system. While international co-operation would certainly be a help, much could be done by individual economies if the will to do so was there.&nbsp; </p> <p><strong><span>Conclusion</span></strong></p> <p>Professor Piketty puts forward a powerful and well documented case for believing that if nothing is done to change existing policies, there are likely to be further dramatic increases in inequality. It has been argued that this does not matter that much if everyone benefits from greater prosperity. This is certainly not an argument which appeals to everyone, but – even if it did – a general trickle down of rising living standards has not, by a very wide margin, been the experience across much of the West in recent decades. Instead, what relatively little increase in national income there has been has gone overwhelmingly to those who are already well off. This is why stagnant living standards are such a powerful political issue and why the inability of our politicians to stop them happening is doing so much to undermine their credibility and the respect which the electorate has for them. We need to do all we can to ward off the further dramatic increases in inequality which will certainly be in store unless action is taken to stop them materialising.</p><p>&nbsp;</p><p><em><strong>This article is part of the <a href="https://www.opendemocracy.net/ourkingdom/collections/there-is-alternative">There is an Alternative</a> series. An economist and entrepreneur, <a href="http://www.john-mills.info/" target="_blank">John Mills</a> is Chairman of JML. He recently established <a href="http://www.poundcampaign.org.uk/" target="_blank">The Pound Campaign</a> to raise awareness of the uncompetitive exchange rate and the effect it is having on UK manufacturing and the wider economy.</strong></em></p><p><em>John Mills is a donor to openDemocracy.</em></p> uk uk There is an Alternative John Mills Mon, 25 Aug 2014 08:30:14 +0000 John Mills 85331 at https://www.opendemocracy.net Holtham's response is not grounded in statistical reality https://www.opendemocracy.net/ourkingdom/john-mills/holtham%27s-response-is-not-grounded-in-statistical-reality <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p><img style="float: right; margin-left: 10px;" src="http://www.opendemocracy.net/files/Alternative-small.png" alt="Logo-There is an alternative" width="140" /></p><p>The growth rates in question have indeed been achieved in the UK before - in the '30s, following a devauation. It is disappointing that Gerry has not engaged with the proposals more fully, nor put forward some of his own in response. </p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/mills.JPG" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/mills.JPG" alt="" title="" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'><span class='image_title'>Gerry Holtham, left, and John Mills</span></span></span></p><p>In his very critical <a href="https://www.opendemocracy.net/ourkingdom/gerald-holtham/mills%27-plan-is-not-answer">article </a>on the <a href="https://www.opendemocracy.net/ourkingdom/collections/there-is-alternative">proposals I have put forward </a>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?</p> <p>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.”&nbsp; 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 &nbsp;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?</p> <p>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.&nbsp;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?</p> <p>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.</p> <p>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 &nbsp;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.</p> <p>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&nbsp; 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. </p> <p>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 <em>There Is An Alternative</em>, 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. <a href="https://www.opendemocracy.net/ourkingdom/john-mills/there-is-alternative-british-economy-can-thrive-once-more">Here is my plan, laid out in detail and open to scrutiny</a>. I look forward to seeing Gerry's.</p><p><strong><em><br /></em></strong></p><p><strong><em><span>&nbsp;</span><span><em><strong>This article is part of the <a href="https://www.opendemocracy.net/ourkingdom/collections/there-is-alternative">There is an Alternative</a> series. An economist and entrepreneur, <a href="http://www.john-mills.info/" target="_blank">John Mills</a> is Chairman of JML. He recently established <a href="http://www.poundcampaign.org.uk/" target="_blank">The Pound Campaign</a> to raise awareness of the uncompetitive exchange rate and the effect it is having on UK manufacturing and the wider economy.</strong></em></span></em></strong></p><p><em>John Mills is a donor to openDemocracy.</em></p> uk uk There is an Alternative John Mills Mon, 11 Aug 2014 07:52:32 +0000 John Mills 85048 at https://www.opendemocracy.net Is the government's current growth strategy unsustainable? https://www.opendemocracy.net/ourkingdom/john-mills/is-governments-current-growth-strategy-unsustainable <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p><img style="float: right; margin-left: 10px;" src="http://www.opendemocracy.net/files/Alternative-small.png" alt="Logo-There is an alternative" width="140" />Delve into the data and you soon find that the British economy is not in a healthy state at all...</p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/553846/Carpathia_Unloading_at_Tilbury_docks_-_geograph.org_.uk_-_2091919.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/553846/Carpathia_Unloading_at_Tilbury_docks_-_geograph.org_.uk_-_2091919.jpg" alt="" title="" width="400" height="266" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'><span class='image_title'>The UK has a trade deficit problem/Tilbury Docks, wikimedia</span></span></span></p><p>The economic policies pursued by the Coalition government, despite current appearances to the contrary, look extremely unlikely to generate economic growth on a sustained basis. The UK economy is too weak and unbalanced for this to be possible. A number of key ratios give the game away. </p> <p>The proportion of our GDP which we devote to investment, at 14%, is barely sufficient to cover depreciation of existing assets - 11.5% - plus a further 2.5% needed to avoid these assets – everything from roads to schools, factories to productive machinery - being diluted down by our rising population. Almost uniquely for any developed country, we now have no net investment per head of the population at all, which is why productivity increases have ground to a halt.&nbsp; </p><p>Our manufacturing output - 32% of our GDP as late as 1970 - now accounts for barely 10%. We simply do not produce enough goods to sell to the rest of the world to pay for our imports, which is why we have such a large trade deficit. Add in the fact that our net income from abroad, previously strongly positive, has now turned negative, largely as a result of the huge sell-off there has been of UK assets, and combine this with increasing transfer payments overseas, and it is hardly surprising that we have a balance of payments deficit running at about 5.5% of GDP – one of the highest ratios in the developed world.</p> <p>On top of this, we have government borrowing which has stuck at just under £100bn per annum, leading to total government debt projected to rise to about 100% of GDP by May 2015. The government deficit largely mirrors trends in our balance of payments deficit – which reached £66bn in 2013 and which is still rising. The government deficit is therefore unlikely to decrease significantly, if at all. Meanwhile, according to the IMF, our net foreign asset position as a nation has deteriorated from a positive $43bn in 1980 to a negative $873bn in 2012, again reflecting the massive sale of UK assets there has been to finance our foreign payments deficits. Nevertheless, despite all these longstanding adverse trends, there has been an increase in consumer confidence, which is driving the current modest growth rate. Unfortunately, however, this has been very largely made possible by our ultra-low bank rate and consequent asset inflation, both of which are clearly unsustainable over anything but a fairly short period. </p> <p>With this sort of background, there is every chance that the economic policy being pursued by the current Coalition government is going to unravel although - as always - it is very hard to predict when this is going to happen, and whether it will occur before or after the general election in 2015. Here are the warning signs, however, that within months rather than years, serious trouble will be brewing:</p> <p><strong>Asset Inflation </strong>Several factors have come together to produce increases in assets values - particularly housing - which clearly cannot continue to rise at their present rate. Nationally, house prices have risen by nearly 10% over the last 12 months and by much more - close to 20% - in London. In the meantime, the FTSE 100 Index, having plunged from 6,722 in October 2007 to 4,038 in February 2009, has now risen by 70% to 6,855 in May 2014. </p> <p>To be fair, there are special reasons for the very rapid rate at which house prices have been growing in London – notably demand from abroad – and a very important underlying reason for house prices going up generally is that we are building far too few new housing units. The main reasons for the huge increases in asset values we have seen, however, are the ultra-low bank rate of 0.5% which we have had since March 2009 and the very lax monetary policy pursued by the authorities, reflected in Quantitative Easing over the same period. </p> <p>Booms in asset prices at times when the economy is barely growing and inflation is at low levels have a long history of imploding. There is no reason to believe that this time it is going to be any different. Once the bubble in asset prices bursts, however, it is very likely that consumer confidence will wane and that the main driver for current growth - rising consumer demand - will stall.</p> <p><strong>Interest Rates </strong>Borrowing rates for most individuals and businesses have been in most cases fairly low recently in nominal terms although, as inflation has also been low, real rates have not always been particularly favourable to borrowers. This leaves many of them vulnerable to interest rate increases, however, and unfortunately, the main weapon which the Bank of England has available to curb asset price inflation is to put up interest rates, as the Governor is now indicating will have to be done before very long. </p> <p>While raising the base rate may slow down the pace of asset price inflation, increasing interest rates also has a generally dampening effect on economic activity, increasing the likelihood that the present growth in the economy will peter out as both consumers and businesses retrench.</p> <p><strong>The Exchange Rate </strong>Raising interest rates will also tend to make the value of sterling on the foreign exchanges higher. Sterling has already risen recently by 12% against the US dollar - from £1.00 = $1.50 in July 2013 to about $1.68 in June 2014 - partly as a result of anticipation that sterling interest rates will start to rise earlier than those in either the USA or the Eurozone. The rise in sterling has also been buttressed by a further wave of sales of UK assets to foreign interests, prime property in London probably leading the charge at the moment. </p><p>The impact of a higher exchange rate - or a lower one - always takes time to manifest itself fully - typically two to three years. Just as, if the exchange rate goes down, the balance of payments tends to deteriorate for a while before it improves, because higher import prices come through more quickly than increased export volumes and import substitution, so the reverse effect applies when the exchange rate goes up. </p><p>We can therefore expect to see a higher exchange rate taking months for its full effect to become apparent on our net trade position. It will, however, inevitably worsen the imbalances in the UK economy and its impact will surely come through eventually as the strengthening exchange rate makes manufacturing even less profitable than it is already, investment in the most productive parts of the economy falls away, exports languish and import penetration becomes even greater. </p> <p><strong>The Balance of Payments </strong>During the last half of 2013, the UK’s overall balance of payments deficit was running at 5.5% of GDP. The total deficit for the year was £66bn. In 2014, this deficit will almost certainly be greater – possibly as much as £80bn. Part of the problem is that our trade deficit, which was £27bn in 2013, might be a reasonably manageable figure if it was on its own. Unfortunately, however, it is not. There are two other major components to our balance of payments deficit and these add very substantially to the problem.</p> <p>One is our net income from abroad. For many years this had been a substantial positive figure. In 2013, however, it turned strongly negative, at £17bn for the year. As a result of the continuing net sale of UK assets to finance our payments deficit, this trend looks like getting worse. In addition, the UK makes substantial net payments abroad, partly remittances from those who have migrated to the UK, partly for aid programmes, but mainly net payments to the European Union. These net payments abroad, which totalled another £27bn in 2013, are also trending upwards.</p> <p>As our balance of payments deficit becomes increasingly clearly unsustainable, this will put further pressure on the Bank of England to raise interest rates for three reasons: to dampen down the economy to reduce the deficit, to try to stop the value of the pound falling because they believe – arguably wrongly - that a lower pound would increase inflation, and to discourage capital flight as the economy becomes closer to being unable to meet all its financial obligations. </p> <p><strong>Investment </strong>The UK economy is never going to grow on a sustainable basis unless we have much higher levels of net investment, particularly in those parts of the economy with the highest rates of return and the greatest export potential, which is largely, although not exclusively, in manufacturing and especially light industry. Of course, there are also major needs for investment in public sector assets – roads, schools, hospitals – and for public and private investment in other areas such as high speed fibre-optic networks and housing. Manufacturing and exports are still key, however, because it is these activities which generate the most rapid productivity increases, the best distribution of high quality jobs regionally and the most export potential. </p> <p>The biggest single problem with the UK economy at the moment is that investment in these key areas, as a result of long-standing downward trends, is almost unbelievably low. Even as late as 2007, total gross investment in the UK as a percentage of GDP was 17.9%. At 14%, which it was in 2013, it is one of the lowest in the entire world – ranking us equal with El Salvador at position 142 out of 154 countries surveyed in 2012. This is why, by the time depreciation and our rising population are netted off, there is nothing left. </p><p>The problem is that the higher the value of sterling on the foreign exchanges, the less profitable investment in the parts of the economy which need it most becomes, the less investment will then take place and the weaker our economy and particularly its manufacturing base becomes. </p> <p><strong>What needs to be done</strong></p> <p>To run any economy successfully, it needs to have not only its fiscal and monetary policies run in a co-ordinated way, it also needs to have an exchange rate policy which enables a reasonable balance to be maintained between key sectors of the economy to ensure, apart from anything else, that we can pay our way in the world. This is what we have utterly failed to do for many decades, but especially since the late 1970s when first monetarism and then inflation targeting became the lodestones by which the economy has been guided. </p><p>By simply ignoring the exchange rate as a vital tool of economic management and, instead, letting the parity of sterling find its own level - however inappropriate this might be in the interests of the economy as a whole - we have condemned ourselves entirely unnecessarily to decades of economic mismanagement. This is why our growth rate is so low, incomes have stagnated, unemployment is so high, huge government and national deficits have accumulated, and why we cannot pay our way in the world. </p> <p>None of this is necessary and all of it could be avoided if we had fiscal, monetary and exchange rate policies all pulling in the same direction. As long as this does not happen – as it clearly isn’t at the moment – there is no prospect of sustainable growth and no chance of the Coalition’s current policies not falling apart as the underlying realities catch up with the weak and unfortunately unsustainable growth, which we currently see on the surface.</p><p>&nbsp;</p><p><em><strong><span><em><strong>This article is part of the <a href="https://www.opendemocracy.net/ourkingdom/collections/there-is-alternative">There is an Alternative</a> series. An economist and entrepreneur, <a href="http://www.john-mills.info/" target="_blank">John Mills</a> is Chairman of JML. He recently established <a href="http://www.poundcampaign.org.uk/" target="_blank">The Pound Campaign</a> to raise awareness of the uncompetitive exchange rate and the effect it is having on UK manufacturing and the wider economy.</strong></em></span></strong></em></p><p><em>John Mills is a donor to openDemocracy.</em></p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/john-mills/there-is-no-puzzle-about-britains-low-productivity">There is no puzzle about Britain&#039;s low productivity</a> </div> <div class="field-item even"> <a href="/ourkingdom/jim-cuthbert/risk-in-british-economy">Risk in the British economy</a> </div> </div> </div> </fieldset> uk uk There is an Alternative John Mills Thu, 03 Jul 2014 01:14:37 +0000 John Mills 84123 at https://www.opendemocracy.net There is no puzzle about Britain's low productivity https://www.opendemocracy.net/ourkingdom/john-mills/there-is-no-puzzle-about-britains-low-productivity <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p><img style="float: right; margin-left: 10px;" src="http://www.opendemocracy.net/files/Alternative-small.png" alt="Logo-There is an alternative" width="140" /></p><p>Britain, almost uniquely, does not invest in itself.</p> </div> </div> </div> <p>Many people, including apparently the Bank of England, are puzzled by the fact that productivity growth in the UK has ground to a halt. There is, however, a compellingly simple explanation. It is that the UK, for the first time since the start of the Industrial Revolution, has virtually stopped investing in the future and particularly in the type of economic activities which are capable of yielding significant increases in output per head. </p> <p>In 2013, the proportion of UK GDP devoted to gross investment was 14%. This is one of the lowest ratios in the entire world, as a survey in 2012 of 154 countries showed. The UK then ranked at number 142 – equal with El Salvador.&nbsp; By comparison, the world average is just under 24%. In China the ratio is just over 46%.</p> <p>Depreciation – also called capital consumption – then has to be deducted from the gross percentage. This is currently running in the UK at just under 11.5%, leaving a margin of 2.5%. This might allow some net investment per head of the population if the number of people living in the UK was static, but the UK population is actually growing at about 400,000 people per year. With about £120,000 worth of accumulated assets of all sorts – roads, schools, hospitals, machines, factories, housing, etc., etc. - per head of the population all of this 2.5% and more is needed just to stop this accumulated capital being diluted down. The result is that there is no net new investment per head of the population now taking place in the UK at all.</p> <p>In particular, there is no significant investment taking place where it is really needed, to increase productivity. Ever since the Industrial Revolution began two and a half centuries ago, output per head has increased because the labour force was provided with capital equipment – mainly machinery of a wide variety of different types – which enabled dramatically more output than before to be achieved per hour worked. It is manufacturing which is very largely responsible for productivity improvements and thus increases in living standards. Services have never been able to do this to the same extent.</p> <p>The huge importance of manufacturing in making everyone in industrialised countries better off has been partly obscured by the huge falls there have been in the cost of manufactured goods – compared with services whose costs have generally tended to rise. This relative price effect makes the contribution of manufacturing to raising living standards more difficult to see, as in money terms the proportion of GDP derived from industry has trended downwards everywhere.&nbsp; Manufacturing, however, is still very largely the key to economic growth and more and more applications of IT to manufacturing processes are currently providing a further boost to increases in output per head – but only where investment in this type of technology is taking place. It is happening here and there in the UK but on nothing like a sufficient scale.</p> <p>This is why productivity in the UK is static. There may be a small pick-up in business investment&nbsp; in the UK at the moment but most of it is going into building office blocks and opening new restaurants. Almost none of it is going into where it really needs to go – into light industry, exporting and import substitution. Of course we need to improve our infrastructure and we need investment in services, but the returns to the economy as a whole of investment in these areas is typically quite low – of the order of 10% per annum.&nbsp; Contrast this with the total returns achievable in manufacturing – including higher wages, better products and more tax revenues as well as increased profitability - where the total returns can easily soar to 50% or more per annum. It is only investment on a big scale in this part of the economy which will deliver significant increases in output per head.</p> <p>There is therefore no puzzle about why productivity is static in the UK. It is because we are not investing in the plant and equipment which can deliver it.&nbsp; Until we do, we are going to be stuck with static living standards and no sustainable growth. Not a great result for the nation which invented the Industrial Revolution in the first place.</p><p>&nbsp;</p><p><strong><em><span><em><strong>This article is part of the <a href="https://www.opendemocracy.net/ourkingdom/collections/there-is-alternative">There is an Alternative</a> series. An economist and entrepreneur, <a href="http://www.john-mills.info/" target="_blank">John Mills</a> is Chairman of JML. He recently established <a href="http://www.poundcampaign.org.uk/" target="_blank">The Pound Campaign</a> to raise awareness of the uncompetitive exchange rate and the effect it is having on UK manufacturing and the wider economy.</strong></em></span></em></strong></p><p><em>John Mills is a donor to openDemocracy.</em></p> uk uk There is an Alternative John Mills Sun, 22 Jun 2014 23:11:11 +0000 John Mills 83882 at https://www.opendemocracy.net There is an alternative: the British economy can thrive once more https://www.opendemocracy.net/ourkingdom/john-mills/there-is-alternative-british-economy-can-thrive-once-more <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p><img style="float: right; margin-left: 10px;" src="http://www.opendemocracy.net/files/Alternative-small.png" alt="Logo-There is an alternative" width="140" /></p> <p>As things stand, the British economy faces a future of decline. But it doesn't have to be this way - there is an alternative. Here, we publish a full pamphlet from John Mills outlining his plan for the British economy after 2015. For a summary,<a href="http://www.opendemocracy.net/ourkingdom/ourkingdom/new-series-there-is-alternative"> see here</a>.</p> </div> </div> </div> <p style="text-align: center;"><img src="http://www.opendemocracy.net/files/Alternative-10_0.png" alt="" width="300" /></p><p>The next general election will be held in May 2015. No one can foretell the outcome. It is not so difficult, however, to forecast the more significant economic prospects and problems which will have to be faced by whichever party or combination of parties wins power. They are likely to be depressingly familiar and as apparently intransigent as ever. </p> <p style="text-align: center;"><img src="http://www.opendemocracy.net/files/Alternative-10_0.png" alt="" width="300" /></p><p>The next general election will be held in May 2015. No one can foretell the outcome. It is not so difficult, however, to forecast the more significant economic prospects and problems which will have to be faced by whichever party or combination of parties wins power. They are likely to be depressingly familiar and as apparently intransigent as ever. </p><p>Even if the current not very convincing growth momentum is sustained, living standards as measured by average Gross Domestic Product (GDP) per head are still likely to be below those prevailing as far back as 2007. The foreign payments deficit is trending towards being considerably greater than the &pound;60bn plus expected in 2013, further increasing the indebtedness of the country as a whole. A gap as large as this on foreign payments is another reason why the recent return to growth is, as Bank of England Governor Mark Carney acknowledged in February, both unbalanced and unsustainable. Even by the time of the 2015 general election the UK&rsquo;s economic recovery, and with it the deficit-reduction plans of the three main parties, may be looking more doubtful. Total government debt will then be approaching 100 per cent of GDP. While this ratio has been much higher in the past, especially after major wars, on these other occasions there was a growing economy to absorb all the accumulated debt, which may be lacking in 2015. The widening balance of payments and growing national debt may by then be beginning to sap the optimism generated by rising house prices, dampening both consumer and business confidence, so that the modest growth which we are currently experiencing may well have lost pace. With current policies in place, the more government action there is in the run up to the election to stimulate the economy to produce a &lsquo;feel good&rsquo; factor, the more daunting the foreign payment deficit &ndash; and with it the pressure to raise interest rates &ndash; is certain to be once the election is over.</p> <p>In addition, the incoming government in 2015 will have other familiar problems to face. The gap in incomes, wealth and every other measure of welfare both between the regions of the country and between socio-economic groups is alarmingly wide and shows little sign of narrowing. Manufacturing &ndash; and with it our main capacity for paying our way in the world &ndash; is likely to have shrunk further as a proportion of GDP to no more than 10 per cent &ndash; down from 32 per cent in 1970 and 24 per cent as late as 1980. Gross investment as a percentage of GDP &ndash; 13.5 per cent for the first three quarters of 2013, compared with a world average in 2012 of 23.8 per cent and 46.1 per cent in China4 &ndash; is unlikely to have improved much, if at all. Productivity per worker, up eight per cent in America since the crash, was down by five per cent in the UK at the end of 2013 and is unlikely to have picked up significantly by 2015. While the total number of people in employment, at close to 30 million, is at a record level, about eight million of those with jobs are only working part-time and there are almost five million other people of working age who are not working at all.7 At the same time, the number of people of retirement age is rising inexorably, precipitating the risk of widespread pensioner poverty as public expenditure becomes more and more stretched.</p> <p>We are therefore facing a very unpromising future. Unless the economy can be made to grow on a sustainable basis, we have in prospect years of stagnation while most of the adverse trends described above continue to move in the wrong directions. Is there anything that can be done to avoid these outcomes, or are they inevitable? The answer is that there is an alternative policy which could be fully implemented within a five- year term and which could transform our prospects. It would, however, involve radical changes from the orthodoxy that has prevailed in the UK for far too long. This policy is set out below.</p> <p>The first of the following sections describes some of the ways in which wrong policy choices in the past have led to our current condition. The second outlines in qualitative form what now needs to be done to get the economy to perform very much better. The third and really much the most important section shows in carefully quantified form how it would be possible over a five year period &ndash; possibly the five years following the next general election in 2015 &ndash; to transform our economic future into one where our rebalanced economy grows at four per cent to five per cent per annum, unemployment falls towards three per cent, investment rises together with living standards, inequality is diminished, the need for borrowing falls, inflation rises only slightly, and we can pay our way in the world. It sets out the calculations needed to demonstrate how all of these changes are possible. All we then need is the will and clarity of purpose to make it happen.</p> <p><strong>Learning from Experience</strong></p> <p>While the main purpose of this pamphlet is to put forward positive proposals for the future, there are important lessons to be learnt from the policies adopted in the past which have led to the poor prospects which we currently face. Key among these are the following:</p> <p>We have placed excessive reliance on financial services. It is true that we have a comparative advantage in this sector of our economy and that its export performance is far better than in other areas, particularly manufacturing. In 2012 financial services alone generated a &pound;36bn export surplus &ndash; about half the &pound;74bn total surplus generated by the whole of the service sector.1 There are, however, major problems with the heavy reliance which the UK economy has on financial services. First, productivity increases are more difficult to achieve in this sector of our economy than in others. Between 1997 and 2012, despite the favour with which financial services were treated by the government over most of this period, output per head in this sector rose by 2.7 per cent per annum, compared to 4.8 per cent in information and communications and 3.3 per cent in manufacturing, although, to be fair, many other sectors of the economy did much worse.2 Second, financial services tend to produce jobs concentrated both in socio-economic and geographical terms which are heavily skewed to high-income occupations in the South East of the country, thus adding to both regional and occupational inequalities. Third, despite the impressive net export performance of financial services, support for the City has tended to have a correspondingly negative effect on industry, not least because of the City&rsquo;s historic capacity to attract so much top talent which could have been put to better use elsewhere in the economy. Fourth, the City&rsquo;s interests in the way the economy is run &ndash; particularly on monetary, interest rate and exchange rate policies and light regulation of what it does &ndash; often conflict with those of other sectors whose importance in aggregate is more significant than that of the financial services industry. We therefore need to reduce the salience of the City without compromising the contribution it ought to be able to make towards wider economic objectives.</p> <p>We have allowed our manufacturing base to be eroded away to an unsustainable extent. In 1970, 32 per cent of the UK&rsquo;s GDP came from manufacturing. By 1997, the percentage was down to 14.5 per cent and by 2012 it had dropped to 10.7 per cent, compared with about 21 per cent in Germany and 19 per cent in Japan. There are three major adverse consequences which flow from this major change in the composition of UK output. One is that the decline in UK manufacturing has made a major contribution to the chronically rising deficit the UK has seen materialise on its foreign trade balance. This came to &pound;107bn in 2012 &ndash; a much larger figure than the &pound;74bn surplus on services. Goods make up about 60 per cent of our export earnings and we have no hope of closing our foreign payments deficit without achieving a better performance in manufacturing. Second, manufacturing provides a much better spread of high quality, skilled and well-paid blue collar jobs than is the case with the service sector. Third, manufacturing jobs, especially those generating high wages, were much more widely spread geographically when we had a much stronger manufacturing base than we have now with our current very heavily service-based pattern of employment.</p> <p>We have been remarkably casual in the way in which we have squandered opportunities, thus enabling us to live beyond our means. From the 1970s onwards, the UK enjoyed the uncovenanted and, up to then, entirely unexpected benefit of North Sea oil and gas which, at its peak in 1985, came to 4.6 per cent of world production, contributing 4.5 per cent to UK GDP while exports alone amounted to 2.7 per cent. This huge bonus might have been used, as it was in Norway, to build up a fund for the future when the oil and gas ran out, but this was not the UK way. Instead, nothing was done to stop the exchange rate rising to previously unheard of heights, on the monetarist principle that the high exchange rate was the inevitable mechanism whereby North Sea energy production would replace manufacturing. The fact that no such mechanism operated in Norway was conveniently ignored as UK manufacturing output plunged while imports flooded in, allowing UK consumers to benefit in the short term from exploiting the benefits from an irreplaceable resource, but with no long-term gain. In a rather similar way, the 2000s saw consumption in the UK running well ahead of what could be afforded, as huge quantities of UK assets were sold off to foreign interests, buttressing UK living standards in another unsustainable fashion. Between 2000 and 2010, net sales of portfolio assets &ndash; shares, bonds and property, but excluding direct investment in plant, machinery and buildings &ndash; came to a staggering &pound;615bn, equivalent to roughly half of our annual GDP at the time, as we sold to foreign buyers our ports and airports, rail franchises and energy companies, industries such as Cadburys, swathes of expensive housing and much else besides. During the same years our cumulative foreign trade balance deficit &ndash; although far too high for comfort at &pound;286bn &ndash; was less than half the net inflow of funds from portfolio asset sales. No wonder that the pound soared to &pound;1.00 = $2.00, resulting in imports surging upwards as our manufacturing capacity went into a further steep decline. At the same time, as UK ownership of many key sectors of the economy passed into foreign hands, with it went their future profit streams as well as control over research and development budgets and investment planning.</p> <p>The UK at the moment displays all too clearly the signs of a society which has fought off relative decline by taking a more and more short-term view of the way ahead. We enjoy a current standard of living which is much too high to allow adequate room for the investment for the future that we need undertake. Too many of those running our major companies are more interested in share buy-backs to inflate their share prices and to increase their bonuses rather than in ploughing back profits to secure future growth and competitiveness. Banks are much more willing to lend money on mortgages than for supporting productive industry. Both as consumers and as beneficiaries of government expenditure, we tend as a nation to spend more than we earn, which is why we are running up more and more debt. We have lost sight of the need to live within our incomes. We simply have to replace this short-term approach with policies with a more distant horizon if we are to have a sustainable economic future.</p> <p>We have allowed an enormous divide to open up in the standard of living and life chances generally on every count between both the regions of the UK and between the richest and the poorest socio-economic groups. Recent figures &ndash; for 2011 &minus; showed that average gross value-added per worker in Greater London was &pound;35,638 compared with &pound;15,842 in the North East, which is the poorest region in the UK. There may have been 619,000 millionaires in the UK in 2011, but even leaving aside the contribution to inequality made by the very rich, there are still enormous disparities. Office for National Statistics (ONS) figures for 2011 showed that the poorest 20 per cent of the population had average pre-tax household incomes of only &pound;5,400 compared with the top 20 per cent with &pound;78,300, although the disparities were considerably less &ndash; at &pound;15,800 and &pound;57,300 respectively &ndash; when all taxes and benefits were taken into account.14 Nor are these trends abating as government curbs on welfare payments begin to bite. At the other end of the scale, total pay for FTSE directors in 2013 rose 14 per cent to an average of &pound;3.3m each15 while union-negotiated private sector pay rises to July 2013 averaged 2.5 per cent, down from 2.9 per cent a year earlier.16 Some degree of inequality in income, wealth and life chances is inevitable, but it is hard to grasp how much more unequal the UK has become since the mid-1970s when the Gini coefficient, which measures income inequality, was just over 23. It shot up to around 33 during the years of the Thatcher government, since when it has hovered at this level through successive governments.17 The figure at the beginning of the 2013 was 36. It had fallen slightly in 2011/12, mainly as a result of at least a temporary reduction in the more egregious financial service sector bonuses, but it is now expected to increase again as a result of government cuts in welfare expenditure.</p> <p>A substantial proportion of the recent increase in inequality in the UK derives from the huge rise there has been over recent decades in the number of people who are unemployed, partly masked by a succession of changes in the way the number of people without work have been counted. For the period July to September 2013, the headline unemployment rate was 7.6 per cent of the economically active population &ndash; a total of 2.47 million people. This, however, is a far cry from the long period from 1946 to 1973 when unemployment in the UK for the whole of these 27 years averaged no more than two per cent. Furthermore, as a report published by the TUC in September 2013 shows, the total number of people who would be capable of working if jobs were available for them at reasonable wages is not 2.47 million but estimated to be 4.78 million, including all those who have dropped out of the labour force because they are caught in benefit traps, have taken advantage of opportunities to get themselves classified as long-term sick or who have given up hope of getting a job and dropped out of the labour force. Furthermore, as many as 6.2 million of the 8 million working part-time, who are currently counted as being employed, regard themselves as being under-employed and would like to work full-time or at least for longer and more reliable hours. This level of lost employment is both a huge economic waste of resources and a massive tragedy for all those who would like to make a full contribution to society but are unable to do so.</p> <p>As the population ages and the economy stagnates, we are drifting into a major pensions crisis. Because people are living longer while the average retirement age is growing only slowly, the total number of people entitled to a pension is rising all the time in relation to those who are still working. Two-thirds of state benefits go to pensioners at present, a proportion which is continuing to rise. Over the period 2015 to 2025, the number of people who are over 65 in the UK population is expected to rise from 11.5 million to 13.5 million. Meanwhile, the retirement age is only planned to increase for men from 65 to 66 by 2020 and for men and women to 67 by 2026. Since a substantial proportion of pensioners are in contractual schemes, some of them, particularly in the public sector, including indexation clauses, there is going to be a major shortage of resources available to pay pensioners not covered by these sorts of schemes unless the economy can be made to grow much more rapidly.</p> <p>Since the crisis broke in 2007/08, there has been a massive increase in government debt brought about by huge gaps between government income and expenditure. The deficit peaked at almost &pound;160bn in 2009. By 2012 it had fallen to an underlying figure, excluding special factors, of about &pound;120bn, which is still about eight per cent of GDP. Clearly, having total government debt, now about 90 per cent of GDP, rising at this rate is unsustainable if the economy is not growing, especially if at some stage interest rates are going to rise from their current low levels. Government debt is to a significant extent mirrored by the country&rsquo;s annual deficit on current account, which was &pound;56bn in 2012 and on a rising trend. Partly as a result of the net sale of assets in the 2000s, the UK no longer has a net income from abroad to offset &ndash; at least in part &ndash; the trade deficit, while net transfers which the UK makes abroad every year are also increasing. Because to a large extent one mirrors the other, it is very difficult to see how, on present trends, it is going to be possible to reduce the government deficit to manageable proportions without our foreign payments balance being brought under control. There is, however, little sign of this happening.</p> <p>As part of the process of rebalancing the UK economy to make it capable of keeping up with the rest of the world over the coming decades, we have to stop relying on the ways of achieving growth that have been used over past decades. Household spending, at 62 per cent of GDP currently, has been relied upon too heavily, underpinned by asset inflation. This has both encouraged borrowing, which may become vulnerable to interest rate increases, and increased inequality, as those lucky enough to own houses that are rising in value leave further and further behind those with no such advantage. Reflecting the UK&rsquo;s very low rate of investment, IMF figures show the UK consuming 87.8 per cent of our national output in 2012, compared to a world average of 75.9 per cent and 67.3 per cent for emerging and developing countries. The result is an economy which consumes too much, invests too little, and which cannot pay its way in the world. No wonder that we need so urgently to rebalance the UK economy towards investment, net exports and less dependence on borrowing from the rest of the world or selling assets to foreign interests.</p> <p>Finally, we need to make sure that we have the right data as our starting point. Measured by current ONS statistics, the UK&rsquo;s GDP at the end of 2013 appeared to be about two per cent below its peak in 2008. The underlying squeeze on average UK living standards is, however, higher than this relatively small gap would suggest is the case for at least three and probably four good reasons (with some offsets with major longer term disadvantages). These are:</p> <p>- Gross national product (GNP), which includes net income from abroad, must be a better measure of the total national income than gross domestic product (GDP) which excludes it. Our net income from abroad fell from &pound;33.2bn in 2008 to &minus;&pound;2.1bn in 2012, equating to a drop of 2.4 per cent in GDP between 2008 and 2012, with a directly consequential fall in UK disposable income.</p> <p>- Over the same four-year period, government transfers abroad &ndash; the largest component being increases in net payments to the European Union as a result of a combination of the phasing down of the UK rebate and rising EU expenditure &ndash; rose from &pound;13.8bn to &pound;23.1bn. As all these extra net payments went abroad, none of them contributed to UK living standards. Their increase thus equates to another drop of 0.6 per cent of GDP in terms of incomes available to spend in the UK.</p> <p>- Between 2008 and 2012, the UK population rose from 61.8 million to 63.7 million. This rise in the population therefore reduced GDP per head &ndash; and the social capital of the country per head &minus; by a further 3.1 per cent.</p> <p>- The fourth reason why households may have sensed a much greater squeeze than the official figures might suggest is because there is a substantial difference between the cumulative rise in the Consumer Price Index (CPI) between 2008 and 2012, at 13.4 per cent, and that of the deflator, at 8.0 per cent, which is the measure which ONS uses to move from nominal to real increases in GDP. Usually these measures of inflation run closely in parallel, and indeed for almost all the period from 2000 to 2007 the deflator was rather higher &ndash; 0.5 per cent per year on average &ndash; than the CPI. From 2008 onwards, however, the position was reversed and the CPI was an average of 1.25 per cent per annum greater than the deflator during the four years to the end of 2012. Apparently, this is mainly the result of ONS changing their methodology to take more account of estimated productivity changes in the non-market sectors of the economy such as the NHS, education, legal services and the armed forces. While there may be productivity improvements in the provision of these services, these are not caught in the CPI, which measures price increases only in the marketed sectors of the economy and which may therefore most commonly be used by most people to measure their current living standards. If, therefore, the CPI rather than the deflator is used to move from nominal to real GDP, this would reduce perceived standards of living by a further 5.4 per cent &ndash; the difference between the 13.4 per cent cumulative CPI increase and 8.0 per cent for the deflator.</p> <p>There have, however, been two important mitigating factors, although both of them involve serious long-term problems. One is that there has been a substantial shift in the proportion of GDP which goes to investment rather than consumption. This fell from 16.8 per cent in 2008 to 14.2 per cent in 2012. The second is that the foreign payments deficit has risen over the same period from 0.7 per cent of GDP to 3.5 per cent. Both these changes, adding up to 5.4 per cent of GDP, have buttressed current expenditure. Neither of them, however, bodes at all well for the future. Both of them are incompatible with any sort of longer-term growth strategy.</p> <p>The cumulative effect of the first three reasons set out above for believing that living standards have been much more heavily squeezed than is usually assumed to be the case comes to 6.1 per cent. If the CPI is believed to be the best way of moving from nominal to real GDP &ndash; which may well not be fair if the ONS have really got good reasons for their change of approach, but may be what a lot of people perceive &ndash; then the cumulative impact is a total of 11.5 per cent. Even allowing, in mitigation, for unsustainable reductions in investment and increases in the foreign payments deficit, the drop may still be over six per cent. No wonder squeezed incomes are now such a major political issue. These exceedingly depressing figures also tell a grave story, however, as to how much ground there is to make up and how desperately urgent it is that we adopt more effective economic policies than those currently in place.</p> <p><strong>A ten point agenda for getting the UK economy back on track</strong></p> <p>What, therefore, should the government, of whatever complexion it turns out to be, coming to power in 2015, do both to address the economic problems it will inherit and to avoid the mistakes made in the past which have led to our current weaknesses? Here is a ten point programme, initially setting out the problems which will need to be overcome in qualitative rather than quantitative terms. Once the scene has thus been set, the third section of this pamphlet then turns to quantifying what needs to be done.</p> <p>Overwhelmingly the most important objective must be to get the economy to start growing much faster. This is the only way in which living standards can be raised, unemployment reduced to tolerable levels, and reasonable levels of public expenditure can be combined with the willingness of the electorate to pay the necessary tax, fees and charges to fund them. A higher rate of economic growth is clearly what an overwhelming majority of the electorate would like to see materialising. There may well be arguments about whether faster growth will produce more happiness (at least among some sections of the population) and how rising GDP can be combined with the more ambitious parts of the green agenda. No doubt these points of view need to be accommodated and taken as seriously as they deserve to be. The fact remains, however, that the vast majority of the policies which most people want to see implemented are impossible to realise without faster economic growth. Furthermore, the rate of growth at which we need to aim has to be sufficiently high to enable the economy to meet the various claims that will be made upon it, not least because of population increases. Without population growth, a target increase in the growth rate to three or four per cent would probably be workable, but with the increasing number of people living in the UK taken into account, the target needs to be raised another percentage point to perhaps four to five per cent.</p> <p>To get the economy to grow at four to five per cent, there will have to be both a large and a sustainable increase in effective demand. This cannot be achieved at the moment by the traditional Keynesian approach of reducing taxation and increasing public expenditure, or by further increasing the money supply to stimulate consumer expenditure. We do not, in particular, currently have the manufacturing capacity required for a balanced and sustainable response to be possible. The UK economy would not therefore be able to react by producing the volume of goods and services needed. The outcome would in consequence be a soaring balance of payments deficit, which would very probably then be choked off by a deflationary rise in interest rates. For sustainability, the increase in effective demand has to come from elsewhere and this means from net trade &ndash; exports minus imports &ndash; and from much higher levels of investment. To achieve this, we have both to remove the balance of payments constraint which has hobbled the UK for the last 40 years and more, so that more demand does not lead to a balance of payments crisis. </p><p>The only way in which it would be possible for this to happen would be for the UK to operate with a much lower exchange rate, relying on market forces to respond to the much greater profitability which would then be generated in manufacturing, exporting and import substitution than exists at the moment, to rebalance the economy to the necessary extent. How much lower an exchange rate would be required turns on how sensitive to lower prices the demand for our exports might be and the extent to which higher import prices would encourage home production instead of importing. These crucial ratios depend in turn on estimates of how big the change in profitability would need to be to shift the economy to achieving a manageable foreign trade balance combined with much faster growth.</p> <p>A vitally important part of this process has to be to revive the scale and competitiveness of UK manufacturing. A major reason why we have such a huge deficit in our foreign trade in manufactured goods is that we now produce so few goods in the UK that we simply do not have enough to sell abroad to pay our way in the world. All economies have special features, relating not least to whether they have indigenous raw materials or whether they need to import them, so that their ability to compete in world markets varies. Broadly speaking, however, for well diversified modern economies such as ours, international comparisons suggest that any with less than about 15 per cent of their GDP coming from manufacturing tend to have weak and constraining balance of payments problems. Once this percentage drops to barely ten per cent, as ours has, balance of payments problems are almost inevitable. A critically important objective must, therefore, be to get manufacturing as a percentage of GDP back to somewhere around 15 per cent. To do this at the same time as getting the economy as a whole to grow faster, with all the extra claims that this on its own is going to put on our manufacturing capacity, is going to require a major increase in its profitability which &ndash; again &ndash; only a much lower exchange rate will be capable of achieving, although the re-establishment of investment allowances and other similarly supportive fiscal changes would help.</p> <p>Changing price signals via a lower exchange rate, even if buttressed by a more favourable tax regime, although critically important, will fall a long way short of exhausting all the actions which the government will then be required to take to achieve a renaissance of UK manufacturing. There is also a wide range of supply- side policies which will need to be implemented to enable a much more rapid rate of growth to be achieved. A major increase in manufacturing is going to require a large amount of retraining. It will also require new production facilities, which will need the speedy granting of planning permission, and better infrastructure, particularly roads, rail facilities and high-speed internet connections. It will also be vitally important to ensure that there is adequate power-generation capacity available. Much better economic prospects will hopefully put much more of a premium on education &minus; which is extremely difficult to achieve if large numbers of young people have no jobs awaiting them when they leave school and very poor employment prospects ahead. There will also clearly be a need for finance to be directed away from supporting equity withdrawal, based on house price increases and other forms of consumer borrowing, towards commercial investment in plant and machinery and working capital, although an increase in house building, especially in some parts of the country, and expenditure on public infrastructure, are also urgently needed. While it may well be sensible for the government not to be too prescriptive in determining how the economy should respond to much more favourable economic conditions, it is critically important that it has strategies in place which facilitate the market&rsquo;s capacity to deliver the increase in output that will be needed.</p> <p>A key part of the adopted strategy should be to raise the number of people employed in the economy as much as possible, both to reduce unemployment and because increased labour inputs will greatly help to raise overall output. There is a major social component to this objective as well as this being a key part of getting government expenditure into better balance. Part of the social element is to remove from many people the stigma and bitter disappointment &minus; and reduced living standards &ndash; which are the inevitable concomitants of being out of work. Another part is to increase the demand for labour in relation to its supply, thus shifting bargaining power back towards labour and away from employers. This need not be inflationary if the response from employers is to make better use of their labour forces by upgrading their skills and productivity instead of wasting talent in jobs requiring no training. Reducing unemployment thus has a major role to play in decreasing the inequality which disfigures the UK at the moment. Bringing millions of extra people into the labour force will also, of course, make switching the economy into a relatively high rate of growth much easier to achieve than if there was already full employment. Indeed, paradoxically, it is the fact that there are such huge unused labour resources in the UK at the moment that makes it possible to produce the surge of extra output needed to enable us to invest in a much better future and to get the economy to grow much faster on a sustainable basis.</p> <p>Because unemployment is heavily concentrated in those areas of the country which used to be disproportionately dependent on manufacturing, it would obviously make sense to encourage new manufacturing opportunities to be sited as much as possible in these areas. These parts of the country are likely to be favoured in any event by those needing to take on additional labour and who want to keep their costs down as much as they can by avoiding the relatively high cost-base in the South East of the UK. A revival of manufacturing along these lines, with all the secondary impact that this would have on supporting service industry activity in the areas where manufacturing was re-established, would clearly help to rebalance economic activity across the regions of the country. This kind of activity would also help to achieve the necessary rebalancing of the economy away from the excessive dominance of financial services. The objective would not be to damage the role which the City plays in the economy but to make sure that the services it provides are used to complement activity in the rest of the economy, rather than to undermine it by pressurising the government to implement policies which benefit those in financial services at the expense of everyone else. Included in this category of change would be monetary and other policies to benefit lenders rather than borrowers, particularly those which make credit more expensive and difficult to obtain for productive investment than it needs to be.</p> <p>If government debt is growing rapidly but the economy is expanding much more slowly than is total government borrowing, with no relief in sight, then clearly there is a major problem, potentially leading to eventual insolvency. Similar considerations apply to the foreign payments balance. If, however, the economy is growing rapidly, these problems become much less acute. Provided that these debts are growing more slowly than the economy, the situation will be manageable for as far ahead as can be seen. The fact that this is the case makes the expansionary policy envisaged in this pamphlet much more feasible and achievable than it otherwise would be. For example, if the economy were growing consistently at five per cent per annum, both a government deficit and a foreign payments deficit of, say, four per cent of GDP would be sustainable. To proceed with a margin of safety, it may not be prudent to push matters to the limit like this. It would, however, be possible to continue with both government and foreign payment deficits of perhaps two or three per cent, or to have higher percentages on what was clearly going to be only a temporary basis. This provides a very substantial element of flexibility. The objective, therefore, should not necessarily be to reduce or to eliminate either of these deficits but only to ensure that as a percentage of GDP they both become lower than the growth rate. A policy along these lines, with no export surplus being generated by the UK to cause correspondingly increased deficits elsewhere, would also have the advantage of making whatever devaluation was required to get the required policy changes in place much easier to achieve and to sell to the rest of the world. Keeping these deficits in place would also make it easier to get and to keep the pound at a competitive level.</p> <p>A crucial requirement for getting the UK economy to grow much more rapidly on a sustainable basis would be to get gross investment as a percentage of GDP up to a much higher level than it is at present. Even as recently as 2008 it was 16.7 per cent, although this is still far below the world average. By 2012, according to world rankings produced by the CIA, with slightly different figures from those provided by the ONS, it had fallen in ratio terms by a further 8.5 per cent to 14.2 per cent, which is one of the lowest in the entire world, ranking the UK&rsquo;s proportion of GDP devoted to investment as low as number 142 &ndash; equal with El Salvador &ndash; out of 154 countries in a recent survey with data from 2012.1 ONS figures for 2013 show the trend getting worse and not better &ndash; down to 13.5 per cent in 2013.2 Furthermore, while the position on gross investment is bad enough, net of depreciation it is even more disastrous. Of the &pound;224bn3 gross investment in the UK in 2012, &pound;176bn4&ndash; almost 80 per cent of the total &minus; was offset by capital consumption, or depreciation to allow for expenditure on keeping existing assets from deteriorating. This left only &pound;48bn &ndash; three per cent of GDP &minus; as net new investment. In China the ratio is about ten times as much.5 No wonder that their economy keeps growing at nearly 10 per cent per annum while ours stagnates. The problem with getting the investment ratio up, however, is that there is no way that this can be done other than by reducing, at least in terms of percentages of GDP, other calls on the economy&rsquo;s output. It is clearly not possible to use the same resources at the same time for both increasing investment and providing for consumers&rsquo; or government expenditure. How much investment would have to grow as a percentage of GDP to sustain a growth rate of, say, five per cent depends very largely on how productive the investment is. This is measured by the social rate of return on investment, also known as the incremental output to capital ratio, which includes all the additional value created as a result of investment not only in returns to whoever put up the money, but also in the form of increased wages and profits to those benefiting from increased output, higher tax receipts and better quality goods or services. These overall rates of return can and do vary enormously. For infrastructure projects they are typically relatively low, but for much of light industry, for example, they can be very much higher. Investments with a short gestation period are also very much better at producing cumulatively better returns than those with long pay- off periods. A crucially important policy requirement is therefore to bias, as far as possible, gross investment into projects which have both a high social rate of return and short gestation periods, while at the same time keeping a reasonable balance between public and private investment, both of which will be needed for balanced growth.</p> <p>If policy changes along the lines proposed so far are to be acceptable, it is also very important that they do not generate unmanageable inflationary pressures. It is, in fact, very difficult to combine as fast a rate of growth as five per cent with inflation as low as two per cent, mainly because productivity increases tend to be more unevenly spread in economies which are growing fast than those which are not, causing an averaging process &ndash; leading sector inflation &ndash; to materialise. This might well lead to the Consumer Price Index (CPI) rising at more than two per cent per annum, but probably with a growth rate of four to five per cent per annum, not much more &ndash; maybe three to four per cent if the right policies are pursued. Disinflationary policies associated with getting sterling to a much more competitive level would need to include lower market interest rates, based on a more competitive banking environment, and lower taxes, such as a reduced rate of VAT and lower National Insurance contributions, to complement the benefit of increasing productivity in ensuring that wage increases do not get passed through to the CPI in full. Especially if there were a tighter labour market, the co-operation of our trade unions would be vitally important in ensuring that the medium and long-term prospects of their members enjoying much higher living standards were not compromised by derailing the policies needed for better medium-term economic performance by excessive wage claims in the short term. International evidence strongly suggests that it is much easier to create a co-operative wages climate with fairly full employment against a background of successful growth policies than ones involving years of cut-backs and failure.</p><p><img src="http://www.opendemocracy.net/files/Screen%20shot%202014-04-21%20at%2011.44.41.png" alt="" /></p> <p><em>Table 1: national accounts aggregates</em></p> <p>Finally, for the policies proposed to be acceptable, they will need to ensure that they provide enough resources to the government to avoid damaging cuts in public expenditure, especially those that hurt the most disadvantaged or which undermine society&rsquo;s cohesion. Of course, at all times we need to try to make sure that public spending is well targeted and avoids waste, but it is hard to believe that slashing arts budgets or curbing entitlements to the poorest &ndash; now increasingly dependent on food banks to keep body and soul together &minus; improve the way we run our affairs. Faster growth and lower unemployment, however, would both increase government revenues and reduce some of the reasons for expenditure. At the moment, taxation, government fees and charges amount to about 38 per cent of GDP whereas government expenditure comes close to 44 per cent.6 It may well be that the best approach to closing this six per cent gap &ndash; or at least substantially reducing it &ndash; would be to bring expenditure down to about 40 per cent of GDP &ndash; the level it was as recently as 2004/05.7 With GDP rising strongly and calls on government spending to deal with the consequences of high unemployment and dependency having been substantially reduced, it would be possible to avoid cuts in expenditure while reducing the deficit and still making room within GDP for much higher levels of investment. On a similar footing, it would be possible to increase post-tax living standards for almost everyone during the period when the UK economy transitions to a much higher and sustainable growth rate. This has to be a key component in producing a mix of policies which it would be feasible to persuade the electorate is worth pursuing.</p> <p><strong>A quantitative agenda for much faster growth</strong></p> <p>It is one thing to set out in broad qualitative terms what needs to be done to get the UK economy growing much more rapidly, and thus to provide the basis for tackling many of our other problems. It is another to show that the policies set out above are capable of fitting together quantitatively into a programme capable of being executed successfully within the term of one parliament. This is the next objective. The plan for achieving this goal is encapsulated in the figures of Table 1 on pages 14-15.</p> <p>The starting point for the table consists of figures taken from the latest available Office for National Statistics (ONS) Quarterly National Accounts, which cover the period to the end of the third quarter of 2013. The spreadsheet covers the period from 2013 to 2018 rather than 2015 to 2020 so that it is based on the most recently available ONS figures, but it can easily be rolled forward as new starting data becomes available. The figures in the table are all colour coded. Those in black are ONS figures. Those in red are estimates for what might reasonably be expected to be the appropriate figures in the future. Those in green are calculated from those already there in black and red. Underneath each of the headings are the four letter codes used by ONS to identify each of the headings in their statistical tables.</p> <p>The top band of figures shows the projected position over the next few years in money terms and the band below shows the same figures in real terms, using the projected annual changes in the CPI to move from nominal to real figures. This seems a safer assumption to make than the approach taken recently by the ONS, which has assumed substantial increase in GDP not caught by measurements of price increases in the marketed sectors of the economy, which the CPI measures.</p> <p>At the bottom of the spreadsheet are set out the assumptions on which the figures in the table above are based.</p> <p>The sensitivity of demand for exports and imports &ndash; the elasticity of demand for each of them &ndash; is shown in the spreadsheet as 0.8 for exports and &minus;1.0 for imports. These figures, to be achieved by the end of a two to three year transitional period, allowing for time lags which need to be taken into account as explained below, are considerably lower than those in a recent (2010) report produced by the International Monetary Fund (IMF) which projected the elasticity of demand for UK exports to be 1.37 and for imports &minus;1.68.1 They are, however, more in line with a considerably less recent report (published in 1987) with elasticities for the UK respectively of 0.86 and &minus;0.65.2 These lower elasticities seem to have reflected more accurately our experience when the rate for sterling against the dollar dropped from about $2.00 to $1.50 between 2007 and 2009,3 although between 2009 and 2012 exports of goods did rise 31 per cent by value and 17 per cent by volume.4 Unfortunately, however, imports rose by about the same amount, starting from a higher base, so the balance of payments did not improve. The explanation for this may be that at $1.50 to $1.60 the exchange rate was still far too high to offset the chronic decline in UK manufacturing as a percentage of GDP and for import substitution on a major scale to be feasible. It may be significant that the 2010 report &ndash; which covered the early 2000s &ndash; showed the elasticity for imports to be numerically much higher than for exports, showing how important import substitution may be. The condition to be fulfilled for a devaluation to improve any country&rsquo;s trade position &ndash; the Marshall-Lerner Condition5 &ndash; is that the numerical values of the elasticities of demand for exports and imports (ignoring the negative sign for imports) has to be more than unity. This condition is clearly comfortably met by both the 1987 and 2010 reports, but particularly the latter.</p> <p>The exchange rate is projected to fall from its current level of about &pound;1.00 = $1.60 to &pound;1.00 = $1.10, with the same reduction applying against all currencies, as from the beginning of 2014. Calculations exemplified in the spreadsheet show that a devaluation of this magnitude is very probably going to be required to rebalance the UK economy to a sufficient extent towards manufacturing, investment and exports to provide both the overall growth rate and the improvement in the payments balance required to produce a sustainable future growth path &minus; especially if the export and import elasticities are not as high as they may be. As explained in more detail below, it is also likely to be necessary to have a devaluation of this size to enable household expenditure to increase and for there to be consequential improvements in living standards throughout the transitional period &ndash; a vital requirement to make the change in economic strategy proposed generally acceptable to the electorate. Reducing the external value of the pound from $1.60 to $1.10 implies a 31 per cent devaluation, which is about the same as the 28 per cent fall in 1931 against the US dollar, when the UK came off the Gold Exchange Standard.6 In 1992, when we left the Exchange Rate Mechanism (ERM), the devaluation was about 20 per cent.7 Our own historical experience and the recent fall in the Japanese yen &ndash; from 77.6 to 103.4 yen per US dollar within the 12 months to June 2013,8 a reduction of 33 per cent &minus; show only too clearly that getting the exchange rate down can be done by a government determined to achieve this objective.</p> <p>Consumer Price Index (CPI) inflation is projected to rise a little from its current level and to stabilise at three per cent per annum. It is widely believed that devaluations always produce increased inflation, but this is based on a priori assumptions rather than on looking at the experience of advanced and diversified economies such as ours when devaluations occur. Sometimes inflation increases slightly but often it does not do so &ndash; as was the UK&rsquo;s experience, for example, both after the 1931 and 1992 devaluations.9 Of course import prices have to rise &ndash; as does the cost of foreign holidays &ndash; if the currency has a lower external value, but strong disinflationary factors also kick in. With a lower exchange rate, both market interest rates and taxation can be lower. Production runs increase, producing economies of scale and lower costs. Sourcing tends to become more locally based, moving away from now more expensive foreign suppliers. Productivity increases in manufacturing tend to rise sharply as increased investment comes on stream, again reducing costs. All these factors help to generate a wages climate where moderation prevails, making it more rational for sectional interests not to press their claims too hard. Nevertheless, historical experience shows that inflation does tend to be rather higher in fast-growing economies &ndash; largely because of an averaging effect between sectors of the economy where productivity increases fast and where this is not possible &ndash; so making provision for some increases in the CPI above two per cent would be prudent.</p> <p>The social rate of return on investment &ndash; i.e. the return not only to whoever pays for the investment but including all the benefits which flow from it in the form of higher wages and profitability, increased tax receipts and better quality goods and services &ndash; is projected to rise strongly as more investment takes place and unemployment falls steeply. The assumption made in the spreadsheet is that the increase in investment, over and above what would probably have taken place on current trends, would have a social rate of return of 50 per cent for a couple of years, falling to 30 per cent. Figures as high as this would only be possible if a substantial proportion of new investment were in manufacturing and if there were ample new labour to draw into the labour force, but it is strongly reflected in the experience of economies pulling out of conditions where there are large pools of labour available to be drawn into production. Perhaps the most telling was the experience in the USA at the end of the 1930s and early 1940s as its economy was propelled by the need for war production out of the very depressed conditions it had experienced during most of the 1930s. Between 1939 and 1944, US GDP grew by 75 per cent, a compound annual rate of almost 12 per cent. Over the same period, industrial output increased by over 150 per cent, while the number of people employed in manufacturing rose from 10.3m to 17.3m, an increase of just under 70 per cent. Productivity rose by some seven per cent per annum.10 Similar if not quite such spectacular results were achieved in the UK after the 1931 devaluation. Between 1932 and 1937, the UK economy grew cumulatively by just over 3.8 per cent per annum as manufacturing output rose by 48 per cent and the number of those in work rose from 18.7m to 21.4m as 2.7m new jobs were created, half of them in manufacturing. Evidence that returns to investment can be as high as this, at least on a temporary basis, is buttressed by the result of studies showing that right across the world in the 1960s the average incremental-output-to-capital ratio was as high as 25 per cent, peaking at 30 per cent in 1964, although it has fallen since, no doubt as a result of the much less favourable growth policies pursued since then by nearly all industrialised countries.</p> <p>At the top part of the table, Net Income from Abroad is projected to stay slightly negative while Net Transfers Abroad are expected to rise slowly, mainly as a result of our increasing net transfers to the European Union, which are projected by the Office for Budget Responsibility to rise by a total cumulatively of about &pound;10bn over the period between 2013 and 2018. Net Income from Abroad fell from an average of &pound;21.6bn per annum between 2007 and 2011 to &minus;&pound;2.1bn in 2012. The main reason for this is a very steep fall in Portfolio Income, largely as a result of the major sell off of UK assets which took place in the 2000s, combined with a recent fall in Di- rect Income from Abroad, which appears to be the result of major debt write-offs by UK-owned banks domiciled for tax reasons in countries such as Holland and Luxembourg. Neither of these trends is projected to be reversed in the near future.</p> <p>To avoid circularity in the spreadsheet, it is then necessary to make assumptions about what the resulting increases year by year in Gross Domestic Product would be and these are set out in the spreadsheet. The increases in GDP have, however, to be consistent with the other figures in the spreadsheet and considerable care has been taken to make sure that they fulfil this requirement.</p> <p>The crucial issue then is whether, based on the assumptions set out above, it would be possible for the UK economy to shift sufficient resources into investment and exports to keep the foreign payments gap manageable and to get the economy growing again at three to five per cent per annum, while at the same time increasing real living standards and avoiding an unacceptable level of inflation. The spreadsheet indicates that it would be possible for all these objectives to be achieved, taking account of the following factors:</p> <p>- The impact on export performance from an elasticity of demand for exports of 1.0 is that, measured in the domestic currency, each one per cent devaluation increases the volume of exports by one per cent. The projected figures for exports from 2014 onwards are thus calculated (subject to the points in 4b below) by starting with the previous year&rsquo;s figure and then taking account of the impact of any change in the exchange rate, growth in the economy and the rise in CPI in the top band of figures which allow for inflation but not those further down which do not.</p> <p>- The IMF figures for the sensitivity of export volumes to changes in their price level, reflecting widespread experience referred to as the J-curve effect, show that it takes two or three years for their impact to be fully felt on the trade balance. For the first year or so, while the economy adjusts to the new price signals, the impact is much less. To allow for the fact that it will take up to three years for the economy to adapt to its more competitive status, the rise in exports as set out in paragraph 4a above is assumed to take place over a three-year period with one third of the impact being felt each year.</p> <p>- The impact on imports of an elasticity of demand of &minus;1.0 &ndash; again measured in the domestic currency &ndash; is that, for each one per cent reduction in the exchange rate, import volumes will fall by one per cent but rise by one per cent in value. This means that with an elasticity of, say, &minus;1.0, the reduction in volume and the increase in value cancel each other out, leaving imports by total value the same as they were before. If the elasticity is not &minus;1.0 but some other figure such as &minus;1.2 then the effect of a one per cent devaluation would be to reduce import volumes by 1.2 per cent while their value rises by one per cent, the overall effect being that in this case imports would fall in total value by 0.2 per cent.</p> <p>- However, a devaluation of, say, 30 per cent will not change import and export prices by this full percentage. Exporters will use some of the reduction in their costs to improve their margins and importers will react the opposite way. It is assumed in the spreadsheet, in the light of experience from previous major exchange rate changes, that one third of the reduction in the exchange rate will be effectively eroded away in this respect.</p> <p>- Historical evidence, also exemplified in the IMF elasticity figures, also suggests strongly that it takes longer for export than import volumes to increase. In the spreadsheet it is therefore assumed that import volumes rise by 10 per cent more than they otherwise would have done in 2014, the year when the devaluation is shown in the spreadsheet as taking place, before increasing by five per cent less for the next two years as the impact of the devaluation on import substitution works its way through. This is likely to be the outcome not least because higher volumes of manufacturing are bound to lead initially to steep increases in the purchase of both capital equipment and raw materials from abroad.</p> <p>- With these assumptions, a devaluation from $1.60 to $1.10 (with equivalent reductions in the value of sterling vis &agrave; vis other currencies) would remove the foreign payments deficit in three years if no other action were taken. There would be a short-term increase in the deficit, which would no doubt help to get the external value of sterling down, before the current account stabilised with a relatively small surplus, taking account of the fact that the trade surplus has to be large enough to cover deficits on Net Income and Transfers. For the reasons set out below, however, there may be strong arguments for taking action to avoid the foreign payments gap closing as fast as this during the transitional period to faster growth.</p> <p>Taking all these considerations into account, the table shows the following intermediate results:</p> <p>- On the basis of all the assumptions set out above, it would be possible to expand the economy by up to three per cent per annum in real terms, rising to five per cent. As productivity increases may remain, at least initially, at no higher than their historical average of about two per cent per annum &ndash; and in the light of recent experience they may be less &minus; there would be a cumulative increase in the demand for labour, which would increase the labour force by at least two per cent multiplied by about 30 million &ndash; the approximate size of the current UK labour force &minus; or 600,000 per year. Past experience indicates that it is likely that about two-thirds of the newly employed would be those previously registered as unemployed and one third would be people drawn into the labour force who had not previously been looking for work. No allowance has been made for increased inward migration, if the UK economy started to perform much better than others in the EU which, however, could well increase the amount of available labour by a further substantial number of potential employees, albeit while putting a further strain on the UK&rsquo;s infrastructure, housing stock and capital assets generally.</p> <p>- To cater for both increased manufacturing and net trade output requirements as well as increases in demand from consumers, the voluntary sector and government, gross investment as a proportion of GDP would need to rise from about 14 per cent, where it is at the moment, to well over 20 per cent. It would be possible for this to happen while still allowing household expenditure to increase by an average of rather more than three per cent per annum, by using increased GDP to provide most of the resources needed to accommodate all these claims on UK economic output at once. As explained in more detail in paragraphs 5g and 5h below, however, all these outcomes could only be achieved together if the UK continued to run a substantial balance of payments deficit for some years &ndash; a strategy which it would nevertheless be safe for us to adopt if our economy were growing fast enough.</p> <p>- About 75 per cent of all our visible exports and imports are manufactured goods. If this proportion of the increase in exports and reduction in imports in real terms is achieved by both increasing export volumes and import substitution, the proportion of GDP coming from manufacturing in the spreadsheet would rise from 10.7 per cent in 2012 to about 13 per cent in 2018. This percentage does not, however, allow for the need for a further improvement in net trade required to close the foreign payments gap, so the proportion of GDP derived from manufacturing would need to rise further, to about 15 per cent if the foreign deficit is to be eliminated.</p> <p>- To get through the transitional period with manageable figures, a number of additional factors to do with manufacturing need to be taken into account:</p> <p>Table 2 on page 24 estimates how the proportion of GDP devoted to manufacturing would rise between 2013 and 2018 from 10.6 per cent to 12.9 per cent. This would be an increase between 2010 and 2018 of just under 45 per cent in absolute terms, involving manufacturing output expanding at an average of 7.5 per cent per annum, at the same time as the economy.</p> <p><img src="//cdn.opendemocracy.net/files/Screen%20shot%202014-04-21%20at%2011.38.21.png" alt="" width="420" /></p> <p><em>Table 2: estimated rise in the proportion of GDP devoted to manufacturing</em></p> <p>expands between 2013 and 2018 by 24 per cent in real terms &ndash; from &pound;1,536bn to &pound;1,905bn at 2010 prices, an average of 4.4 per cent per annum. An increase in output of 7.5 per cent per annum in manufacturing from the current low base should be achievable but, if not, the consequent strain on resources could be taken by running a somewhat larger balance of payments deficit for a bit longer.</p> <p>This rate of growth in manufacturing output depends heavily on the social rate of return (the same as the incremental output to capital ratio) being high enough to enable all the figures to hang together. This is only likely to happen if the UK economy combines rapidly reducing unemployment with a recapturing of a sufficiently substantial amount of the highly productive light industry, with high returns and short gestation periods, that has migrated to the Pacific Rim. This, in turn, will only occur if the cost-base in the UK is charged out at a rate which is sufficiently competitive to make this possible, which in turn makes the deep devaluation posited an essential component of the strategy.</p> <p>If these very high returns on investment cannot be achieved, at least for a short period while many currently unused resources, particularly labour, are pressed into service, the prospects of achieving sustainable high growth become much harder to realise. The lower the social rate of return, the more investment is required for any given rate of growth, the fewer resources are available to reduce or close the foreign payments gap and the greater the negative impact on current living standards.</p> <p>It should be possible to achieve significant decreases in inequality on two counts in the circumstances portrayed in the spreadsheet. A big increase in manufacturing output would disproportionately benefit the regions of the country outside the South East and a tighter labour market should tend to increase the bargaining power of labour, thus bidding up wage levels among those on relatively low pay at the same time as much more high-productivity employment would become available.</p> <p>By altering the assumptions towards those reflecting the current parameters, the spreadsheet also shows how dismally poor the prospects are going to be for any government elected in the near future in the UK without a radical change in economic policy. Without an expansionist devaluation strategy, growth in the economy is unlikely even to keep up with population growth, leading to stagnant living standards as far ahead as can be envisaged. Even with a heavy devaluation, however, the position remains challenging because of the need to shift so significant a proportion of GDP into investment and net exports without squeezing consumption and living standards. Even with much faster growth and with constraints on public and voluntary sector expenditure, it would take three or four years before increases in consumer expenditure would be possible unless countervailing action is taken to deal with this factor.</p> <p>There is, however, a solution to this problem. Deficits on both foreign payments and government expenditure are only unmanageable if the rate at which they are rising is greater than the rate at which the economy&rsquo;s capacity to service them is increasing. If the economy is shifted to rapid growth, deficits of their current size become far less important and dangerous. The solution, then, to ensuring that household and government expenditure avoid getting squeezed unnecessarily hard &ndash; and indeed are allowed to grow every year &ndash; is to allow borrowing from abroad (i.e. running a payments deficit) to take the strain during the transition period.</p> <p>This would need to be done by government action to increase demand so as to channel the main effects of a much lower exchange rate during the transitional period not only towards rebalancing the economy towards exports, investment and import substitution but also to increasing household and government expenditure. The result would be a continuing balance of payments deficit. This is reflected in the spreadsheet in the assumptions at the bottom of the table under the column heading &lsquo;Net Trade to Consumption&rsquo;. This points to the action which the government would have to take through fiscal and other policies temporarily to keep consumption rising &minus; at the same time as increasing investment &minus; by borrowing from abroad. The main way in which this would need to be done would be to allow for large increases in imports of plant, machinery and raw materials to be reflected in a continuing balance of payments deficit.</p> <p>On the basis of all the assumptions made and the calculations based upon them, the outcomes which would then be achievable over a five year period (modelled in the spreadsheet as starting from 2014, as mentioned previously, so that it is based on the most recent available ONS figures, but allowing for the fact that it would be easy to roll the numbers forward to 2015) would be the following:</p> <p>- The growth rate could be stepped up to as much as five per cent per annum on a sustainable basis.</p> <p>- The foreign payments deficit would hover at no more than around four per cent of GDP throughout the five-year transitional period, but at the end of this period it could clearly be made to fall.</p> <p>- The percentage of GDP devoted to gross investment would rise from its current level of less than 15 per cent to about 23 per cent &minus; about the world average. This is essential if the economy is to embark on a sustained growth path.</p> <p>- Manufacturing output as a proportion of GDP would rise from 10.6 per cent in 2012 to about 13.0 per cent in 2018, which is getting close to the level necessary for the UK to have a foreign payments balance which is no longer a constraint on the expansion of domestic demand and on the attainment of reasonably full employment. For this to be achieved, manufacturing as a percentage of GDP would probably need eventually to be about 15 per cent.</p> <p>- Consumer expenditure could increase in real terms every year. The projected rise is 19 per cent over the five year period from 2013 to 2018 &ndash; 3.5 per cent per annum &minus; but this does not allow for any increase in the population. If the number of people living in the UK continues to rise at around 0.6 per cent per annum, as it has done on average for the last four years, then the increase in GDP per head per year would be closer to three per cent. If, as a result of much better economic prospects, the personal savings ratio were to rise from its present very low level &ndash; 5.4 per cent, which is one of the lowest among developed countries &minus; this would make it possible for incomes to rise somewhat faster than household expenditure.</p> <p>- Registered unemployment would fall by about 400,000 a year or more for two or three years, reducing its level towards three per cent, although the total employed labour force would rise by about 50 per cent more than this, i.e. by an aggregate of 600,000 per year. Increasing the size of the labour force would be a crucial element, buttressed by much higher levels of investment, of the strategy to get the economy to transition to a much higher growth rate.</p> <p>- It would very probably be difficult to keep inflation as low as two per cent, but with appropriate government policies on taxation and interest rates in place, it should be possible to keep average inflation over the period at around three per cent, or perhaps four per cent at worst.</p> <p>&nbsp;</p> <p>Conclusion</p> <p>It is widely believed in the UK that there is relatively little that can be done to get the economy to perform significantly better than its present level. This pamphlet shows that perceptions of this sort are wholly inaccurate. While there is certainly room for disagreement as to whether all the assumptions made above are accurate as they stand or whether they may require some modification, the overall strategy which they underpin would allow for very considerable variations in the assumptions to be made while vastly improved economic performance would still be achieved. Furthermore, while the projections in this pamphlet are all based on there being no major developments outside the UK which have a heavy impact on the way our economy performs during the next few years, obviously, if some do occur &ndash; which seems very probable &ndash; appropriate adjustments in policy to take account of them would need to be made. Whatever happens in this respect, however, the UK economy would be in a much better position to respond to whatever events do materialise than it would be if present policies continue.</p> <p>The problem with managing the UK economy is that, for far too long, there has been an assumption that the only two major macroeconomic ways of controlling the economy available to the government are fiscal policy on the one hand and monetary policy on the other. The third, perhaps even more powerful, way of influencing economic outcomes &ndash; exchange rate policy &ndash; has been almost entirely ignored. This is one critical mistake which our policy makers have made. The other is to believe that having low levels of inflation, entailing a target of no more than two per cent increases in the CPI per year, as the primary economic goal will somehow produce a growing economy whatever happens to our international competitiveness. There is no evidence that this is realistic. Without rectifying these critical misconceptions, there is no mixture of policies which is going to get the British economy back on track. With all three policies for controlling the economy working together, however, and without taking undue risks with inflation, it is comparatively easy to see how our economic prospects could be transformed. This is what we need to do. A major change in the perception of economic policies and strategy is going to be needed but it is all possible, achievable and viable. There is an alternative and we need to start implementing it as soon as we can.</p><p><em>This pamphlet was first published by Civitas, and a fully referenced version can be found <a href="http://civitas.org.uk/newblog/tag/john-mills/">on their website</a>.</em></p><p><em><strong><span style="font-size: 15px; font-family: Arial; color: #000000; background-color: transparent; font-variant: normal; text-decoration: none; vertical-align: baseline;">Liked this piece? Please donate to OurKingdom </span><a style="text-decoration: none;" href="http://www.opendemocracy.net/ourkingdom/donate"><span style="font-size: 15px; font-family: Arial; color: #1155cc; background-color: transparent; font-variant: normal; vertical-align: baseline; text-decoration: underline;">here </span></a><span style="font-size: 15px; font-family: Arial; color: #000000; background-color: transparent; font-variant: normal; text-decoration: none; vertical-align: baseline;">to help keep us producing independent journalism. Thank you.</span></strong></em></p> John Mills is a donor to openDemocracy. <fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/oliver-huitson/devalue-or-else-new-ourkingdom-debate-on-british-currency">Devalue or Else - a new OurKingdom debate on the British currency</a> </div> <div class="field-item even"> <a href="/ourkingdom/ourkingdom/new-ourkingdom-series-there-is-alternative">New OurKingdom series - There is an Alternative</a> </div> </div> </div> </fieldset> uk uk There is an Alternative John Mills Mon, 21 Apr 2014 23:11:11 +0000 John Mills 81985 at https://www.opendemocracy.net The UK isn't investing anything in its future https://www.opendemocracy.net/ourkingdom/john-mills/uk-isnt-investing-anything-in-its-future <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>When all things are taken into account, the UK is in effect investing nothing in its future economy. The coalition may have conjured some temporary growth, but we need serious change if we wish to avoid long term decline.</p> </div> </div> </div> <p><img src="http://www.opendemocracy.net/files/Derelict_Factory_-_Alperton_-_geograph.org_.uk_-_311079.jpg" alt="" width="460" /></p><p><em>derelict factory - wikimedia</em></p><p><strong></strong><span>All those who believe that the current growth in the UK’s economy – 1.9% in total in 2013 – is sustainable need to ponder two figures, both of which can easily be verified from Office for National Statistics (ONS) publications.</span></p> <p><strong>Gross and Net Investment </strong> </p> <p>The first is the proportion of our national income which we devote to investment. ONS figures for the first three quarters of 2013 show that this ratio – which was 16.7% in 2008 - had dropped by 2013 to 13.5%. This is one of the lowest percentages in the entire world. The CIA estimated that in 2012 the ratio was 14.2% - slightly higher than it is now. Comparing other countries across the world in 2012 showed that of a total of 154 countries surveyed, the UK ranked number 142 equal - with El Salvador. This compares dismally badly with the performance almost everywhere else. The world average for gross investment as a percentage of Gross Domestic Product (GDP) in 2012 was 23.8%. The percentage for China was 46.1%. </p><p>While the gross figure is bad enough, the net position is far worse. ONS figures show that Capital Consumption – i.e. the depreciation of existing assets in the UK is running at just over 11% of GDP. If, therefore, we subtract from the gross investment percentage a provision for existing capital assets becoming worn out and needing to be replaced, we are left no more than about 2.3% of our GDP as net investment. This is also far lower than almost anywhere else. </p> <p>Worse, however, is to come. Unlike in many other countries, especially in the developed world, the UK’s population is growing relatively fast - by around 350,000 a year on average - about 0.6% as a percentage of the total number of people living in the UK. The average value of all the capital assets in the country divided by the current population gives a figure of around £120k. We are therefore now in a position where our current net investment of about £37bn (2.3% of £1,620bn) is less than the £42bn (350k x £120k) which needs to be spent every year just to stop the capital assets of the country being diluted down by our rising population. </p><p>The result of these easy-to-check calculations is that our net investment per head of the population is as close to zero as makes no difference. No doubt this has a lot to do with the collapse in the rise in productivity, which has been such an apparently puzzling recent development for many people. With no net investment per head of the population this is bound to happen. The Industrial Revolution was built on investment in stocks of more and more capital goods of all sorts, but particularly those used in manufacturing operations. If this accumulation stops – which is what has occurred to the UK economy – productivity increases will stop with it. This is exactly what has happened. </p><p><span><strong>Manufacturing</strong></span><span> </span> </p> <p>The second figure which ought to be of concern to anyone who thinks that the UK is now on a viable course to sustained growth is the percentage of our GDP which currently comes from manufacturing. It is now about 10.7%. As recently as 1970 it was 32%. Even in 1980 it was 24%. It haemorrhaged during two decades. One was during the heyday of monetarism in the 1980s. The second was during the gross over-valuation of sterling during most of the 2000s.</p> <p>Manufacturing is of key importance to the viability of any economy such as ours for three main reasons. One is that it is far easier to achieve productivity increases in manufacturing industry than it is in the service sector, as all the statistics continually show. The second is that manufacturing produces much more high quality and high income skilled blue collar jobs than is the case in the rest of the economy. It also produces them with a far better geographical spread than is the case, for example, in financial services which are heavily concentrated in the South East of the UK. Most important of all, however, is the role that manufactured goods play in enabling us to be able to pay our way in the world – or to fail to do so as has been our lot now for many decades. The last time the UK had a foreign payment balance was in 1983 – now over 30 years ago. </p> <p>&nbsp;ONS figures for 2012 – the most recent which are available in detail – show the UK having a total balance of payments deficit on current account that year of £59bn. Largely as a result of the huge sell-off of UK assets which took place in the 2000s, we no longer had any net income from abroad. In 2008 this was still £33.2bn but by 2012 it was minus £2.1bn. Transfers abroad are another negative item – rising from £13.7bn in 2008 to £23.1bn in 2012, mainly as a result of the increasing cost to the UK of our EU membership. With negative net income and transfers, we therefore needed to have a sufficiently positive net trade performance – a surplus of exports over imports - to offset these burdens. Exports of services in 2012 did do well, with a surplus of £74bn, of which almost half - £36bn – came from financial services. Unfortunately, however, the deficit on goods – at £108bn - was much larger than the surplus on services. Of this £108bn, about £84bn was a deficit on manufactured goods. </p><p>The problem the UK has as a relatively compact and densely populated country with comparatively few major natural resources is that the only way we can pay our way in the world is by selling other countries sufficient quantities of manufactured goods. Exports of services are too small to bridge the gap and nearly all the rest of our foreign trade is in commodities such as oil and coal, where supplies are limited. We are never going to be able to do this with only just over 10% of our GDP coming from manufactures. This ratio needs to be around 15% for viability. Unless this gap can be closed, the balance of payments will act as a perennial deadweight constraint on us and we will face year after year of stagnation.</p> <p><span><strong>Current Prospects</strong></span></p> <p>Against the background of no net investment per head of the population and too small a manufacturing base to enable us to close an already very large payments deficit, what are the prospects for the UK economy over the next few years? The Coalition government has achieved 1.9% growth in 2013 and expects about 2.4% in 2014. Looking further ahead, the Office for Budget Responsibility paints a relatively optimistic picture in their forecasts for 2015 and 2017, with growth rates per year averaging about 2.5% annum. Are these forecasts likely to be correct? Looking ahead to 2014/15, running up to the general election, they may be right but those further ahead look wildly optimistic.&nbsp; </p><p>Current growth is not based on any improvement on our trade performance which can reasonably be expected. It is based on the feel good factor generated by very loose money and the consequent rise in asset prices, including both housing and stocks and shares on the Stock Exchange. Growth is therefore being driven very largely by more consumer expenditure and not by investment and improved trade performance. At least three consequences, however, are likely to flow from this background:&nbsp; </p><ol><li><p>The balance of payments will deteriorate with a deficit, which is already about 4% - and one of the highest in the world - widening to increasingly unmanageable proportions.&nbsp; </p></li><li><p>As there is a very strong link between the government deficit and the foreign payments balance, if the latter deteriorates, the former is very likely to do so too. Government borrowing, therefore, far from falling will almost certainly get larger, rising to well over 100% of GDP.</p> </li><li>Against this background the authorities are all too likely to believe that interest rises are need both to damp down the economy and to avoid sterling sliding in value. If this sequence of events materialises, growth will grind to a halt. </li></ol><p>What is therefore in prospect for us at the moment is a mini-boom which no doubt the Coalition government knows will help them during the election but which brings dismally poor prospects ahead once the brief period of growth which we can now expect grinds to a halt.</p> <p><span><strong>What can be done?</strong></span></p> <p>The root problem facing UK economic policy makers is that there is no solution to us achieving a sustainable rate of reasonably strong economic growth unless we can get both our investment rate and our manufacturing capacity up substantially, and one depends to a significant extent on the other. The figures, however, look daunting. The same output cannot be used both for consumption on the one hand and for investment and closing the payments gap on the other. If we were to get our rate of investment up to the world average of 23%, we would need to shift about 10% of our GDP out of consumption into investment to do so. To close the current foreign payments gap we would need another 4% - making 14% in total. Even half of these percentages, which might get us back to slow growth rather than stagnation, would need a shift of around 7% - triggering a reduction in consumer expenditure of about 10%. </p> <p>&nbsp;Who believes that it would be possible to persuade consumers to reduce their living standards by a further 10%? If this is not done, however, it is very hard to see how we are not in for decade after decade of stagnation. </p><p><em><strong><span>Liked this piece? Please donate to OurKingdom </span><a href="http://www.opendemocracy.net/ourkingdom/donate"><span>here </span></a><span>to help keep us producing independent journalism. Thank you.</span></strong></em></p><p><em><strong><span></span></strong></em><em>John Mills is a donor to openDemocracy.</em></p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/oliver-huitson/devalue-or-else-new-ourkingdom-debate-on-british-currency">Devalue or Else - a new OurKingdom debate on the British currency</a> </div> </div> </div> </fieldset> <div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> uk uk UK John Mills Thu, 13 Feb 2014 00:11:11 +0000 John Mills 79243 at https://www.opendemocracy.net Response to Curzon Price on a British devaluation https://www.opendemocracy.net/ourkingdom/john-mills/response-to-curzon-price-on-british-devaluation <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p><img style="float: right;" src="http://www.opendemocracy.net/files/devaluefinal.jpg" alt="" width="140" /></p><p>Devaluation alone is not the solution to the UK's economic woes. But it is the necessary foundation needed for other policies to work.</p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/549821/3958011797_62b8964d78_z.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/549821/3958011797_62b8964d78_z.jpg" alt="" title="" width="400" height="265" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'><span class='image_title'>Flickr/Ihongchou. Some rights reserved.</span></span></span></p><p>I am really grateful to Tony Curzon Price for his thoughtful and <a href="http://www.opendemocracy.net/ourkingdom/tony-curzon-price/is-devaluation-of-sterling-answer-to-britains-economic-woes">detailed review </a>of my book&nbsp;<em>Exchange Rate Alignments –&nbsp;</em>which I can only agree has an unappealing title, chosen not by me but insisted upon by the book’s publishers who thought it would increase sales! Let me turn away from what the book is called, however, to the major criticisms which Tony Curzon Price puts forward on what it has to say. He has three specific lines of attack, which I deal with in turn, these being:&nbsp;</p><p>1.A&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Devaluation may provide only a temporary respite from uncompetitiveness. Far from kicking off a virtuous cycle, bad managers and over demanding workers are let off the hook from their economically irresponsible decisions.</p><p>1.B&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; A more competitive exchange rate will not address the social conditions which have produced “deep structural weaknesses – from infrastructure to science; from education to industrial policy – that hold businesses back. Devaluation is addictive. It is also an admission of defeat.”&nbsp;</p><p>1.C&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Policies involving faster growth will fall foul of resource constraints, particularly those round carbon emissions.</p><p>As regards devaluation only providing a temporary competitive advantage, as poor management and over-grasping labour are let off the hook, surely the answer is to look at what actually happens rather than to rely on judgements of this sort. There are dozens of cases of large devaluations by countries with broadly similar economies to ours. They all show common characteristics as Tony Curzon Price recognises earlier in his review. In almost all cases there is little, if any, change to the rate of inflation despite almost universal belief that the opposite will happen. A long lasting improvement in competitiveness is thus achieved. As a result, the growth rate goes up, investment as a proportion of GDP rises, living standards increase, government deficits go down and social and geographical inequalities decrease. These benign developments arise because a lower exchange rate makes them all possible. The reason for the UK’s deindustrialisation is not “bad decisions” by management but sensible ones in all the circumstances, to close down manufacturing operations which have no hope of making any money because the exchange rate is much too high for them to have any chance of being profitable. Nor should “over-demanding workers” be blamed if they desert low-paying export orientated jobs in unprofitable businesses for the easier life provided by service industries.</p><p>A similar approach needs to be taken to the “social conditions” argument that the UK is unable to compete in world markets because of inadequate standards of education and training, combined with outdated infrastructure. These kinds of problems are far from unique to the UK yet both our own and other countries’ histories show that they are no bar to better performance with a lower exchange rate. The UK economy performed dismally badly during the 1920s but far better in the 1930s as a result of the 30% devaluation in 1931. Between 1932 and 1937 the UK economy grew at over 4% per annum – the fastest rate of growth over this length of time we have ever achieved. The German economy at the end of World War II was in ruins, but this did not stop a highly competitive post war exchange rate propelling Germany into a growth rate for decades not far off what is now being achieved in China. The problem with the UK economy is that we have had an over-valued exchange rate for as long as almost anyone now alive can remember and it is this which has caused so many of the adverse social conditions with which we are now confronted. Faster growth will not solve all our difficulties but they would make almost all of them much easier to tackle than if we face years of completely unnecessary stagnation, because too strong a pound means that we cannot compete in the world.&nbsp;</p><p>How about the impact which higher growth rates might have on resources constraints? Much depends on the view you take about humankind’s capacity to find solutions to impending shortages. If you take the sort of approach adopted by the Club of Rome 40 years ago, of course you will conclude that growth is finite. If, on the other hand, you think that those who want to curb growth now on resource constraint grounds are as likely to be as wrong in their assessments as the Club of Rome turned out to be when it published “Limits to Growth” in 1972, you can be much more optimistic, as I am. This is particularly the case if you look at where the crucial pinch points might come, as my book does.</p><p>Of course carbon emissions provide the route to a different kind of constraint and it may well be that carbon taxes may have an important role to play in curbing them. Global warming may or may not turn out to be as threatening as some people believe it will be but there seems to me to be a strong argument for saying that the richer the world is the more easily it will find the resources to combat the negative effects of the world’s temperature rising, if this is what happens. It also seems to me that the point made in my book, that the biggest threat to the future viability of humanity is that the world’s population becomes unsustainably large and that this is best counter-acted by raising living standards in the poorest countries with the highest birth rates, must be the best way ahead. This will not happen, however, without a return to prosperity in countries like the UK to provide us with the capacity – mostly through trade rather than aid – to help the poorest countries raise their living standards, so that the demographic transition to smaller families takes place.</p><p>Finally, Tony Curzon Price takes me to task for appearing to believe that devaluation is a panacea which will solve all our problems on its own. I do not believe this at all. I think that there are many complementary policies which will need to be implemented to help a &nbsp;lower exchange rate make the UK more prosperous. I also believe, however, that none of these other policies will achieve any significant results until exporting is made far more profitable than it is now and importing much less so. A &nbsp;lower exchange rate for the UK is not a sufficient condition for pulling us out of stagnation. It is, however, one which is absolutely necessary. Any mix of growth oriented policies which does not include an active exchange rate strategy is doomed to fail.</p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/tony-curzon-price/is-devaluation-of-sterling-answer-to-britains-economic-woes">Is devaluation of sterling the answer to Britain&#039;s economic woes?</a> </div> <div class="field-item even"> <a href="/ourkingdom/john-mills/norman-tebbit-exchange-with-john-mills-how-to-fix-britains-industry">Norman Tebbit exchange with John Mills - how to fix Britain&#039;s industry</a> </div> </div> </div> </fieldset> <div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> <div class="field field-rights"> <div class="field-label">Rights:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> Creative Commons </div> </div> </div> uk uk UK economics Inflation Reviews Devalue or Else! John Mills currency devaluation Tue, 10 Sep 2013 07:38:24 +0000 John Mills 75166 at https://www.opendemocracy.net The scale of debt in the western world now threatens a serious collapse https://www.opendemocracy.net/ourkingdom/john-mills/scale-of-debt-in-western-world-now-threatens-serious-collapse <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>There can likely be no repeat of the 2008 bailouts, sovereign states do not have the capacity. But the accumulating debt is now so large, the point of no return may have been breached. Euro collapse could trigger far wider meltdowns.</p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/eurodebt333.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/eurodebt333.jpg" alt="" title="" width="400" height="198" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'><span class='image_title'>Image: EuroCrisisExplained.co.uk</span></span></span></p><p>Debt is as old as history – and so are defaults. It is part of human life. Most of the time debt is not a major problem but sometimes it can become catastrophic. Unfortunately, in recent years the amount of debt outstanding in the western world compared to total economic output has massively increased. As a result, the risk of a disastrous financial breakdown in the world economy may be much greater than many people realise.</p> <p>Throughout history, the major protection against there being too much debt has been creditors’ concerns that, if they lend too much with too little security, they might not get repaid. This has not, however, stopped many spectacular defaults taking place. Almost every country in the world has failed to pay its debts at one time or another. Companies large and small, from Lehman Brothers (owing just under $700bn) to corner shops, have gone bust. In the UK about 135,000 individuals currently declare bankruptcy each year and a further 1.2m in the USA. Default is endemic to human society and most of the time the economic system is resilient enough to absorb the consequent bad debts.</p> <p>This relatively benevolent state of affairs may, however, be changing as a result of three factors coming together. These are globalisation, massive credit creation and austerity. The result is much more debt than there was before combined with much less capacity to repay it. The danger now is that the defaults which may be looming up at present are going to be so large that they destabilise the whole world’s economic system. </p> <p>Globalisation has been responsible for footloose capital swilling round the world – arguably generating much less benefit than is provided by free trade. But a bigger systematic problem has been the massive imbalances between the export performances of the countries which run foreign payment surpluses and those that run deficits. In 2010, for example, China had a current account surplus of 6.0% of its GDP; Singapore 13.8% and Switzerland 18.6% The UK, by contrast, had a deficit of 2.5% and the USA 3.2% while Spain chalked up 4.5% and Greece 10.5%. </p> <p>These one year figures are destabilising enough, but it is when big surpluses or deficits continue year after year that the position becomes unsustainable. During the 2000s, the UK accumulated nearly £300bn in foreign payments deficits. Both Switzerland and Singapore, by contrast, have accumulated net foreign assets which equal about twice these countries’ national incomes. Some of these assets and liabilities are reflected by ownership of operating companies or real estate but a huge proportion of it is paper debt, not least in the form of sovereign bonds. As long as the creditor countries are in a strong enough position to service the debt and to stop it accumulating to unsustainable levels, the situation is essentially fairly stable. But what if this condition ceases to apply?</p> <p>A big part of the reason why these enormous imbalances have been able to accumulate is because nothing has stopped banks being able to create credit on a huge scale, especially since the 1990s. Over the last couple of decades the ratio between world liquidity and world GDP has roughly doubled. This explosion of bank credit has recently been augmented by the steps taken by governments and central banks to increase liquidity and to keep interest rates down, to try to get economies which are stuck in the economic doldrums to start growing again. Both sources of finance have facilitated the absorption of the huge amounts of borrowing and lending required to finance the world’s foreign trade imbalances. It has also encouraged financial institutions to lend more and more money to consumers, many of whom, particularly in the UK and the USA, have been only too keen to take on far more debt than is good for them. </p> <p>The combination of trade imbalances and credit creation on a huge scale has also had a major impact on another form of debt, especially, although not exclusively, in countries with big foreign payment deficits. The last year during which the UK paid its way in the world was 1985. Since then our deteriorating foreign payment position has sucked sufficient demand out of the economy to make government deficits inevitable - and getting bigger the worse the economy performs. This then leads to the third factor which is that what makes debt unmanageable is when it is accumulating faster than the debtor’s capacity to service and repay it. This is the trap into which much of the western world is now falling. Debt then accumulates which is likely never going to be paid back and which can only be serviced at increasingly unbearable cost. Default can then only be staved off by the creation of more unsustainable debt, which only makes the eventual collapse worse.</p> <p>This is the situation which has probably already been reached in the Eurozone. It is unfortunately where the UK and the USA are also heading. The danger now is that the debts owed by governments and correspondingly to banks are so large that there can be no repeat of the financial rescues which took place in 2008. Then governments had sufficient creditworthiness to be able to recapitalise stricken banks, thus stopping the world economy melting down. This condition may not hold in future, as several key factors come together.</p> <p>In the Eurozone, where growth has ground to a halt, the sums of money required to finance the deficits of the austerity countries are growing exponentially – and much faster than Eurozone GDP. It is European Central Bank funding on a massive scale which is keeping the Single Currency together, but at the risk that the losses, if eventually there are large devaluations among the austerity countries as the Single Currency breaks up, are beyond the capacity of either sovereign states or banks within the euro area to absorb. In both the UK and the USA too, sovereign debt is rising much more rapidly than either economy’s capacity to repay it. The US dollar’s role as the world’s main reserve currency may put off the evil day when the markets realise that the game is up for the USA, but the UK has no such protection. Sooner, rather than later, sterling will be devalued either as a matter of policy or by market pressure. The weakening position of both the USA and the UK may therefore leave the IMF critically short of credit worthy members if the situation in the Eurozone goes from bad to worse, as it may well do.</p> <p>What can be done to make it less likely that there will be a financial melt down across the western world, spreading to everyone else? A break-up of the Eurozone in as orderly a fashion as possible before the debt involved in keeping it going gets larger and larger would reduce the risk of unmanageably large defaults if and when holding the Single Currency together becomes impossible. Encouraging exchange rate adjustments which reduce huge trade surpluses which have to be matched by deficits elsewhere would certainly help too. Reining in excessive credit creation would make it more difficult to finance ultimately unsustainable borrowing. Whether any of this will happen remains to be seen. We face a future which may be much more catastrophic than many people realise.</p><p><em>John Mills is a donor to openDemocracy.</em></p><div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> <div class="field field-topics"> <div class="field-label">Topics:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> Democracy and government </div> <div class="field-item even"> Economics </div> </div> </div> uk openEconomy uk UK Democracy and government Economics John Mills The fortunes of the Eurozone Tue, 11 Jun 2013 08:15:02 +0000 John Mills 73160 at https://www.opendemocracy.net Why cutting expenditure won't reduce the UK's deficit https://www.opendemocracy.net/ourkingdom/john-mills/why-cutting-expenditure-wont-reduce-uks-deficit <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p><img style="float: right;" src="http://www.opendemocracy.net/files/devaluefinal.jpg" alt="" width="140" /></p><p>The deficit is the consequence, not the cause, of Britain's financial problems. Reducing it would require big increases in spending from corporates and consumers. Could the trade balance component be the easiest route out of austerity?</p> </div> </div> </div> <p>Cuts in government expenditure will not reduce the deficit. If anything, they may increase it as consumer and the corporate confidence gets further undermined. How can this be? Surely, cutting government expenditure and increasing taxation must get the government’s finances into better shape. Unfortunately, they won’t&nbsp; - and here is why. </p> <p>Buried in Table I in the ONS’s quarterly publications on the UK economy are some crucially important figures. The table contains values for four key variables. There is the government deficit, a net figure for the corporate sector, showing whether its expenditure on investment is greater than its retained profit, and a net figure for consumer borrowing and lending. The fourth figure is the UK’s current account foreign payments balance.</p> <p>What the table does not show is that all these four figures always have to sum to zero. This is because all of them involve either borrowing or lending and total borrowing as an accounting identity has to equal total lending. The table below shows the same numbers as the latest Office for National Statistics quarterly accounts but with the net figures added. The numbers for 2011 and 2012 do not quite sum to zero because the ONS has not yet completed its final reconciliations for these years, but they will do when this process is completed.</p><p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/Capture_0.JPG" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/Capture_0.JPG" alt="" title="" width="400" height="144" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'></span></span></p><p>Now, if the figures have to add up to zero, the crucial question is how this outcome is achieved. Which of these variables are the drivers and which are the residuals? The critical problem now faced by the UK is that it looks as though the<strong> </strong>residual is the government deficit. Here’s why. All the other figures are close to being fixed. The foreign payments deficit is running at about £60bn a year and if anything appears to be on an upward trend. Consumers, who were net borrowers in 2008 have now pulled their horns in and are net lenders, a condition which seems unlikely to change. Because the outlook for the economy looks so poor, business investment is low and does not seem likely to rise much – if at all – in the near future. </p> <p>This is then the problem. If we have a foreign payments deficit of £60bn, net lending by consumers of, say, £20bn and a corporate surplus of perhaps £40bn, none of which look likely to change significantly, the government deficit has to be £120bn. This indeed is where the underlying figure for the government deficit, net of a few essentially one off subventions, seems to have settled down.</p> <p>Because the total size of the government deficit is very largely the residual and not the driver in all the borrowing and lending which takes place, cutting expenditure or raising taxes will not materially reduce the government deficit. Instead, it will change the level of output in the economy. Lower net government expenditure will not stop the figures summing to zero. They will still do so, but with equilibrium re-established at a lower level of GDP output. The process will be that cuts in government spending will increase unemployment and lower the tax take. They will also depress consumer expenditure and business investment. The foreign balance may improve a bit but probably not much. The economy will shrink but the government deficit will stay the same – or may even increase. </p> <p>This is why the current Coalition policies<strong> </strong>are not working. It is also why attempts to impose austerity on the weaker Eurozone economies are causing output there to plummet. In addition, though, it presents a really major problem for the next Labour government. UK government debt is already just under 90% of GDP. It is increasing by an average of about £2.3bn a week. If it continues accumulating at the rate of £120bn – just under 8% of our national income - per annum while the economy stagnates, then by 2015 total government debt will be well over 100% of GDP (and still rising strongly). If debt is accumulating far faster than the economy’s capacity to repay it, the situation is clearly unsustainable.</p> <p>What could the next Labour government do? At present, it is inclined to take a more reflationary stance than that of the Coalition and, if cuts in government expenditure cause the economy to shrink, it seems logical that reversing these cuts should increase GDP. Unfortunately, however, a strategy along these lines is equally unlikely to be successful. Reflating the economy is likely to worsen the foreign payments position while doubts about whether such a policy is viable will almost certainly cause consumers and businesses to retrench rather than increase their net spending. Again, the figures have to sum to zero but this time they are likely to do so with the government deficit being perceived to be spiralling out of control.</p> <p>Is there, then, nothing that can be done to get out of the UK’s current bind? There is a policy which would work but it goes against all the established conventional wisdom. The way out is to tackle the foreign trade deficit. To do this, however, we have to overcome the root problem with the UK’s competitive position which is that we depend on manufactured exports to pay our way in the world and we charge far too much for producing them. This is because the exchange rate is much too high. </p> <p>For most manufacturing operations, about 20% costs are raw materials and about 10% is depreciation on machinery and equipment. All the other 70% comprises locally determined costs, and the rate at which we charge these out to the rest of the world is entirely an exchange rate matter. Some simple maths shows that if – for example – we reduced the exchange rate by 50%, our manufactured export prices to everyone abroad would fall by half of 70% - in other words by 35%. To make our exports sufficiently competitive to enable us to pay our way in the world, we would not have to devalue by as much as 50% - but we would have to bring sterling down by about a third – to just over £1.00 = $1.00 or around €0.80.</p> <p>A devaluation of this size would get the foreign payments position back into balance over a year or two. A reflationary policy would then work, increasing consumer confidence and business investment. The government deficit would go down and – even better for a Labour government – cuts in expenditure to make this happen would not be necessary, although the economy would very probably work better if government expenditure was slowly reduced to around 40% of GDP. This would be relatively easy to achieve against a background of GDP increasing at 3% to 4% per annum and unemployment falling to perhaps 3% over a period of a few years. If small government deficits were then needed, to keep the economy on track, they could easily be afforded. If the economy is growing much faster than the rate at which debt is accumulating, borrowing ceases to be a major problem.</p> <p>The real problem of course is that selling a major devaluation to the electorate as a positive policy is a massively difficult project. If this is not done, however, the alternative may well be that sterling eventually collapses in a totally unplanned way as confidence evaporates. The run up to the 2015 election is going to highlight some very tough economic policy choices.</p><p><em>John Mills is a donor to openDemocracy.</em></p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/john-mills/currency-war-rhetoric-obscures-real-need-for-realignment">&quot;Currency war&quot; rhetoric obscures the real need for realignment</a> </div> </div> </div> </fieldset> <div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> <div class="field field-topics"> <div class="field-label">Topics:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> Democracy and government </div> <div class="field-item even"> Economics </div> </div> </div> uk uk UK Democracy and government Economics Devalue or Else! John Mills Tue, 28 May 2013 16:59:04 +0000 John Mills 72865 at https://www.opendemocracy.net "Currency war" rhetoric obscures the real need for realignment https://www.opendemocracy.net/ourkingdom/john-mills/currency-war-rhetoric-obscures-real-need-for-realignment <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p><img style="float: right;" src="http://www.opendemocracy.net/files/devaluefinal.jpg" alt="" width="140" /></p><p>Global economy remains so imbalanced that significant currency shifts are needed, not only to help pull the West out of its slump but to ensure a stable and viable world for us all.</p> </div> </div> </div> <p class="MsoNormal"><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/currencywar1.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/currencywar1.jpg" alt="" title="" width="400" height="400" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'><span class='image_title'>Image: Vladimir Guculak</span></span></span></p><p class="MsoNormal">There is much talk of currency wars at the moment. These involve predatory devaluations at the expense of other economies. Clearly, any one country’s depreciation has to be matched exactly by currency appreciations somewhere else. Japan, for example, has recently seen the yen falling by some 15%, with a corresponding improvement in its export performance coming through as a result, inevitably at the expense of its competitors.</p> <p class="MsoNormal">At the recent <a href="http://www.guardian.co.uk/business/2013/feb/15/eurozone-crisis-live-currency-wars-g20">G7 meeting in Moscow</a>, the British Chancellor of the Exchequer agreed with his colleagues that completive devaluations should be strongly discouraged, to avoid so called currency wars. Is this, however, a reasonable - or fair - policy for the UK to pursue?</p> <p class="MsoNormal">Finding the correct answer to this question surely has to start by considering whether the existing pattern of exchange rates between the countries making up the world trading environment is in reasonable balance. The test for determining whether this condition is met has to be whether all the economies involved in world trade have exchange rates which allow each of them to grow reasonably rapidly with full employment and without balance of payments problems.</p> <p class="MsoNormal">Unfortunately, it is manifestly clear that this condition is a very long way from being fulfilled. In particular, most countries in the West are barely growing at all, have large pools of unemployed or underemployed labour and are struggling with balance of payments deficits. In these circumstances, exchange rate adjustments very clearly are required, to bring the world economy closer to being in balance. Broadly speaking, the currency parities in most of the West need to be reduced substantially – probably by about one third on average – in relation to most of those along the Pacific rim.</p> <p class="MsoNormal">For a country like the UK to say that exchange rate changes should therefore be avoided, on the grounds of the disruption which “currency wars” always entail, is madness. If the biggest single reason for the poor state of the UK economy is that our exports are grossly uncompetitive in world markets – which unquestionably they are – then ruling out exchange rate changes which would give us the chance to get sterling down to where it needs to be makes no sense at all. On the contrary, what we ought to be doing is pressing for the currency realignments which the West desperately needs and which would also be in the interests of the world as a whole.</p> <p class="MsoNormal">There are several reasons why such a realignment would benefit everyone and not just those of the countries which would finish up with lower parities in a rationally run world. These are:</p> <p class="MsoNormal"><strong>Avoiding austerity in the West - </strong>There is no way in which most of the West’s economies – including the UK’s – are going to avoid years of austerity, little or no growth, high unemployment, stagnant living standards, rising inequality and relative if not absolute decline, unless their economies are allowed to be more competitive. The danger to the rest of the world is that collapsing economic performance in the West would precipitate a major economic crisis involving everyone. </p> <p class="MsoNormal"><strong>Avoiding debt crises - </strong>Chronic balance of payments deficits have to be matched pound for pound, dollar for dollar and euro for euro by corresponding capital movements, mostly borrowing. It makes no sense for anyone for huge debts to be run up which debtors will never be able to pay back and which creditors will therefore eventually have to write off.</p> <p class="MsoNormal"><strong>Increasing living standards - </strong>A vital condition for world output being increased is that there is sustainable demand for all the goods and services which the world economy is capable of producing. This condition – essential for improving living standards and avoiding unemployment – can only be realised if the world economy is sufficiently in balance for increased demand to be capable of producing more output across the world, and not just more balance of payments crises among the weakest and least competitive economies.</p> <p class="MsoNormal"><strong>Producing a sustainable future - </strong>The biggest long term threat to the world is over-population and this is most likely to be the outcome if the world continues to have billions of its people at living standards which are so low that having large numbers of children is the only potential route to security in old age. Bringing up living standards in poor countries is much more likely to happen if the world economy is prosperous than if much of it – especially most of the West - is mired in depression. </p> <p class="MsoNormal">How likely is it that the currency realignments which the world so urgently needs will be secured? It will not be easy, but steps along the way may be the following:</p> <p class="MsoNormal"><strong>Pillorying balance of payments surpluses - </strong>Because all balance of payments surpluses have to be matched by deficits somewhere else, we should not admire countries which run surpluses but pillory them much more than we do at the moment for being the cause of many of the world’s problems. These are the economies which need to be forced to revalue their currencies, if necessary by devaluations elsewhere. Running a surplus is not a sign of virtue. On the contrary it is both irrational in itself and hugely damaging for the rest of the world.</p> <p class="MsoNormal"><strong>Recognising reality in the West - </strong>Countries in the West which are in deficit and need lower parities, need to realise what their root problem is and to stop pretending that their future is sustainable without significant currency realignments to make them more competitive. The economic policies pursued in much of the West, particularly the obsession with trying to keep inflation at very low levels rather than targeting exchange rates which keep the economy able to compete in the world, have to change.</p> <p class="MsoNormal"><strong>Realising the key role of manufacturing - </strong>Part of what needs to be done is to increase recognition of the fact that all advanced and diversified economies depend much more or on manufactured goods than services for their export revenues. Having a cost base which enables their manufactured exports to compete in the world – which is almost entirely and exchange rate issue – is thus crucial to rebalancing the world economy. </p> <p class="MsoNormal"><strong>Finding consensus - </strong>Perhaps more than anything else, we need to fight for a consensus around seeking ways to run the world economy more rationally. If there are ways of doing this which are in everyone’s interest, it does not seem an impossible task to achieve this goal even if these involve significant currency parity realignments.</p> <p class="MsoNormal">Where, then, does this leave the G7 meeting condemning “Currency Wars? Just putting another nail into the coffin of economic failure in the West, ensuring that the world economy will remain unbalanced, that unsustainable debt will increase, and that – apart from anything else -<span>&nbsp; </span>the world population will peak or plateau at a much higher level than is necessary: exactly the opposite to the outcome<span> </span>we need.</p><p><em>John Mills is a donor to openDemocracy.</em></p> <p>&nbsp;</p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/john-mills/norman-tebbit-exchange-with-john-mills-how-to-fix-britains-industry">Norman Tebbit exchange with John Mills - how to fix Britain&#039;s industry</a> </div> <div class="field-item even"> <a href="/ourkingdom/robert-skidelsky/devaluation-is-no-panacea">Devaluation is no panacea</a> </div> </div> </div> </fieldset> <div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> <div class="field field-topics"> <div class="field-label">Topics:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> Democracy and government </div> <div class="field-item even"> Economics </div> </div> </div> uk openEconomy uk UK Democracy and government Economics Devalue or Else! John Mills Thu, 14 Mar 2013 10:10:40 +0000 John Mills 71508 at https://www.opendemocracy.net Foreign ownership of British assets has damaged our economy https://www.opendemocracy.net/ourkingdom/john-mills/foreign-ownership-of-british-assets-has-damaged-our-economy <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p><img style="float: right;" src="http://www.opendemocracy.net/files/devaluefinal.jpg" alt="" width="140" /></p><p>Unlike any other developed nation the UK has sold off considerable amounts of its major industries and assets to overseas owners. This has weakened democratic control of industry, inflated our exchange rate and seriously undermined our manufacturing base. Here's why.</p> </div> </div> </div> <p>&nbsp;</p><p class="MsoNormal"><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/city1_0.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/city1_0.jpg" alt="" title="" width="400" height="266" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'><span class='image_title'>City of London (Image: Ben Rimmer)</span></span></span></p><p class="MsoNormal"><span>Between 2007 and 2009, the value of the pound fell from close to $2.00 to $1.60, a fall of 20%. Most people think that sterling must therefore be at a competitive level. This is a huge mistake. On the contrary, all the evidence shows that the pound, by any reasonable measure, is still grossly over-valued. We have a massive trade deficit. Our share of world trade is now barely 2.5% and still falling - compared to 25% in 1950. We are now importing well over £100bn more manufactured goods each year than we export. How can this be after a 20% devaluation?</span></p> <p class="MsoNormal"><span>There is a simple answer. For most of the 2000s sterling was not just very over-valued. It was grotesquely too strong. This is why between 2000 and 2010 the proportion of our GDP devoted to manufacturing fell from 17% to 11% while our manufacturing<span>&nbsp; </span>labour force tumbled by a third from 4.2m to 2.8m. Financial services would be our long term saviour, yet this hasn’t turned out quite as hoped. Meanwhile, our trade deficit in goods went from £33bn to £98bn – we import far more than we export.<span>&nbsp; </span>But how could sterling have been so strong if our trading performance was so poor?<strong> </strong>All else being equal such a large trade deficit would naturally devalue the pound over time, bringing exports and imports back into balance. The reason this hasn’t happened is that there was a huge flow of funds into the UK over this period which had nothing to do with the UK’s trading performance – that inflow drives the value of the pound upwards.<strong> </strong>The money came in because between 2000 and 2010 we sold off a massive proportion of our national assets. We then frittered away the proceeds on a flood of imports.</span></p> <p class="MsoNormal"><span>Between 2000 and 2010, our total trade deficit was £286bn, but during the same decade the value of our net sales of portfolio assets was much larger than this – at £615bn. None of this money was spent on direct investment in plant, machinery and industrial <a name="_GoBack"></a>buildings, which would have strengthened our economy. Portfolio assets are no more than titles to ownership – mostly shares - so selling these to foreign owners involved no physical investment in the UK, just loss of ownership and control on a grand scale.</span></p> <p class="MsoNormal"><span>What did we sell? Foreign interests bought from us an incredible range of what had previously been owned in Britain. Most of our power generating companies, our airports and ports, our water companies, many of our rail franchises and our chemical, engineering and electronic companies, our merchant banks, an iconic chocolate company - Cadbury, our heavily subsidised wind farms, a vast amount of expensive housing<span>&nbsp; </span>and many, many other assets all disappeared into foreign ownership. </span></p> <p class="MsoNormal"><span>No other country in the world allowed this sort of thing to happen. Why did it occur in Britain? There were three main overlapping reasons. The first was an institutional change. Until 1999, when it was abolished, the Monopolies and Mergers Commission was required to consider whether take-overs satisfied a general public interest test. The organisation which replaced it after 1999, the Competition Commission, had no such remit. It was only concerned with whether acquisitions would weaken competition. This left the UK with no process for reviewing whether the wider interests of the British economy were likely to be compromised by the purchase by foreign interests of UK companies and other assets.<span>&nbsp; </span></span></p> <p class="MsoNormal"><span>Second, this was the time when there was blind faith in the market. If there were buyers for British companies why not sell to them? Did it matter who owned UK companies provided they were well run? Third, there were vast sums of money to be made arranging the take-over deals. It seems that 3% was about the average fees and commissions charged on all the take-overs which took place. The City – for most of the 2000s at the zenith of its political influence -<span>&nbsp; </span>must have<span>&nbsp; </span>earned about £40bn from the sale of UK assets during the 2000s.</span></p> <p class="MsoNormal"><span>Does it matter that we lost ownership and control of such a large proportion of our national assets? Yes, it makes a huge difference for all of the following reasons:</span></p> <p class="MsoNormal"><strong><span>Management<span>&nbsp; </span></span></strong></p> <p class="MsoNormal"><span>When any company is bought by another one based abroad, it is inevitable that control will pass to those whose focus is primarily based not on the UK but on their home markets. This is where research and development will tend to be concentrated. This is where the loyalties of top management will lie. This is where taxes are more likely to be paid and where the links between the businesses concerned and the government are likely to be strongest. </span></p> <p class="MsoNormal"><strong><span>Investment<span>&nbsp; </span></span></strong><span><span>&nbsp;</span></span></p> <p class="MsoNormal"><span>When acquisitions are made by foreign companies, it is not unusual for undertakings to be given that investment levels will be maintained and factory closures minimised or avoided. These assurances, however, are always time limited, and when trading conditions worsen and hard choices have to be made, international companies nearly always give preference to their home markets. There is a huge problem, for example, in the UK at the moment where most of our power companies are foreign owned. They all have serious problems raising the capital required for investment and pressing needs for large scale investment in their home markets. Are they really going to be able and willing to provide the expenditure we very badly need in the UK to avoid power outages in a few years’ time?</span></p> <p class="MsoNormal"><strong><span>Profits<span>&nbsp; </span></span></strong></p> <p class="MsoNormal"><span>When a British company is sold to a foreign owner the flow of future profits goes with the ownership. Of course there is a temporary infusion of funds to the UK as the assets are sold but this is at the expense of losing the right both to future profitability and to any growth in value of assets lost to UK ownership. There is a very unfortunate parallel here between the way we treated North Sea oil from the 1970s onwards and the huge sale of UK portfolio assets in the 2000s. In both cases the proceeds were used to pay for imports we could not otherwise have afforded while the opportunities for alternative future benefits, had the proceeds been used more sensibly, were lost. </span></p> <p class="MsoNormal"><strong><span>The Exchange Rate<span>&nbsp; </span></span></strong></p> <p class="MsoNormal"><span>When allowed to take place on a big enough scale, the impact of very large volumes of sales of portfolio assets to foreign companies inevitably tends to be to make the exchange rate much stronger. This is exactly what happened in the UK, with all the negative effects that this had on our exports, which got priced out of the market. This is why the sale of so many UK companies in the 2000s was a major factor in undermining the rest of the economy’s capacity to compete in the world – the <em>public interest</em> of such sales goes far beyond merely domestic “competition”. The net sale of British portfolio assets during the 2000s financed the sharply increasing trade deficits which were caused by the damage done to our ability to compete in the world, which in turn was occasioned by the over-valued exchange rate which itself was largely brought about<span>&nbsp; </span>by excessive asset sales. </span></p> <p class="MsoNormal"><span>Did it make any sense at all to run the economy like this? Surely it was a disastrous error to allow this free for all sale of UK assets to take place. We mortgaged our heritage, made the economy dramatically less competitive, hollowed out our manufacturing base and made it even more difficult to get the economy to perform satisfactorily in future. Some price to pay for belief that the market always knows best!</span></p><p><em>John Mills is a donor to openDemocracy.</em></p> <p>&nbsp;</p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/john-mills/norman-tebbit-exchange-with-john-mills-how-to-fix-britains-industry">Norman Tebbit exchange with John Mills - how to fix Britain&#039;s industry</a> </div> <div class="field-item even"> <a href="/ourkingdom/john-mills/why-devaluation-could-reduce-inequality">Why devaluation could reduce inequality</a> </div> </div> </div> </fieldset> <div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> uk uk UK Devalue or Else! John Mills Tue, 12 Feb 2013 11:59:38 +0000 John Mills 70908 at https://www.opendemocracy.net Norman Tebbit exchange with John Mills - how to fix Britain's industry https://www.opendemocracy.net/ourkingdom/john-mills/norman-tebbit-exchange-with-john-mills-how-to-fix-britains-industry <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p><img style="float: right;" src="http://www.opendemocracy.net/files/devaluefinal.jpg" alt="" width="140" /></p><p>John Mills and Norman Tebbit discuss Britain's approach to manufacturing, home-grown industry, foreign ownership of assets, the exchange rate, and re-examine the choices of former governments and how they have affected Britain's economy today.</p> </div> </div> </div> <p class="MsoNormal"><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/cadbury1.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/cadbury1.jpg" alt="" title="" width="400" height="266" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'><span class='image_title'>Image: Katchooo</span></span></span></p><p class="MsoNormal"><strong>13 July 20l2</strong></p> <p class="MsoNormal">Dear Mr Mills</p> <p class="MsoNormal">I am still<span>&nbsp; </span>unsure of how the $/£ rate could be managed down by some 25% nor what other policies would be needed to boost our industrial output?</p> <p class="MsoNormal">Your sincerely, </p> <p class="MsoNormal">Norman Tebbit</p> <p>&nbsp;</p><p><strong>16th July 2012</strong></p><p>Dear Lord Tebbit </p><p class="MsoNormal">Let me try to provide you with some answers. </p> <p class="MsoNormal">Here are the policies which I suggest we should follow to get the exchange rate down to, say, £1.00 = $1.20: </p> <p class="MsoNormal">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&nbsp; set out in the material I have sent to you and that they were determined to get the rate down to $1.20. </p> <p class="MsoNormal">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. </p> <p class="MsoNormal">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.</p> <p class="MsoNormal">1.d) The Bank of England should adopt a policy of selling sterling and buying other currencies. </p> <p class="MsoNormal">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&nbsp; 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?</p> <p class="MsoNormal">In my view, these kind of policies would soon get sterling clown to where we wanted it to be. In<span>&nbsp; </span>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. </p> <p class="MsoNormal">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. </p> <p class="MsoNormal">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: </p> <p class="MsoNormal">2.a) Making sure that the planning system does not get in the way of industrial expansion to any undue extent. </p> <p class="MsoNormal">2.b) Providing skills training targeted towards clearly identifiable skill shortages. </p> <p class="MsoNormal">2.c) Making sure that funding is available for manufacturing on favourable market terms. </p> <p class="MsoNormal">2.d) Providing tax breaks to encourage industrial investment. </p> <p class="MsoNormal">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. </p> <p class="MsoNormal">Here are also a number of things which I would <em>not</em> advocate: </p> <p class="MsoNormal">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. </p> <p class="MsoNormal">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.</p> <p class="MsoNormal">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. </p> <p class="MsoNormal">3.d) Introducing more regulations than are absolutely necessary. </p> <p class="MsoNormal">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. </p> <p class="MsoNormal">Yours sincerely,</p> <p class="MsoNormal">John Mills</p> <p class="MsoNormal">&nbsp;</p> <p class="MsoNormal"><strong>23rd July 2012 </strong></p> <p class="MsoNormal">Dear Mr Mills</p> <p class="MsoNormal">I can follow well enough much of your argument, however there are some points on which I would have concerns. </p> <p class="MsoNormal">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? </p> <p class="MsoNormal">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? </p> <p class="MsoNormal">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? </p> <p class="MsoNormal">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?</p> <p class="MsoNormal">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?</p> <p class="MsoNormal">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. </p> <p class="MsoNormal">Yours sincerely,</p> <p class="MsoNormal">Norman Tebbit</p> <p class="MsoNormal">&nbsp;</p> <p class="MsoNormal"><strong>29th July 2012</strong></p><p class="MsoNormal">Dear Lord Tebbit</p> <p class="MsoNormal">Let me respond to the points you make in this letter: </p> <p class="MsoNormal">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. </p> <p class="MsoNormal">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. </p> <p class="MsoNormal">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. </p> <p class="MsoNormal">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?</p> <p class="MsoNormal">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. </p> <p class="MsoNormal">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. </p> <p class="MsoNormal">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. </p> <p class="MsoNormal">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:</p><p class="MsoNormal">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. </p> <p class="MsoNormal">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&nbsp; reasonable balance. We will then have to start producing other products. </p> <p class="MsoNormal">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. </p> <p class="MsoNormal">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 </p> <p class="MsoNormal">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,<span>&nbsp; </span>believe it or not, a particularly high productivity industry (at least in the USA, and I suspect the same applies in the UK).</p> <p class="MsoNormal">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.</p> <p class="MsoNormal">Yours sincerely,</p> <p class="MsoNormal">John Mills</p><p class="MsoNormal">&nbsp;</p> <p class="MsoNormal"><strong>17th August 2012</strong></p> <p class="MsoNormal">Dear Mr Mills</p> <p class="MsoNormal">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.</p> <p class="MsoNormal">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. </p> <p class="MsoNormal">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.</p> <p class="MsoNormal">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.</p> <p class="MsoNormal">In retrospect I think Alan Walters was right and Nigel Lawson wrong. </p> <p class="MsoNormal">Yours sincerely, </p> <p class="MsoNormal">Norman Tebbit</p> <p class="MsoNormal">&nbsp;</p> <p class="MsoNormal"><strong>1st September 2012</strong></p> <p class="MsoNormal">Dear Lord Tebbit</p> <p class="MsoNormal">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.</p> <p class="MsoNormal">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.</p> <p class="MsoNormal">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.</p> <p class="MsoNormal">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.</p> <p class="MsoNormal">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!</p> <p class="MsoNormal">Yours sincerely,</p> <p class="MsoNormal">John Mills</p><p class="MsoNormal">&nbsp;</p> <p class="MsoNormal"><strong>14th September 2012</strong></p> <p class="MsoNormal">Dear Mr Mills</p> <p class="MsoNormal">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.</p> <p class="MsoNormal">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.</p> <p class="MsoNormal">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. </p> <p class="MsoNormal">Perhaps one could take powers to prevent export of key companies, but that would be messy and invite retaliation.</p> <p class="MsoNormal">Finally, I ask myself, which is the chicken and which the egg in this affair?</p> <p class="MsoNormal">Yours sincerely, </p> <p class="MsoNormal">Norman Tebbit</p><p><em>John Mills is a donor to openDemocracy.</em></p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/john-mills/mills-responds-to-curzon-price-on-productivity-wages-and-uks-low-earners">Mills responds to Curzon-Price on productivity, wages and the UK&#039;s low earners</a> </div> <div class="field-item even"> <a href="/ourkingdom/john-mills/mills-replies-to-skidelski-without-more-devaluation-nothing-will-turn-round-uk">Mills replies to Skidelski: without more devaluation nothing will turn round the UK economy </a> </div> </div> </div> </fieldset> <div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> <div class="field field-topics"> <div class="field-label">Topics:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> Economics </div> </div> </div> uk openEconomy uk UK Economics Devalue or Else! John Mills Tue, 22 Jan 2013 10:31:06 +0000 John Mills 70481 at https://www.opendemocracy.net Mills responds to Curzon-Price on productivity, wages and the UK's low earners https://www.opendemocracy.net/ourkingdom/john-mills/mills-responds-to-curzon-price-on-productivity-wages-and-uks-low-earners <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p><img style="float: right;" src="http://www.opendemocracy.net/files/devaluefinal.jpg" alt="" width="140" /></p><p>We may not be able to do much about the top decile protecting their earnings, but we can drive the bottom up if we focus on areas of existing strength in productivity - here's why</p> </div> </div> </div> <p class="MsoNormal"><span>In his recent reply to my article on inequality Tony Curzon-Price makes some important comments and I will try to respond to each in turn:</span></p> <p class="MsoNormal"><strong><span><span>The Exchange Rate and the City</span></span></strong><strong><span><span> </span></span></strong></p><p class="MsoNormal"><span>Tony makes the good point that there are no compelling rational arguments for the City preferring a high rather than a low exchange rate. Actually, I agree with Tony that those who work there would almost certainly be better off if the exchange rate was lower. They could charge more for their services and the economy in which they operate would be more buoyant.<span>&nbsp; </span>Like so many other groups, however, those who work in the City seem to have a clear preference for a strong pound even if it is not really in their interest for their wishes to be realised. The advantages of a weaker currency are just as difficult to sell to people in banking and financial services as they are to other occupational groups.</span></p> <p class="MsoNormal"><strong><span><span>Top Earners and a lower Exchange Rate</span></span></strong><span><span>&nbsp;&nbsp; </span></span></p> <p class="MsoNormal"><span>I think that Tony is also right in saying that the impact on income distribution of a lower exchange rate would not be to make high earners generally worse off. Of course there would be some losers, particularly those whose incomes one way or another depend on relatively cheap imports of goods and services, but most high earners would be better off. This would not, in itself, of course produce more equality, but it might be an important argument in favour of making a more competitive foreign exchange strategy acceptable.</span></p> <p class="MsoNormal"><strong><span><span>High Tech and Low Tech Manufacturing</span></span></strong><span><span>&nbsp; </span></span></p> <p class="MsoNormal"><span>Tony queries whether my contention that we would be better getting the UK into relatively low rather than high tech industries, if our manufacturing base is going to be strengthened, and whether<span>&nbsp; </span>the distributional consequences of a move in this direction would be towards more or less equality. There are a number of points to be made here:</span></p> <p class="MsoNormal"><span>&nbsp;- In my view, if we are going to increase our manufacturing base, it would be much easier and quicker to do it in comparatively low tech rather than high tech industries. This is because entry is much quicker. High tech activity takes years to get under way, with correspondingly high risks of failure. The reason why we still have quite a lot of high tech industries in the UK – aircraft airframes and engines, arms, pharmaceuticals, etc. – is not because, in the long term, these are less vulnerable to competition from countries with competitive exchange rates than low tech industries. It is because they are more difficult to replicate and it therefore takes longer for this to happen.</span></p> <p class="MsoNormal"><span>&nbsp;- It is also a mistake to think that productivity – or wage costs per hour – are generally higher in high tech than low tech industries. Really detailed figures are difficult to find for the UK but much easier in the USA, where the economy is not that different from what it is here. These show almost no correlation between wages levels and the sophistication of the output concerned. The notion that high tech equals high wages – although intuitively attractive – is not borne out by the statistics.</span></p> <p class="MsoNormal"><span>&nbsp;- Generally, however, productivity is much higher in manufacturing than it is elsewhere in the economy as is shown by the striking contrast in the UK between the percentage of GDP derived from manufacturing – 12% - and the proportion of the labour force employed in this sector of the economy, which is only 8.5%. This indicates that productivity is nearly 50% higher in manufacturing than it is in the economy as a whole.</span></p> <p class="MsoNormal"><span>&nbsp;- Productivity is also much higher on average in the UK in manufacturing than it is in places such as China. This is why the argument that low wages necessarily involve more competitiveness is wrong. If it was correct, countries in Africa with pitifully low wage levels would out-compete Germany and Japan, but of course this is not what happens. The crucial metric is wage levels adjusted for both productivity and the exchange rate. Because our productivity is still relatively high, we could still be on average competitive with China over a wide swathe of manufacturing, if the exchange rate was right, while still enjoying much higher wages than are paid on average in China – exactly as is the case with Germany and Japan.</span></p> <p class="MsoNormal"><span>&nbsp;If these arguments are correct, far from new relatively low tech jobs being poorly paid, they would bend to be much higher than the average – as is indeed the case with what is left of manufacturing in the UK at present. This strongly suggests that the recreation of much larger scale blue collar employment in manufacturing would be strongly redistributive. This would be the case both because the wages paid would be much better than average and also because the geographical distribution of the new industries to be created would be much better aligned with the workforce and infrastructure which we have available in the UK.</span></p> <p class="MsoNormal"><span>&nbsp;</span><strong><span><span>Labour’s Bargaining Power </span></span></strong><span><span>&nbsp;&nbsp;</span></span></p> <p class="MsoNormal"><span>Tony’s riposte to my paper also seems to me to pay inadequate attention to the changes which the policy I advocate would make to the bargaining power of the UK labour force generally. Globalisation may have generated the highly paid global elite to which Tony refers and there may not be much we can do about their earnings to achieve more equality. At the other end of the social spectrum, however, there is no reason why we should complacently accept the impact of very high levels of unemployment on the bargaining power of labour. With 8% unemployment<span>&nbsp; </span>- 2.5m people – out of work on international criteria – but nearly twice this number of people who would work if jobs at reasonable wages were available – it is hardly surprising that the proportion of GDP going to wages and salaries has plummeted from 64% in 1975 to 55% now as labour’s bargaining power has been drastically eroded. This would never have happened if the pressure on the labour market had been much higher, as it could have been if sterling had not been so over-valued for so long. It is not globalisation which has produced unemployment and weakened labour’s bargaining power. It is the consequence of having decade after decade with the exchange rate far too high.</span></p> <p class="MsoNormal"><span>&nbsp;</span><strong><span><span>Unemployment </span></span></strong><span><span>&nbsp;&nbsp;</span></span></p> <p class="MsoNormal"><span>While the lack of bargaining power among those who are in work has generated an economy where far too many people are paid very poorly in low productivity service economy jobs, we must not forget the millions of people who are not now working at all. These are the ones who have suffered most from the policies which have been pursued which have made it impossible to run the economy at full throttle. The uncompetitiveness of our manufacturing base internationally has produced chronic balance of payments problems which have only been made containable by ensuring that the total demand on the economy has been sufficiently weak to stop the gap between our imports and exports getting too wide. This has resulted in the tragically high levels of unemployment from which we now suffer. In turn, this leaves a huge section of the population living off state support at income levels far below the average and what could potentially be achieved if the economy was in better balance.</span></p> <p class="MsoNormal"><span>&nbsp;</span><strong><span><span>Conclusion</span></span></strong><em><span><span>&nbsp;</span></span></em></p> <p class="MsoNormal"><span>My conclusion, therefore, is that taking the situation overall, a much lower exchange rate would enable a very substantial reduction in inequality to be achieved in the UK. Of course, no policy is perfect and all have some unwanted side-effects. These have to be set, however, against the major gains which could be made in other respects. Yes, some people in the City would become even better off. I think this is a small price to pay in equality terms for providing the opportunity for well over half of the population to become very much better off relative to all but the very richest.</span></p><p><em>John Mills is a donor to openDemocracy.</em></p> <p>&nbsp;</p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/tony-curzon-price/devaluation-could-exacerbate-inequality-rather-than-reduce-it">Devaluation could exacerbate inequality rather than reduce it</a> </div> <div class="field-item even"> <a href="/ourkingdom/john-mills/why-devaluation-could-reduce-inequality">Why devaluation could reduce inequality</a> </div> </div> </div> </fieldset> <div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> <div class="field field-topics"> <div class="field-label">Topics:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> Economics </div> </div> </div> uk openEconomy uk UK Economics Devalue or Else! John Mills Fri, 14 Dec 2012 13:41:12 +0000 John Mills 69961 at https://www.opendemocracy.net Why devaluation could reduce inequality https://www.opendemocracy.net/ourkingdom/john-mills/why-devaluation-could-reduce-inequality <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p><img style="float: right;" src="http://www.opendemocracy.net/files/devaluefinal.jpg" alt="" width="140" /></p><p>It is not just Britain's balance of trade that would be aided by a substantial devaluation but also inequality and the host of ills it brings with it. John Mills explains why in this second round of articles from the debate <a href="http://www.opendemocracy.net/ourkingdom/collections/devalue-or-else">Devalue or Else</a>.</p> </div> </div> </div> <p class="MsoNormal"><span><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/Makeitinbritain.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/Makeitinbritain.jpg" alt="" title="" width="400" height="266" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'><span class='image_title'>IMage: bisgovuk</span></span></span></span></p> <p>A conspicuous development in Britain over the years since the 1970s is the massive increase in inequality that has occurred. It is not just that incomes and wealth distribution have become much less equal. So have life chances on almost any relevant measure. Rich people live longer than those who are much poorer. They are much less likely to suffer from most sorts of crime. They generally have much more secure jobs. Their health is better, partly because they can afford much better diets. While inequality slowly decreased between 1945 and 1970 in the UK, nowadays the top 10% have incomes 12 times higher than the bottom 10% - up from 8 times in 1985. The top 1% of income earners now earn 14.3% of total remuneration, compared to 7.1% in 1970. Nor is inequality just an average income phenomenon for the whole country. Some areas of the UK are much richer than others for clearly identifiable reasons.</p> <p>How much of this is to do with the exchange rate? While of course there are other factors at work, consider just how much impact the highly over-valued exchange - rate which Britain has had at least for the last forty years - has had in causing inequality to rise:</p> <p><strong>High Unemployment</strong>&nbsp; </p> <p>The UK’s over-strong pound has undoubtedly been directly responsible for the country’s chronically weak current account balance of payments position. During the last ten years, the average annual deficit has been over £30bn. The size of this deficit and fear that expanding demand in the economy would make it even bigger has been a major constraining factor on economic expansion. As output per head among those still in work has risen, the result has not been the rise in national income which this could have produced. Instead it has been reflected in rising unemployment, especially among young potential entrants to the job market. The headline total unemployment figure is now about 2.5m, of whom over 1m are aged between 16 and 25, but the real number of those who could work and would be willing to do so at any reasonable wage or salary is much higher. If all those who are able-bodied enough to work but on long term incapacity benefit, all who are caught in benefit trap problems, all those who have got demoralised and have given up hope of ever finding a job are included, the total number of unemployed is nearly 5m. </p> <p>Those who are out of work suffer from far lower livings standards than those in employment. They also have many more social, health and psychological problems than those in work. Long term joblessness also appears to transmit generationally; those without work have children more likely to be jobless, reproducing another cohort of people who struggle to enter the job market. </p> <p><strong>De-industrialisation</strong> </p> <p>The &nbsp;very high exchange rate we have had for many years now has also been directly responsible for the continuing de-industrialisation of the UK economy. As recently as 1990, 5.2m people in the UK worked in manufacturing. Now only 3.1m do so - a fall of about 40% in two decades, as further swathes of industries in the UK have been run out of business by their inability to compete in world markets. I am only too familiar with this process myself. The business of which I am the Chairman gets most of the products it sells produced in China for barely half the price we would have to pay for them in the UK. This is almost entirely an exchange rate issue, as the UK economy charges out to the rest of the world all its locally incurred costs at far too high a rate to be competitive. The consequence has been a massive reduction in the number of stable, high quality blue collar jobs available in the economy. Where they have been replaced at all, the alternative forms of employment available have tended to be far less skilled, much more insecure and lower paid. The result has been that not only are there nearly 5m people with no work at all but that a much larger number – perhaps one third of the total UK labour force – is now employed in low productivity, insecure service sector jobs seldom paying much more than the minimum wage. Although manufacturing now employs only 8.5% of the UK’s workforce it produces 12% of national output, because productivity is nearly 50% higher in what is left of UK manufacturing industry than it is on average in services. </p> <p><strong>Finance</strong></p> <p>The impact of the high pound on the distribution of employment opportunities in the UK has been hugely to favour services over manufacturing, but in a very lop-sided way. While the vast proportion of service sector jobs are poorly paid with little scope for productivity and output opportunities, this has not been the case for finance. The City has certainly been helped by factors such as the use of the English language, London’s position in the time zones between the Far East and New York, and by a range of cultural and institutional considerations. Crucially, however, the demand for financial services – unlike manufactures and many other services - is peculiarly insensitive to what is charged for them. This has allowed London’s financial service industries to have boomed while the rest of the economy has wilted as a result of the over-valuation of sterling which has done everyone else in the UK so much damage. The City has always tended to favour a strong pound – and low inflation - and its increasingly dominating political role has had a major impact on ensuring that policies to keep inflation down and the pound strong have been implemented without reserve. </p> <p>Much of the increase in inequality which has been visible in the UK – and the USA – has stemmed directly from the strength of financial services <em>vis à vis </em>the rest of the economy. The enormous sums of money which, in particular, people such as bankers and hedge fund managers have been able to extract from their employers, investors and shareholders has been a major factor in increasing <em>disproportionately</em> the incomes earned by those in financial services and particularly those in senior positions.</p> <p><strong>Regional Impacts</strong>&nbsp; </p> <p> The collapse of so much manufacturing industry in the UK has also had a significant impact on the relative prosperity of different regions in the UK. During the hey-day of British manufacturing in the nineteenth century – when Britain was the ‘workshop of the world’ – living standards were considerably higher in the North of England than they were in the South. This has now completely changed. London is now about 20% richer on average than the UK as a whole and almost 40% better off than the poorest region in the UK: the North East, which used to be the shipbuilding capital of the world. </p> <p>The reasons for this enormous turn around are not difficult to see. The prosperity of the regions of the UK outside the South East was always heavily dependent on industries which have now largely disappeared as a result of unmanageable competition. This has left these regions with relatively little to sell to the rest of the world, leaving them with corresponding difficulties in paying their way. Some of the gap has been filled with public expenditure, which is much more heavily concentrated in these regions than it is in the South East, but with the risk that current cut-backs are going to leave them even worse off than they are now. If this happens, unemployment, which is already much greater than it is in the South East, is likely to rise even higher. Even before the current round of cuts was implemented only 67% of the potential labour force in the North East was in work compared with 75% in the South East. Hardly surprisingly, the corresponding unemployment rates were 11.5% and 6.2%. Proportionately, nearly twice as many people were out of work in the North East than the South East. </p> <p><strong>Trade Unions and Employee Bargaining Power&nbsp; </strong></p> <p> Yet another major source of inequality, which in turn is the direct consequence of the high levels of unemployment caused by the over-valued pound, has been a huge weakening in the bargaining power of both organised labour and employees, especially those not in trades unions. The result has been a massive reduction in the proportion of the national income going to wage earners, which has fallen from 64% in 1975 to barely 55% now. </p> <p>Some of this reduction in bargaining power has been reflected in falling trade union membership, which peaked at just over 13m in 1979 and which has now dropped to barely 7m – a reduction of nearly half. Most of the remaining trade union membership is in the public sector, however, where working conditions and pay scales have been relatively well protected. It is in the non-unionised areas of the economy that the position of employees <em>vis à vis</em> employers has been most gravely weakened by high levels of unemployment, meaning that there are often far more applicants for jobs than employment opportunities available. </p> <p>These circumstances have clearly driven down wages and conditions, leaving a huge proportion of the nation’s workforce dependent on casual, insecure and poorly paid jobs (where there is any employment available at all). Although, it might be argued that increasing the cost of labour would make the economy less competitive there is little evidence that this is correct. Labour scarcity spurs investment while an excess of cheap labour does the reverse, reinforcing the fact that it is wage costs per unit of output which are crucial for competitiveness not the absolute levels of wages on their own.</p> <p>Those who do not care about mounting inequality may not be too concerned about these trends. Those who take this view are, however, an increasingly small proportion of the population across most of the political spectrum. Both the outrage expressed across the board recently about the excessive amounts paid to bankers and the impotent anger manifested by both those engaged in the riots in London and elsewhere during the summer of 2011 – however much what they did is to be condemned - are symptoms of mounting unease that inequality in the UK is much greater than it could or should be. </p> <p>Some of this concern is directed at trying to make the division of the national income fairer through the tax system. Unfortunately, however, for those who would like to see the situation ameliorated in this way, the prospects for using taxation and spending to make the post-tax distribution of income much fairer do not look good. With the sums which need to be raised, too much of the tax payments to be made fall on those with relatively low income while it is too easy for those with high incomes to avoid – or evade – paying all the tax which the tax codes say they should. This is not an argument for not making the tax system as fair and efficient as it should be. It is, however, important to recognise that changing the tax system is never going to unwind all the inequality which has built up over the last forty years.</p> <p>There is only one way to do this, which is to rebalance the economy so that the major cause of all the inequality which currently manifests itself is removed. Only by making the UK sufficiently competitive to be able to pay its way in the world, and removing the constraint currently provided by our huge balance of trade deficit, will it be possible to provide the keys to making life chances in the UK much more even. A strong devaluation is needed:</p> <p>- To get unemployment right down, </p> <p>- To bring back much more manufacturing industry to the UK with the high quality, well paid and highly productive blue colour jobs it can provide, </p> <p>- To rebalance the economy away from being as dependent as it is now on the service sector, and particularly on financial services, and move towards having a more substantial manufacturing component (not least to provide us with the larger volume of exports which we desperately need to enable us to pay our way in the world).</p> <p>- To supply the regions of the UK which currently lack them with export generating revenues, and </p> <p>- To restore the bargaining power of labour, so that it can secure a higher proportion of the national income.</p> <p>No other policy prescription will work without a strong devaluation. We therefore have a choice if we want to do something effective about inequality. We either tackle the root cause of the British economy being as uncompetitive as it is by getting the exchange rate down to a level which will enable us to compete in international markets, or we will have to live with present levels of inequality for the foreseeable future.</p><p><em>John Mills is a donor to openDemocracy.</em></p><div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> <div class="field field-topics"> <div class="field-label">Topics:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> Economics </div> </div> </div> uk openEconomy uk UK Economics Devalue or Else! John Mills Tue, 04 Dec 2012 12:14:35 +0000 John Mills 69741 at https://www.opendemocracy.net Mills replies to Skidelski: without more devaluation nothing will turn round the UK economy https://www.opendemocracy.net/ourkingdom/john-mills/mills-replies-to-skidelski-without-more-devaluation-nothing-will-turn-round-uk <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p><img style="float: right;" src="http://www.opendemocracy.net/files/devaluefinal.jpg" alt="" width="140" /></p><p>In this thoughtful reply to Robert Skideslky, John Mills examines the UK's trade performance post-crash and argues that, though requiring a more rounded industrial policy as a whole, any measures taken without further devaluation will fail to turn the economy around.&nbsp;</p> </div> </div> </div> <p>I would like to firstly thank Robert Skidelski most warmly for his <a href="http://www.opendemocracy.net/ourkingdom/robert-skidelsky/devaluation-is-no-panacea">comments</a> on my Civitas <a href="http://www.opendemocracy.net/ourkingdom/john-mills/price-that-matters">pamphlet</a> as they help draw out some of the critical points of the devaluation debate. Before providing some responses to that critique I think it worthwhile to provide some background as to how my views have developed, from both the intellectual perspective and also the practical experience of running a multinational business.</p> <p>My academic background in economics comes from reading PPE at Oxford, where I specialised in Economic History and Statistics. Many of the perceptions I have about economic policy, however, stem from the 50 years I have spent in the commercial world selling high volume consumer products. For the first 25 of these I ran various manufacturing companies in the UK which produced the products I then sold. This period of my career came to an end in the early 1980s when the pound was so strong that we could barely buy the raw materials for a better price than we could buy the finished goods from China. As a result, the company I was then running went to the wall, leaving me with debts which it took me half my income for ten years to pay off.</p> <p>Aged 46, I then started again from scratch and I am now the Chairman and majority shareholder of a company with a turnover of £100m a year with operations in about a dozen countries, while we also sell our products to about another eighty. Nowadays we have no manufacturing facilities. Everything is subcontracted, mostly to China where we can still get almost everything we sell manufactured for barely half the price it would cost to make in the UK. My experience is not, therefore, only academic. I have seen from very close up how economic incentives work.&nbsp;</p> <p>I simply do not understand how economic policy makers can believe that we have any chance of reviving manufacturing and rebalancing our economy if it is far easier to make money out of importing than exporting, and where any sort of manufacturing starts with costs which are far above the world average. This makes competing extremely difficult and generally unprofitable. Human beings, from my experience, are good at working out what is and what is not in their best financial interests. If they live in conditions where manufacturing is difficult and loss making, while importing is relatively easy and much more profitable, it is hardly surprising that countries with over-valued exchange rates deindustrialise and are left with a massive balance of payments problem. Unless they are in a niche business, they are protected by intellectual property rights or they operate in the sort of business in which it takes decades to accumulate the necessary experience to compete, this is the situation facing British manufacturing. This is exactly the problem we must address.</p> <p>Tuning now to Skidelsky’s analysis:</p> <p>It is suggested that I have perhaps concentrated on only one aspect of a complex problem. I agree, wholeheartedly, that there is much else that needs to be done for the UK economy beyond just getting the exchange rate down. I do, however, believe that without this being done all the other policy prescriptions on hand will not work effectively. In particular, I do not believe that keeping the rate of inflation at about 2% as the main macro policy goal, while promoting supply side policies on the other, has the slightest chance of being successful, as is becoming increasingly apparent. The policies needed to keep inflation at 2% are more or less exactly the same as those needed to keep the exchange rate much too strong while supply side policies are never going to make the economy competitive enough to cope with international competition with the exchange rate where it is now.</p><p>Skidelsky points to the apparent lack of progress on the trade balance since the fall in the pound from 2007 to 2009. I am not sure that the figures bear that out. The latest ONS Balance of Payments Statistical Bulletin shows that the value of our manufactured and semi-manufactured exports rose by nearly 21% between Q3/2009 and Q1/2011, which I think is quite impressive. Admittedly, imports over this period rose slightly faster and recent experience has been worse, partly because of the travails in the Eurozone and partly because sterling has recently strengthened. I think there are two major comments to make on these sorts of figures, these being:</p> <p>Firstly, there is a “J” curve effect which means that any devaluation will take a bit of time to show that it is working successfully.</p> <p>Secondly, figures like the recent ones for the UK always tend to be distorted by influences other than the exchange rate. It is better, therefore, to rely on long run elasticities of demand (price sensitivity) for imports and exports as an indication of whether a devaluation strategy is likely to work in the medium to long term. All the figures I have been able to find – some of which are cited in the Civitas pamphlet but there are also others - show that this condition for the UK is amply fulfilled.&nbsp;</p> <p>That devaluation on its own needs to be accompanied by an active industrial strategy is again a point on which I agree, up to a point. I think we will need initiatives such as training programmes and probably some relaxation of planning and regulation constraints but I also think that many other components of the sort of industrial strategies which are generally favoured which are unlikely to be very helpful. Let me give some examples:</p> <p>I am extremely sceptical as to whether it makes any sense for the UK to try to achieve an economic revival based largely on “high tech” industries. Of course it is true that we do relatively well with cars, aero-engines, arms, and pharmaceuticals, all of which are relatively high tech. In my view, however, the reason why these industries are still with us, whereas simpler manufacturing processes have disappeared, has a lot to do with the fact that high tech industries are complicated and difficult businesses to run. It therefore takes longer for countries such as &nbsp;China to catch up and compete with them than with the simpler sorts of processes with which I was concerned when I was running manufacturing companies, such as injection moulding, metal pressing, assembly and fabrication.</p> <p>Sooner or later, however, these high tech businesses will face more and more effective competition with the exchange rate as it stands, and their advantages will get eroded away. Incidentally, high tech industries are not necessarily ones with particularly high productivity. Consequently, the idea that high tech equals exceptional increases in output per head, and hence stronger economic growth, does not work either.&nbsp;</p> <p>If we then need to rebalance the economy with new manufacturing processes, I think we would be far better to concentrate on low tech. Entry is much easier and quicker. The problem with low tech, however, is that ability to compete on world markets depends entirely on the cost base and the exchange rate. But so, in the end, does high tech. The notion, however, that if the exchange rate is very strong then the only way to survive is by concentrating on high tech industries - while ignoring low tech - is in my view absolutely guaranteed to fail.</p> <p>At the company level, I am also very sceptical about anything the government can do to help other than to keep out of the way and to provide opportunities for profitable trading. I do not believe that the success of the Tiger economies or Japan in its heyday or China now had much – if anything – to do with whatever industrial strategies they had. What worked for them, in my view, very largely was that they had competitive exchange rates. Everything else then fell into place.</p> <p>On financial structures Skidelsky makes an important point, in particular the need for an industrial bank and easier access to finance for manufacturing industry. I think that the record of the British banking industry is appalling and I dare say that we share much common ground here. I am not, however, convinced that lack of finance is nearly such an important constraint on export performance as lack of profitability. My own telling experience is that, although the business I run is extremely difficult to finance, we have never actually been stopped from doing anything we wanted to do by lack of cash. Provided we kept profitable we could always find the money we needed somehow (with no help at all from UK high street banks). If manufacturing was profitable enough it would find the money it needed – probably from ploughed back profits which, in my view, is always the best sort of finance to have.&nbsp;</p> <p>Moving on, clearly we do not want to get into a world where there are unending competitive devaluations but surely this cannot possibly be an argument for keeping our exchange rate far too high, and running our economy into the ground as a result. It seems to me that what the world needs is to get an exchange rate regime in place which enables every country, broadly speaking, to keep its foreign payments in balance. I think this needs to be done by having exchange rates which enable all diversified economies such as ours to have enough manufacturing capacity to pay their way in the world.&nbsp;</p> <p>This seems to me to be a powerful argument for us to put to the rest of the world. If our exchange rate is too high and, as a result, we cannot avoid big current account deficits and &nbsp;all the borrowing that entails, combined with no growth, then we are heading for default. This is in no-one’s interest. This is a completely different matter from surplus countries trying to build up even larger surpluses – completely pointlessly in my view - by manipulating their currencies downwards.</p> <p>If, however, we could not persuade other countries that what we were proposing in terms of a major devaluation was in their interest, I doubt if there would be much retaliation, if any. Our share of world trade now is less than 3%. The USA still has the dollar as the world’s major reserve country, making it much more difficult for them to devalue than it would be for us to do so. The Eurozone countries have their own pre-occupations, although their travails may very well soon lead to massive exchange rate changes which the world will have to live with, on the back of which we might well be able to ride. In the end, I don’t think that we should crucify ourselves because of fears of retaliation. There may be some risks, but ultimately we need to do what is right for our economy.</p><p><em>John Mills is a donor to openDemocracy.</em></p> <p class="MsoNormal">&nbsp;</p> <p>&nbsp;</p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/robert-skidelsky/devaluation-is-no-panacea">Devaluation is no panacea</a> </div> <div class="field-item even"> <a href="/ourkingdom/oliver-huitson/devalue-or-else-new-ourkingdom-debate-on-british-currency">Devalue or Else - a new OurKingdom debate on the British currency</a> </div> </div> </div> </fieldset> <div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> <div class="field field-topics"> <div class="field-label">Topics:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> Economics </div> </div> </div> uk openEconomy uk UK Economics Devalue or Else! John Mills Tue, 06 Nov 2012 11:16:59 +0000 John Mills 69200 at https://www.opendemocracy.net A price that matters https://www.opendemocracy.net/ourkingdom/john-mills/price-that-matters <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p><img style="float: right;" src="http://www.opendemocracy.net/files/devaluefinal.jpg" alt="" width="140" /></p><p>Reproduced with thanks to Civitas, in this 2012 pamphlet John Mills sets out the case for devaluation as the best means of returning the British economy to balance and prosperity. It is published here in full, except for tables and footnotes, as part of OurKingdom's new series - <a href="http://www.opendemocracy.net/ourkingdom/collections/devalue-or-else">Devalue or Else!</a></p> </div> </div> </div> <p><span>1 - Britain’s Disastrous Exchange Rate Policy</span></p> <p class="MsoNormal"><span>The British economy is in dire shape. Growth is melting away. Unemployment is rising fast, with over one million young people between the ages of 16 and 24 out of work. Investment is wilting. Exports are flagging compared to imports. We have a very large and rising current account balance of payments deficit. The government is still spending much more than it raises in taxes and charges and no-one, not even the Chancellor of the Exchequer, now believes that this deficit is going to come anywhere near closing during the current parliament. As a result, government borrowing is rising fast, although the situation is actually much worse than is generally realised. Government liabilities are much higher than the usually quoted figures. If public sector pensions, financial interventions and Public Finance Initiative (PFI) commitments are all included, all the obli- gations on the government books already total about £2.5 trillion, or 167 per cent of GDP. Coping with all these liabilities, without unsustainable tax levels, depends on a much higher rate of economic growth than looks likely to have any chance of being achieved. Meanwhile mortgage debt stands at £1.2 trillion and unsecured consumer credit exceeds £210bn.<span>1 </span>On top of all these other problems, the huge difficulties in the Eurozone and faltering political and economic policies in the USA make the prospects for the UK look even more uncertain.</span></p> <p class="MsoNormal"><span>As the outlook worsens and both government and private debt seem more and more difficult to get under control, fewer and fewer people believe that any of our politicians have policies which really are capable of coping adequately with our economic situation, however much our political leaders may say in public that they have a clear plan for the way ahead. Labour advocates reflation to bring down unemployment and to increase tax revenues, but any serious attempt to boost the economy in this way is bound to increase borrowing at least in the short term and to worsen the already dangerously high foreign payments deficit. This is all too likely to lead rapidly to the UK’s credit rating being downgraded and interest costs rising. This does not, therefore, appear, at least on its own, to be a realistic policy. The Conservative-led Coalition is desperately trying to cut public expenditure to reduce the government deficit, but the rising costs of unemployment and all its associated costs, combined with falling tax revenues, have made the gap increasingly hard to close, as recent announcements clearly show.<span>2 </span>In the meantime, the resurgence in private sector activity and employment that reduced public expenditure was supposed to achieve is nowhere in sight as both consumer and corporate confidence falter and the economy lurches towards a double-dip recession.</span></p> <p class="MsoNormal"><span>Is all this doom and gloom really inevitable? While there evidently are serious problems to be faced, is there really no practical alternative to our being resigned to years of privation and austerity? The message in this pamphlet is emphatic. We do not need to continue as we are. There is no reason at all, other than remediable policy errors, why we are in our present predicament. We are in the mess we are in not because we have to be but because we have chosen economic strategies which are deeply flawed. These economic strategies could easily have been different—and soon could be—if the right policy changes were made. Actually, it would be sur- prisingly easy to avoid all the austerity which now appears to be in prospect for the foreseeable future. This is because there is a compellingly simple and powerful explanation for the complex of problems that Britain—and most of the West—now faces. It has few awkward ideological overtones and dealing with it ought therefore to be acceptable to the vast majority of the population once they understand what is required. Unfortunately, however, what needs to be done is right off the spectrum of public discourse, as it has been for many years. It very urgently needs to get back into mainstream thinking because until we recognise what this elephant in the room is, we will never succeed in putting together policies which are going to get us out of our current bind.</span></p> <p class="MsoNormal"><span>The root problem is essentially simple and straightforward. Keeping inflation down to two per cent is not the most important policy goal, but getting the exchange rate and the cost base where it needs to be is absolutely crucial. Our fundamental problem is that the exchange rate policy which we have pursued for decades has made it much more expensive to run most manufacturing operations here than in other parts of the world, especially the countries round the Pacific Rim. As most foreign trade is in manu- factured goods, we cannot pay our way in the world. This is why we have a chronic current account payments deficit—£46bn in 2010 alone<span>3</span>—which both sucks demand out of the economy and makes borrowing to fill the gap inevitable. It is the collapse of manufacturing caused by the UK’s cost base being far too high which is at the root of our problems.</span></p> <p class="MsoNormal"><span>The cost base is so crucial because it is a measure of all the locally based costs which go into manufacturing. Typically, of all cost inputs, about 20 per cent is raw materials and ten per cent covers depreciation of fixed assets such as plant and machinery. For all of these cost factors there are world prices which governments in any individual country can do little to influence. Of the remaining 70 per cent—leaving aside a target profit ratio of, say, ten per cent—about 60 per cent consists of local costs, of which the vast majority are ultimately for wages and salaries. The rate at which these locally based costs are charged out to the rest of the world is set by the exchange rate and this is a factor over which any government can have a large amount of influence, if it is determined to exercise it. If the exchange rate, and hence the cost base, is too high, manufacturing will migrate elsewhere. If it is low, manufacturing will be strongly attracted.</span></p> <p class="MsoNormal"><span>It is sometimes argued that the exchange rate does not matter because countries with high parities can always move up-market and make more and more sophisticated products, and thus stay competitive. It is indeed true that Britain has managed to compete successfully in a number of key industries such as pharmaceuticals, motor vehicles, arms and aircraft engines. Just because some industries remain competitive, however, does not alter the fact that many others—particularly those less protected by intellectual property rights or producing simpler products—find it far harder to compete in high cost base conditions and frequently go to the wall. Furthermore countries with strong manufacturing bases also move up market and then become threats to the industrial survivors in countries like the UK. In the end it is the average which counts and measured in this way British industry is unfortunately heavily handicapped. This is why we have for many years had a huge visible trade deficit—about £95bn in 2010, or 6.5 per cent of our National Income.<span>4</span></span></p> <p class="MsoNormal"><span>The bottom line is that the UK has allowed the cost base to be far too high for far too long. This is why our manufacturing base has been eroded and why our living standards, which were the highest in the world in the nineteenth century, are now lower than those in about 20 other countries.<span>5 </span>There is no solution to our current economic problems unless we can get our cost base down. And this is almost entirely an exchange rate issue on which governments can have a decisive impact if they are minded to do so.</span></p> <p class="MsoNormal"><span>&nbsp;</span></p> <p class="MsoNormal"><span><strong>2
 Origins of the Error</strong></span></p> <p class="MsoNormal"><span>How did this situation come about? Again, there is a simple answer. Much of the explanation lies in a big change in intellectual fashion. When, during the 1970s, inflation increased rapidly across the whole of the western world, fuelled by monetary excesses following the dollar devaluation in 1971 and enormous—although in real terms temporary— increases in commodity costs, particularly oil, Keynesianism fell out of fashion and monetarism took its place. When price rises took off, therefore— rising in the UK by 24 per cent between 1974 and 1975—almost everyone agreed that getting inflation down was the top economic policy priority and that restricting the money supply was the way to do it. As a result, all the available weapons were brought into play. Interest rates were raised dramatically so that, for example, for the whole of the 1980s, UK Treasury Bill rates averaged over ten per cent.<span>1 </span>The money supply was tightened. Credit was restricted. Unemployment rose—and inflation fell back. Unfortunately, almost no-one was concerned with what all these policies did to the exchange rates both in the UK and elsewhere in the western economies compared to the Pacific Rim countries. In fact, hardly surprisingly, they shot up, especially in real terms after allowing for very high levels of inflation. In the UK, by 1982 the pound had gone up in value by a mind boggling 64 per cent against all other currencies compared to its value in 1977.<span>2 </span>This happened, moreover, just as China, which was barely at the time on any western economic policy maker’s radar screen, was just moving into the trading world. At the same time, the Tiger economies—South Korea, Hong Kong, Taiwan and Singapore—were getting fully into their strides as major world trading economies. The West, which in most cases already had cost bases which were not very competitive compared to other parts of the world, suddenly had them jacked up as a result of the implementation of monetarist policies to combat inflation so that they became far higher than they were in the East, and this is how it has stayed ever since. As a direct and ineluctable consequence, a huge amount of manu- facturing activity left the West and moved to the East. We deindustrialised and they reaped all the benefit.</span></p> <p class="MsoNormal"><span>Forty years later, keeping inflation down is still the top economic priority. The Bank of England’s target is two per cent. The European Central Bank’s is even lower. The US Fed’s is about the same. The theory is that low inflation keeps interest rates down and will lead to economic growth, but this is not what has happened. Growth rates in the West are far below those in the East and have been for many decades now. By far the biggest reason why this has happened is that the real exchange rates between West and East which were established in the 1970s have never changed significantly since then bar some fluctuation. Concentrating on inflation and ignoring the exchange rate has been a catastrophic policy error for the UK and for all the western countries which have allowed this to happen.</span></p> <p class="MsoNormal"><span><strong>3- A More Competitive Exchange Rate</strong></span></p> <p class="MsoNormal"><span>Britain has not had a sufficiently competitive exchange rate to attract manufacturing on a major scale compared to the rest of the world since the nineteenth century. Our economy grew by a remark- able amount in the 1930s after the 24 per cent devaluation in 1931,<span>1 </span>when Britain came off the Gold Standard and for a brief period we had a competitive pound. In the five years between 1932 and 1937, manufacturing output rose 48 per cent to 38 per cent above the 1929 peak.<span>2 </span>Unemployment fell sharply as the number of people with jobs quickly increased. Over the period between 1931 and 1937, the number of those in work rose from 18.7m to 21.4m as 2.7m new jobs were created, half of them in manu- facturing.<span>3 </span>This shows how critically important the cost base, very largely determined by the exchange rate, really is. The British economy grew faster in the five years between 1932 and 1937—at a cumulative 4.6 per cent per annum —than for any other five-year period in our history, showing clearly how effective a radical expansionist policy could be, against the most unpromising background of the time.</span></p> <p class="MsoNormal"><span>Getting the exchange rate right, therefore, makes a huge difference, setting the scene for making all the other complementary policies needed to run a successful economy work well. Any country with a low exchange rate—such as China—will have four massive advantages over any country—like the UK—with a high one. These are:</span></p> <p class="MsoNormal"><span>1.<span> </span></span><span>The competitive economy’s manufacturing base will grow more rapidly than the world average and its share of world trade will rise. </span></p> <p class="MsoNormal"><span>2.<span> </span></span><span>It is much easier to achieve productivity gains in manufacturing than in most of the service sector, so that any economy with exceptionally competitive exports will grow more rapidly than the world average. </span></p> <p class="MsoNormal"><span>3.<span> </span></span><span>Highly competitive economies benefit from a better spread of employment opportunities both geographically and in socio-economic terms than if they depend very heavily on services. </span></p> <p class="MsoNormal"><span>4.<span> </span></span><span>Countries with highly competitive exports are very unlikely to find their economic policies constrained by balance of payments problems. 
World trade consists partly of commodities, partly </span></p> <p class="MsoNormal"><span>services, but by far the largest component—about 60 per cent for most modern diversified economies—is manufactured goods. If any country—like the UK— has a weak manufacturing base, it will therefore tend to have problems paying its way in the world—and indeed we do. Deficits then have to be financed either by selling assets or by borrowing. Any current account deficit has, therefore, to be matched pound for pound by an exactly equivalent amount of capital receipts. These can take the form of either selling assets such as shares in UK companies, or direct investment or borrowing, in exactly the same way as any individual who spends more than his income has to draw on capital or borrow to make up the dif- ference.</span></p> <p class="MsoNormal"><span>There is another crucial problem about a foreign payments deficit. If what we sell to the world is less than we buy, purchasing power gets sucked out of the economy—a total of £46bn in the UK in 2010 after taking all international transactions into account. There are three ways in which this can be counteracted, to avoid this gap in demand depressing the economy. Either, consumers have to spend more than their incomes or the government has to spend more than its revenues or businesses have to invest more than they save. At the moment investment in the corporate sectors is low and its cash savings are high, so all the gap and more has to be filled by consumer and government borrowing. There is thus a direct causal link between the exchange rate and borrowing. If the exchange rate is too high, it leads to a current account foreign payments deficit. The only way then to maintain demand in the economy is by consumer and government debt increasing.</span></p> <p class="MsoNormal"><span>Does this matter? Yes, indeed it does, especially if, to keep plugging the deficits in the country’s, the consumers’ and the government’s expenditure, more and more debt has to be created in relation to the borrowers’ capacity to repay. This is exactly what has happened to us. Provided lenders are satisfied that, in the last analysis, the debts owing to them will be honoured and in the meantime interest on them will be paid, borrowing can carry on going up and up—as it does, for example, to growing and profitable companies. Unfortunately, however, neither countries with weak payment balances, nor their consumers, nor their governments, generate the sorts of income flows which are produced by profitable corporate investments. Very significant constraints on borrowing then come into play.</span></p> <p class="MsoNormal"><span>When the sums owed both by consumers and the government begin to look uncomfortably large, lenders get increasingly unsure about lending to them. They also start to worry about the country’s capacity to meet its obligations. To stop the country’s current account payments deficit getting too substantial, the economy therefore cannot be run at full stretch because this would widen the payments gap to an unsustainable extent. A weak balance of payments position thus makes it impossible to run the economy at full throttle. The cumulative effect of this constraint explains why unemployment, running at about 2.6m in the UK during the autumn of 2011, is so high. Actually, the headline unemployment figure, bad as it is, grossly underestimates the real total number of people who would be willing to work if there were sufficient jobs available that paid a reasonable wage. Surveys, including a recent one compiled by the TUC, show that the total number of missing jobs is nearer 4.9m than 2.6m.<span>4</span></span></p> <p class="MsoNormal"><span>As deflationary polices bite harder and growth stalls, constraints tighten still further. If any economy has a large borrowing requirement which is rising more slowly than the economy is growing—like India does at the moment—lenders can remain reasonably confident that their debts will be repaid. If the debts are rising faster than the growth rate— which is now the position in the UK and much of the rest of the West, and particularly in much of the Eurozone—as soon as it becomes apparent that this is the case, lenders start getting much more nervous. Their reaction then is both to raise interest rates to compensate for the increased lending risk and to try to reduce their exposure to the debt. But these can very easily turn into self-defeating policies. The less borrowing there is to make up the demand deficiency, the more slowly the economy will grow and the less debt-servicing capacity the economy will have. Meanwhile the need for borrowing may not go down. If consumers’ incomes drop more rapidly than their spending and claims on government expenditure rise faster than before as unemployment goes up, the need for more debt may go up rather than down. Indeed, as long as there is a current account balance of payments deficit, this is bound to happen.</span></p> <p class="MsoNormal"><span>This is the bind in which the UK government now finds itself. With the exchange rate and the cost base where they are at the moment, no mix of policies which is on the horizon will work. Neither Labour reflation nor Conservative/Lib Dem cuts are viable. If we carry on the way we are at the moment, at best we will suffer from years of slow or quite possibly negative growth, rising unemployment, stagnant or falling real incomes, and cutbacks in government expenditure. At worst, our capacity to go on borrowing the money we need to plug the unending deficits with which we will be confronted will lead to lenders losing patience with us. Our ability to borrow more money on any viable terms will then disappear. A really major crisis will be precipitated. We will drift into the same predicament as hopelessly uncom- petitive Eurozone economies such as Greece and Portugal now face.</span></p> <p class="MsoNormal"><span>The root problem, which we in most of the West now face, can therefore be simply stated. We have been chasing the wrong economic goal and we have been doing so for a long time. Keeping inflation down to two per cent, the Bank of England’s target, or even less in the case of the European Central Bank, with the Fed’s goal being about the same, is not the most significant objective. Getting the exchange rate at the right level is far more important. The theory that low inflation keeps interest rates down and will therefore lead to economic growth has not worked in practice and it never will. The problem is that all the policy instruments needed to keep inflation at very low levels are exactly those which keep the exchange rate and the cost base up. This is why the West has deindustrialised, and this in turn is why we have such problems with our balance of payments and hence, unemployment, low or non- existent growth and both government and sovereign deficits, leading to more and more borrowing. Furthermore, because growth rates in the West are far below those in the East, we are steadily losing influence, self-confidence and ability to deal with world problems from a basis of solvency and self-assurance. We are rapidly heading downhill and all because of nothing which is inevitable. Just bad policies which we should never have adopted but which luckily are not impossible to reverse, once the will to do so is there.</span></p> <p class="MsoNormal"><span>What, then, do we need to do to unwind the mistakes which have dogged British economic history for far too long but right now in an even more acute form than at any time since the 1970s and 80s? The answer is essentially fairly simple. We need to cease trying to fight inflation as our major objective. Instead, we need to get the exchange rate and the cost base right, so that we can attract back enough manufacturing and services—but mainly manu- facturing—to enable us to pay our way in the world. If we can do this, we can get rid of our weak balance of payments position which, in turn, is the only long- term way to stop the country, its consumers and its government needing to borrow more and more money with less and less chance of being able to pay it back. It will enable us to have a much more prosperous future. In addition, it will avoid our position in the world sliding downhill as a result of our inability to run our economy effectively. It will then strengthen our capacity to help solve some of the world’s longer term problems from a position of solvency and confidence rather than weakness and decline.</span></p> <p class="MsoNormal"><span>What would we have to do with the exchange rate to get our economy functioning much better? Some fairly easy calculations provide the order of magni- tude of the devaluations which would need to be made to deal with various different objectives. They start from where we are now with £1.00 = about $1.60 and around €1.15 and assume, for the moment, that we devalue and—at least for the time being—no other countries do so too. The results are as follows:</span></p> <p class="MsoNormal"><span>1.<span> </span></span><span>To eliminate the payments deficit, leaving the economy capable of growing at about two per cent per annum but still with large levels of unemployment, a devaluation of between ten per cent and 15 per cent would be needed. </span></p> <p class="MsoNormal"><span>2.<span> </span></span><span>To eliminate the payments deficit and to provide enough leeway to allow the economy to be run with a much higher level of demand, producing a cumulative growth rate of about four per cent per annum—about the world average—a devaluation of between 20 per cent to 25 per cent would be required. </span></p> <p class="MsoNormal"><span>3.<span> </span></span><span>To enable the UK economy to move over a transitional period to the growth rates exper- ienced by countries such as Germany and Japan after World War II, or China now—i.e. with a growth rate of about eight per cent per annum— the pound would need to fall in value on the exchanges by 40 per cent to 50 per cent. 
It is important to realise that these parity changes </span></p> <p class="MsoNormal"><span>need to be on a trade weighted basis to be effective. This means that we need to allow for the impact of other countries in the West following our example and reducing their exchange rates at the same time as the UK. Obviously, to the extent that this happens, the increase in the UK’s competitiveness will be reduced. If other countries were to devalue at the same time as the UK then even larger devaluations against the non-devaluing countries would be required. The magnitude of the changes needed even before taking this factor into account is, however, an important testament to the enormous lack of competitiveness, particularly with many of the Pacific Rim countries, to which Britain is currently exposed.</span></p> <p class="MsoNormal"><span>How likely is it that we would be faced with other countries devaluing with us, thus diluting the impact of the pound coming down? At the moment, the prospects for other countries following suit do not look that large. As long as the Eurozone holds together, Germany’s huge export surplus is likely to keep the international value of the euro up. If the Eurozone breaks up, our main trading partners in the EU, particularly Germany, would be certain to see their currencies rapidly revaluing, which would be the mirror of what needs to be done in the UK. Since the dollar is still the world’s major reserve currency, a major US devaluation matching ours is not that probable. It is also unlikely that the rest of the world would pay much attention to what we do with our currency because we are not now major players in world trading terms. When sterling fell by about 20 per cent between 2006 and 2008 from its previous stratospheric level, there were few international repercussions. Why should there be any more if the pound fell to, say, $1.20 and €0.85?</span></p> <p class="MsoNormal"><span><strong>4
 What Is To Be Done?</strong></span></p> <p class="MsoNormal"><span>What would need to be done to get the exchange rate down? There would have to be a major reversal of the policy objectives which policy-makers in the UK have long strived to attain. The authorities would need to make it clear that a much lower pound was not only what they wanted to see, but what they were determined to achieve. The Bank of England would have to be instructed to sell sterling and buy foreign currencies. More quantitative easing should be introduced, supplemented by lending directly by the Bank of England to organisations capable of paying the money back from income flows, such as local authorities and housing associations. This would enable them to finance house building. The govern- ment should deliberately increase its spending in relation to its revenues to widen the foreign payments deficit temporarily, to assist in making the parity of the currency fall.</span></p> <p class="MsoNormal"><span>The nationalised banks would need to be instructed to lend more money to businesses, accepting the risk that there might be more bad loans. Inward investment—allowing the shares in UK companies, such as Cadbury’s to be sold to foreign buyers—should be discouraged instead of being welcomed, as it has been, because, apart from any other considerations, the huge capital infusions to sterling from these kinds of transactions drive up the exchange rate. If the credit rating agencies threaten downgrades, they should be ignored—even encouraged—because negative postings from them would help to bring the pound down. If interest rate rises are threatened, they should be counteracted by the Bank of England simply printing more money, instead of it having to be borrowed from the markets.</span></p> <p class="MsoNormal"><span>All of this is technically feasible but there would be potentially three major obstacles in the way. One would be the attitude of the countries against whom we were devaluing. The second would be concerns about whether it would in practice be possible to get the pound down. The third would be entrenched views on economic policy within the UK and most other western countries about the relevance of the exchange rate in relation to other much more conventional economic policy objectives.</span></p> <p class="MsoNormal"><span>Countries, such as China in the east, and others elsewhere, may well object to losing some of their competitiveness with us but, on mature reflection, they may realise that they have little to lose and much to gain from countries such as the UK being in better financial and economic shape. It is not in anyone’s interest for there to be a massive debt crisis in the West, undermining the prosperity of the world economy generally and the prospects for everyone’s exports in particular. Nor is it in the long-term interest of countries such as China to run its present large balance of payments surplus, especially if the foreign exchange thus generated is lent to countries which are never likely to be able to pay it back. China’s very rapid growth rate would only be impacted if the UK and other western countries adopted very deep devaluations, which would be much more difficult to achieve than smaller ones. For depreciations of anything up to about 25 per cent against the Chinese Renminbi, there would not be much erosion, if any, to China’s huge manufacturing capacity.</span></p> <p class="MsoNormal"><span>It might be argued on more general grounds that it would be unfair for Britain to bring the value of the pound down because other countries, especially those in the West, would be adversely affected. There is, however, no reason why they should be. If our export prices were lower and our output more competitive, all the countries to which we export would benefit from better value for money on the goods they buy from us. When we could be severely criticised would be if we were to run a balance of payments surplus, which would have to be matched by extra deficits elsewhere, but it would make no sense for us to allow this to happen. In fact the real international culprits are countries such as China, Germany, Switzerland, Taiwan and Japan which have consistently run balance of payments surpluses year after year, thus forcing deficit countries into penury. We should not do this and there is no reason why we should contemplate doing so. Provided we do not go down this road, there is no reason why it would be unreasonable for us to have enough manufacturing and export generating capacity to pay our way in the world. We very urgently need to get to this position and if no international consensus was forthcoming there would still be nothing to stop the UK taking the unilateral actions described above. It would clearly be better to achieve some measure of acceptance of the reasons why we needed to do what had to be done, but in the last analysis, this would not be essential.</span></p> <p class="MsoNormal"><span>Would it, however, actually be possible to get the value of the pound down by perhaps 25 per cent from where it is now, even assuming that all the policies for doing so outlined above were put into effect? There is certainly plenty evidence from our recent economic history that allowing the pound to become too strong is feasible. Few people now deny that this was the position particularly in the early 1980s as monetarism drove up the exchange rate to completely unsustainable levels, or during the ERM period running up to 1992, or during the 2000s as the parity of the pound rose to $2.00. The issue is whether, if the policies which caused these over-valuations were reversed, they would get the pound down as successfully as doing everything possible to keep the pound up kept it too strong during the periods of acute over-valuation.</span></p> <p class="MsoNormal"><span>Clearly, controlling the exchange rate is more difficult with a floating currency than when exchange rates are fixed, especially against the background of the huge sums being traded across the exchanges every day. Historical evidence, however, indicates that devaluations can be achieved if the governments concerned are determined enough to make sure they happen. The impact of the Plaza Accord in 1985 achieved a huge weakening of the US dollar, with its value falling against all other currencies by almost 45 per cent between 1984 and 1987.<span>1 </span>Our own recent experience as the value of sterling fell from $2.00 in 2007 to about $1.60 in 2009 is surely also instructive. So are all the many other devaluations which have been achieved, some of which are highlighted in table 5.1 (pp. 26-30). If, moreover, it turned out to be impossible to get the pound down without exchange controls on capital movements—which seems to be extremely unlikely—at the very worst we might be left with a choice of some constraints on foreign exchange movements, or endless deflation. Would it really be sensible in these improbable circumstances necessarily to rule out all constraints on capital movements if the alternative was unending austerity?</span></p> <p class="MsoNormal"><span><strong>5
 - Doubts and Objections</strong></span></p> <p class="MsoNormal"><span>The biggest objections, well founded or not, are likely to come from everyone in the UK who is inured to different policy objectives. Politicians and civil servants, who have fought for low inflation and ignored the significance of the exchange rate for decades, supported by almost all the media and academia, are unlikely to change their minds quickly. Importers are bound to oppose devaluation and so will all those who regard cheap foreign holidays as a prize not to be foregone. The City has always tended to favour a strong pound because of the increased leverage this provides everyone involved in inter- national transactions. Pensioners and others fear that the accommodating monetary policy and low interest rates which go with low exchange rates may adversely affect them, which may well be true in the short term. In the longer term, however, good pensions are only affordable if the economy can be made to grow to pay for them. There are also four other arguments against devaluation which undoubtedly would carry weight with those who would be inclined to oppose a change in policy along the lines proposed in this pamphlet, and these need to be dealt with in some detail.</span></p> <p class="MsoNormal"><span><em>A fall in living standards?</em><strong>&nbsp;</strong></span></p> <p class="MsoNormal"><span>First, it is frequently argued that devaluations lower living standards. If lowering the exchange rate makes the economy grow more quickly than it otherwise would have done—which always happens—this argument cannot, however, be correct. In the end, living standards are determined by the national income divided by the number of people in the country. If the national income goes up but the number of inhabitants stays the same, national income per head must increase. It is true that there will inevitably be some losers as well as many winners, but on average everyone must be better off, particularly in the longer term. It is also true that if the percentage of national income devoted to investment goes up, the proportion going to consumption must go down, and this has to be reflected in more savings. As incomes rise, therefore, the savings ratio will have to increase—which urgently needs to happen for other familiar reasons. This will not affect average total incomes, however, only the proportion of income which is saved rather than consumed. On average, everyone will be better off in the short term and much better off in the medium and long term.</span></p> <p class="MsoNormal"><span>This is exactly what happened in Britain not only in the 1930s but much more recently when we came out of the Exchange Rate Mechanism (ERM) in 1992. Wages rose faster than the Consumer Price Index (CPI) and everyone in employment, on average, became better off. Everyone in Britain continued to spend in sterling as well as getting paid in pounds, so that they were insulated from the fact that, measured against international currencies, the pound was a good deal cheaper. This, however, made a big difference to the competitiveness of British exports, which in turn drove a significant increase in British industrial output. Output rose by 2.2 per cent in 1993 and 5.4 per cent in 1994, having fallen by 3.3 per cent in 1991, the last full year when we were in the ERM.</span></p> <p class="MsoNormal"><span>Nor is what happened to Britain in the 1930s and the 1990s exceptional. The pattern has been repeated time after time when any of the many major devaluations and revaluations which have taken place in recent years are considered. The table below shows what has happened, including cases such as Argentina and Iceland. Their devaluations have been much greater than anything proposed in this pamphlet. Even major depreciations like these, however, caused by crises which caused large-scale temporary disruption, are followed within a year or two by rapid recovery. More gentle devaluations, on the scale that this pamphlet recommends, generally show no significant—if any—reductions in living standards as wages rise faster than the cost of living.</span></p> <p class="MsoNormal"><span>It is widely feared that devaluations generate big inflationary pressures which are hard to control and which may lead to prices running away. This, however, is also a false fear. As the table above shows, the world has had plenty of experience of major currency changes and with reasonably well-run economies there simply is no evidence from economic history that devaluation produces more inflation than, at most, a short term blip compared to what would have happened anyway. Again, we have had recent experience of this in the UK. When we came out of the ERM in 1992, the pound fell against all other currencies by about 19 per cent. There was then a widespread fear that inflation would take off, but nothing of the kind happened. In fact, inflation fell from 5.9 per cent in 1991 to 3.7 per cent in 1992 and to 1.6 per cent in 1993, before stabilising for the next few years at not far above two per cent. Nor is it surprising that this should have happened. While it is true that if the pound goes down, import prices will rise, there are many other factors which come into play which tend to moderate rather than increase inflation. Interest rates tend to be lower. The government can afford to reduce taxation. Production runs get longer, lowering costs. Orders switch to domestic producers, thus avoiding now more expensive imports.</span></p> <p class="MsoNormal"><span><em>Can manufacturers really benefit?</em><strong>&nbsp;</strong></span></p> <p class="MsoNormal"><span>It is also feared that if the pound went down, British manufacturing industry would be in such bad shape that we would have nothing to sell to the rest of the world even if the prices charged were much lower than they are now. Again, we need to look at the statistics to see what actually happened in the past, to give us a guide to what is likely to occur in the future. Perhaps the most telling figures are to be found in recent ONS figures, showing what happened after the 2007/2008 devaluation. Between Q3/2009 and Q3/2011, the value of exports of semi- and finished manufactured goods rose by an astonishing 27 per cent—from £44.7bn to £56.7bn.<span>1 </span>Unfor- tunately, our imports also rose over the same period by 27 per cent. This started from a considerably higher base figure, so our goods trade deficit widened, but this did not prevent the UK’s exporters from rapidly increasing their sales abroad over this period. There is, however, always likely to be a period after a devaluation when the benefits to exports take longer to come through than the increase in the cost of imports. There is no policy without some downsides, however, and it is important to recognise that this drawback is likely to apply whenever a devaluation takes place.</span></p> <p class="MsoNormal"><span>In fact, the key requirement for a devaluation to work successfully is that the so-called medium-term elasticities of demand for exports and imports are of the right size and direction. Numerous studies have been done on what these elasticities are and all of them cluster round figures (+1 for exports and -1 for imports) which show that devaluations, if reasonably competently executed, must improve export performance, reduce imports, reduce unemployment, and increase the growth rate, although there will be a two or three year period of adjustment, particularly to export performance. Estimates published in 2010 in IMF Working Paper WP/10/180,<span>2 </span>covering 113 countries and regions in the world, reviewed all the available research work and academic literature on these elasticities. For the 27 most developed countries the mean export elasticity was 1.28 and the median value 1.14. The mean and median import elasticities were 0.97 and 0.88. Those for the UK were actually above the average at 1.37 for exports and 1.68 for imports. There is no reason whatever, on the basis of these figures, for believing that a major devaluation by the UK would not dramatically improve most of our economic prospects within a year or two and the current account balance after two or three years.</span></p> <p class="MsoNormal"><span><em>A bad track record?</em><strong>&nbsp;</strong></span></p> <p class="MsoNormal"><span>Finally, there is the argument that we have tried devaluation many times in the past and it has not worked. It is true that, since World War II, the UK devalued in 1949 and 1967, when there were fixed exchange rates, and that there have been fluctuations—some of them downwards—in the international value of the pound since it started floating in 1971. Unfortunately, it is also true that inflation has been higher in the UK, at least until recently, than in most of the countries with which we trade and therefore reductions in the value of sterling were unavoidable. In fact, the situation was always worse than this. The 1949 and 1967 devaluations thus only made up for ground which had already been lost and those since 1971 have all been too little and too late. The truth is that sterling has been over- valued as long as almost anyone now alive can remember, sometimes more and sometimes less but always far too high. The most telling statistic of all as to whether a country has an over-valued currency is what happens to its share of world trade and here the evidence for the UK is damning. In 1950 our share of world trade was 25 per cent.<span>3 </span>By 1970 it had dropped to 6.5 per cent.<span>4 </span>By 2000 it had fallen to 4.4 per cent and by 2010 it was 2.7 per cent.<span>5</span></span></p> <p class="MsoNormal"><span><strong>6 - Conclusion</strong></span></p> <p class="MsoNormal"><span>There is thus a great deal to be said in favour of a big shift in policy towards getting the exchange rate down, while we still have the room for manoeuvre to achieve this objective in reasonable order. There are, however, two more compelling arguments for seizing the initiative to get this done as soon as possible.</span></p> <p class="MsoNormal"><span>The first is that the alternative to moving in this direction is going to be dauntingly awful. The state of the British economy is bad enough at the moment, but it is very likely to get worse. Growth has already ground more or less completely to a halt, while our borrowing is still increasing fast. This is going to mean that, without a radical change in economic policy objectives, we are bound to suffer from years of deflation, negligible growth and mounting unemployment as whatever government we may have struggles with increasing difficulty to balance the books. Do we really want to suffer year after year of privation and austerity when none of it is really necessary?</span></p> <p class="MsoNormal"><span>The second consideration is that getting the exchange rate down is a matter on which, in the end, we will have no choice. If we continue to run up huge debts which we cannot pay back, sooner or later we will run out of creditworthiness. We will then have no lenders from whom we can borrow on manageable terms. There will then be a major currency crisis and the pound will crash. The reality, therefore, is that we do not in fact have a choice about whether the pound is going to be devalued. This is going to happen anyway, whether we like it or not, before very long. The choice we have is whether we get this done in an orderly manner while we still have time for this to be arranged, or whether we wait so long that we finish up with a disorderly rout. There is unfortunately all too real a danger that this second choice may be made and that our policy makers will fight to the bitter end to keep the currency much stronger than it needs to be for us to be able to pay our way in the world. This would simply repeat and accentuate the catastrophic policy errors which we have already made for much too long.</span></p> <p class="MsoNormal"><span>Nor would the result of the misjudgements involved in letting this happen be confined to our economic future. It is likely that there would be profound political implications as well. Unfor- tunately, the whole of the moderate right and the moderate left has been involved, not only in the UK but also across nearly all of the western world, in promoting and sustaining the exchange rate policies which have served us so badly over the last few decades. As a result, there are already increasingly ominous signs of support for the political centre leaching away across all western countries. No governing class can afford to make too many mistakes, but this is what we see happening to us. If this trend continues and politicians offering moderate policies lose traction on a major scale with the electorate, there is a very significant danger that their place will be taken by a very different sort of politics, based on fear and resentment. Its characteristics will be xenophobia, racism, nationalism, protectionism and irrationality. The cost of the policy mistakes which our policy makers have made on the exchange rate have not only had huge economic costs. If they continue, they risk a massive erosion of our democratic cohesion and our liberal democracy.</span></p> <p class="MsoNormal"><span>The stakes are getting very high. We very urgently need a major reassessment as to where our current policies are taking us. We now need to look much harder than has recently been fashionable at radical alternative approaches to the conventional wisdom which has clearly failed and got us into our current depressing and disastrous predicament. There is an alternative range of policies which we could choose to adopt, which would make unnecessary all the austerity and failure with which we are currently threatened. Now is the time to pluck up the courage needed to adopt a strategy which will put our economy back on track for the growth, full employment and national well-being which will be well within our grasp if we can only muster the clarity of thought and determination needed to put this strategy into practice.</span></p> <p class="MsoNormal"><span>&nbsp;</span></p> <p class="MsoNormal"><span><em>*Reproduced with kind thanks to Civitas: Institute for the Study of Civil Society, London</em></span></p> <p class="MsoNormal"><span><em>The original pamphlet can be found <a href="mailto:http://astore.amazon.co.uk/civitas-21/detail/1906837376">here</a>.&nbsp;</em></span></p><p><em>John Mills is a donor to openDemocracy.</em></p> <p>&nbsp;</p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/oliver-huitson/devalue-or-else-new-ourkingdom-debate-on-british-currency">Devalue or Else - a new OurKingdom debate on the British currency</a> </div> <div class="field-item even"> <a href="/ourkingdom/robert-skidelsky/devaluation-is-no-panacea">Devaluation is no panacea</a> </div> </div> </div> </fieldset> <div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> <div class="field field-topics"> <div class="field-label">Topics:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> Economics </div> </div> </div> uk openEconomy uk UK Economics Devalue or Else! John Mills Mon, 29 Oct 2012 11:13:59 +0000 John Mills 69052 at https://www.opendemocracy.net Economic and social good sense requires the UK to target a lower exchange rate https://www.opendemocracy.net/openeconomy/john-mills/economic-and-social-good-sense-requires-uk-to-target-lower-exchange-rate <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>The exchange rate is the most important single price in the economy: it determines the price of goods for export and the real value of foreign-owned debt. The UK needs a more competitive external sector and can achieve it by much greater quantitative easing</p> </div> </div> </div> <p>When inflation took off in the 1970s and monetarism became fashionable, almost everyone agreed that getting inflation down was the top economic policy priority. As a result, all the available weapons were brought into play. Interest rates were raised. The money supply was tightened. Credit was restricted. Unemployment rose – and inflation fell back. Unfortunately, almost no-one was concerned with what all these policies did to the exchange rates both in the UK and elsewhere in the West compared to the Pacific Rim countries. China, which was just moving into the trading world, was barely at the time on any western economic policy maker’s radar screen. </p><p> Forty years later, keeping inflation down is still the top economic priority. The Bank of England’s target is 2%. The European Central’s Bank’s is even lower. The US Fed’s is about the same. The theory is that low inflation keeps interest rates down and will lead to economic growth. But this is not what has happened. Growth rates in the West are far below those in the East. By far the biggest reason why this has happened is that the exchange rates between West and East which were established in the 1970s have never changed significantly. Concentrating on inflation and ignoring the exchange rate has been a catastrophic policy error for the UK and for the West. </p><p> This is because it is the exchange rate which determines, more than anything else, what any economy charges the rest of the world for the output it sells to it. Any country with a low exchange rate – like China – will have four massive advantages over any country - like the UK - with a high one. These are: </p><ul><li>A The competitive economy’s manufacturing base will grow more rapidly than the world average and it share of world trade will rise. </li><li>B It is much easier to achieve productivity gains in manufacturing than in most of the service sector, so that any economy with exceptionally competitive exports will grow more rapidly than the world average. </li><li>C Highly competitive economies benefit from a better spread of employment opportunities both geographically and in socio-economic terms than if they depend very heavily on services. </li><li>D Countries with highly competitive exports are very unlikely to find the economic policies constrained by balance of payments problems. </li></ul><p> World trade consists partly of commodities, partly services, but far the largest component - about 60% for most modern diversified economies - is manufactured goods. If any country – like the UK – has a weak manufacturing base, it will therefore tend to have problems paying its way in the world – and indeed we do. In 2010, for example, the deficit on the UK’s current account payment balance was about £40bn. This sum has to be raised either by selling assets or by borrowing. It is an accounting identity that any current account deficit has to be matched pound for pound by an exactly equivalent amount of capital receipts. </p><p> There is also another crucial problem about a foreign payments deficit. If what we sell to the world is less than we buy, purchasing power gets sucked out of the economy - £40bn worth of it in the UK in 2010. There are three ways in which this can be counteracted, to avoid this gap depressing the economy. Either consumers have to spend more than their incomes or the government has to spend more than its revenues or businesses have to invest more than they save. At the moment corporate investment is low and their savings are high, so all the gap and more has to be filled by consumer and government borrowing. There is thus a direct causal link between the exchange rate and borrowing. If the exchange rate it too high it leads to a current account foreign payments deficit. The only way then to maintain demand in the economy is by consumer and government debt increasing. </p><p> Does this matter? Yes, indeed it does, especially if, to keep plugging the deficits in the country’s, the consumers’ and the government’s expenditure, more and more debt has to be created in relation to the borrowers’ capacity to repay. Provided lenders are satisfied that, in the last analysis, the debts owing to them will be honoured and in the meantime interest on them will be paid, borrowing can go on going up and up – as it does, for example, to growing and profitable companies. Unfortunately, however, neither countries with weak payment balances nor their consumers and nor their governments generate the sorts of income flows which are produced by profitable investments. Very significant constraints on borrowing then come into play. </p><p> When the sums owed both by consumers and the government begin to look uncomfortably large, lenders get increasingly unsure about lending to them. They also start to worry about the country’s capacity to meet its obligations. To stop the country’s current account payments deficit getting too substantial, the economy therefore cannot be run at full stretch because this would widen the payments gap to an unsustainable extent. A weak balance of payments position thus makes it impossible to run the economy at full throttle. The cumulative effect of this constraint explains why unemployment, running at about 2.6m in the UK during the autumn of 2011, is so high. Actually, however, the headline unemployment figure grossly underestimates the real total number of people who would be willing to work if there were sufficient jobs available that paid a reasonable wage. Surveys show that the total number of missing jobs is nearer 4m than 2.6m. </p><p> As deflationary polices bite harder and growth stalls, constraints tighten still further. If any economy has a borrowing requirement which is rising more slowly than the economy is growing – like India does at the moment – lenders can remain reasonably confident that their debts will be repaid. If the debts are rising faster than the growth rate – which is now the position in the UK and much of the rest of the West – as soon as it becomes apparent that this is the case lenders start getting much more nervous. Their reaction then is to try to cut down the amount of borrowing needed, but this can very easily turn into a self-defeating policy. The less borrowing there is to make up the demand deficiency, the more slowly the economy will grow and the less debt servicing capacity the economy will have. Meanwhile the need for borrowing may not go down. If consumers’ incomes drop more rapidly than their spending and claims on government expenditure rise faster than before as unemployment goes up, the need for more debt may go up rather than down. </p><p> This is the bind in which the UK government now finds itself. Labour advocates reflation, but clearly with a substantial risk that such a policy will cause the creditworthiness of the country to be downgraded. Interest charges would then rise as the lending risks increased, and expansion of the economy would be unsustainable. The Conservative/Lib Dem Coalition is trying to cut expenditure to satisfy lenders that borrowing can be kept under control, but with the heavy risk that growth will disappear completely while more borrowing is still needed. Neither policy looks viable. If we carry on the way we are at the moment, at best we will suffer from years of slow or quite possibly negative growth, rising unemployment, stagnant or falling real incomes, and cut backs in government expenditure. At worst, our capacity to go on borrowing the money we need to plug the unending deficits with which we will be confronted will lead to lenders losing patience with us. Our ability to borrow more money on any viable terms will then disappear, and a really major crisis will be precipitated. </p><p> Is there a solution to these problems? There is but only if our economic policy priorities are radically changed. We need to cease trying to fight inflation as our major objective. Instead, we need to get the exchange rate right. If we can do this, we can get rid of our weak balance of payments position which, in turn, is the only long term way to stop the country, its consumers and its government needing to borrow more and more money with less and less chance of being able to pay it back. It will also enable us to have a much more prosperous future. In addition, it will avoid our position in the world sliding downhill as a result of our inability to run our economy effectively. It will also strengthen our capacity to help solve some of the world’s longer term problems from a position of strength and confidence rather than weakness and decline. </p><p> What would we have to do with the exchange rate to get our economy functioning much better? Some fairly easy calculations provide the order of magnitude of the devaluations which would need to be made to deal with various different objectives, starting from where we are now. The results are as follows: </p><ul><li>A To eliminate the payments deficit, leaving the economy capable of growing at about 2% per annum but with still large levels of unemployment, a devaluation of between 10% and 15% would be needed. </li><li>B To eliminate the payments deficit and to provide enough leeway to allow the economy to be run with a much higher level of demand, producing a cumulative growth rate of about 4% per annum – the world average – a devaluation of between 20% to 25% would be required. </li><li>C To enable the UK economy to move over a transitional period to the growth rates experienced by countries such as Germany and Japan after World War II, or China now – i.e. with a growth rate of about 8% per annum – the pound would need to fall in value on the exchanges by 40% to 50%. </li></ul><p>It is important to realise that these parity changes need to be on a trade weighted basis to be effective. If other countries were to devalue at the same time as the UK then even larger devaluations against the non-devaluing countries would be required. The magnitude of the changes need is, however, an important testament to the enormous lack of competitiveness particularly with many of the Pacific Rim countries, to which Britain is currently exposed. </p><p> What would need to be done to get the exchange rate down? There would have to be a major reversal of the policy objectives which policy makers in the UK have long strived to attain. The authorities would need to make it clear that a much lower pound was not only what they wanted to see but what they were determined to achieve. The Bank of England could be instructed to sell sterling and buy foreign currencies. More quantitative easing could be introduced. The government could deliberately increase its deficit to widen the payments deficit unless the parity of the currency fell. The nationalised banks could be instructed to lend more money to businesses, accepting the risk that there might be more bad loans. Portfolio inward investment could be discouraged instead of being welcomed, as it has been. If the credit rating agencies threaten downgrades, they should be ignored because these would help to bring the pound down. All of this is technically feasible but there would be two major obstacles in the way. One would be the attitude of the countries against whom we were devaluing and the other would be the entrenched views on economic policy within the UK and most other western countries too. </p><p> Countries like China may well object to losing some of their competitiveness but on mature reflection they may realise that they have little to lose and much to gain from countries such as the UK being in better shape. It is not in China’s interest for there to be a massive debt crisis in the West, undermining the prosperity of the world economy generally and the prospects for Chinese exports in particular. Nor is it in China’s long term interest to run its present large balance of payments surplus, especially if the foreign exchange thus generated is lent to countries which are never likely to be able to pay it back. China’s very rapid growth rate would only be impacted if the UK and other western countries adopted very deep devaluations, which would be much more difficult to achieve than smaller ones. For depreciations of anything up to about 25% against the Chinese renmembi, there would not be much erosion, if any, to China’s huge manufacturing capacity. Furthermore, if no international consensus was forthcoming there would still be nothing to stop the UK taking the unilateral actions described earlier. It may be better to achieve some measure of agreement, if this can be done, but in the last analysis, it is not essential. </p><p> Much larger objections’ however, are likely to come from everyone in the UK who is inured to different policy objectives. Politicians and civil servants, who have fought for low inflation and ignored the significance of the exchange rate for decades, supported by the media and academia, are unlikely to change their minds quickly. Importers are bound to oppose devaluation and so will all those who regard cheap foreign holidays as a prize not to be foregone. The City has always tended to favour a strong pound, as have pensioners and others who fear that the accommodating monetary policy and low interest rates which go with low exchange rates may adversely affect them. There is also the fear that a big devaluation will lower everyone’s living standards, although there is no evidence that in practice this would be likely to happen. </p><p> So if there is no change of economic policy priorities away from inflation and towards achieving a competitive exchange rate, we can expect the response to further worsening of our debt position to be exactly the reverse of what is really needed. There will be more cuts, more unemployment and no growth. Unfortunately, however, the need for borrowing will not go down. On the contrary it is likely to increase as neither the country, nor consumers nor the government can make ends meet. This is not a sustainable position. It cannot go on for ever, and it won’t. Sooner or later there will be no lenders. </p><p> When this happens, the exchange rate will fall uncontrollably. The choice before us, therefore, is not whether we are going to have a much lower exchange rate at some stage. We will. The choice is whether we engineer this in time for the transition to be done in reasonably good order or whether, by fighting a losing battle to the bitter end, we waste huge additional amounts of time and money before the inevitable outcome overtakes us.</p><p><em>John Mills is a donor to openDemocracy.</em></p><div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> England </div> </div> </div> <div class="field field-topics"> <div class="field-label">Topics:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> Economics </div> <div class="field-item even"> Equality </div> </div> </div> openEconomy openEconomy uk England Economics Equality John Mills Financial crisis Wed, 23 Nov 2011 09:51:31 +0000 John Mills 62732 at https://www.opendemocracy.net John Mills https://www.opendemocracy.net/author-profile/john-mills <div class="field field-au-term"> <div class="field-label">Author:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> John Mills </div> </div> </div> <div class="field field-au-firstname"> <div class="field-label">First name(s):&nbsp;</div> <div class="field-items"> <div class="field-item odd"> John </div> </div> </div> <div class="field field-au-surname"> <div class="field-label">Surname:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> Mills </div> </div> </div> <div class="field field-au-city"> <div class="field-label">City:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> London </div> </div> </div> <div class="field field-au-country"> <div class="field-label">Country:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> England </div> </div> </div> <p>John Mills is a businessman and economist. He is chairman of direct to consumer retailer, <a href="http://en.wikipedia.org/wiki/JML_%28John_Mills_Limited%29">JML</a>, and has published widely as an economist. He sits on the openDemocracy board and is a donor to oD. His most recent book is <a href="http://www.palgraveconnect.com/pc/doifinder/10.1057/9781137022974">Exchange Rate Allignments</a>.</p><div class="field field-au-shortbio"> <div class="field-label">One-Line Biography:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> &lt;p&gt;John Mills is a businessman and economist. He is chairman of direct to consumer retailer, &lt;a href=&quot;http://en.wikipedia.org/wiki/JML_%28John_Mills_Limited%29&quot;&gt;JML&lt;/a&gt;, and has published widely as an economist. His most recent book was &lt;a href=&quot;http://www.amazon.com/Critical-History-Economics-John-Mills/dp/1403918929&quot;&gt;A critical history of economics&lt;/a&gt;, (Macmillan 2002), which has been translated into Mandarin and is widely used in Chinese university courses&lt;/p&gt; </div> </div> </div> John Mills Sun, 20 Nov 2011 21:03:57 +0000 John Mills 62733 at https://www.opendemocracy.net