November 21, 2012 by johnmillsjml
My first obligation, apart from welcoming you all, is to say thank you to at least four groups of people. The first is to Civitas for having us here and to all of you for coming to the book launch this evening, particularly those of you who may feel that you have already been bombarded by me with enough pamphlets, bulletins and letters about the subjects covered in the book. The second is to Taiba Batool of Palgrave Macmillan for publishing Exchange Rate Alignments in the teeth of the condescending and rubbishing reviews she received from the academic establishment before she turned to the new reviewers who in the end persuaded her to get it published – Ruth Lea, Jeremy Hardie, John Black and Geoffrey Gardiner. The third is to the group of steadfast friends I have had over a long period who have strongly agreed with the line taken in the book – Austin Mitchell, Shaun Stewart, Bryan Gould, Kelvin Hopkins and again Geoffrey Gardiner. And finally a very special thank you to John Black, my Economics tutor when I was at Oxford, and Peter Moyes who was an undergraduate with me, who may still not agree with everything I have to say, but who – especially John – took immense pains to get the book into reasonable shape.
What of the book itself and the arguments it contains? I am only too well aware that there is a big problem. Nearly all the analysis and policy proposals it contains go against a large part of the conventional economic wisdom in the UK – and indeed in most of the western world – about how the economy should be run. The conventional view certainly in the UK is that there is really no realistic alternative to years of austerity, low or negative growth, high unemployment and wasted resources while we try to get our economic house in order by cutting expenditure. I don’t believe that any of this doom and gloom is justified. In my view, a large part of conventional economic wisdom, on which this world view depends, is simply wrong. I think that there is no reason other than inept policies, flowing from poor analysis and correspondingly ineffective prescriptions, which has allowed the UK to slide down from being the richest country in the world to being about 20th now in the rankings. Nor is it necessary for us to have millions of people out of work, or for us to be facing a double or triple dip recession, or for us to have the huge inequalities which now disfigure our society. Nor do I think we need to have all the excessive borrowing which is currently dragging us down, reflected in both the government’s and the country’s huge deficits and debts.
If this all sounds utopian and impossible, let me summarise for you very quickly what the book says about how this depressing future should be avoided – although I hope that revealing this much will not discourage you from buying the book and reading it! Here is its thesis in a nutshell:
1.A The UK’s fundamental problem is that we cannot pay our way in the world. We do not have enough exports to pay for all that we want to import.
1.B The consequent balance of payments problems suck demand out of the economy and are the fundamental cause of the government’s inability to balance its books. All current account deficits have to be financed by borrowing, which is why we are so much in debt.
1.C Most exports even now are manufactured goods and the reason why we do not have enough of them is because we have de-industrialised, so we do not have enough to sell to the rest of the world.
1.D This has happened because it is far cheaper to manufacture almost anything in places like China than in the UK so manufacturing has migrated massively from here to there.
1.E The reason for this goes back in large measure to the 1970s when inflation was a big problem and monetarism became fashionable. Unfortunately the very high interest rates and tight money then imposed on the UK economy drove the exchange rate up massively – where with some fluctuations it has remained – just as China and the tiger economies were coming on stream, making manufacturing in the UK largely uneconomical. It still costs about half as much to get most goods made in China as it does in the UK.
1.F The only way to solve this problem is to make manufacturing and exporting profitable again and the only way to do this is to get the exchange rate down to where it needs to be – about 25% lower than it is at the moment, so that exporting is more profitable than importing.
1.G Could this be done? Yes it could if the will was there. Would there be lots more inflation? No. Would other countries retaliate? Almost certainly not. Would devaluation make us all poorer? No, it would very quickly make us all richer.
1.H Then why don’t we do it? Why don’t we get the pound down to around $1.20 and €0.85, which would be the level needed to enable us to pay our way in the world again? I think there are three main reasons why almost no-one advocates getting this done:
8.H.1 It is counter intuitive and hard to understand that getting the pound down makes you richer and not poorer, so this is difficult policy to sell even if it is right.
8.H.2 The exchange rate, although absolutely crucial as an economic policy instrument has largely disappeared from sight as a policy target.
8.H.3 Economic policy makers are then left with trying to keep inflation at about 2% as their only main policy goal. Unfortunately, this is completely the wrong objective as the policies needed to keep inflation low are exactly the same as those which keep the pound too strong.
The result of the consensus round ineffective mix of inappropriate policies is that it leaves our policy makers with no idea what to do about the country’s current economic predicament other than to muddle along, hoping for the best. The academic world is no help. So we are in a bind with unending austerity in sight, whereas I believe that, with a different approach, we could within two or three years get back to sustained growth at about 4% per annum, with unemployment falling to about 3% and with little in the way of an inflationary price to pay. The book explains in detail why all this is possible and what actions need to be taken to get it done.
Can it, nevertheless, really be true that there is as simple a solution to our truly depressing and apparently intractable economic problems as the book suggests? And, if so, why is it not more generally canvassed? Again, let me offer you some thoughts as to why it could easily be that we could easily get stuck in a rut with the wrong policies.
2.A I hate to say this but I think that a large amount of the blame lies with the academic economic world which, in my view, has done a very poor job in providing good advice to those who are not economist but who – as politicians, civil servants and commentators – have to cope with formulating economic policy. I think that academic economists – mostly much too divorced from the real world – could and should have done a lot better than they have.
2.B In my view, there is much too much of a herd mentality among economic policy makers, buttressed by very strong establishment, institutional and financial pressures, with far too big a tendency for any unconventional views to be rubbished rather than challenged and investigated, to establish if they have any merit. This may be changing as the bankruptcy of conventional economic policy making becomes every day more apparent.
2.C I have to say also that any policy involving devaluation is automatically regarded unsympathetically because of deep prejudices which are embedded in all the language used in dealing with the exchange rate. Who wants a weak pound when you can have a strong one? Who wants the pound to go down rather than up? All this loaded terminology makes it difficult to get an objective view taken. Who, also, wants to have more expensive holidays abroad, even if the price paid for them is stagnant living standards at home?
So the thesis in Exchange Rate Alignments is not an easy one to get across. I am, however, absolutely convinced that fundamentally it is right. There are solutions to our economic problems which are not that difficult to implement, and we ought to go for them. I don’t need to tell you all, however, that I am really in a pretty isolated position in putting these ideas forward. They are not what the world wants to hear. Does this mean that they must be wrong? I don’t think so, mainly because I think I have been very fortunately placed. I have been hugely lucky to have had the friends with whom I have exchanged views over many years, the long experience of business I have had at the really sharp end of the capitalist world, my independence from career or professional pressures – and the fact that I was taught economics very well in the first place. I have a lot for which to be very thankful – even if putting forward popular views to wide acclaim is not one of them!
Now it remains for me to encourage you to buy the book and to read it – to see if you are convinced by what it says. I hope you will be. And if you are, I hope that you will do what you can to get the world to realise that there is a far better future available for us all than you are used to hearing.
Thank you for coming today.
21st November 2012