BY JOHN MILLS
Published 23rd October 2012, in Hardback, £65.00
A major new challenge to economic orthodoxy
At a time when policy makers and the public are reluctantly facing up to years of austerity, high unemployment, low or negative growth, constrained public expenditure, rising inequality and declining influence – with apparently no alternative available – this book sets out a radical new analysis of the reasons for the UK’s deep-seated economic problems. It then sets out a clear path for overcoming our current economic malaise, showing that there is no reason why we could not move, over a relatively short time period, to having a growth rate of around 4% per annum, with unemployment down to about 3% – and with inflation running at probably only a small fraction above its present level.
Our fundamental weakness, the book argues, is that we cannot pay our way in the world. This is because the amount we charge our export markets for all our domestic costs is much too high. It therefore costs far more to produce almost anything in the UK than it does elsewhere. As a result of the manufacturing decline and de-industrialisation consequently experienced by the UK, we have a huge balance of payments deficit. This can only be financed by borrowing or by sales of assets, neither of which can be sustained indefinitely. The only viable solution is to make our economy more competitive and to do this we have to reduce what we charge the rest of the world for our exports. There is only one effective way of getting this done, which is through a radical change to our economic priorities – away from keeping inflation as low as possible and towards making sure that we have a competitive exchange rate. There is no other way of charging out our cost base to the rest of the world at prices which they would be prepared to pay.
At least since the 1970s – but actually for much longer than this – the UK’s main economic policy goal has been to keep inflation down. Since the 1990s the target has been 2% per annum. This was supposed to stimulate increasing growth, but it has failed to do so, mainly because the policies needed to keep inflation as low as this are almost exactly the same as those needed to keep the pound much too strong. The result is that we have far too little to sell to the rest of the world at competitive prices to pay for our imports. The only way to remedy this situation is to make it more profitable to export than to import, and thus to re-establish our manufacturing base.
Providing a competitive cost base, the book shows, would transform the UK’s economic prospects. It would make possible the export led growth which has been the key everywhere to driving up productivity, thus increasing living standards. By removing the balance of payment barriers to expanding demand, unemployment could be dramatically reduced. This would hugely improve both prospects for the regions and for those currently suffering from low incomes and job insecurity, thus countering the steady drift to more and more inequality.
Why have policies along these lines not already been adopted? It is because, until carefully examined, they seem so counter-intuitive. It is far from obvious at first sight that lowering the value of the pound would make everyone better off at least on average, but all the evidence shows that this is what would happen. Nor would a competitive exchange rate policy be particularly difficult to implement. The book explains, furthermore, why all the standard objections to lowering the value of sterling are surprisingly weak and ill-founded. Contrary to widespread belief to the contrary, devaluations do not unusually generate more inflation, nor do they make everyone poorer, nor do they promote retaliation. The main obstacle to implementing a competitive exchange rate strategy is not operational. It is faulty analysis and entrenched attitudes which have condemned the UK economy quite unnecessarily to its long-standing relatively poor performance.
The book argues that neither politicians, civil servants, commentators or members of the academic economic world in the UK generally have any realistic policies to offer which will get the economy back on track. Using the exchange rate as a key policy tool is almost entirely off the agenda. John Mills argues that this very urgently needs to change. Exchange Rate Alignments shows with crystal clarity how important it is to get this done and how our economic prospects could then be transformed.
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