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Dear Eddie
Like us, you will have observed with dismay the growth of speculation along the old outdated lines that because the economy shows signs of a slight stirring to performance above the pathetic you must increase interest rates. The fear is that inflation is certain to result from the fact that growth is half a percent higher than expected and unemployment is still falling.
The result is shock and horror for the economic dinosaurs whose dearest hope is to see unemployment rise to control inflation. They, therefore, advise deflation. The assumption being that Britain can never grow because the working classes have to be disciplined and kept in order, being unworthy of the public school geniuses who run our financial affairs.
All this is the outdated economics of the Eighties. Perhaps, even, the Twenties. It has no relevance to the present realities. Now inflation is low and will remain so but the economy is seriously under-performing and needs boosting. Britain will be very vulnerable if either or both of the two likely external trends happens. First if European, and particularly German, growth is boosted substantially by their competitive devaluation. Second, if the American bubble bursts because so much of it is based on stock market Keynesianism and this in turn rests on the inflated value of thirty stocks whose price bears no relationship to their profit performance. Either or both of these developments makes us very vulnerable so you must safeguard against both. Deflate. Discipline. Keep the people down for the City’s sake!
In these circumstances you should reduce interest rates along the lines we have advocated in all our previous submissions. You should do so substantially. That will give a clear signal to British industry, to markets and to the world, that the new strategy is not defensively and timorously holding the line against an inflation threat which has disappeared or acting on the basis of policies which no longer work. Your intention now is to seize the enormous opportunity which lies before Britain to grow without damaging inflationary consequences. Missing that opportunity would, in our view, be a betrayal.
We won’t bother you again with a new deployment of the basic arguments which we have given several times for such an expansionary approach. In summary the major considerations are:-
- If the rationale of your earlier approach of edging interest rates up was that doing so would defeat anticipated inflation then the near certainty of low, even falling inflation, requires you now to reduce them. Otherwise you might have to give a pathetic explanation to the Chancellor of why and how you have failed in your allotted task. More important, you will have lost an opportunity the rest of the world is seizing.
- The paramount problem facing the economy is still overvaluation of Sterling. This is producing a balance of payments problem and remains deeply damaging to manufacturing. Far from having learned to live with overvaluation it has really learned only to die more slowly and less spectacularly. There is no other way of reducing that overvaluation but a reduction in interest rates. It may not bring the Pound down as far as it needs to go. But it will certainly help it on its way. Stop oozing sympathy you don’t mean and do it. Nor are inflationary consequences to be envisaged from this. Import profit margins have been maintained, indeed increased, as the price of imports have fallen. They can and will be reduced when the price of imports rises in the effort to maintain market share. But an increase in British production increases productivity, reduces unit costs. That will only come if it is profitable to produce here rather than to import.
- There is a marked difference between two British economies, London and the South East, where your members and the pundits all live, and experience, for instance, rising house prices. In the rest of the country house prices remain comparatively low and manufacturing is unnecessarily depressed. It is long past the time when the economy could or should be run for the needs of Finance and the South East. Something substantial needs to be done for the rest of the nation.
- With similar inflationary conditions and our economy turning down as theirs turns up and a gaping balance of payments problem with the EU gapes further the central question becomes why should our interest rates be double Europe’s? This is the question to which you must give a clear and unambiguous answer if you decide to hold rates at their present level. You can’t do so, therefore reduce them.
- None of the prognostications about "Non-Inflation Accelerating rates of unemployment", nor any norms for unemployment, nor any connection between levels of unemployment and rates of inflation, nor the old difference between sustainable and unsustainable rates of growth has proved correct, either in the United States or in Britain. Yet they remain norms of policy though mainly here where the interests of Finance are more important. All these must be questioned and rejected. Indeed, sustainable rates of growth must be higher here if all the painful restructuring was in fact justified. If the level of unemployment has fallen without inflationary consequences it can fall further without them. If firms have hung on to Labour in the hope of recovery then there is great potential for a surge in productivity when that Labour is put to more intensive use by an expansion of the economy.
We emphasise once again that the economy now has a great opportunity to expand at substantially higher than the pathetic growth rates Britain has managed to date. It can do so without inflationary consequences. That opportunity won’t be there forever. You should seize it as the best, indeed the only, way of keeping inflation low long term by increasing productivity, and production, and reducing unit costs..
Put the economy on the path of sustainable growth which lies before us. Do that by reducing interest rates to a level comparable with those of Europe and getting the Pound down to a level where we can compete in a single market where we are presently losing out. Unless you act decisively and soon. The praise you got from select committees in both the Lords and Commons can be justified only accidentally. You now have the opportunity to deserve it. Let’s Grow with George! |
