|
Dear Eddie
It is clear from the confused comment and speculation in the run-up to this meeting of the Monetary Policy Committee that uncertainty prevails. Economists and pundits disagree about the state of the economy, the way it is moving, and what action you should, and are likely, to take. We don’t think there has ever been as much disagreement.
Nor is this uncertainty confined to Britain. The US economy is on notice of a tightening but none has taken place. The European Central Bank watches, and warns, impotently as the Euro slides. Everywhere governments are palsied. Particularly here. As is usual in these situations the Chancellor exudes confidence and eschews action. Or, indeed, policy.
All this should not become the excuse for another wait and see holding operation on interest rates. What you need to do is make absolutely clear by study of the real productive economy, as distinct from the superficialities of the money supply, consumer demand, house prices, wages, credit or spending as read from the inaccurate dials you usually look at so obsessively to distract your attention from the main issue.
Raise your eyes from these minor matters. Look at the basic reality and you will see an economy which is slowing fast, which may (or may not, it’s far from certain) avoid the recession we have warned about, but in which the real fundamentals are slowing down: growth is slowing to zero, unemployment is going to increase and the balance of payments will gape even wider. All this creates the possibility, we would say probability, of a wind down which will take hold and get worse unless drastic action is taken now to stop it and to boost the real economy. Any analysis of the fundamentals of production and Britain’s deteriorating competitive situation will lead you to follow our advice and reduce interest rates to the European level now. There is no reason why ours should be doubt theirs. We are in a highly competitive single market. To keep the gap so wide is to guarantee severe damage and ensure that the Pound stays at a level which is now higher than it was in the ERM. Prolonging that will be disastrous and after two years of you know it isn’t going to come down without action.
Only bringing interest rates down to European levels can give the economy the boost it needs, and restore even a proportion of the loss of British competitiveness which the steady slide of the Euro, a slide neither the member governments nor the central bank can stop, even if they really want to, for realistic governments don’t. Bankers may flinch and financiers sneer but realists must accept that in EMU the bankers have no way of asserting themselves in this crucial area, a useful example of how to treat Central Banks.
Reduction of interest rates is essential to save the real economy of production and exporting and to preserve Britain’s ability to make things here and export them at a profit. This productive economy includes anyone who produces goods and services in this country and sells on an international market or here in competition with imports. The Production Economy has been hard hit over the last twenty years, particularly by two major recessions embarked on to fight inflation. That’s closed a high proportion of productive capacity and forced the rest to survive by cutting investment, research, design, development, training and all the other requirements for survival in a highly competitive market.
All this was in addition to the problems the Production Economy it has suffered on a long term basis. We have always run our economy to benefit finance and consumers who have been kept happy by cheap imports. Ministers have constantly hectored business about the need to be competitive while imposing on it competitive weaknesses which the productive economy of no other competitor has had to face. Interest rates have been consistently higher than those born by most of our advanced industrial competitors, discouraging investment and technological change. The exchange rate has been kept higher than manufacturing needs because of the paramount interests of finance in a high and stable exchange rate, the better to transact its business and to acquire assets world wide. The powerful property sector on which pension funds and institutions depend for a high and rising return (less important in countries where fewer pensions are funded) has imposed its own burden of higher rent and development costs than exist in other countries. Utility charges have been higher and are now heavier again with privatisation. We have treated the Production Economy as a beast of burden not the nation’s champion. Lastly, the Productive Economy has been based on a weaker home market, characterised by wilder fluctuations than those in other competitors where growth and demand have been steadier.
The results of all this are:-
First. that manufacturing has shrunk more rapidly, shed more jobs, closed more capacity and been less successful in winning or keeping markets than that of any other advanced industrial competitor, none of whom has had as drastic a shrinkage in the manufacturing base that has affected us since 1978.
Second. It has been consistently less profitable to produce in this country and profits of production, always lower than those in other sectors, have never been generated on the scale necessary to keep investment at the high levels it should be in a very competitive world.
There have been consistent claims by government, yourself and a few surviving producers that Britain’s manufacturing is "competitive" or more honestly "now competitive". I hope you haven’t been fooled by this. It is a truism to say that that manufacturing which survives is "competitive". The problem is it isn’t very, is often clinging on by jettisoning what it needs to survive, and that claim tells us nothing about those sections which have gone under, or the new industries and production we need to attract but which won’t come because Britain isn’t a competitive base to produce in. Indeed, the queue of motor car manufacturers (and others less publicly) clamouring for government aid and support bears witness to this fact. What they’re really saying is "It’s not profitable to produce here at this exchange rate and if you don’t help us we won’t stay". It’s an unfortunate law of economics that if you don’t give production competitiveness it closes down or you have to subsidise to keep going, transferring to public spending a job which should be done by the exchange rate.
All this is too often portrayed by those economic illiterates who play a pundit’s role by parroting the views of finance and by the city as "modernisation", getting out of sunset or smokestack "industry", "building" the new "information economy" - "the micro chip world", "the productivity gains of computerisation" and all the rest of the rubbish. Nowhere is it said what these new industries we are to get into are, how many people they will employ or why they should come to a slow growth, defensive, constrained economy when they can go somewhere which is growing faster and providing more competitive opportunities. Growth which is always more attractive (and beneficial) than battening down hatches and cutting costs.
In short, the theory that we boost the future by killing it dead is pure escapism, and dangerous nonsense too because it obscures the basic reality that production has not been profitable enough and has now been made unprofitable. As a result, Britain has lost and is still losing the powerful productive base and the competitive industries every economy rests on. As a result, we face growing difficulties with:
(i) Jobs. The Production Economy supports jobs, services and pay on a scale no other sector does.
(ii) The ability to pay our way. The Production Economy contributes to the balance of payments in a way no other sector can. Sixty percent of our exports are manufactures. The long term damage to the sector and the loss of competitiveness and exports this has led to have had serious effects on the balance of payments, concealed since the Seventies by oil, which has allowed us to pay our way in the world even as manufacturing weakens. Yet, despite oil’s contribution, the balance of payments is now weakening and oil’s contribution will in any case decline making our present gaping balance of payments deficit even worse. To cope with that future and deal with that deficit any other way than by a fall in the exchange rate, an expansion of production in the internationally traded sector, particularly manufacturing, means either a rentier economy living on the return from overseas investments made during the oil rich days which benefits only a section of the population, provides no jobs, and keeps the Pound high as the money is repatriated, or a sustained deflation and a cut in living standards to reduce demand for imports we can no longer afford. Neither is a promising future for a nation with a population of 55 million.
(iii) The threat of inflation. Only manufacturing generates the productivity gains, the economic growth, a modern economy needs. This sector alone allows us to fight and defeat inflation long term because only it can produce the falling unit costs that come from expanding production. A counter inflation policy which destroys and depresses it is ruinous.
The basic long term problem of the British economy is the need for production to be more profitable. Your economic management coupled with the fact that the government has not
lived up to its promises of managing the economy for growth and jobs have now brought us up slap bang up against that problem by undermining even the low levels of profitability production had.
None of the previous attempts to solve the problem have worked over the last two decades. Monetarism made it worse, turned anorexia into a way of life and closed a large section of industrial capacity which should have been modernised. Fixing exchange rates (also known as joining the Exchange Rate Mechanism) proved predictably disastrous, because it was fixed too high, and because the exchange rate is a market clearing mechanism which was unable to clear markets.
Floating rates (also known as escape from the ERM) were more beneficial until the rate began to float up. The fall in the exchange rate had produced a revival of the economy, growth and an improvement in productivity, all without any real inflation problem. This was perversely killed by the Bank’s high interest rate policy, coupled with the uncertainty produced in Europe by the move to Monetary Union making Sterling a safe haven and pushing the Pound up. Here was a development which was inevitable which should have been foreseen and countered but was compounded with disastrous results, which are now coming home.
This is the problem you have to deal with. It should fall to government but the Chancellor shows no sign of being prepared to do it because his aim is to avoid macro economic policies and concentrate on supply side measures, even though these are no answer to a slow growth scenario which leads to cutbacks, job shedding, and lower levels of economic activity. No use training people for better jobs if there are fewer jobs or encouraging business to be competitive when there is no demand. So you can expect no help from this quarter. Nor will any be forthcoming from your own basic approaches. Your members and their voting habits have displayed no consistency and little continuity. No one with the possible exception of De Ann Julius has defended the interests of manufacturing, the regions and production. The collection of bastardised monetarist policies you have proffered in justification for your policies has been neither relevant nor useful.
(a) No use talking of NAIRU, there is no such thing, even if some now argue that NAIRU is lower than you thought because inflation is lower.
(b) Fighting inflation when it is no problem is a Maginot Line strategy with guns pointed in the wrong direction, while the real problem creeps up from behind.
(c) "structural unemployment" is a misleading concept. We can have any level of unemployment we want with the appropriate policies. The real problem is that unemployment has been dropped as a priority.
(d) Stability, low inflation or a balanced budget will not bring growth without any strategy for demand management.
(e) Fiddling fine tuning is irrelevant in a crisis of the productive, real economy, like putting in and taking out cupfuls of petrol in a car running on empty.
One other indication that you are going obstinately down the wrong track is to ask what exactly you have achieved in your two years of economic management? Inflation is low but would be anyway. Growth you have killed. The balance of payments you have allowed to deteriorate. All the extra jobs, growth, productivity and benefits which would have come from a more substantial rate of growth (easily attainable without strain) over those two years, and which would be forthcoming even from trend growth in the next two have been thrown away.
The only way out of this long-standing British problem once again becoming acute is expansion. Treading water is now no use. Europe is going for growth with interest rates as low as this and a competitive exchange rate which will now lead to recovery in Germany and sustain the expansion going on in France, Spain and Eire Ireland but further damage us and make our balance of payments far worse. The US is changing gear. Given the size of its trade deficit it should hand the burden of acting as the world’s consumer of last resort over to someone else. If the US stock market slides stock market Keynesianism ends and the Dollar will come down and Sterling with it. All this means you have to act for Britain, and soon.
If our balance of payments gets worse, as it will, there should be downward pressure on Sterling but it’s no use waiting for "maybes" as the productive economy gets weaker and the real economy worse. Going for growth and jobs reduces inflation and the tax burden. It boosts the productive economy on which we depend. It stimulates the whole economy. It can only be achieved now by much lower interest rates and a competitive exchange rate. It is your responsibility to go for both. With the Pound at these levels we face a crisis akin to in the ERM. Something must be done about it and only you can. |
