Taking a leaf out of China’s book and devaluing our currency could give us a blue-collar jobs revival, argues John Mills
Britain led the world during the Industrial Revolution. We were known then as the “workshop of the world.”
But now, 200 years on, over 20 countries have overtaken us.
They have vibrant manufacturing sectors that provide good-quality blue-collar jobs, higher living standards and the money to invest in infrastructure and protect their national services. In comparison, we have stagnated.
We now invest less in our future than almost anyone else — 14 per cent of our annual national income compared with a world average of 24 per cent and 46 per cent in China — and as a result our manufacturing base has withered from providing about a third of our economic output as late as 1970 to barely 10 per cent now, and we have steadily lost share of world trade, falling from 10.7 per cent in 1950 to 2.6 per cent now.
As a result, we cannot pay our way in the world. We now do not make enough to sell abroad to pay for everything we need to import.
The last time we had a balance of payments surplus was in 1983. We have instead staved off further decline by borrowing huge sums from abroad — and selling off national assets to foreign interests, especially in recent years London property to rich oligarchs.
The government is getting deeper in debt and the little growth we have seen has been caused almost entirely by asset price inflation.
On top of all this we have witnessed huge increases in inequality. Headline unemployment, which averaged only about 2 per cent for the whole of the period from 1945 to 1970, now fluctuates round about 8 per cent, and the number of people with no job who would work if they could do so at a reasonable wage is at least 50 per cent higher.
On the other hand, even despite the poor performance of the British economy since the 2008 financial crisis, over the last five years the richest 1,000 people in Britain have seen the value of their assets roughly double.
Why have we done so relatively badly? Here is the reason. It is because, as a nation, we have neglected a vital component of our economic policy-making, allowing so many other countries to steal a march on us.
We have ignored a crucial factor governing the trading and financial relationships we have with all of the rest of the world — our exchange rate.
We have mistakenly assumed that it does not make any difference at what price we try to sell our goods and services to the rest of the world — and that our customers will go on buying from us whatever we charge them.
We have blithely assumed that the market knows best and that our exchange rate is a residual over which we have no control.
As a result we have had a pound that has been far too strong for almost all of the last 200 years — but especially since the 1970s. How has this come about and why does it matter?
The reasons why Britain has had too strong a currency for so long are tied up with the fact that we were the first country to industrialise.
The profits that we generated gave the financial community which managed them and those with inherited wealth a steadily more powerful position in our economy.
The long period of relative political stability during the 19th century allowed the City to underpin the gold standard, which was the institutional embodiment of the dominance of finance at the time.
Crucially, the only time up to the end of World War II when Britain was not overburdened with an over-strong pound was the 1930s.
Following the 30 per cent devaluation in 1931, the economy grew faster between 1932 and 1937 — at about 4 per cent per annum — than it has ever done before or since.
In the postwar period from 1945 to 1970, we hugely underestimated how quickly continental Europe would recover from the devastation and compete against us.
High inflation in Britain left us increasingly uncompetitive, meaning that the devaluations in 1949 and 1967 were too little and too late.
The really major damage, however, came when monetarism replaced Keynesian policies in the late 1970s.
Drastic contractions in the money supply and interest rates of over 15 per cent pushed up the exchange rate by over 60 per cent between 1977 and 1982 and as a result British industry began to decline — and then collapse.
And while we pushed up the value of the pound higher, China devalued by an astonishing 75 per cent. The rest is history.
Across the whole of the Western world, but especially in the US and Britain, deindustrialisation took place on a massive scale.
Good-quality blue-collar jobs disappeared. Swathes of the country, previously dependent on industries were left with no secure economic base.
The growth rate fell compounded by a huge switch in the proportion of our national income going to labour as opposed to returns on capital.
Living standards stagnated until the 2008 crisis and then, for many people, fell to unprecedented levels — and didn’t recover.
Is there anything which can be done to counteract all these trends?
Yes, there is, although it is often difficult to get people to realise what needs to be done.
We need a much lower exchange rate to enable us to compete with world prices, especially for manufactured goods that still comprise about 50 per cent of our export earnings.
We need to get Britain back into manufacturing relatively low-tech products,
which tend to be very price sensitive, instead of relying only on high-tech industries such as arms, aerospace and pharmaceuticals, whose sales volumes are not that sensitive to the prices charged for them.
Typically for manufacturing industries, about a third of costs are raw materials and plant and machinery, for which there are world prices.
Almost all other costs are denominated in sterling and would fall pro rata to the change in the exchange rate.
Here’s the maths. If we devalued by, say, 33 per cent — much the same as we did in 1931 — our export prices, measured in world currencies, would fall by two-thirds of 33 per cent, or 22 per cent.
This would enable us to start competing with the Far East again.
But wouldn’t any strategic devaluation of the pound lead to inflation — making us all poorer in the long run?
This misconception, widely held by economic columnists and commentators, is simply false. It is a myth.
We only have to look at the historical record. Devaluation did not drive up inflation, for example, when we left the Exchange Rate Mechanism in 1992.
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 about 3 per cent.
Would this be “a race to the bottom”? Exactly the opposite.
Reviving manufacturing industry would reproduce just the sort of high-productivity jobs that we now so sorely lack. Why don’t we do it? Good question.
We need a government that is prepared to face down the City and to run the country in the interests of manufacturing and workers rather than finance and bankers. Are we ever going to have one?
John Mills is an economist and chairman of JML, the Pound Campaign and the Labour Euro-Safeguards Campaign.