What is going to happen to the UK economy over the next few years? The general consensus is that the worst of the recent crisis is behind us and we can therefore expect modest growth ahead. However, my pamphlet published by Civitas on 25 March called 'There is an Alternative', paints a much gloomier picture of the future if policies remain as they are. You can download the pamphlet here and watch the launch event here.
But it also has another very different message. With a radical change in policy, which the pamphlet explains in detail, the UK economy could grow at 4% to 5% per annum on a sustainable basis, unemployment could be made fall dramatically, debts would get paid off and the economy would become far better balanced. How much of all of this is realistic?
Why, first, the pessimism about current trends? There are two crucial weaknesses which the UK economy exemplifies even more acutely than most of the rest of the western world. Investment is far too low - insufficient, in fact, to cover depreciation of existing assets and to keep up with the UK's rising population. There is thus no net new investment in the sort of assets which, ever since the start of the Industrial Revolution, raise productivity and living standards. Gross investment as a share of the UK's national income is barely 14%. The world average is 24%. In China it is 46%. No wonder that increases in output per head have ground to a halt in the UK and there is a living standards crisis.
The second major problem is that manufacturing as a proportion of UK national output has sunk from over 30% in 1970 to barely 10% now, with inevitable unfavourable consequences. Since so much of world trade is in manufactured goods, with an industrial base this weak the UK has a major problem in paying its way in the world. It is manufacturing industry which has traditionally provided the high quality blue-collar jobs which are now so badly lacking. The deindustrialisation which has taken place in large areas of the UK is directly responsible for much of the inequality between the country's regions.
These are the problems which I believe the UK has to address if it is to get back on track. With no net investment and not enough to sell to the rest of the world, the UK economy is in grave danger of stagnating indefinitely once the current mini-boom - based on ultra-loose money and consequent asset inflation - runs its course, as may well happen. This all sounds ominously plausible. What, however, could be done to avoid this outcome materialising?
The big problems, as the pamphlet makes clear, are to get investment up to a much higher level and to rebalance the economy towards manufacturing and a sustainable balance between exports and imports - and to do this without driving down living standards in the process. The same limited output cannot be used both for investment and consumption. The solution the pamphlet advocates is to create and then to take advantage of an environment where two vital components are made to come together.
One is a high level of light industrial investment and the other is bringing into the labour force large numbers of previously unemployed or underemployed people. Put the two together and huge increases in output suddenly become achievable. This is what happened in the UK in the mid-1930s, when the economy grew faster than it has ever done before or since. An even more striking example is the performance of the US economy as lend-lease kicked in at the start of World War II. Between 1939 and 1944, US national income grew by an astonishing 75%, a compound annual rate of almost 12%. All the more successful developing countries have achieved their very high growth rates by the same combination of heavy investment in light industry and drawing labour into far more productive employment in manufacturing rather than working on subsistence farms. This is exactly what China has done year after year to achieve its stellar growth rate. To get our rate of investment up to where it needs to be and to pay our way in the world, these are the conditions which have to be created in the UK.
How should this be done? The exchange rate, I believe, is the key. Sterling needs to be competitive enough to make investment in light industry hugely profitable - which it is not in the UK at the moment, but which it surely would be if £1.00 = $1.00 instead of $1.65. A combination of both high levels of investment in light industry, where returns are very high and where productivity increases can be rapidly achieved, and drawing large number of currently unemployed people back into the labour force, will produce the big surge in output needed to provide the resources to rebalance the economy. It is then possible to increase the proportion of our national income going to both investment and manufacturing at the same time as raising living standards.
If this transformation could be achieved, much else could also be accomplished at the same time. Not only would the UK's economy rise to a sustainable 4% to 5% per annum, but the foreign payments balance would cease being a constraint, unemployment would fall to about 3% and the government would no longer need to run a fiscal deficit. There would be a small price to pay in inflation rising to a little more than 2%, but probably to no more than 3% or 4% at most.
Is this all really possible? Many will doubt it but my pamphlet puts forward a carefully quantified plan showing that the numbers really do stack up. If it really is true that the current uptick in the economy's performance is unsustainable and that, as a result, the UK is facing years of stagnation once the current spurt in growth peters out, maybe we should look harder than might be our initial inclination at a radical alternative policy which promises so much.
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