Duncan’s Economic Blog

Some Advice from Austin Mitchell

Posted in Uncategorized by duncanseconomicblog on April 20, 2009

I actually have a lot of time for Alistair Darling. His ‘infamous’ interview of August 2008 (‘the worst economic times in 60 years’) looks pretty prescient 18 months on. I worry that he has been hemmed in y civil servants, the Tories and the Bank of England and forced to back away from a further large stimulus, but I like him nonetheless.

However if Alistair were not Chancellor, I know who I would want – Austin Mitchell.

Danny Blanchflower, of the Monetary Policy Committee, gets a lot of attention for seeing the coming crisis early and consistently voting for interest rate cuts. He was not the only one aware of the dangers.

This is from Austin Mitchell in September 2007:

September traditionally marks the start of a new political and economic season after August’s hibernation. That makes new thinking appropriate and time for the MPC to listen in a way it hasn’t up to now. The Bank is moving obstinately down the wrong path to higher interest rates and a credit squeeze. This will be applauded by the financial interests which dominate your counsels and who have already applauded your stealthy progress towards ever higher interest rates and who are currently using their platform in our ignorant media to predict confidently that rates will again go on.

Here Government and the Bank have neglected their duty to regulate the explosion of under-regulated bank-like institutions, the financial engineering of off balance sheet accounting (which is in fact a government policy) the bundling of debts into big investment packages and the development of a massive risk industry of hedge funds.

We are embarked on a massive game of gambles generated by a financial sector which should know that what can`t go on probably won`t. Yet the Bank which has presided over all this must be aware of the risks and must understand that the increased complexity and the spread of risk-taking makes the system potentially more unstable, more prone to crises and less manageable by the blunt instrument of ever higher interest rates. Indeed, by producing the danger of a stall, these are quite capable of producing a crisis through the knock on consequences of repossessions forcing a dash for liquidity, the collapse of debt prices and a run on funds.

Our advice, therefore, is to prepare the way for a steady reduction of interest rates. Stop talking about inflation, credit squeezes and higher rates. Opt for a one quarter percent reduction now, announcing that the policies have worked and can now be relaxed. Begin to emphasise that economic growth must be sustained and begin to talk about a more competitive exchange rate. Then embark on a steady process of reduction to take British rates below the Fed (which meets on 18 September and will probably reduce rates) and below Europe and aiming at a two and a half percentage points reduction by mid 2008.

Certainly the correct advice.

I think ever incoming Labour Chancellor should be made to read the ‘Practical Politican’s Guide to Practical Economics’. Written ten years ago but still in many ways relevant.

The success or failure of all governments turns very largely on their achievements on the economy. Of course, political leaders have many other matters in mind when elected. They can set a new style. They can tackle sleaze. They can reorganise the constitution. They can change spending priorities. They can make rousing speeches to their party conferences. In the end, however, it is success or failure on the economy which is likely to be the pre-eminent factor in the electorate’s mind when judging the record of any government’s tenure of office. To fail there undermines everything.

People with financial backgrounds tend to fear inflation unduly, little recognising that their own enormous salaries and bonuses are much more obvious signs of rising costs than the much more modest wage increases prevalent elsewhere.

No doubt there were problems with over-mighty unions in the 1970s, mainly because the cake was not growing, so people struggled to increase their share. Yet there are other ways of coming to a tolerable social compact between capital and labour than the visceral anti-union policies and attitudes which became the Tory staple diet. As was shown in many countries in Europe during the decades after the war, much the most efficacious solution was high economic growth, which the Tory policies post 1979 never achieved for any length of time. Significantly, during the 1950s and 1960s across most of Western Europe, rising output almost every year generated a wage bargaining climate of moderation, the maintenance of which was clearly in everyone’s interest, thus keeping inflation at bay for nearly all the period. In Britain, on the contrary, appeals for wage restraint to reduce costs never on their own, without changes in macro-economic policies, had a chance of producing the promised big increases in subsequent output. When trade unionists loyally accepted low wage increases, to no avail, it is hardly surprising that disillusionment set in, and a harder and much more disruptive wage relations climate was the result.

The primary goal has to be to make Britain an attractive place for the modern, footloose investment which is the key to fast growth. For this to be done, we need to ensure that total operating costs in Britain are competitive with those in the fast growing areas of the world. The more competitive we are, the faster the economy will expand. This means a much lower exchange rate, and there is a spectrum of possibilities, as some fairly simple calculations, published in other LEPG documents, show. If we want the economy to grow at 3% to 4% per annum, we will need to bring the value of sterling down to around DM 2.20 and $1.20. If we want to get the economy to grow cumulatively at 5% top 6% per annum, a much deeper devaluation will be required, probably to around DM 1.80 and $1.00.

The objective should be to kick start British manufacturing, and those parts of the services sector capable of responding in the same way to the same stimuli, into a major and cumulative expansion of output. This is how to soak up unemployment, to expand the tax base, to reduce the calls on government expenditure, and to provide the government with room for manoeuvre with public expenditure. Import substitution and expansion of exports would remove the balance of payments as a constraint on expansion. The high profitability achieved by the type of investment encouraged by a competitive exchange rate policy would push up the savings ratio in the economy, providing all the finance needed for further waves of expansion. In these circumstances, there certainly would be a major role for the government in providing training and education for the work force, and for enhancing the infrastructure and communications. There would be no risk, however, of expenditures on these headings going to waste in conditions of rapid expansion, as increased labour force skills moved to being at a premium, and the scope for using new investment of all sorts abounded.

Worth reading the whole thing.


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