Almost everyone has a gloomy outlook for the UK. It is expected to face years of austerity, high unemployment, cuts in expenditure, nil or negative growth, disfiguring inequality and relative if not absolute national decline, as we struggle with increasingly unmanageable debt. But this dismal outlook is not necessary. It is directly the result of avoidable policy mistakes which would not be that difficult to correct.
Our basic problem is that we cannot pay our way in the world. We therefore have a payments deficit which sucks money out of the economy. The gap then gets filled by more and more borrowing by the government and by private consumers. There is a simple reason why there is too much debt: we do not export enough to pay for our imports. Most of our exports are still manufactured goods and we have allowed our country to deindustrialise to a point where we do not have enough manufactures to sell to the rest of the world to pay for everything we want to buy from abroad.
Why is our manufacturing base so weak? Because it is far more expensive to produce almost anything here than it is elsewhere in the world, especially in the Far East. The exchange rate in the UK—and indeed in many other western countries—is far too high compared to what it needs to be to make our exports competitive in world markets.
How did we find ourselves in this predicament? In the 1970s and 1980s, when there was a big problem with rapidly rising prices, economic policymakers prioritised bringing down inflation. To do this, interest rates were raised, the money supply was tightened dramatically, unemployment went up—and price rises did slow down. But the exchange rate also rose—in the UK, by over 60 per cent between 1977 and 1982.
Unfortunately, this happened just as South Korea, Hong Kong, Taiwan and Singapore— the so-called “tiger economies”—were getting into their stride and as China was entering the trading world. The result was that the east’s cost base (the relative cost of manufacturing a product) from the 1980s onwards has been about half the west’s. Because of western policymakers’ obsession with keeping inflation down, it still is. The result is that we have deindustrialised…