Mills’ plan is not the answer

John Mills plan is a peculiar mixture of fact, acute observation, misconception and fantasy.

He paints a picture of a UK economy growing rapidly – 4 to 5 per cent, a rate never sustained in the whole of our peacetime history – with higher levels of investment going into reviving manufacturing industry in relatively deprived areas of the country.  This is all to be launched, if not achieved, within one parliamentary term.

This week on Click on Wales


This week on Click on Wales we are publishing part of the series run by OurKingdom recently. In the first piece John Mills wrote a sobering analysis of the state of the UK economy. In the following pieces of this series Gerald Holtham and Eurfyl ap Gwilym respond to John Mills’ article.


Yesterday: John Mills outlined his plan for the British economy after 2015.


Today: Gerald Holtham argues about Mills’ economic plan for the UK.


Tomorrow: Eurfyl ap Gwilym replies to John Mills’ proposal on how to re-industrialise British economy.


How is this miracle to be achieved? By somehow getting the exchange rate to fall to £1= $1.10.  And how is that to be achieved?  Mills writes as if we still lived in the Bretton Woods era of adjustable-peg exchange rates, backed up by exchange controls.  Somehow he has not noticed that we have lived with floating exchange rates since 1973 and exchange controls were abolished during the first Thatcher administration. Exchange rates are now driven by relative monetary policy, the expected return on assets in different currencies and the expectation of the markets about those things. This year the pound has risen from around $1.50 to $1.70, the opposite of what he wants. But that is not government policy; it is the result of the current pick-up in the UK economy and the foreign exchange market reaction to it.

The usual way to lower an exchange rate is to slash interest rates. But official rates are already close to zero. I suppose the government could put a scare into the financial community so it fled the pound – perhaps by threatening  to tax financial transactions and by extending higher taxes to offshore investors. But wait a minute. The devaluation was supposed to lead to a large, nay vast, increase in investment, from 14 per cent to over 20 per cent of GDP. Presumably much of that investment is supposed to come from the private sector. Yet it is hard to imagine private business being so gung-ho when the government is busily trying to scare the wits out of foreign exchange dealers and foreign investors.

So John Mills depicts a scenario remote from the present situation and he has no means of getting there. Monetary policy could not be easier than it is. A determined effort to force the exchange rate down by printing yet more money or terrorising the markets would undermine the confidence he needs to raise investment to rates that have not been seen in the whole of British economic history outside the war economy. A dirigiste war economy is a logical possibility: draconian exchange controls, forced investment under threat of expropriation etc. But, to be fair, Mills does not suggest that, and the precedents for running a modern economy that way are very far from good.

So there will not be a 4-5 per cent growth rate and the problems of the British economy will not be tackled in one parliamentary term. So much for the fantasy; let us turn to the misconception.

Mills’ desire to restore British manufacturing is quite widely shared. It is uncomfortable to be running a deficit in trade (visible and invisible) which is financed by borrowing or selling assets to foreign residents. I share the unfashionable view that ownership matters in many industries. Scotch whisky can be made only in Scotland but that is not true of most commodities or services. So we should not be indifferent as British registered companies are sold off. Companies that have roots, that will stick and compete where they are rather than decamp to where inputs are cheaper, are of great benefit to a country – as the German Mittelstand has shown. But the key is that these are successful companies making and selling marketed products. It is irrelevant whether they are selling motor cars or software, computers or code for computer games. To fetishise “manufacturing” is to miss the point.

Mills laments the decline of manufacturing from 30-odd per cent of GDP in the 1970s to some 10 per cent now.  But reader, ask yourself this: how much of your own discretionary expenditure is on manufactured goods now, compared with 30 years ago (if you are old enough for the question to make sense)? Manufacturing as a proportion of output is down world-wide because it is down as a proportion of consumption. If you won the lottery, you might buy a new house (not a traded good) and a smarter car. But after that you would consume services: get the garden landscaped, dine at the best restaurants, send the kids to expensive schools, perhaps employ a trainer. You would not need to fill your house with more tat; even if you are a member of the “squeezed middle” it is probably full of tat already. You might get it wired up so you can draw the curtains while you are away on an expensive holiday. But the cost of doing that is largely the consultant know-how and the installation, not the kit.

Manufacturing should play its part in a revival of the productive British economy but Mills shows he is really living in the past when he says:  “… manufacturing provides a much better spread of high quality, skilled and well-paid blue collar jobs than is the case with the service sector.”

Now a manufacturing revival may help the country balance the trade books and be of other benefits but it will never be a large-scale employer. Manufacturing employment has been falling for decades in all developed countries, including Germany, and will continue to do so. If anyone chooses to locate a manufacturing plant in the UK rather than China or Vietnam it will be because productivity is high enough to offset higher wage costs. That generally means automation, lots of it. Those well-paid blue collar jobs are a feature of economic history, not the present day.

That is also why, contrary to Mills’ assertion, the existence of unemployment does not in itself provide the fuel for rapid growth of 4-5 per cent. With the ending of capital controls, the IT revolution and the liberalization of China, India and other formerly autarkic economies, there is a global surplus of untrained, ill-educated workers – especially ones who require the UK’s minimum wage.

So fantasy and misconception apart we get to Mills’ acute observation and to the crux of the issue.  Globalisation has led to the re-siting of many relatively unskilled activities to countries where labour is cheap. There has always been such a product cycle of industries moving to low-wage locations as their technology ceases to be cutting-edge and becomes widespread. But the scale and speed has gone up enormously. That has changed the balance of industrial power in developed countries, not just the UK with evident effects on the distribution of income.

So much, so well known. But there is a corollary less often acknowledged. With wages not keeping up with output as profits rise, there is a shortage of effective demand world-wide. In that situation everyone, like John Mills, wants a competitive exchange rate so they can export the problem to someone else – but that does not work when everyone tries it. The only solution found so far is to encourage the workers to accumulate debt to buy the things their wages won’t cover. And the way that is done is to provide super-lax credit that leads to asset price bubbles, notably in house prices. If your house makes more money than you do, you can increase your liabilities in line with your assets and borrow to spend.

Mills is quite right that the current recovery has not departed from this pattern. He is also right that it is unsustainable, that eventually the asset bubble bursts and households have to rein in their spending sharply. Another recession then looms. As a solution it also leaves out the young who have not had time to acquire assets to borrow against and who cannot afford to get on the housing ladder with their inadequate wages.

So he is perfectly right that the economic future has troubling features. It is also perfectly true that in many parts of the country our education and training systems do not equip our young people to deal with this difficult reality. The political and academic classes have largely failed to grapple with these intractable problems and have peddled bromides of one sort or another.

Unfortunately, John Mills’ proposal belongs in that category.

Gerald Holtham was adviser to the Welsh Finance Minister on strategic infrastructure investment. He is the managing partner of Cadwyn Capital LLP and a visiting professor at Cardiff Business School.

10 thoughts on “Mills’ plan is not the answer

  1. What a depressing picture of an island nation with little room to manoeuvre from an entrenched habit, it of creating income and lifestyle inequality, at least since the late 1970s; of falling expectations vis-a-vis quality; and of hopeless manufacturing dreams; I too, had put my faith in this last ideal.

    I try to buy goods made in the UK, but admit that it’s not so easy to find them in the High street, or at out-of-town retail parks. Many of our big stores stock products made abroad, that are also cleverly designed, manufactured and marketed from the outset to match current trends, and big stores’ product plans.

    No doubt quite alot of these products could fall into the category of ‘tat’, but many of us ‘workers’ adore tat, even though it does little to improve our incomes, or our financial security, and Britain used to be good at making delightful, even good quality, tat. If only it were available here… we only need to be shown it, to see it amply stocked and nicely marketed, to want to buy it.

    The problem is that the cost of living is rather high, with house prices, rents, heat and light, transport, insurance, food packaging, IT media, and tea and coffee all biting into our incomes. I think such costs also aflict and stifle businesses (and now, public organizations like councils and hospital boards).

    It is such a big problem to tackle. Yet for some people, such as Members of Parliament, with decent incomes, opportunities, secure pensions, and possibly houses in London, there is the comfort of rising house prices and improving investments to make the problem a continuing economic conundrum.

  2. So! The Uk’s debt is at £1.4 Trillion (American) and rising. The debt is more than 90% of the ability to service it.

    This means that the UK is on the very edge of bankruptcy with no ability, or plan, to turn it round. Other than pretending it’s not really there.

    If the Scots have even a modicum of sense they’ll leave England to the mess they’ve created. We ought to do the same.

  3. This is the IWA so I’d rather consider manufacture in Wales which is 19% of GDP similar to the level seen in Germany, Switzerland,Japan, Malaysia and Singapore so for me that seems like a good balance. It appears that a level of 30% is very rare these days – South Korea and Thailand [ figures from the world bank ]. The key is WHAT are you manufacturing? The service industry requires manufactured goods – these tend to be higher value, professional quality, serviceable AKA Capital Goods. These in my opinion are the manufactured goods that we should be making more here and already do. Durable goods also should be a component of the manufacture landscape. Consumer goods manufactured here should be high quality luxury goods that required made in the UK stamped on them to sell.

  4. Professor Holtham has effectively demolished Mr.Mill’s arguments. This is somewhat of a pity because we need thoughtful new voices and other ‘numbers’ people apart from and in addition to the sainted Eurfyl ap Gwilym. Mind you I have to agree with the Prof that Mill’s arguments are from another century and maybe another (better?) planet. The only digestible ‘take home’ message seemed to be that devaluing the currency would solve all our problems – an argument Prof has dismissed.
    Still I must congratulate the IWA in finding and disseminating these new arguments/articles from and by writers with different backgrounds from the usual. You never know – a different slant on things may stimulate new thinking. I hope Mr.Mills will not be discouraged.

  5. One has to agree with Gerald Hotham on this. Even if one disagrees with his politics, he is always good on his home ground, as he is here.

    Indeed, his demolition of the commonplace fantasy of a manufacturing-led return to high employment is particularly brilliant. Despite spending a lot of time cogitating about what one would do if the lottery finally paid out, it came as a shock to realise how little would in fact be spent on more ‘tat.’ More space to store the existing ‘tat,’ however, would be nice…

    His penultimate paragraph would also command almost universal endorsement from the business community, who are rightly suspicious of grand macro-economic plans instead of focus on actual problems.

  6. Spot on Gwyn. The iceberg hit the Titanic a while ago. Pathetic though it is, we can all appreciate the irony as we observe he Unionist band playing. If Scotland says No it can expect a massive English backlash, with Carwyn and his attack puppies in Farage’s wake. Better Together? I think not!

  7. Gwyn, I don’t need to be Mr ab Gwilym or Mr Holtham to know you are talking absolute rubbish. The Uk currently has a public sector deficit of around 6-7 per cent of GDP, which it is slowly managing down. The debt figure you quote is irrelevant because most of it is owed to UK residents, i.e. It is debt we owe each other and nets out. Wales, by contrast,has a public sector deficit of about 30 per cent of our GDP, financed by hand-outs from the rest of the UK. What you are saying is let’s slash public services and public employment by nearly a third so we can be independent and stand on our own feet. Noble sentiments that do you credit, no doubt. But persuading the Welsh public to take that sort of hit? No chance. Telling them there wouldn’t be a hit is not only dishonest it is pointless. They know better.

  8. R. Tredwyn, do your research.

    Government debt is currently about £45,000 per houshold. That’s before their own debts. It works out as dividing 1.4 trillion (American definition) by 60 million for the government’s debt per head of population. When you’ve done it you should then realise that the sum is for every man woman and child in the UK BEFORE their own debts.

    The UK government currently pays interest at about 2% on its borrowing. It that goes up between 1% and 2% they will fail to be able to service the debt.. The debt is currently still rising at close to £100bn a year.

    According to the GDP is just under 80% of the debt.

  9. Gwyn, Tredwyn is talking about the *deficit* (the annual gap between tax revenues and public spending); you’re talking about the *debt* (the total amount of money owed by Government, accumulated over years).

    It’s worth bearing in mind that many other countries, including Japan, Italy, Ireland, the USA and France have higher debt-to-GDP ratios than the UK, and many of them have worse credit ratings and hence higher borrowing costs.

  10. It’s true I was quoting deficits but let’s talk about debt. Gwyn, who holds all that government debt? We do. Most of it is held by insurance companies and pension funds. They want the interest on it to pay pensioners and policy holders. Future taxpayers will be paying future pensioners,who are the same people at different points In their lives. That’s what I meant by saying the debt nets out. UK citizens owe it to each other.

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