The Elephant in the Room Why UK living standards may be lower in 2030 than they were in 2019 or even 2007 and what we can do to stop this happening John Mills The Elephant in the Room The Elephant in the Room Why UK living standards may be lower in 2030 than they were in 2019 or even 2007 and what we can do to stop this happening John Mills First published September 2020 © Civitas 2020 55 Tufton Street London SW1P 3QL email: [email protected] All rights reserved ISBN 978-1-912581-18-4 Independence: Civitas: Institute for the Study of Civil Society is a registered educational charity (No. 1085494) and a company limited by guarantee (No. 04023541). Civitas is financed from a variety of private sources to avoid over-reliance on any single or small group of donors. All the Institute’s publications seek to further its objective of promoting the advancement of learning. The views expressed are those of the authors, not of the Institute. Typeset by Typetechnique Printed in Great Britain by 4edge Limited, Essex Contents Author vi Introduction 1 1. Missed Opportunities 5 2. Economic Growth 33 3. Industrialisation 62 4. 1914-1945 and John Maynard Keynes 89 5. Post-World War II 110 6. The Arrival of Monetarism 141 7. World Imbalances 167 8. Competitiveness 196 9. Sustainability 217 10. The Future 241 Conclusion 246 Notes 251 Index 268 v Author John Mills is an entrepreneur and economist with a life-long political background in the Labour Party, leading him to becoming its largest individual donor. He graduated in Philosophy, Politics and Economics from Merton College, Oxford, in 1961. He is currently Chairman of John Mills Limited (JML), a consumer goods company specialising in selling products requiring audio-visual promotion at the point of sale, based in the UK but with sales throughout the world. He was Member of Camden Council, specialising in Housing and Finance, almost continuously from 1971 to 2006, with a break during the late 1980s when he was Deputy Chairman of the London Docklands Development Corporation. He was a Parliamentary candidate twice in 1974 and for the European Parliament in 1979. John has been Secretary of the Labour Euro-Safeguards Campaign since 1975 and the Labour Economic Policy Group since 1985. He has also been a committee member of the Economic Research Council since 1997 and is now its Vice-Chairman. During the period running up to the June 2016 referendum he was Chair of The People’s Pledge, Co-Chairman of Business for Britain, Chair of Labour for a Referendum, Chair and then Vice Chair of Vote Leave and Chair of Labour Leave, which became independent of Vote Leave two months before the referendum. John is the author of numerous pamphlets and articles and he is a frequent commentator on radio and television. He is Founder of the John Mills Institute for Prosperity, which campaigns for economic policies for the UK which will both rebalance the economy and get its growth rate up. The Institute advocates that .policy should be far more focused on the exchange rate than it has been for many decades, and that an over-valued pound has been largely responsible for UK deindustrialising, leaving the country too dependent on vi AUTHOR services and too dismissive of the importance of manufacturing. He is the author or joint author of fourteen books, these being: Growth and Welfare: A New Policy for Britain (Martin Robertson and Barnes and Noble 1972); Monetarism or Prosperity (with Bryan Gould and Shaun Stewart; Macmillan 1982); Tackling Britain’s False Economy (Macmillan 1997); Europe’s Economic Dilemma (Macmillan 1998); America’s Soluble Problems (Macmillan 1999); Managing the World Economy (Palgrave Macmillan 2000); A Critical History of Economics (Palgrave Macmillan 2002 and Beijing Commercial Press 2006); Exchange Rate Alignments (Palgrave Macmillan 2012); Call to Action (with Bryan Gould, Ebury Publishing 2015); The Real Sterling Crisis (with Roger Bootle, Civitas 2016); Britain’s Achilles Heel – Our Uncompetitive Pound (Civitas 2017); Economic Growth Post Brexit (Bite-Sized Books 2019); Left Behind: Why voters deserted social democracy – and how to win them back (Civitas 2019) and; The Road to Recovery: Reviving Manufacturing after Coronavirus (Civitas 2020). vii Introduction This book was completed in the middle of the coronavirus pandemic. It is an updated edition of previous books I have written about getting the UK economy to perform better, but now with added urgency. It is particularly concerned with what we can do to recover from the current Covid-19 crisis, avoiding a lost decade of stagnant or falling incomes and relative if not absolute national decline. It argues that the UK is much more vulnerable to a slow long- term rebound than many people hope will be the case. We are in this predicament because strategic decisions made over a long period by our policy makers have left the UK economy both heavily unbalanced and with a very low underlying rate of economic growth, thus providing only a weak foundation on which to rebuild our economy and to get it back on track after Covid-19. As a result, there is a big risk that UK disposable incomes will be smaller in 2030 than they were in 2019 or even before the 2008 financial crisis. We may be slipping relentlessly further and further behind other countries, with many that were relatively recently much poorer than we were now overtaking us, but the pressure to do something radical about this situation has – up to now – been relatively muted. Stagnant or falling living standards and over-stretched public services, which have been the consequence of our relatively poor economic performance, particularly over the past decade, have caused resentment and discontent, but the UK is still a relatively rich country and life for most people has not been intolerable. This may be about to change. Covid-19 has evidently done huge damage to our economy and, if recovery is as slow and difficult a process as our underlying 1 THE ELEPHANT IN THE ROOM economic problems suggest may be the case, far from achieving a V-shaped rebound, it may take several years to get back to where we were in 2019. At the same time, we have some very expensive problems to confront in the near and more distant future – on climate change, health, pensions, social care, education and training – all of which are going to entail rising prices and pressure for increased taxes, biting hard into everyone’s living standards. This is why there is a real danger that we may well find that UK average disposable incomes will be lower – possibly substantially so – in 2030 than they were in 2019 or even 2007. There are some people who think that such an outcome would not be that bad and that simpler and lower living standards are what we should be aiming for. This is not a view, however, shared by the vast majority of the population – who don’t want to see either their private living standards deteriorating or public services becoming more and more underfunded and overstretched. Most people well understand the need for sustainability and for economic growth to move into new less resource consuming channels, but they still want to be able to take advantage of rising productivity and the availability of more funding both for private enjoyment and to support and pay for high quality public services. So the issue is whether it would be possible to get our economy rebalanced and the underlying growth rate of the UK economy up to a point where there would be sufficient additional output to cover the costs of both recovery from the coronavirus and the other major cost increases we are going to have to pay for over the next few years, without making most people in the UK a lot poorer. The message in this book is that there are ways in which we could successfully meet this challenge, but only with some major – difficult but feasible – changes to the way in which we run our economy. What would we have to do? We would have to increase the proportion of our GDP which we spend on investment and we would have to get much better returns on the money we do spend on our future than we have done recently. We would have to reverse the process of deindustrialisation which has led to such regional imbalances, poor job prospects in many areas, and to be a lot better at achieving the productivity increases which are so much easier to 2 INTRODUCTION secure in manufacturing than they are in services. With increased manufacturing output we would have more to sell abroad, thus reducing, or even eliminating, the huge balance of payments deficit which we have been used to sustaining every year. We would then need to borrow less and to sell fewer of our national assets year after year to pay for a standard of living we are not earning. With a better-balanced economy, we could reduce both regional, inter- generational and perhaps socio-economic inequality as well. How would we do all this? We need to shift our economy to being much more reliant on manufacturing and less on services. To make this happen we would have to make it profitable to site new manufacturing facilities in the UK rather than elsewhere, with a competitive exchange rate policy tailored to the needs of manufacturing rather than services playing a key role. We would need dramatically to increase investment, with finance directed strongly in this direction, concentrating on projects with the highest total or social rates of return.