oger Bootle is unusual among economists in that he is right more often than he is wrong. In his book The Death of Inflation, he famously predicted long before it was fashionable that inflation would cease to be a problem in Western economies.
Less successfully, he was a long-term bear of British house prices but we are still waiting for the crash he predicted in the aftermath of the financial crisis. Still, you can’t win them all.
His latest assault on conventional thinking, this time sharing the authorship with entrepreneur John Mills* is to say that, far from being unnerved by sterling’s sharp fall after the Brexit vote, we should see it as the best thing that could have happened. Instead of worrying about what we might do to stop the pound falling further, the authorities should use their skills to keep it low.
In the longer term, securing an exchange rate for the pound that makes this country competitive in world markets should be the central aim of monetary policy, rather than the focus on controlling inflation. The authors say that, while outright manipulation of the exchange rate is against the rules of the G7 club of leading industrial nations, much could be done within the rules, and we should do it.
The desire for a lower exchange rate is not simply a fit of whimsy on Bootle’s part. Rather he says that without it, we are heading for disaster. Because the pound has been overvalued for so long, the country cannot pay its way and has not done so for years. The balance of payments deficit is bigger as a proportion of GDP than at any time since 1948.
We do not export enough and we import too much. We do not earn enough on our assets abroad. We borrow vast amounts from overseas every year simply to maintain our standard of living. Even then, we can only make ends meet by selling off assets — from Heathrow to Cadbury — which we do with a wanton disregard for the long-term consequences that simply does not exist anywhere else in the world. If we continue much longer on this path, half the country will soon be in foreign hands. History will repeat itself, but this time with us as the colony.
A lower exchange rate would ease these pressures. It would reduce the price of exports in overseas markets and help us sell more. More expensive imports would encourage home-grown rival products, just as the increased cost of foreign holidays would encourage people to spend on leisure breaks at home instead. What income we do get from abroad would be worth more in sterling terms. Put all these factors together and gradually the balance of payments would improve, the trade deficit would disappear and Britain would begin to pay its way again.
It is a seductive thesis, but recent history suggests that it will not be quite this easy. A major part of our economic problem is that we simply do not make enough of what people want to buy — it is not a question of price. Although sterling fell off a cliff in the wake of the 2008 financial crisis, there was no discernible increase in exports in the months and years that followed.
This was partly because the rest of the world was in no condition to buy anything, but even when it recovered our exports did not shift. This is because price matters less than quality, particularly with high-end stuff like pharmaceuticals, software or jet engines, all of which we are good at. We also sell a lot services — various forms of design, advice and consultancy as well as financial — where, again, it is the quality and uniqueness of the product that matters, rather than what it costs.
There are other issues. We sell a lot of government debt to foreigners. They will be less likely to buy if they think they will be repaid in devalued pounds. Tempting them back in will mean higher rates. Government borrowing costs could rise sharply.
A lower pound will also make our best assets even cheaper to foreign buyers. One of the depressing consequences of the Brexit-induced fall in sterling was the way American and Japanese firms moved in to pick off some of our best tech companies — Cambridge-based Arm being a case in point. Bootle says we should do more to protect our best firms from foreign takeovers. But is that likely?
All this suggests that lower sterling is not a universal panacea for our problems, but that in no way negates Bootle’s claim that we would be much better off if the pound were lower. He and Mills make a very serious and thought-provoking case for this in their paper and have done the country a significant service by making this an issue for debate.
*The Real Sterling Crisis: Why the UK Needs a Policy to Keep the Exchange Rate Down by Roger Bootle and John Mills, published by Civitas