Spare a Thought (or Prayer) for the New PM – and his Chancellor

ECONOMIC PERSPECTIVES 58

Emile Woolf, Going Postal
Boris Johnson, BackBoris2012 Campaign Team CC Licence

The global economy is entering dangerous territory. In Britain’s case, the standard scapegoat for any slowdown is Brexit, of course. But how to explain the contraction in other major manufacturing countries? Forewarnings of serious decline are evident throughout the eurozone as well as in Japan, Germany, China and Russia. Even the USA is teetering on the brink of a manufacturing decline, despite its low unemployment.

No matter how hard government statisticians try to mask the underlying fault lines, all the symptoms are there. Commerce is being hit by trade wars waged by protectionist governments on a truly mercantilist scale. Central banks’ knee-jerk response to lack of growth – cutting interest rates – is not available when, unbelievably, negative rates have already become the new norm. Years of money-printing and interest rate suppression have created massive distortions in asset prices, leaving domestic property prices even more overvalued in developed economies than they were in 2008 at the height of sub-prime lending madness.

Successive Tory finance ministers, striving to get the massive budget deficit they inherited from Labour down to respectable levels, have now achieved this by ratcheting taxation up to its highest level in 50 years as a proportion of GDP, but at the cost of severely restricting growth.

Into this mix we are about to introduce a new Prime Minister and a new Chancellor. There will be no honeymoon period this time – from day one they will need to set about creating an economic vibrancy in which private sector growth can arise, unencumbered by regulatory drag.

Opposition in their own ranks

The neo-Keynesian brigade will scream blue murder, but the new team in Downing Street will have to display judicious deafness as they get on with the job of leaving the EU and of stabilising government finances.

The perennial fantasy of demand stimulation through quantitative easing (QE) has once again been shown up as a busted flush – and this time even central banks realise that more QE offers no escape. When the problem is on the supply side, stuffing the economy with yet more money is the route to higher inflation and, ultimately, currency collapse.

In Strasbourg, Mario Draghi must be counting the days to blessed release from presidency of the ECB – central bank of the world’s largest economic zone. He will no longer need to feign a wry belief that his “whatever it takes” mantra can maintain eurozone solvency. His successor, IMF chief Christine Lagarde, will enter the ECB portals able to offer investors the privilege of depositing money in “safe” sovereign bonds that guarantee a repayment, would you believe, of 5 per cent less than the sum originally invested!  Insanity has never been an impediment for central bankers.

Given the struggle to provide both safety and even a small return, sovereign funds have been resorting to massive buying of equities on stock exchanges everywhere, despite lacking the skills needed to distinguish wheat from chaff in the commercial hurly-burly.

We see the result in inflated equity prices that factor in no pretence of risk assessment, particularly in sectors awash with government money like construction and infrastructure. Wherever you look, distortion abounds.

A fresh overview

There is no area of government that is not desperate for a fresh policy overview: lowering taxes without creating even more distortion; cutting swathes of grossly overblown regulation; allowing massively swollen debt levels to unwind even when painful casualties follow, inexorably; and the need to resist the cries to debase the currency even further by bailing out profligate institutions with still more fiat money creation.

We wish Theresa May’s successors Godspeed in sorting out this mess. Given that issues concerning international trade, otherwise known as Brexit, are behind all this turmoil, why not celebrate our escape from the shackles of crippling EU trading restrictions by launching a policy of unilateral free trade? We can find any number of examples of bilateral trading arrangements involving mutual tariff-free, back-scratching deals. But these can take years to achieve and are hugely wasteful of time and resources.

Unilateral, on the other hand, means “one-sided” – and unilateral free trade therefore escapes the bureaucracy of government involvement altogether. After all, governments don’t trade and would not know how to anyway. Trading takes place between businesses acting in their own private interests without requiring government input.

Salvation: understanding free trade

Habitual thinking is suspicious of anything that requires no government sanction. You will hear, for example: “But what if the government of a company with which you want to trade puts up trade barriers in the form of tariffs? Surely our government should restore an even playing field by doing like-for-like and imposing tariffs in return? That would be fair”.

That could stand as a Donald Trump tweet! But think it through for yourself – clearly!

If an overseas company wants to purchase goods from a UK company, that can only mean that its customers in that country actually desire the UK company’s products. If their government imposes a tariff on the import of goods from the UK, who is punished? People in that country are punished by their own government – it has made those goods more expensive for them to buy.

Our own thinking is so hamstrung by EU regulation that we can’t actually visualise free trade. If one country’s tariffs hamper the flow of goods from the UK, there are plenty of other takers in this big world who will reciprocate with free trade. What’s happened to our vision? Or the imagination to grasp the meaning of that freedom?

Here’s another common retort: “But surely the operation of free trade cuts both ways? What about imports that threaten to undercut the prices of our homegrown products? Are jobs in our domestic industries not entitled to protection, either by imposing tariffs on imports or by subsidising our own products?”

Let’s get it straight

Take it in stages:

(i) If the goods being imported are of inferior quality to those produced in the UK, but do not threaten health or otherwise cause harm, the market will determine whether, despite quality differences, there is a local demand for those cheaper imports. That may well create a problem for the local manufacturers who will need to respond to the competition by upping their game, and finding ways of reducing their manufacturing costs. But is it honestly the role of government to prevent our citizens from enjoying the cheaper goods?

(ii) If imports such as pharmaceutical products are found to be harmful to health or the environment there is certainly a protective role requiring regulatory action. Protecting the lives and health of its citizens is an important part of governmental overview.

(iii) If major domestic sectors are threatened by cheaper imports, a tariff on those imports, or a subsidy that favours domestic production, amount to de facto punishment of UK citizens who are prevented from enjoying the benefits of cheaper goods from abroad.

(iv) If the incoming goods are cheaper only because the government of the country of origin subsidises those industries, that could of course have implications for UK jobs – but remember: there is a limit to the length of time that a foreign government can go on punishing its citizens by using their taxes to support a single, uneconomic, sector. Its citizens will soon make it known that using their taxes in this way carries election consequences.

(v) Finally, employment is always threatened by changes in the market place, and a change from protection to freedom is no exception. This may be due to automation, new technologies, health or environmental priorities, or competition (including “unfair” competition). The pace of change can be truly bewildering because it is a compounding phenomenon – each advance carries wider coercive implications for the next generation of related technologies. There is no alternative to the need for adaptation, notwithstanding the painful intermediate phases of this process.

It is worth remembering that protective barriers against free trade always harm the citizens of the country that imposes them – the very citizens that they are trying to protect!

Knowledge, intuition and experience are our only guides and we must begin from where we are, even if we do not know exactly where it will end.
 

© Emile Woolf July 2019 (website)
 

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