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Full employment is not just desirable, it must underpin Britain’s growth strategy – John Mills

Civitas, 1 April 2014

George Osborne is now setting his sights on a return to “full employment” in the UK as the Conservatives seek to improve their offer to voters at the next general election.

The need to make best use of the UK’s labour capacity is addressed by the entrepreneur and economist John Mills in his latest Civitas pamphlet, There Is An Alternative: An economic strategy for 2015. In this extract he explains why full employment is not just desirable but essential to achieving a more ambitious rate of growth in the years ahead.

He also argues that reviving manufacturing should be a central goal on the way to increasing job opportunities and rebalancing the economy for the long term.

Overwhelmingly the most important objective must be to get the economy to start growing much faster. This is the only way in which living standards can be raised, unemployment reduced to tolerable levels, and reasonable levels of public expenditure can be combined with the willingness of the electorate to pay the necessary tax, fees and charges to fund them. A higher rate of economic growth is clearly what an overwhelming majority of the electorate would like to see materialising. There may well be arguments about whether faster growth will produce more happiness (at least among some sections of the population) and how rising GDP can be combined with the more ambitious parts of the green agenda. No doubt these points of view need to be accommodated and taken as seriously as they deserve to be. The fact remains, however, that the vast majority of the policies which most people want to see implemented are impossible to realise without faster economic growth. Furthermore, the rate of growth at which we need to aim has to be sufficiently high to enable the economy to meet the various claims that will be made upon it, not least because of population increases. Without population growth, a target increase in the growth rate to three or four per cent would probably be workable, but with the increasing number of people living in the UK taken into account, the target needs to be raised another percentage point to perhaps four to five per cent.

To get the economy to grow at four to five per cent, there will have to be both a large and a sustainable increase in effective demand. This cannot be achieved at the moment by the traditional Keynesian approach of reducing taxation and increasing public expenditure, or by further increasing the money supply to stimulate consumer expenditure. We do not, in particular, currently have the manufacturing capacity required for a balanced and sustainable response to be possible. The UK economy would not therefore be able to react by producing the volume of goods and services needed. The outcome would in consequence be a soaring balance of payments deficit, which would very probably then be choked off by a deflationary rise in interest rates. For sustainability, the increase in effective demand has to come from elsewhere and this means from net trade – exports minus imports – and from much higher levels of investment. To achieve this, we have both to remove the balance of payments constraint which has hobbled the UK for the last 40 years and more, so that more demand does not lead to a balance of payments crisis. The only way in which it would be possible for this to happen would be for the UK to operate with a much lower exchange rate, relying on market forces to respond to the much greater profitability which would then be generated in manufacturing, exporting and import substitution than exists at the moment, to rebalance the economy to the necessary extent. How much lower an exchange rate would be required turns on how sensitive to lower prices the demand for our exports might be and the extent to which higher import prices would encourage home production instead of importing. These crucial ratios depend in turn on estimates of how big the change in profitability would need to be to shift the economy to achieving a manageable foreign trade balance combined with much faster growth.

A vitally important part of this process has to be to revive the scale and competitiveness of UK manufacturing. A major reason why we have such a huge deficit in our foreign trade in manufactured goods is that we now produce so few goods in the UK that we simply do not have enough to sell abroad to pay our way in the world. All economies have special features, relating not least to whether they have indigenous raw materials or whether they need to import them, so that their ability to compete in world markets varies. Broadly speaking, however, for well diversified modern economies such as ours, international comparisons suggest that any with less than about 15 per cent of their GDP coming from manufacturing tend to have weak and constraining balance of payments problems. Once this percentage drops to barely ten per cent, as ours has, balance of payments problems are almost inevitable. A critically important objective must, therefore, be to get manufacturing as a percentage of GDP back to somewhere around 15 per cent. To do this at the same time as getting the economy as a whole to grow faster, with all the extra claims that this on its own is going to put on our manufacturing capacity, is going to require a major increase in its profitability which – again – only a much lower exchange rate will be capable of achieving, although the re-establishment of investment allowances and other similarly supportive fiscal changes would help.

Changing price signals via a lower exchange rate, even if buttressed by a more favourable tax regime, although critically important, will fall a long way short of exhausting all the actions which the government will then be required to take to achieve a renaissance of UK manufacturing. There is also a wide range of supply- side policies which will need to be implemented to enable a much more rapid rate of growth to be achieved. A major increase in manufacturing is going to require a large amount of retraining. It will also require new production facilities, which will need the speedy granting of planning permission, and better infrastructure, particularly roads, rail facilities and high-speed internet connections. It will also be vitally important to ensure that there is adequate power-generation capacity available. Much better economic prospects will hopefully put much more of a premium on education − which is extremely difficult to achieve if large numbers of young people have no jobs awaiting them when they leave school and very poor employment prospects ahead. There will also clearly be a need for finance to be directed away from supporting equity withdrawal, based on house price increases and other forms of consumer borrowing, towards commercial investment in plant and machinery and working capital, although an increase in house building, especially in some parts of the country, and expenditure on public infrastructure, are also urgently needed. While it may well be sensible for the government not to be too prescriptive in determining how the economy should respond to much more favourable economic conditions, it is critically important that it has strategies in place which facilitate the market’s capacity to deliver the increase in output that will be needed.

A key part of the adopted strategy should be to raise the number of people employed in the economy as much as possible, both to reduce unemployment and because increased labour inputs will greatly help to raise overall output. There is a major social component to this objective as well as this being a key part of getting government expenditure into better balance. Part of the social element is to remove from many people the stigma and bitter disappointment − and reduced living standards – which are the inevitable concomitants of being out of work. Another part is to increase the demand for labour in relation to its supply, thus shifting bargaining power back towards labour and away from employers. This need not be inflationary if the response from employers is to make better use of their labour forces by upgrading their skills and productivity instead of wasting talent in jobs requiring no training. Reducing unemployment thus has a major role to play in decreasing the inequality which disfigures the UK at the moment. Bringing millions of extra people into the labour force will also, of course, make switching the economy into a relatively high rate of growth much easier to achieve than if there was already full employment. Indeed, paradoxically, it is the fact that there are such huge unused labour resources in the UK at the moment that makes it possible to produce the surge of extra output needed to enable us to invest in a much better future and to get the economy to grow much faster on a sustainable basis.

Because unemployment is heavily concentrated in those areas of the country which
used to be disproportionately dependent on manufacturing, it would obviously
make sense to encourage new manufacturing opportunities to be sited as much as
possible in these areas. These parts of the country are likely to be favoured in any
event by those needing to take on additional labour and who want to keep their
costs down as much as they can by avoiding the relatively high cost-base in the
South East of the UK. A revival of manufacturing along these lines, with all the
secondary impact that this would have on supporting service industry activity in
the areas where manufacturing was re-established, would clearly help to rebalance
economic activity across the regions of the country. This kind of activity would
also help to achieve the necessary rebalancing of the economy away from the
excessive dominance of financial services.

To download the rest of the pamphlet as a free PDF, visit here. Alternatively, hard copies can be purchased from Amazon here.

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