Roger Bootle backs Civitas author John Mills on exchange rate target

Kaveh Pourvand, 18 June 2013

Economist and respected Telegraph columnist Roger Bootle has cited Civitas author John Mills in his latest piece, arguing that the value of the pound must fall further if Britain is to achieve a sustainable recovery. Bootle writes that ‘recovery is in the air’ but worries it will be an ‘unattractive’ and ‘unsustainable’ one based on debt-driven consumer spending and a widening trade deficit as we import more consumer goods. If this is the case, UK companies, which are sitting on a whopping £754bn of cash, will not invest because they won’t be convinced the recovery will last.

‘What, if anything, could economic policy do to make the recovery more sustainable?’ Bootle asks. The answer is the exchange rate. The problem is that any increase in aggregate demand merely increases the trade deficit rather than domestic employment because purchasing power goes overseas. Bootle refers to Mills’ argument ‘that the UK needs a lower exchange rate to price its domestic production into markets at home and abroad. For Mills the overriding requirement is to get the exchange rate to a level that can ensure sustainable growth at full employment’.

The British policy establishment have embraced sterling depreciation since 2008 but they have ‘never quite gone the full monty’. Bootle concedes that there are risks to a devaluation, such as the gains being wiped out through higher inflation or even a further deterioration of the deficit if British exporters cannot take advantage of the more competitive environment. But there are always risks in economic policy and the ‘current approach of encouraging a housing market and consumer-led recovery is about the riskiest of the lot’.

He concludes: ‘with a new Governor soon to take office and with a policy of greater flexibility on the inflation target already in place it is time to take Mills’ arguments seriously. Otherwise, we could soon be back to the traditional British pattern of a recovery which is already doomed from the start’.

An official exchange rate target is now one step closer to the mainstream.

John Mills report, An Exchange Rate Target: Why we need one, can be found here.