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Mr. Bill O'Brien (Normanton): On my hon. Friend's point about causes, will he comment on the fact that £30 billion is being injected into the economy by building
societies acquiring plc status and paying people bonuses with their own money? Does my colleague think that that has a bearing on the heating of the economy?
Mr. Mitchell: My hon. Friend is right. I shall deal with that later. It is ludicrous that £30 billion of purchasing power is allowed into the economy. Even if people do not spend the money that they get from the shares, they still feel more confident. They feel that they have more money, so they spend more. That will produce a rise in interest rates. The Bank will warn of inflation, demand, and the threat of overheating, interest rates will go up and the consequence of that will fall on manufacturing--on the jobs of the people who are spending the money. It is one of the stupidities of our economic policy that that goes on. I agree with my hon. Friend.
The last two overvaluations were the prelude--or the consequence, because they occurred under the Tory Government--of wilful stupidity. That still exists because the Bank still influences our economic policy, but the stupidity was mainly that of the Government. In the first great Thatcher deflation, which was associated with enormous overvaluation, which in turn was the instrument of that deflation, the psychology was that British industry is like an English public school boy--it must be made vigorous, healthy, good and virtuous by exposure to punishment in the form of cold showers and frequent beatings. Manufacturing was subjected to such treatment, and 1.8 million jobs were lost as a consequence of that overvaluation.
The second overvaluation was caused by the Government's infatuation with the exchange rate mechanism. That lost us almost a million jobs in manufacturing, and about 1.5 million jobs altogether.
Now there is a little less wilful stupidity. The Government have changed, but we face the EMU mess. It cannot be described as anything else, much as my hon. Friend the Member for Rotherham (Mr. MacShane) would like to rush in and support it. There is uncertainty about whether ERM will go ahead, which is causing instability in the markets. The growing fear is that there will be a soft euro, which is bringing more money to the United Kingdom to push up our exchange rate.
Europe's problems are causing problems for us because they have the effect of raising our exchange rate. That will continue, because Europe will not clear up the mess quickly. It is staggering to see how elites are trying to force down the throats of electorates a monetary union that they do not want and whose consequences they know will be severe for them.
We will get no relief from Europe, which will go on causing us problems. The second cause of our problems is the fact that our interest rates are high--astonishingly high in real terms. I have a table from the Treasury. I believe that parts of it are wrong, but the Treasury figures show that real interest rates in 1996, adjusted for inflation, were 2 per cent. They are, of course, higher now because interest rates have gone up. In the 1970s, they were 0.75 per cent. or 0.5 per cent.--that was in 1977, for example. In some years, we had negative real interest rates. Now they are at a record high level.
The result is that money is coming to this country. The Swiss exchange rate is rising, but the Swiss are not paying interest on the money coming into Switzerland. We are paying generous interest rates, which attract more money to Britain.
Like a self-trussed turkey voting for Christmas, we have delivered ourselves to markets, by the decision to hand interest rates over to the Bank of England and, having given up the monetary weapon, by our commitment not to use the fiscal weapon by increasing tax rates. That is perfectly acceptable to markets, confidence grows and people come in to invest in sterling and push our exchange rates up.
It was curious to give control of interest rates to the Bank of England at any time, but it was daft when interest rates have such an effect on the exchange rate by which we live and on the basis of which our exports succeed or fail in world markets; and it was crazy to do so at a time when the pound was going up anyway. That concession of interest rates pushed them up further because the Bank's thinking is, "When in doubt, raise interest rates." Its highest wisdom is to put up interest rates. It always thinks that the economy is overheating. Any glimmer of growth, and the Bank of England is howling that the economy is overheating. Three per cent. growth is pathetic by any standard for rebuilding our manufacturing base and generating jobs and well-being for the people, but the Bank is panicking. The financial committee warns of overheating and says that it is terrible.
The Bank always thinks of manufacturing industry as greedy workers and greedy shop stewards demanding more money if the economy expands. The real pressures for inflation come from the financial community and the City--as my hon. Friend the Member for Normanton (Mr. O'Brien) said, by pumping out money from demutualisation, which is in its interest--and from high pay in the City and lax credit. Most of the economic revival in the UK is due to an increase in the money supply produced by credit being poured out by the financial institutions.
The Bank blames manufacturing and, instead of dealing with the causes--the financial community itself and its methods of operation--it clobbers manufacturing with high interest rates and an overvalued exchange rate to make it suffer for the sins of others. That is a marvellous way of running an economy, but it is disastrous for any country whose economic base, like ours, is not wide enough and needs to be expanded. The asset inflation generated by finance, and not wages, is the only true cause of the current inflation.
The Bank of England is fighting inflation long after it is dead. That is necrophilia. Inflation is no longer a threat. It is in a glass case somewhere in south-east Asia. The enhanced competition of those economies, plus the breaking of wage inflation and the power of labour in the UK, which has been a tragedy in many respects, means that inflation is dead, yet the Bank of England is still clobbering manufacturing industry, which it sees as the cause of inflation. That is crazy economics.
Mr. Denis MacShane (Rotherham):
Can my hon. Friend guide us by explaining why our inflation rate is none the less still significantly higher than that of the United States and most of our European partners, including those growing more strongly than we are? If wage-led inflation is dead, why is the anger over fat-cat pay feeding down into the labour market? We are seeing serious claims for 5, 6, 7 and 8 per cent. pay rises this year in many sectors.
Mr. Mitchell:
I hope that my hon. Friend does not identify with the "Clobber the workers" theory of
Our difference in inflation is marginal. The experience of the past few years both in the United States and the United Kingdom is that a fall in the exchange rate does not generate the inflationary consequences that were widely feared. For practical purposes, inflation is dead. To put it at the centre of economic policy, when the real problem is insufficient jobs, insufficient growth and a weak industrial base, is to live in the past and to fail. Whenever we get an expansion in the UK, we kill it.
Mr. Dale Campbell-Savours (Workington):
I have been following my hon. Friend's logic closely and I agree with much of it, although not with his general position on these matters. If he argues that interest rates are at the core of high exchange rates, what does he suggest is the best way to manipulate interest rates down? Can he give us his agenda?
Mr. Mitchell:
I am grateful that my hon. Friend is following my argument--with enthusiasm and joy, I hope, as it affects his part of the world as well as mine. I shall deal with the matter shortly. I did not say that interest rates were the only cause of high exchange rates. I said that turmoil in Europe was one of the major causes, as well as the strength of finance and the prevailing orthodoxy in economic management, which is attractive to speculators in this country. All those are part of the equation and must be taken into account.
I was arguing that the first response was to clobber manufacturing, and that raising interest rates was one of the instruments by which that was done. However, we live by manufacturing. It provides most of world trade and is the basis for most of our trade deficit. Do we in Britain never learn? We are heading the same way as we were before two previous disastrous blood lettings, at a time when we need to widen our industrial base and develop new industries. Manufacturing has been through 20 years of slimming down and overvaluation and it is suffering from anorexia instead of having a lean, mean, "Let's get at the markets" mentality. The position will be made worse by the battle against inflation that dominated the late 1970s and the 1980s. Overvaluation as a means of fighting inflation will have the same consequences now as it did then.
I do not want those consequences to occur under a Labour Government. If we are not going to redistribute wealth and increase taxes--and it is right not to increase taxes--we can generate the extra public spending that we need only through economic growth achieved through getting people back into work. How can we achieve that when overvaluation is leading us into the economic trap that I have just described? We cannot narrow the tax base any more by such blood letting without disastrous consequences for Labour's programme as well as for borrowing and without producing exactly the circumstances that lead inevitably to more cuts and more deflation in the public sector. People will then say that the public sector is too big to be supported by the shrinking industrial base.
We are following the economics of folly. The Government cannot afford to be locked into a downward spiral with a shrinking industrial base and more
unemployment justifying more cuts in the public sector. We must expand our industrial base by remedying its two basic problems. First, we must remedy the deficiency of demand for what the British economy can produce at full capacity. Secondly, we must offer the prospect of profitability. British manufacturing is just not profitable enough. We have to make it more profitable by generating demand. We should reduce the exchange rate and let the economy move into export-led growth.
Supply-side measures will not produce those improvements. I am all in favour of supply-side measures such as upgrading skills and training, but supply does not generate its own demand. Governments generate demand, not supply. We need extra demand and a sustained prospect of competitiveness.
A lot of rubbish is talked about economic and monetary union. It has been said that unless we commit ourselves to monetary union, inward investment will no longer come to Britain. There are fears that we will be excluded from Europe. That is total nonsense. Foreign investors want not stability, but a competitive base from which to export. We can provide them with that only if we have a competitive exchange rate on a long-term basis. That would guarantee that if companies set up here they would be able to produce and export profitably in Britain and sell at a profit internally and overseas.
We already have problems because we do not have a competitive exchange rate and we have to offer foreign investors bribes to come here. For example, Nissan was offered £28 million more regional development money in Sunderland than we could offer in Humberside. So Nissan went to Sunderland. The same applies to Toyota, Jaguar, to Ford--to develop a new model and a new engine--and to BMW. All those companies were bribed with taxpayers' money to come to Britain or to stay here because the exchange rate was not sufficiently competitive to lure or to keep them here. As a result of our obsession with an overvalued exchange rate, the taxpayer has to pay out more to keep firms here and to keep Britain attractive to inward investment.
We should also bear in mind the fact that much of our so-called inward investment involves the retained profits of overseas firms that have already invested here. In terms of attracting new overseas investment, France has a better record than we do. Retained profits represent a large component of inward investment into Britain. However, those retained profits will not remain here if exchange rates remain high. The money will be invested overseas. That is what Imperial Chemical Industries and other big British firms are doing. Ford is sourcing more from Europe. Those are the symptoms of extended overvaluation and if it continues, Britain will no longer be attractive to inward investment. We will not be sufficiently competitive to justify foreign investors coming here rather than somewhere else.
The message is clear. The prospect of sustained overvaluation may be one reason why Toyota has been hesitating about making a second investment into Britain. We have to get the pound down and make the exchange rate competitive to allow exports to fall in price or to generate more profit for investment in Britain and to use the existing capacity to make imports dear.
We should use the price mechanism, which is now our only weapon for changing our competitive position, to reduce our labour costs through a cheaper exchange rate. It will be claimed that raw material prices will also rise and, of course, they will, but our role is surely to add more value to our imports and to export them at a higher price. That higher price is set by a competitive exchange rate.
If the elasticity of demand for imports and exports together is more than 1, we get direct and immediate benefits from a more competitive exchange rate--from devaluation. The elasticity of demand for British imports and exports is somewhat lower than that of our competitors. In Britain the figure is 1.51, in Japan it is 2.35 and in Germany it is 1.81. It is above the crucial balance figure of 1.
Devaluation will work. Indeed, it is the only way to expand our exports and to stop the continuing and remorseless fall in Britain's share of world trade. That is still going on and we have to turn it round. So how do we do it? I hope and believe that it is not beyond the wit of the Government to address a major problem. It has to be tackled. We might say that it is not as bad as people think, but those words would be spoken in the wind in six months' or a year's time when the consequences come through. We have to act now whatever comforting words are said.
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