The John Hann Letters

This is a series of letters to UK finance minister George Osborne, who has consistently claimed that stringent Austerity measures will somehow restore the UK economy, and particularly manufacturing industry to robust growth.
It has similarly been claimed that the United States has underinvested in manufacturing and technology as a result of the excessive growth in power of the finance sector. However, the UK seems to have been the worst affected.

Letter One

Dear Mr. Osborne,
Would it be possible for you to provide evidence that the UK has, as you claim, a comparative advantage in “high value” manufacturing?

There have been numerous reports suggesting that Britain in fact suffers from serious disadvantages including poor skill levels, and short-termism which has led to the high target rate of return on investments, and the high costs of, and difficulty in obtaining, long-term finance.

You have said that “the levels of skills in our country are unacceptable”. And it has been pointed out that “the UK has the smallest gross fixed capital formation as a share of GDP of any OECD country” ; and that “UK manufacturing industry has declined at the fastest pace of the G7 economies; resulting in the UK moving from having one of the largest shares in 1948 to the lowest in 2012 … Britain spends less on investment than any other G7 economy” .

I have been in a position to see about 90% of “high value” British manufacturing companies disappear in the last 35 years, with their markets being taken by companies in countries like Germany, Japan, France, and the USA; while assembly (which is less affected by skills shortages and short-termism) has largely remained.

Even if, which I do not believe, the UK has a comparative advantage in “high value” manufacturing, it is clear from the trade deficit that there is not nearly enough of it. As C.V.J. Simpson has put it “there are simply not enough of these companies” .

With regard to the £45 million export package, are you suggesting that this will really have a major effect? Will it resurrect all the manufacturing companies we have lost?

In replying to each of the points on your letter I show in italics the questions from my letter to you of 21 July 2014:

Do you agree that Britain’s manufacturing decline contributes to Britain’s twin current account and fiscal deficits?

You say there is no “simple relationship” between the size of the manufacturing sector and the fiscal deficit. Are you therefore suggesting that the loss of corporation tax from manufacturing companies and income tax from well-paid employees does not affect the fiscal deficit?

Of course if you accept the twin deficits hypothesis then there is in fact a simple relationship. A manufacturing deficit affects the current account deficit which is linked to the fiscal deficit.

Do you agree that the loss of well-paid jobs in manufacturing has contributed to the shift towards a low-productivity and low-wage economy?

With respect, the statement that 61% of the increase in employment has come from “high skilled” jobs is disingenuous. It depends on how you define “high skilled”. This does not answer the question about low productivity.

Productivity has stagnated since 2007 , and to quote the Bank of England “it is still some 16% below the level implied by a simple continuation of its pre-crisis trend” . “The MPC has repeatedly forecast an improvement in productivity growth over the past five years; each time its hopes have been dashed” . “Output per hour worked in the UK is 21% lower than the average for the other six members of the G7” .

As Larry Elliott has pointed out productivity is not aided by “the lopsided nature of Britain’s economy, where manufacturing makes up just over 10% of GDP and the service sector more than 75% of GDP. Productivity gains are not impossible in the service sector, but in some cases such as hairdressing they are harder to come by, and in other cases –think schools –they would not be especially desirable if increasing output per head meant bigger class sizes”2.

This view would not conflict with the conclusions of the Bank of England “the protracted weakness of labour productivity – still 4% below its pre-crisis peak six years after the onset of the recession – and the recent strength in employment growth suggest that cyclical factors alone are unlikely to fully explain the productivity puzzle”7.

You have selectively highlighted wage growth over the last quarter. As I am sure you are aware the figures over a longer period are much less favourable , and there is controversy over the presentation of the more recent figures .

Do you agree that the loss of manufacturing, as well as the “rent-seeking” operations of the City, have resulted in a transfer of wealth from the regions to London?

You have not answered the question about the “rent-seeking” operations of the City. As John Kay has written “The primary locus of modern rent-seeking is the overblown financial sector, where burgeoning trade in existing assets has overwhelmed the creation of new wealth” .

To quote from a recently published article of mine ‘Hostile Takeovers in the UK and Short-termism – the need for an anti-takeover law’: “Wealth is not ‘trickling down’ from the wealthy financial sector in London to the rest of society. Or if it does, then this is outweighed by the adverse effects of its operations. The problem of rising inequality in Britain, exemplified by the protests and the occupy movement, has not gone away. It has merely been postponed by allowing Britain to live beyond its means. The inequality between London and the rest of the country is apparent in the increasing demands for regional autonomy” .

As Allan Massie has written in his article ‘Do Londoners know the rest of the country exists’: “[London] is resented, because finance capitalism, with its use of private equity, its zeal for mergers and takeovers, and its concentration on shareholder value, has done great damage to manufacturing industry by its encouragement of short-termism, and lack of interest in investing for the long haul” .

You have not included details about the investments you propose in the north on infrastructure, scientific research and innovation; however, in view of the public sector cuts they are unlikely to be substantial. Since you have not delivered on the ‘march of the makers’ you have a credibility problem. Are you any more likely to deliver on creating a ‘northern powerhouse’? To quote an editorial from the Financial Times “Britain is still waiting for growth based on higher investment, improved exports and increased productivity” .

Your mention of employment growth in the north-west begs the question of what the type of employment this represents. The chemical and pharmaceuticals sector has stalled badly with output down by 11% since 2009, and with real wages down by 4%. This has particularly affected the north-west where chemical companies employ 50,000 workers .

Finally I attach an article by Larry Elliott. Would you care to comment on his contention that while you used to have a long-term plan based around exports and growth which did not rely on consumer debt, you now have a short-term plan to keep the economy going at full throttle until polling day?

Your statement about wage growth in the three months to March leads directly onto Larry Elliot’s contention that you have had “a short-term plan to keep the economy going at full throttle until polling day” .

In my opinion there has not been an economic “recovery”. Not only is GDP per capita lower than it was before the financial crisis . There is also something fundamentally wrong with modern economic theory when the much trumpeted increase in GDP, caused by increased consumption, particularly of foreign-made products, is considered to be “growth”.

As The Economist has commented “A few years ago it was an article of faith among all the major parties that the economy would have to be sustained by something less gluttonous than consumer spending. There was talk of Britain paying its way in the world through stronger exports, and of a manufacturing revival. That has not happened. Instead, the recovery has been domestic. Since 2013 consumer spending has grown at a healthy annualised rate of 2%... Instead of rebalancing, Britain has returned to its old ways: growth has been led by consumers and fuelled by house-price increases”20.

Your assertion that growth is more balanced is not supported by numerous articles including in The Economist: “Far from rebalancing, Britain has gone on a debt-fuelled binge” , and Martin Wolf’s article “An unbalanced recovery is no cause for complacency” .

Conclusion:

For about 35 years there has been chronic underinvestment in productive capacity. The financial crash revealed the underlying weakness of the UK economy.

Although economic growth appeared strong this was because consumption was increasingly taking the place of investment. “In 1970-79, 21% of growth was driven by production (investment). In 1979-97, only 11% of growth was not derived from consumption and by 1997-2009, investment and net trade actually detracted from per-capita GDP growth” .

In my view the underinvestment in productive capacity was caused by the increasingly short-termist pressures of the City. And the reason why this was masked was that the high levels of household and government consumption were largely financed by the very same activities of the City, which included asset stripping and rent-seeking.

I believe that the levels of wealth that can be extracted by the City are well past their peak, while the decline of manufacturing limits the alternative sources for growth and foreign income.

Your short-term plan to keep the economy going at full throttle until polling day has not addressed the question as to how the UK is to earn its living in the future and provide for its citizens. “No other country runs a budget deficit of about 5% of national income alongside a current account deficit of the same order of magnitude” .

As I wrote in a letter on 18th November 2003, and as I earlier told my MP, nothing will be done about this problem…until civil servants come to realise that their own pensions are at risk. With the recent actions on public sector pensions in Greece (which has much lower fiscal and current account deficits than the UK) has that time finally arrived?