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Don’t leave the pound to the bankers

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Issue 1690


Don’t leave the pound to the bankers

By Alex Callinicos

MUCH OF the media proclaimed last week’s budget as a triumph. Even Roy Hattersley, a normally critical Old Labour figure, declared in last Monday’s Guardian, “It looks as if Gordon Brown is going to prove that socialism works.” Such sentiments will seem very hollow to the tens of thousands of people whose jobs are at risk in the West Midlands.

Mainstream commentators noted a gaping hole in the budget-the pound. As William Keegan put it in the Observer, “The budget did not address this central threat to the government’s entire economic and European strategy.” Why is the pound such a serious threat? The higher sterling’s exchange rate with other currencies, the more expensive British exports are, and the cheaper imports will be.

So, when the pound is as strong as it is as present, manufacturing industry in Britain finds itself at a competitive disadvantage. Firms based abroad can sell their goods more cheaply than those based in Britain. The terrible recession of the early 1980s, when a third of British manufacturing industry was wiped out, was made much worse by the Thatcher government’s policy of keeping interest rates, and therefore the pound, high.

The last economic slump, in the early 1990s, was brought on by John Major’s decision to take Britain into the European Exchange Rate Mechanism-the predecessor to the euro-at a high exchange rate with the deutschmark. Yet again government policy-this time under Labour rather than the Tories-is helping to produce a major industrial crisis.

Rover is one of the most spectacular victims so far. Even the ultra-loyal Blairite Sir Ken Jackson, general secretary of the AEEU engineering union, is worried. He predicts that a million jobs will disappear in manufacturing over the next 12 months unless the value of the pound falls.

Why is sterling so high? One reason-the weakness of the euro-is outside the control of any British government. But the problem has been made much worse by Brown’s adoption of the kind of monetarist free market economics championed by Margaret Thatcher. Brown renounced what he calls “tax-and-spend” policies, but which used to be known as Keynesian economics.

For several decades after the Second World War, governments used to adjust the levels of taxation and spending in an effort to maintain full employment. Brown stuck instead to Tory targets aimed at lowering public spending. The resulting crisis in the National Health Service has forced him to ease up a bit, but he still proclaims his commitment to “fiscal prudence” and lower spending.

This surrender to monetarism has left the state with one main tool for influencing the overall state of the economy-the power to raise or lower interest rates. But Brown has abandoned this as well by handing this power over to the Bank of England. The bank’s sole concern is to hit an inflation target of 2.5 percent. It doesn’t have to concern itself with the state of manufacturing industry or the level of unemployment.

So if the bank is worried about rising house prices or financial speculation in the City it increases interest rates. Since higher interest rates attract money into Britain they help to keep the pound high, so manufacturing industry gets further squeezed. The government claims that firms can cope with the strong pound through higher productivity.

But Ford Dagenham-the most productive Ford plant in Europe-is still threatened with closure because of the level of sterling. Brown claims there is no alternative to his policies. This is nonsense. For one thing, he could take control of interest rates away from unelected bankers and set them at a level that would stimulate higher economic growth. He could also sharply increase public spending both to provide the decent services we need and to boost the economy.

The money could come from raising the higher rates of income tax and other taxes that bear more heavily on the better off. Instead Brown is funnelling yet more money into the pockets of the rich. His cuts in Capital Gains Tax will give what one source told the Financial Times were “bloody colossal” benefits to 100,000 company directors and senior managers. Whatever the budget was, it certainly had nothing to do with socialism.

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