Richard Buxton: QE is the wrong policy for today

Buxton Richard Old Mutual

It appears Prime Minister Theresa May has decided to put an industrial strategy at the centre of her “Government for everyone, not just the privileged few”. While it has been confirmed this is not about the Government “picking winners”, I  am curious as to what exactly this strategy will be.

It may be that once Article 50 is triggered and we have left the European Union, rules on grants, tax incentives and so forth can be used to lure overseas investors to establish manufacturing or assembly plants here in the UK. But presumably this will depend on the nature of the agreement on our terms of trade with the rest of Europe, which will remain an unknown for the foreseeable future.

More fundamentally, in an economy that is primarily skewed towards the service sector, exactly what does an industrial strategy look like? None of today’s US technology giants – Amazon, Facebook and Google – is a product of an industrial strategy.

The sense of discontent at stagnant real incomes and pronounced income inequality, which contributed to the protest vote element of the EU referendum result, is in part a consequence of the digital revolution. It creates a “winner takes all” environment, which for a “nation of shopkeepers” is catastrophic.

UK consumers enjoying the ease of shopping at Amazon, with all the convenience that brings, invariably also bemoan the loss of their traditional high street. Technological innovation destroys geography, unless we resort to tariffs and trade barriers targeted at non-UK digital businesses.

Furthermore, we live in a world characterised by excess productive capacity and insufficient demand. “Generation Z” appears to want fewer things, is learning to drive later or not at all, and “Generation Rent” spends less on stuff for the house it cannot afford. The world needs less capacity and more demand.

But while innovators will continue to design products not yet dreamt of, can an industrial strategy really ensure they are designed and made in Britain? Or is the Government better focused on ensuring we have all we need to entice and encourage the entrepreneur?

We have some natural advantages – the rule of law, respect for property rights and, importantly, intellectual property rights, to name but a few. That puts us ahead of a number of large countries I could think of.

“Innovators will continue to design products, but can an industrial strategy ensure they are made in Britain?”

In order to keep that edge, let’s ensure the corporate and personal tax system minimises tax avoidance loopholes. Furthermore, let’s provide modern transport and communication links. Decide between the runway expansion at Heathrow and Gatwick, but at least get on with it.

We have an electricity supply issue looming. Let us abandon the guarantee of high consumer prices to attract the Chinese and French to build new nuclear power stations. If we cannot encourage the private sector to build new gas-fired generation capacity, build it ourselves.

Quantitative easing was probably the right policy during the immediate aftermath of the financial crisis, given the speed of the collapse in the money supply as banks de-levered and rebuilt capital ratios. But it added to inequality by increasing asset prices in both housing and financial markets. In my view, it is the wrong policy today. Banks have ample capacity to lend – the uncertainty is about the level of demand to borrow.

Monetary policy is increasingly counter-productive, with lower interest rates eroding bank profitability. So let us use the ability to borrow at negligible interest rates to invest in the nation’s infrastructure; create the right environment for business of all types to succeed, be they services, consumer or industrial.

The Government can strive to create an environment in which new businesses can flourish. It can also strive to help the losers from the digital revolution. Education, re-training and developing a skilled workforce should be at the heart of Government policy.

Leaving the EU will not reverse the digital revolution, nor get hard-working Britons a pay rise. But if the Government borrows heavily to invest in infrastructure there is at least the possibility that we could start to see some wage inflation. Voters’ dissatisfaction with the status quo has probably just about reached the level where it is in politicians’ interests to oblige
them.

An industrial strategy? From now on I shall think of it as an inflation strategy and feel much more comfortable that I understand what the Government is trying to do.

Richard Buxton is head of UK equities at Old Mutual Global Investors