Author: johnredwood

Labour nationalised steel after the war, only for the Conservatives to denationalise it when they came to office in 1951. Labour renationalised it in 1967 and  ran a grand investment strategy through to the end of the 1970s when it had to be abandoned  because it created massive overcapacity. The Conservatives bought into the Labour investment led approach for their period in office of 1970-74.

In 1950 the nationalised industry produced 16 million tonnes of steel. By 1965 the competitive private sector industry restored by the Conservatives had got output up to 27 million tonnes. The Labour government on nationalising it decided to build an industry capable of 35 million tonnes of output. They signed off on a bold plan to put in five major integrated works  at Redcar, Scunthorpe, Ravenscraig, Llanwern and Port Talbot. and to develop in Sheffield.

By 1978-9 the industry was only selling 17.3m tonnes, 10m less than the privatised industry had managed on a much smaller capital base a decade earlier. It had however received a whopping £2674 million in interest free  capital from the taxpayer and £350 m of write offs, to allow it build five large integrated works despite their inability to sell the steel they could make.

This ushered in a long period of agonising decisions to close each of the works or parts of each of the works in turn as they struggled to get costs and output down to match the poor levels of demand . Large numbers of redundancies followed and the complete withdrawal of the industry from places like Corby and Ravenscraig.

The tragic story of nationalised steel leads a commentator to ask how could state planning get their forecasts for demand so wrong? Why did the costs of putting in the extra capacity escalate so  badly, making the steel even more uncompetitive? Why did Labour end up closing so much down and making so many redundant? The strategy was bold, well financed and well intentioned. The result was an industry unable to compete with German steel, and later with Asian product, that spent years agonising over cuts and closures. The taxpayer lost large sums.

All previous Labour governments have nationalised some state assets. The 1945-51 government did so on a large scale out of ideological conviction.  The Wilson government of 1964-70 and the Wilson-Callaghan  administration of 1974-9 did so alleging it would enable them to pursue an industrial and economic strategy that would lift the growth rate, with a continuous row over how far they should go as the left pushed for a more active strategy. The Blair-Brown governments came to office in 1997 accepting privatisation and saying they would not reverse the large changes from the Conservative privatisation programmes. Later in office they renationalised the bulk of the railway and went on to buy two of the largest commercial banking groups following the failure of their regulatory approach to banking.

The left who argued strongly for more nationalisations argued their case based on three main erroneous propositions. The first was that it would be better for employment and the employees if their jobs came from Ministers and a political process, rather than from competing private sector employers. Instead, as we shall see, the main nationalised industries ended up sacking large numbers of people.

The second was that it would cut out the so called “inefficiencies of competition” – the extra head offices and advertising programmes to sell different brands and services – making the nationalised industries more efficient and better for customers. Instead, monopoly pricing power wherever they had it was used to push up prices to pay for inefficiencies which the monopoly could not or did not wish to remove.

The third was that it would allow rational planning and longer timescale for investment. This they wrongly thought would lead to stronger and better based industries. Instead, the planners usually got it wrong, made large and wasteful investments and ended up having to close their own pet projects or sack their staff.

It would be interesting to hear from those of you who favour complete nationalisation of current railways why the nationalised Network Rail is not delivering a railway you are happy with.

As I will show from  tomorrow from past experience, nationalised industries in the UK developed a bad record as employers, making hundreds of thousands redundant, pushed up prices a lot, and bungled large scale investment programmes badly.

The government was able to report a reasonable increase in productivity in the third quarter of 2017 with a 0.9% gain in the three months, with similar advances in both services and industry. The Treasury is keen to advance productivity as a means of promoting higher real incomes and improving UK competitiveness in world markets.

One of the areas  of the economy that has struggled to make productivity improvements is the public sector. Whilst there is a good reason to want good staffing ratios for front line services like healthcare and teaching, there are many back office functions and other services where the government can improve quality and lower cost by adopting more productive ways of working. Offering more computing power to perform clerical functions, speeding and cheapening communication with users by going digital, adopting the internet for a wide variety of productivity enhancing improvements are the way forward.

Some of it requires policy change. The introduction of Universal Credit is partially designed to reduce the number of benefits that require separate application and calculation, whilst ensuring decent support for those who need it. The Treasury could reduce the costs of tax collection by streamlining and simplifying taxes.

Some of it requires  careful negotiation with staff. The aim should be to help people work smarter and to be better paid as a result. Given the need for more staff in many areas of the public sector, productivity raising improvements do not require reducing the number of jobs overall, but ensuring the jobs are better and achieving more. Some technology will not be popular with workforces, as we have seen with more automation on trains.

Today I am inviting you to write in with your suggestions for ways public service could be improved through the adoption of new technology. Well done it can  raise service  standards for users, reduce costs for taxpayers, and provide better paid and more worthwhile jobs for those in the public sector adopting the new ways of delivering.

Today we will doubtless hear plenty of ill informed discussion about car sales and the fall in the pound. So let me remind people of what has happened to the pound in recent years.

It reached a peak of $1.71 on 6 July 2014.  It fell to a low of $1.38 on 28 February 2016, well before the referendum vote when the establishment and City were still all convinced we would vote to stay in.

It was only at $1.41 on 14 June before the vote, and fell to $1.29 on 7 July  after the vote. It is currently at $1.35. As you can see from these figures the pound has moved in big swings in recent years, largely unconnected with the referendum.  I doubt those who think the referendum is the main driver argue that the pound has rose 7% against the dollar last year because of Brexit.

Car sales rose well against the background of a falling pound in the year before the Brexit vote, and rose strongly for the first nine months after the Brexit vote when the pound fell further. Since April 2017 diesel  car sales have fallen sharply, whilst petrol and electric car sales have risen but not by enough to offset all the fall in diesels. This has taken place against the background of the pound rising against the dollar and the yen and stabilising against the Euro which has been strong against all currencies.  This history shows it was not the Brexit vote that caused the change in the market for diesels.

The SMMT and the media do accept that tax changes and a different mood  towards diesels account for some of the fall. They should remember that the April 2017 budget increased VED strongly for dearer new cars. Presumably the intention was to cut sales of higher priced cars, and it certainly worked. There are also discussions about further taxes and bans on diesel cars in various towns and cities. This is leading some potential buyers to put off a decision pending greater clarity over whether modern cleaner diesels will be allowed in all places in the UK and what the tax regime for them will be.  April also saw the tightening of new car lending by the authorities which added to the problems in the car showrooms.

I find many people still want to talk about crypto currencies. There is a line of thought amongst entrepreneurs and radicals that wants a crypto currency to emerge that is free of the controls of governments and Central Banks, reflecting their distrust of these organisations. There are two main lines of criticism of national monopoly official currencies. The first is the way most of the countries backing these currencies allows or even encourages some inflation, reducing their real  value over time. The second is the way national monopoly currencies give the authorities greater controls over people’s money and their way of life.

It is true that most Central Banks aim for a gentle devaluation of their money by around 2% per annum, as they think a little inflation helps growth and economic change. Sometimes they lose control and end up with considerably higher rates of inflation.  Individuals in a free country which allows its citizens to buy and own real assets and other national currencies can protect themselves against an undesirable inflation in their national money by owning inflation proofed assets like local currency index linked debt or by holding other currencies less exposed to inflation. Inflation linked bonds, property and shares have some inflation beating characteristics.  The so called crypto currencies have so far not proved to be a low risk way of protecting yourself against inflation in your national currency. There has been extreme price volatility, producing either an excess return well above the inflation erosion of your base currency, or days of large price falls  reminding you that in the wrong one of these  vehicles you could lose the lot.

It is true people can design crypto currencies with clever ways of restricting supply of them. All the time there is an increasing  number of people willing to believe in their properties, this can create substantial upward pressure on their  value. However, there is also a central paradox. To create the magic ingredient of pressure for the price to rise requires tough restrictions on the issue of new crypto currency. This means such a currency will struggle to be liquid enough and universal enough to meet the test of effective money that  is freely and widely accepted in payment. National currencies are  very flexible in response to demand for more money for legitimate uses. The very flexibility that allows too much money to chase too few goods, leading to inflation, is also a crucial feature to allow money to expand as economic activity expands to permit growth and business success. Judging the right amount of money, as Central Banks have to do, is a difficult task to get right.

Some of the advocates of crypto currencies I have listened to are even more concerned about the way commercial banks holding our deposits in national monopoly currencies are increasingly the regulated creatures of the state allowing the state to exert substantial control over our finances. The answer to this is not to create a new  non government currency which allows people to break the tax and financial laws. The main reason states are so suspicious of crypto currencies is they fear they can and will be used by drug traffickers, terrorist organisations, large scale tax evaders who want a currency that is not reported to the authorities  and which allows them to do as they wish without trace. Some people used to like bearer bonds, gold bars and other stores of value that avoided direct reporting to tax authorities, but gradually governments brought these under regulatory control. Anyway people often found they had to use the normal banking system and monopoly currencies at the end of the process when they wished to spend their wealth.

The case for crypto currencies has to be made for reasons other than the dislike of tax that a national authority seeks to impose. If there are too many taxes or they are at too high a rate there has to be democratic pressure to change, or the person who objects strongly has to move to a lower tax jurisdiction to live and work permanently.

There seems to be a widespread misunderstanding about our railway. The tracks, signals and stations are all in public ownership and are run as a nationalised industry. The private sector train companies bid for a monopoly franchise on a single route, and have to meet detailed specifications for timetables and services laid down by the government and rail regulators. There is little scope for competition, innovation or adventurous uses of private capital.

The great frustration of some commuters with their rail service is understandable. Some lines are badly affected by poor labour relations leading to a series of strikes which interrupt the service. Many lines are suffering from a  lack of capacity, as the nationalised rail company is unable to provide the capacity commuters need on busy routes to the train operating companies. Train operating companies would often be willing to run more peak time trains if only there was line capacity to do so.

That is why I have been urging the nationalised Network Rail for some time to adopt better signalling systems that would allow more trains to run on the same track compared to the 20 an hour which is the common experience with today’s signals. If they adopted new  systems that allowed 30 trains an hour we could enjoy a 50% increase in seat capacity and trains running for a modest outlay of public investment.

The idea that we should complete the nationalisation of  the railways means cancelling the train operating franchises, probably as they expire, and arranging finance to buy up trains to run as the train operations rejoin track provision and maintenance in the public sector. This would impose an additional  financing strain on the state, but would not lead to much change in train services. As the timetables, fare regulation and the provision of the bulk of the railway assets is already in state hands it is difficult to see there would be much change for passengers. How would a nationalised railway resolve the disputes with employees that currently disrupt some of the private sector franchises? At least the periodic advertisement of franchises provides some modest competitive stimulus to better performance that would disappear with a wholly nationalised monopoly.

Network Rail last year (to March 2017) lost £990  million. Its outstanding borrowings were £47bn on a small equity base.

It was a moment of honesty from John Mc Donnell reminding us of Labour’s struggle to get elected to government in the 1980s and 1990s. Post war Labour governments in 1945, 1964 and 1974 all suffered badly from market dislike of their high spending high borrowing policies, which led to sterling crises in each case.  It is etched on the memory of older Labour figures that market disciplines have previously prevented socialist policies being followed, and have created political tensions within Labour governments to be followed by loss of office as electors lose confidence in their ability to manage the economy.

The first two Labour governments inherited and kept a system of managed exchange rates. They were forced to devalue the rate. In 1949 Labour devalued the pound by 30% against the dollar, taking it down from $4.03 to $2.80. In 1967 Labour devalued the pound again, from $2.80 to $2.40, a fall of 14%. In 1974 they inherited a floating pound. Over their five years in office they allowed it to float down from $2.30 to $2.08, a fall of 10%. In 1976 there was a sterling and payments crisis leading to a visit to borrow money from the IMF to stabilise the pound and the financial position. This crisis sealed the fate of the Labour government which lost power for a generation. Only the John Major  decision to join the damaging European Exchange Rate Mechanism and its economic impact changed the electoral position back in their favour.

The Blair government came to office in 1997 determined to avoid a fourth devaluation and sterling crisis for post war Labour governments. They adopted Conservative spending and borrowing plans, and spent the first few years moving the accounts into surplus. The economy continued to perform well. Labour then decided to make substantial increases in public spending, to increase public borrowing and to follow a very accommodating money policy which allowed large debt build ups. The end result was a bad  recession and banking crash. Over their time in office with a floating pound there was a modest devaluation of 11%. This crisis is likely to keep Labour out of office for a considerable time period.

In total Labour spent around 30 years in office and presided over the bulk  of the fall of 64% that occurred in the sterling/dollar rate between 1945 and 2015.

In government the Conservatives kept the fixed rate of $2.80 throughout their period in office from 1951 to 1964. In 1970 to 1974 with a floating pound the Conservatives presided over a 4% fall against the dollar. Between 1979 and 1997 with a floating pound there was a 22% decline.  This included the Exchange Rate Mechanism fiasco which damaged the currency value and much else in the economy and led directly to the loss of office by the Conservatives.  It  kept them out of office until Labour presided over a worse economic crisis. Over  the Coalition years 2010-2015 there was no change in the pound. If you average the rate of fall to an annual figure under Conservative governments the devaluation has been at a rate of 0.6% and under Labour at 2.2%. The Conservative devaluation was largely  the result of the ERM disaster. a single policy error not to be repeated.

Floating rate policies are better than fixed rate policies. They give countries a bit more financial leeway. They do not, however, exempt a country from all the disciplines of the market. Mr Mc Donnell is right to worry about the market constraints on policies. The sorry history of Labour devaluations are a reason why I think a Labour win at the next election is unlikely. The constant resort to devaluation to deal with the consequences of the spending and borrowing policies shows the inherent tensions in their policy mix.

I have charted the pound in relation to the dollar as this has been the crucial rate throughout the period, with the devaluations formally expressed in terms of the sterling/dollar rate. The pound has also fallen against the DM and  Swiss franc. Since its creation the Euro has had periods of both strength and weakness against the pound.