Mervyn King on Productivity
Lord Mervyn King is a former governor of the Bank of England, now a member of the House of Lords and an author. His book, called The End of Alchemy. Money, Banking and the Future of the Global Economy, is important and radical in its conclusions. I have written about the general material, but here I report his views on promoting productivity. There are three general suggestions.
Productivity is 'barely noticable' since the global crisis of 2007-08. Capital growth has been much contracted and growth has been supported by hiring more people. Efforts to boost productivity will require a restoration of increased capital. and there are many opportunities to increase productivity.
Boosting productivity in the product market by reducing monopolies and increasing competition. In the tax system by reducing distortions between saving and spending. Also by eliminating complex deductions and reducing rates of income tax. Simplifying regulation (which King claims support for the 'Chicago plan' in banking would greatly simplify) and improving public infrastructure. I would add tax cuts to promote innovation.
Lord King's second item is the promotion of trade. 'Throughout the post-war period, the expansion of trade has been one of the most successful routes to faster productivity growth, allowing countries to specialise and exchange new ideas about new products and processes'. The so-called Doha Round (which started in 2001) failed to produce another round of reductions in tariffs and other trade barriers. 'The best way forward now would be for the advanced economies to push further liberalisation in trade of services - the dominant part of our economies and a growing proportion of total trade - not only to benefit from increased trade and its effect on productivity but also to demonstrate to the emerging markets that they cannot block all progress in this area. (King, p361).
The third proposal is the restoration of floating exchange rates. 'The experiment with fixing exchange rates has not been successful and it is important that exchange rates are free to play their stabilising role in order to correct the current disequilibrium'. (King, p361). In my view the best candidate for this is the EU. Exchange rates of Germany and other 'Northern' members would be higher and those of deeply recessed 'Southern' members would be far lower. Of course, this would be seen as a deeply regressive move by the elites of the EU, and would also require possibly large debt write offs for 'southern' members before the float, as happened to Germany during the great economic difficulties of the 1930s.
Both China and Germany would have important matters to sort out, even if a return to flexible exchange rates was to be considered. But free floating of currencies would have great benefits for productivity and the point needs to be pursued by global leaders.
Lord King finishes his book with some warning points. One of the most thought provoking is the follows: 'There is nothing predetermined about the inevitable triumph of capitalism'. (King, p 365). But here I shall finish, after applauding Lord King's summary.
'Four concepts have run through this book in order to explain the nature of financial alchemy ... 'disequilibrium, radical uncertainty, the prisoner's dilemma and trust. It is hard to think about money and banking, and their role in the economy, except in those