It seems that our quiet former home secretary, Theresa May, might well turn out to be as radical a leader as was Lady Thatcher. The abrupt sacking of George Osborne and cancellation of his 2020 target of a Budget surplus, suggests she is serious in her intentions: she will govern for all, not just the globalisation elite, and repair the breach in British society shown by the Brexit vote.
Within her first month in office as prime minister, she recalled Hinkley Point nuclear power station approval for reconsideration – perhaps set to become one of the worst financial decisions of modern times – and acted to make cheap and plentiful shale gas a reality.
As a grammar schoolgirl herself, she has cancelled the long-standing ban on the opening of new grammar schools. This will support Michael Gove’s reforms of opening a superior education to the aspiring poor, and help make the Conservative party attractive to the nation not just to Etonians and their friends.
Myths and realities of political economy
The concept of the state as a larger version of the private household and its budget was never part of the writing of Scottish philosopher Adam Smith in his Wealth of Nations, although it was certainly so for political and economic dunces.
For him and his successors, political economy was the relationship of the actors within economic society – manufacturers, retailers, advisers and consumers – and their harmonious relationships to each other and to the state.
As one of the most practical and clever economists of the past century expressed it: “The central idea is that government fiscal policy – its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money – shall be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound.
“This principle of judging only by effects has been applied in many other fields of human activity where it is known as the method of science… The principle of judging fiscal measures by the way they work or function in the economy we may call Functional Finance.” (Abba Lerner, 1943)
Sadly, all too many politicians and their economic gurus succumbed to economic myths, such as printing money to finance deficits is inflationary, and high current debt is unfair to the next generation or leads to high interest rates, and more inflation, or even to over-full employment and problems with wage rates. The mythic status of these beliefs in shown by national emergencies – none of these mattered in 1914, 1939 or in 1982 when Mrs Thatcher went to war over the Falklands.
Wages, productivity and decent jobs
Sovereign states, able to print their own money, can do anything they want – provided they maintain their credit rating. All other things being equal, running deficits to finance consumption such as pensions, welfare payments or other necessities of a civilized society is less economically useful than paying for investments that will produce a return on the money, such as education, improved transport systems, power generation and even teachers’ wages, or attempts to resuscitate economic viability to former coal mining and steel-making communities.
Working problems
Britain has two major economic problems, quite apart from the complexities of negotiating Brexit. Wages are too low, with far too many hardworking people forced to apply for tax credits to live. Productivity is also low, and has shown little or no sign of improvement since the start of the financial crisis eight years ago.
The last government thought one would follow the other. Encouraging growth at any price, and immigration to fill low-pay and low-productivity jobs, achieved apparent but not real prosperity.
Economically, however, those factors should be in reverse order. Too many of us forget that England has always been a rich and fortunate country, and the industrial revolution started here because high wages encouraged people to invest in technology – steam engines and mechanized transport at that time – to increase outputs.
Increased outputs reduced prices, enlarged the market and encouraged consumer demand, and higher profits led to higher wages and so greater market demand.
Kick-starting the virtuous cycle
It is this virtuous circle this government needs to kick-start, and the first signs of this should come in the Autumn Statement this year. Most worthwhile infrastructure takes months and even years before the first workers draw their first pay, but the London north-south Crossrail is ready to go and just needs financing.
The north needs even more investment – not perhaps Mr Osborne’s unspecified northern powerhouse or even David Cameron’s industrial strategy – but effective and fast lateral rail links between the major cities and universities of the north.
Industrialists will not invest if they know their factories and their workers will be flooded out of house and home on average every two or so years. So there is a need for flood defences or, given climate change and recent history, major work on river courses, floodplains, bridges and roads.
Multi-year willingness of government to invest in the built environment, and its improvement and modernisation, is sufficient as an industrial strategy. Private money will come once it sees that the government is serious, and using its own money, to make the north attractive and productive.
Nissan’s factory in Sunderland is its most productive; it is there as Japanese schoolchildren know it as the town that built the battleships with which the Japanese navy destroyed the Russian fleet in 1904.
Perhaps the new government can show the rest of Europe that fiscal and spending actions can drag an economy out of its deflationary slump – and not an increasingly desperate monetary policy that has failed over the past eight years in doing anything other than raising asset prices. Central banks are needed, but much more so are politicians who are willing to make things happen.
How to invest in the confusion
In the meantime, investors must either hold bank deposits, with no return at all, or invest in equities with considerable risk and no certainty of a positive return over the next decade.
If the Autumn Statement suggests that this government is serious in its attentions, then either those investment companies that invest in infrastructure are the fixed income answer, or those that are international in their investment remit.
Accepting that no asset class is safe given the actions of central banks, there are three possibilities that the brave might consider. After the failed bid from RIT, Alliance is now in play. With a 10 per cent discount on a decent international portfolio, the certainty of action on its loss-making subsidiaries, and its hedge fund investor keen to get out, the downside is limited only to the market.
The same is true of Caledonian, selling at a 15 per cent discount, but controlled by the Cayzer family with the same interest as any private investor – income and capital growth over the long-term with little or no downside risk.
Technology is driving efficiencies, and the loss of blue and white-collar jobs, and Baillie Gifford group has been losing investors. It has made good money, but is frightened of losing its profits. But Baillie Gifford is unlike most fund management groups. Its trust portfolios have little in common with market indices, based instead on a bottom-up stockpicking approach.
There is no model portfolio, although there is a collegiate approach with ideas shared across investment teams, if appropriate, and an emphasis on disruptive technology.
While Baillie Gifford has focused on a stock’s growth potential, the emphasis has shifted towards high growth and technology to disrupt traditional industries. The doyen of the four investment trusts is Scottish Mortgage, with its predilection for portfolio concentration and running profits, and so worrying ultra cautious investors.
But the same style of investing, although with different portfolio components, can be accessed through Monks IT and Edinburgh Worldwide IT, while Scottish America is less volatile because of its income commitment.
