A view of Britain at the economic crossroads

Liverpool's top Thatcherite calls for end to 'unimaginable stupidity'; THE MONDAY INTERVIEW patrick minford
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The Independent Online
Britain stands at a crossroads in economic policy. So thinks Patrick Minford, one of our leading right-wing economists. Economic policy has been disastrous for the past five years, but it might be about to take a dramatic turn for the better.

"Ken Clarke is the key man. He could finally unlock the recovery potential of the British economy," says Professor Minford.

What has given him hope that Mr Clarke is about to see the light is the decision not to raise base rates at the beginning of May - a decision the Chancellor is almost certain to stick to at this month's monetary meeting on Wednesday.

According to Professor Minford, who has held the chair of applied economics at Liverpool University since 1976, the recession was unnecessary and we have not had a full recovery. Bad monetary and fiscal policies are to blame.

"When you have finally persuaded people of the benefits of free markets after 40 years of socialism, the last thing you can afford to do is pull the rug from under them. That is so unimaginably stupid," he says.

The stupidity started with membership of the exchange rate mechanism when the pound was both overvalued and rising. It seems hard to believe now, but the central exchange rate against the mark was DM2.95.

Interest rates were raised too much in order to keep the pound at the required level. When sterling was bounced out of the ERM in September 1992 and base rates fell, the Government made the mistake of tightening fiscal policy through higher taxes.

Professor Minford believes this policy was to blame for the recession and the slump in the housing market.

It destroyed the new, true capitalist faith of home owners who had bought their council house and entrepreneurs who secured their new business on a mortgage.

In other words, he says, "The Government has almost thrown away the gains Mrs Thatcher had made on the supply side of the economy."

Professor Minford's admiration for Thatcherite policies is not unrelated to his economic education at the hands of her adviser, Sir Alan Walters, at the London School of Economics in the late 1960s.

Sir Alan, too, was an outspoken opponent of ERM membership.

However, adherence to monetarism and virulent opposition to fixed exchange rates is, these days, terribly out of fashion. Most mainstream economists regard Professor Minford as being way out in right field.

"Delightful chap, but completely mad," is a typical comment from one of his peers - who, almost to a man, also find him charming and stimulating.

He gives the impression of relishing his current role as provocateur to upholders of the latest economic orthodoxy, although he points out that in the early1980s it was he who embodied the prevailing conventional wisdom, monetarism.

Professor Minford is calling now for lower interest rates and tax cuts of pounds 20bn over a couple of years.

The orthodox think pounds 5bn would be pushing it. "I'm one of those slash- and-burn right-wingers," he says.

His reasoning is that there is plenty of spare capacity in the economy.

Unemployment is unnecessarily high. A growth rate higher than the trend does not risk igniting inflation in these circumstances. "Rapid growth is acceptable when you have to dig yourselves out of a deep hole," as he puts it.

He says higher growth is needed to build on the gains the British economy has made in its productivity and competitiveness. The supply-side of the economy looks just fine from Liverpool, thanks to greater job market flexibility, improved business efficiency, privatisation and the start of a shake-up of the welfare state.

The recent competitiveness White Paper comes in for faint praise: "Its ideas are moderately intelligent." But being more competitive is no use if the demand is not there.

These views put Professor Minford squarely in the camp of the Conservative right-wing MPs who are sure that a bit of a boost to the economy is what's needed to sprinkle some of that elusive feel-good factor over their constituents.

His adherence to this group is an echo, perhaps, of three years spent working at the Treasury under Chancellor Anthony Barber, who engineered the classic post-war pre-election boom.

It is a measure of how far the Labour Party has changed, perhaps, that it does not strike fear into the Minford heart. "Their macro-economic policies seem fairly sensible," he says. He does not believe Tony Blair would lead Britain into monetary union.

His main concern about the government-in-waiting is that it would end Britain's opt-out from the Social Chapter. "That would reintroduce strong union power and undo the supply-side reforms."

An extreme view of what the Social Chapter implies, perhaps? Professor Minford will have none of that.

He reckons the EU's social legislation is a German ploy to make Britain uncompetitive again.

"We know from experience that if you give British unions power they do not have the incentives to behave responsibly," he says.

Professor Minford also disagrees with the notion, popular in Labour circles, that better education and training are the key to enhancing the economy's long-run potential.

He's not against it, of course, but reckons people with skills will get themselves more training anyway, while jobs for the unskilled do not actually call for much training.

Shifting people from one group to the other is beyond the power of a government programme: "How are you going to take ex-dockers and turn them into software engineers?" he asks. If they had the potential to write software, that's what they would have chosen to do in the first place.

The professor's current research, at the University of Liverpool and Cardiff Business School, is exploring the effects of industrial growth in emerging economies for the unskilled workers of the West.

Real wages for the unskilled in Britain and the US have been falling, which he thinks is the right adjustment.

"We need to get people here back to work by recognising their need to stay competitive," he says. The Continental preference for higher wages involves the cost of higher unemployment.

Since industry looks in such good shape, Professor Minford burns with the urgency of the need to get macro-economic policy right at last.

He dismisses arguments that the credibility of monetary policy is at stake, seeing it as a device used by Bank of England and Treasury officials to enhance their own power.

Mr Clarke has been exploited by his officials, Professor Minford believes. "The nadir was when they forced him to raise interest rates before last year's party conference." It gives him hope that the Chancellor seems to have broken free from the mandarins' shackles.

According to this eminent member of the Conservatives' militant tendency: "This is a major turning point in economic policy."

Diane Coyle