David Smith: The ‘march of the makers’ heads north

George Osborne’s wooing of the north is a bold move that will pay off for Britain, says journalist and author David Smith.

David Smith and I used to be sort-of colleagues. He is economics editor of The Sunday Times and I used to have a column in the Money section of the paper (I stopped in 2007), in which I often wrote about economics. We disagreed. A lot. I worried endlessly about the credit bubble, the banking system and the housing market. He didn’t. I was convinced there would be a crash. He was not. I think I might have won that round.

However, since then, Smith’s more optimistic attitude has clearly been the one to have. At MoneyWeek we might worry (still) about credit bubbles, the impact of deleveraging and, of course, about the odds of a sudden resurgence in inflation (UK wages really are rising now). But the sanguine attitude has been the correct one: post-crash, the economy – and most people – have done just fine.

And so to Smith’s new book, Something Will Turn Up. The title comes from the Dickens character Wilkins Micawber – who had endless faith in the idea that “something would turn up” to relieve his straitened circumstances – and expresses Smith’s faith that, however bad things look (and however much MoneyWeek frets about the global economy), the economy has “natural healing properties” and “things do get better” as long as policymakers do the right thing. Hmm.

On our side of the river we tend to think that, as most crises are the result of policymakers doing the wrong thing in the first place, it is hard to believe that they can be fully resolved by policymakers doing the right thing. Would perhaps no policy at all have been a better response to the 2008 financial crisis?

Smith thinks not. “Something had to be done.” There were two keys to success, he reckons. The first was just how fast the Bank of England brought interest rates down (something that didn’t happen in past recessions). “The effect of that was to ease the impact of the crisis… so most people didn’t have the burden of high interest rates when unemployment was going up very sharply.”

And the second was the way in which the UK showed the international markets so much “willing, in terms of getting the deficit down”. The time around 2008 was the period when we really were “sitting on a bed of nitroglycerin” fiscally. Our efforts to cut the speed at which the UK’s debt was rising was vital – and growth has still “been okay in the post-crisis period”.

Mixed feelings about QE

What about quantitative easing (QE), I ask. Was that an absolute necessity too? Smith has “slightly mixed feelings”. In 2009, yes, it was a necessity, but probably not in 2011/2012. He also finds that he gets “a little bit queasy about QE… when it is seen as a normal tool of economic policy” rather than an emergency measure. If it had been reversed as soon as possible post-2009, people would not be talking – as they are now – about “people’s QE” and using money printing to fund infrastructure.

I wonder if it could have been reversed back then. The UK had and still has a huge deficit (annual government overspend) and an almost incomprehensibly large debt. That means we were issuing large volumes of government bonds – surely we needed the Bank of England to buy those bonds?

Not so, says Smith. One thing that has taken most economists by surprise has been the strength of government bond markets (thanks to their global “safe haven” status). So it would have been possible to reverse QE “almost by stealth” by simply not reinvesting the proceeds as each gilt matured. But we haven’t done this – the Bank is still buying new bonds every time it gets paid out of old ones. This will continue “until rates have been raised to a level from which they can be materially cut, and who knows when that will be”?

As long as QE remains unwound, the idea of more of it will remain a “temptation for politicians”. You will have guessed (as I had by this point) that, like us, Smith has no patience for the idea of people’s QE. But just in case, I ask. His answer is pretty clear: “People’s QE is economically illiterate, I mean, it is ridiculous.”

We move on to talk about how the UK economy looks today. Smith has previously told me that his two favourite chancellors of all time are the late Geoffrey Howe and Alistair Darling (see the full video for why). How does he rate George Osborne? He gives him “quite high marks for bravery” and making tough decisions in the face of “outcry from many economists”, including the International Monetary Fund. He is falling down in some areas (tax simplification being the obvious one). But he is sticking to his plan – and it is working.

So he feels that the UK economy is safe under Osborne? Yes, “in the sense that we don’t worry that every Friday evening there’s going to be a downgrade from one of the ratings agencies”. The deficit has not fallen as fast as Osborne and others might have hoped, but it has come down at “sufficient speed to take it away as a crisis issue”. Meanwhile, “the employment story has been staggeringly good… in the recession of the early 1990s GDP fell by 2.5% from peak to trough. Employment fell by 6.5%. In 2008/2009 it was exactly the opposite. GDP fell by 6.5%. Employment fell by 2.5%.”

In the early years of the recession much of the work was part-time and low quality, but “some employment is better than no employment”. In the last couple of years, employment growth has been dominated by the kind of full-time jobs that pessimists thought had disappeared forever. You can see that in the wages data. In the beginning, the jobs were low-paid, which “bore down” on wage data. Now there are more higher-paid jobs, so wage growth is rising. We are getting back to “a kind of normality”.

The return of the North

We move north. Smith grew up in the West Midlands (near Birmingham). His father worked for a manufacturer (Metropolitan Cammell) that made rolling stock for the tube trains and railways. Like all the manufacturing in the area, it felt “utterly permanent”. One of his early memories is seeing an “enormous batch of rolling stock ready to be shipped off to South African Railways” on an open day at the plant. The area remains close to his heart and a good part of his book looks at what has happened to the region since.

The key thing to note, he says, is not that manufacturing declined – hardly unique to the UK – but the speed at which it declined. In 1973, the sector was still strong. By 1983, it had gone “even in the areas where it previously seemed permanent, like the Black Country”. Manufacturing was 40% of the economy. Within a few decades it was 10%. The story today, however, is of revival, albeit from a much lower base. Why?

We are good at two things in the UK, says Smith. “High-value manufacturing” and things that “require quite a lot of technology”. But there are other things coming back that aren’t in those high-value areas – such as piping and basic building products. People had outsourced to China, but “it’s become cheaper to do it here” as China has lost some of its cost advantage (wages are rising). “Reshoring” is real. However, it isn’t yet real enough to save the UK economy. Global demand isn’t strong enough for us to see a full-on “march of the makers”, and the “green shoots” of manufacturing have a habit of being stamped on by one thing or another: the exchange rate, the eurozone crisis and so on.

However, the UK is also exceptionally good at a few other things – financial, professional and business services being the obvious ones (accountancy, architecture and so on). A part of that is also moving to the Midlands: the likes of HSBC and Deutsche are moving many staff there and thinking of Birmingham in a way “they wouldn’t have done five years ago”.

This moves Smith to have a few more warm feelings for Osborne: the “Northern Powerhouse” concept is, he says, “very imaginative”. Too many Conservative chancellors ignore the north on the basis that there are no votes in it. But if we can get local authorities co-operating, on infrastructure and on private-sector investment, that may start something big. The legacy of the decline of manufacturing has been that too many of us have simply written off the old manufacturing areas. But “I don’t think we should be that pessimistic”.

We’ve been talking too long. But I can’t let him go without a house-price forecast (MoneyWeek readers don’t forgive that kind of thing). The last crash, says Smith, was a “once-in-a-century crisis… and… I always say to people, you don’t get two once-in-a-century crises in the space of a few years”. From here, you can expect house prices to keep rising. People are living longer and they aren’t downsizing. So there is a shortage not just of new-builds (the thing politicians go on about) but older houses too. And mortgage lending is rising again. So rising prices are just a “straight forward supply/demand thing”.

The only thing that really brings house prices down in the absence of a major crisis is a “sudden and sharp rise in interest rates… and we’re assured by the Bank of England that that’s never going to happen again… when interest rates go up it will be gradual, to another level much lower than in the past”. Hmm, I say, I wonder. Things rarely unfold as central bankers (or anyone else) thinks they will. So I am not convinced they will this time. Smith sort of agrees. He reckons that Mark Carney will keep rates low until 2018 (when he leaves the Bank). But beyond that we could be in a very different environment and “it is anybody’s guess”. On that, I think, we all agree.

Who is David Smith?

David Smith, 61, has been economics editor of The Sunday Times since 1989 and writes a weekly column for the paper. He grew up in West Bromwich, and went on to study at Cardiff University, Oxford and London. He started his working life as an economic report writer for Lloyds, then moved into business journalism, eventually joining The Times as economics correspondent in 1984. In 2004, he won the Harold Wincott Award for senior financial journalist of the year.

Smith has written 11 books, including Free Lunch (2008) – a layperson’s guide to economics – and The Age of Instability (2010), a summary of the financial crisis. He blogs regularly at www.economicsuk.com, and his latest book – Something Will Turn Up: Britain’s Economy, Past, Present and Future (published by Profile) – is out now, priced £14.99.

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