If we are to have a national conversation about trade, manufacturing, debts, foreigners buying up the country and so on then it would be a good and reasonable idea to get the underlying right first:
Economic theory, and generations of politicians, told us not to worry about leaving manufacturing behind.
We’ve not left manufacturing behind. Manufacturing output is still within a few percent of all time highs. It’s double what it was when St Maggie came to power.
Since we moved to a floating exchange rate, economists and politicians have claimed this does not matter. But the trade deficit is both a product of our problems and a cause. It is a product because we do not make, do or sell enough to the rest of the world. It is a cause because the arising current account deficit leads us to sell assets to foreign investors and build up external debt, which leaves us with less control over our economy, and more exposed to investors’ interests and increases in international interest rates.
Economists are right here. Which, given that we are talking about economics seems appropriate.
Then there is the budget deficit and stock of debt…..In 2024-25 Britain plans to issue a record £271 billion in new gilts, and the strangers upon whom we depend will demand higher yields. They will wonder about inflation – higher in services than goods – and the value of Sterling, and price British debt accordingly.
And here’s it’s necessary to become detailed - in order to show why the economists are right.
There is no connection - none - between the size of the national debt and anything to do with trade. We have a national debt because generations of politicians micturate the wealth of the country up the wall. They continually spend more than we the people are willing to pay in taxes - or more than the politicians are willing to try extracting from us. That’s the cause, the only cause, of the national debt.
The trade defict is indeed balanced - exactly, precisely - by a surplus on the capital account. That’s definitional. But while capital might flow in from foreigners into debt instruments - like gilts - it doesn’t have to. It can purchase assets outright. This then leads to the old Warren Buffett argument about Squanderville. What happens when Johnny Foreigner owns all the capital assets in the country?
The UK trade deficit is - of the order of - £80 billion a year, meaning we need to have that same amount coming in on the capital account. In one recent year the UK produced £1 trillion in new wealth. That’s a 9% rise in total wealth - and we sold 8% of that new wealth to foreigners. Thus at the end of the year foreigners owned less of the national wealth than at the beginning of it.
This does not strike us as being a problem.
Painful things to political arguments, facts are. But we do think that facts are where the arguments should start so let’s try doing that, eh?
Our real contempt is reserved for this argument:
Classical economic theory holds that it does not matter who owns what, nor what is made where. Comparative advantage means countries do what they are good at, and buy what other countries provide. Thus, trade makes us all richer.
But this is not the case. First, governments get in the way.
So the solution to governments getting in the way is that we should have more government getting in the way in order to solve the problem of government getting in the way. We all should be contemptuous of that silliness.