The fall in the value of sterling since the vote for Brexit has had commentators wringing their hands with concern. But why are so many so quick to assume that a cheaper pound is a bad thing? The truth, as leading economists Roger Bootle and John Mills explain here, is that the British economy has suffered from an overvalued pound for many years. It has restricted exports by making them more expensive and stimulated imports by making them cheaper; it has therefore been a leading cause of the UK s large current account deficit. But it has also reduced profits in relation to real wages, which has led to lower investment, lower productivity growth and lower living standards. And because the effects of a high exchange rate fall disproportionately on manufacturing this has helped create an unbalanced economy in which the winners are mostly located in financial services and the South-East.
The real sterling crisis, then, is not that the pound has fallen in recent months but that it had previously been priced too high for many years. This was allowed to happen by policymakers overly fixated with keeping down inflation and overly confident that the markets know best . In fact, markets may systematically misprice financial variables, as is widely acknowledged now in relation to equity and property. In this pamphlet, Bootle and Mills whose political sympathies, with the Right and the Left respectively, cross the political divide argue that the government should now devise a new economic framework that has at its centre an exchange rate policy designed to ensure the pound continues to trade at a competitive level in the years ahead. They outline the steps that might be undertaken towards such an approach and address head on the anxieties many have about a cheaper pound. With the British people having voted to leave the EU, this is an ideal time for the government to pursue an alternative policy framework. Indeed, setting a policy that would establish and maintain a competitive exchange rate for sterling is the single most important thing that a government can do for the promotion of a prosperous Britain.