The outspoken former minister's report is, like the man himself, a breath of fresh air. But in his 89 recommendations, there is little that addresses the main problem: acute lack of demand
Michael Heseltine, the cabinet minister whose leadership bid precipitated the fall of Margaret Thatcher but not his own rise, has always been a breath of fresh air in British public life.
When the Thatcher cabinet was divided, in her own terms, between "wets" and "dries" – the wets being ministers such as Sir Ian Gilmour, Jim Prior and Peter Walker, who opposed the monetarist policies adopted by Thatcher's "dry" entourage – Michael, now Lord, Heseltine, delighted in the ambivalent position of being regarded as "half wet and half dry".
During a long period when it was unfashionable to say so, he made no secret of his belief in the important role of government, whether central or local, in promoting economic growth. With help from some ideas provided by the cabinet office thinktank, Heseltine played a major role in reviving Liverpool after the Toxteth riots.
In recent years Heseltine has been an enthusiastic admirer of David Cameron's. It was a relief to some of us when the prime minister and chancellor called upon our wet and dry friend to come in from the cold, and he has not disappointed. What is more, the welcome accorded by Cameron and Osborne to a report that challenges their approach to many things has been warm enough to escape the accusation of "damning with faint praise".
It is easy to lose count of the recommendations, on everything from transport infrastructure to local government, that Heseltine has made, but 89 seems to be the agreed figure for the total in his report No Stone Unturned: In Pursuit of Growth.
If we stand back from the detail, over which there will be endless arguments and infighting, it is the broad approach that matters. This country, in postwar decades, has lurched from one policy fashion to another in pursuit of the economic philosopher's stone. This stone, with due respect to Heseltine, has remained persistently unturned.
In the 1960s and 1970s we had national plans and forums such as The National Economic Development Council that brought what were known as "both sides of industry" (employers and trade unionists) together with government. These were all collective efforts to resolve the British economy's weaknesses, accompanied by attempts by governments of both major political parties "to back winners".
After the short life of the Industrial Reorganisation Corporation in the late 1960s, the fashion turned against intervention, the classic failure being the government-engineered merger of Leyland Motors with BMC to create British Leyland. But as Nicholas Comfort notes in his book Surrender, "the IRC itself performed valuable work in bringing together companies in fields like engineering, between which there was a natural synergy".
Under Thatcher and her svengali Sir Keith Joseph – who thought the Department of Trade and Industry, which he headed, should be abolished – government intervention became dirty words, and the future lay in deregulation and low taxes.
Well, we all know where that led. The wider significance of Heseltine's report is that the coalition is finally waking up to the fact that extreme free-market policies are bad for the nation's health, and "may contain nuts". It is foolhardy for governments not to take a strategic view of the supply side of the economy: why, the CBI has been crying out for this floppy coalition to make up its mind about energy and infrastructure – policies that affect the plans of business big and small.
Heseltine is well aware of how the policies of recent years have aggravated the imbalance between manufacturing and financial services, as well as between London and the regions. It was significant that he launched his report in Birmingham, the base of one of his heroes, Joseph Chamberlain.
I wish the noble lord nothing but the best in embarking on the long haul of British industrial and regional revival. But at this stage one has to sound a dissenting note. Economics is about supply and demand. Contrary to the belief of the early 19th century French philosopher Jean-Baptiste Say, (promulgator of Say's Law), supply does not create its own demand.
Heseltine says he endorses the government's deficit reduction strategy. I wonder if he really does. There is a huge shortage of demand in this economy and in most of the rest of Europe. The Keynesian revolution was about the need to manage demand. As Martin Beck of Capital Economics points out, GDP in the UK is now about 14% below what it would have been if the long-run trend rate of growth had continued after the financial crisis. Beck reckons that, even assuming the crisis has permanently damaged some capacity, the economy is still operating at about 6% below potential because of premature "fiscal consolidation".
Alas, the damage to our industrial structure is such that the recent devaluation of the pound has still left us with a formidable trade deficit. The Office for Budget Responsibility and the National Institute of Economic and Social Research are both concerned about the trend of the current balance of overseas payments. In a disconcertingly convincing pamphlet, A Price That Matters (Civitas) the economist John Mills argues that the pound remains seriously overvalued. The terrible truth may be that, in order for exporters and rivals to importers to take advantage of all that spare capacity, and boost output and employment, we need yet another significant devaluation.
William Keegan's new book, Saving the World? Gordon Brown Reconsidered, is published by Searching Finance at £9.99