Governments have little power these days - learn to live with it

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The Independent Culture
WE ARE, I fear, catching a glimpse of the future. When you see reports in the papers that "business leaders pleaded with Tony Blair to rescue the economy", you know something is up.

Here in Britain, the focus of concern has been interest rates and the strong pound. But there is a bigger game unfolding. Anyone who has read a newspaper in the last month will have taken on board the fact that the world's second largest economy, Japan, has gone into a slump, and the East Asian economic crisis is now starting to have an impact on the US economy and on the world's financial markets. Securities markets around the world are not running scared because of the policies of the Bank of England's monetary committee; they have taken on board the possibility (and for the moment it is no more than that) that the East Asian crisis could tip the world into a post-millennial recession.

What that mission to Mr Blair shows, though, is not so much that parts of the business community realise that there are difficult times ahead, but rather that they still look to politicians to solve economic problems. The glimpse of the future that we are catching is not so much the distant thunder of the next downswing, but rather a new tension between governments and the people who elect them.

In any democracy governments have to present themselves as having some responsibility for the fruits of economic prosperity. They say that they have "created" jobs, "given" people better health care, or "provided" better schools. So it is natural when businesses are finding things tough that they should go to the Government and ask it to rescue the economy. But this attitude reflects relationships which, if they ever existed, certainly do not exist now.

Ask the practical question: what do these pleading business leaders want the Government to do? Take back control of interest rates from the Bank of England? If it did that there might be some decline in short-term rates and there would certainly be a fall in sterling. But there would also be a rise in long-term rates, a sharp fall in share prices, rising inflation, a balance of payments crisis and - in a couple of years - new austerity measures including higher interest rates, tax increases and so on.

Maybe the business leaders want some form of subsidy. Well, governments can provide those and frequently do. But all that is happening there is that they are taking away money from one group of people in taxation and giving it to another in the subsidies, after deducting their own administrative costs for organising the redistribution. The first group will have less money to spend on the goods and services they want to buy, and the businesses getting the subsidies will go on producing goods and services that people do not want at the price at which they can be produced. Society as a whole will be poorer as a result.

Take even health care, or education: the Government is not magically "giving" people anything. It is taking money in taxation, using this to manufacture and distribute the services. Of course we want and need these things and of course society as a whole gains from good public services. But everything has to be paid for somehow: governments have no money of their own.

We all know this. So why does the rhetoric persist? I can understand its carrying on in the debate over public services because there is a genuine sense in which governments have control over these. They can be either efficient or inefficient in the way they run the show, taking credit for the former and carrying the can for the latter. But when you come to talking about control over the economy as a whole, it is surely a mug's game for any government to pretend it can do more than nudge things at the margin.

Really bad economic management can certainly make it very difficult for an economy to prosper. Britain experienced that in the Seventies and Japan is experiencing it at the moment. But I do not think it is reasonable to expect our present government to be really bad at economic management. It will make some modest errors - it may have made a modest error in its last spending plans, which if they are to be paid for without higher taxation require steady growth through to the early part of the next century. As each day passes that growth appears less likely: the new Bank of England economic forecasts show awareness of the possibility of a coming recession, though those canny central bankers merely note this as an outside possibility rather than an odds-on bet. But all governments make modest errors in economic management. I see no reason to think that ours will be less competent than those of most other developed nations.

The trouble will be that reasonable competence is a hard thing for governments to sell, if that is all that can be offered in the face of a much more difficult global economic environment. It requires politicians to present themselves in a different way: instead of being able to solve voters' problems, a nice, simple on-line message, they have to try to convey the more subtle notion that they can create an environment in which it will be easier for those voters to solve their own problems.

This government is brilliant at presentation and has as good a hope as any at being able to re-educate the electorate as to the limits of its power - indeed the power of any national government in a global market economy. Given a following wind it could probably sell this in a credible way.

Trouble is, it may not get a following wind. The last six years have been unnaturally favourable in the UK. Every year since the recession we have grown faster than France or Germany and in all but one, faster than Italy too. Throughout this period the US has also experienced a long, low-inflation boom.

Now you do not need to buy the more gloomy end of the spectrum of views about the world economy to believe that the next six years will be less favourable than the last. You do not need to think they will be dreadful, to accept the point that they cannot be as good as our recent experience.

This will change the political dynamics. This is not a party political matter; it would apply to any shade of government. Nor is it even that Mr Blair and his colleagues will need to learn how to govern in bad times, when they are hated and being blamed for things beyond their control - rather than being adored and taking the credit for things beyond their control. That will happen, and when it does I think Mr Blair in particular will find the experience very hard to cope with.

In fact, I don't think this is a British issue at all. It is a global one. In the last two decades the world economy has been utterly transformed. The word "privatisation" did not exist; now even Ukraine is doing it. International capital flows have multiplied nearly 100-fold. Information is instantly and totally available - and frequently wrong!

As a result, governments have to live in a world where they are much less powerful, and they have to explain this to their electorates. So when business leaders next plead with Tony Blair to "rescue the economy", he has to steel himself to reply: "I can't. You are the business people. You create the wealth; all we can do is shuffle it around. If anyone is able to rescue the economy, it is yourselves."