Stephen King: Prosperity is a matter of timing

I am about to be grossly unfair because, for the purposes of this article, I am going to assume that Labour loses the general election on 6 May. This, I stress, is not a prediction but, instead, a way to allow me to offer some economic comparisons. With a complete run of economic data going back to the early Fifties and, in some cases, to the late Forties, it is possible to show how governments of all persuasions have performed over the decades.

Only by assuming that Labour gets booted out of office come May can I make these comparisons. Should Gordon Brown prove to be a modern-day version of Lazarus and find himself back at No 10, even with a little help from his Liberal Democrat friends, my numbers will prove irrelevant because Mr Brown would then have a number of years in which to salvage his economic reputation.

So how do the governments over the years match up? The table provides the key details for both growth and inflation, expressed as annual averages through the duration of each administration. On the growth front, the winners are undoubtedly the Conservative administrations of the 1950s and early 1960s under Churchill, Eden, Macmillan and Home. Edward Heath, another Tory, did rather well in the early 1970s. Throughout these Conservative administrations, annual economic growth averaged around 3 per cent. The big loser, it now seems, is the current Labour Government. In politics, timing is everything. Gordon Brown has had the misfortune of being in power during the worst global downswing since the 1930s, an experience which has seriously tarnished New Labour's record.

Had Labour's time in office finished at the end of 2007, Mr Brown (and Tony Blair) would have enjoyed one of the most impressive post-war records on economic growth, with an annual rate of expansion of around 2.9 per cent. But Labour stuck around and, as the world economy collapsed, Labour's leaders lost their economic mojo. In the space of just two years, the average growth rate dropped to just 2 per cent, the worst record (just) in post-war history. In fact, we've been stuck around this rather low growth rate for quite some time now. There isn't much to choose between New Labour, the Tories under Thatcher and Major and the old Labour regimes of Wilson and Callaghan. All incoming governments like to claim they have unearthed the secrets of rising prosperity. Most promise too much.

Harold Macmillan is remembered for having said "You've never had it so good" although, to fair to him, his actual words were "Let's be frank about it, most of our people have never had it so good" – which is not quite the same thing. The Conservatives of the 1980s and 1990s may have stopped Britain's relative decline compared with our European neighbours, but arguably this had more to do with German and French economic failings than new-found British success. Under Gordon Brown, Labour promised "no more boom and bust". Given hundreds of years of ups and downs associated with capitalist endeavour, this must fall into the King Canute category of silly claims.

Inflation also matters, not just because high and volatile inflation tends to be bad for growth (although that claim is looking weaker now than it once was) but also because it can have a huge and unfair impact on the distribution of income and wealth. After all, according to John Maynard Keynes: "Lenin is said to have declared that the best way to destroy the Capitalist system was to debauch the currency."

On inflation, New Labour scores handsomely. Since the Bank of England was made independent in 1997, inflation has been remarkably low, a better performance than in any other period of post-war British history. This is a significant achievement. Previous Labour administrations were sometimes badly undone by inflation, often through no fault of their own. After all, Wilson and Callaghan would have had fewer problems had the Heath government of the early 1970s not been stupid enough to generate an uncontrollable economic boom.

The achievement of price stability, however, has not been sufficient to deliver economic stability. Lots of other things have subsequently gone wrong, as David Smith, economics editor at The Sunday Times, so eloquently explains in his new book, The Age of Instability: the Global Financial Crisis and what comes next. Anyone, however, with a little knowledge of economic history would know that price stability, on its own, doesn't guarantee lasting economic success. Yet history is too often ignored. Even Keynes was guilty. In September 1928, he asked in a note, "Is there inflation in the US?" Concluding, rightly, that there wasn't, he went on to say that "stocks would not slump severely ... unless the market was discounting a business depression" which the Fed "would do all in its power to avoid". No inflation, faith in an all-powerful central bank ... who says history doesn't repeat itself? The problems affecting governments over the ages have, in one sense, been similar. How do you generate economic prosperity without triggering some kind of nasty financial shock?

What, I think, has for too long gone unrecognised is that the financial shock can vary depending on the circumstances of the day. In the 1950s and 1960s, the big problems were the balance of payments and frequent sterling crises. In the 1970s and 1980s, the major worries were oil prices and inflation. In the 1990s and beyond, the problems have increasingly been related to asset prices and leverage. In all of these cases, governments too often tried to get the nation to live beyond its means. The state of the UK's fiscal position today reveals that the current government has, ultimately, been no different. Inflation has been low, but economic instability is very much part of the here and now.

The obvious lesson to be drawn from all of this is that politicians promise too much (you knew that much already). Perhaps, also, the electorate is too gullible, always hoping to find the sunlit uplands that deliver prosperity to all.

More broadly, failed promises surround our political classes because, in so many different areas, they are no longer in control of our nation's destiny. Rising oil prices, house price booms and busts, risky bank lending and the rest are not just UK phenomena. They all reflect the impact of a rapidly changing world in which the reawakening of hitherto-dormant superpowers like China and India is altering the rules of the economic and political game. Their influence on the rest of us – through their consumption of oil and other raw material, through their saving behaviour and, most obviously, through their super-competitive labour forces – will increasingly shape our own economic destinies. Our would-be potentates are losing their power and influence to shape our nation's affairs. Their promises are increasingly falling on cynical, if not deaf, ears.



Stephen King's new book, Losing Control: The Emerging Threats to Western Prosperity, will be published by Yale University Press on 4 May

stephen.king@hsbcib.com

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