Stephen King: Tale of two weddings... how the royals reflect the financial mood
Economic outlook: At the time of the 1981 royal wedding the UK was most definitely on the fragile road towards recovery
Monday 02 May 2011
Charles and Diana's marriage may have been ill-fated in so many ways but, economically, the "Wedding of the 20th Century" was propitious. It took place in July 1981. After more than a year of economic contraction, the UK economy was beginning to turn the corner. In the third quarter of 1981 alone, GDP rose 1.4 per cent, signalling the beginnings of a multi-year period of economic expansion associated with tax cuts, yuppies, striped shirts, eyeliner (for men), Madonna and Liverpool FC.
So you can see why George Osborne, the Chancellor of the Exchequer, might be salivating. Having just been through another royal wedding, could it be that the UK economy is again about to stage a sustained period of wealth creation that will turn the recent financial crisis into nothing more than a distant memory?
The 1981 royal wedding came shortly after the 1981 UK Budget. Geoffrey Howe, the chancellor at the time, delivered one of the biggest-ever fiscal squeezes bang in the middle of a particularly nasty recession. Many economists thought he was mad. Indeed, 364 of them wrote a letter to The Times suggesting the government had taken leave of its senses (Mervyn King, now a keen advocate of fiscal consolidation, was one of them).
Yet, despite Mr Howe's fiscal bludgeoning, the UK economy was most definitely on the fragile road towards recovery. But it didn't seem to be the case at the time. In the week that Charles and Diana got hitched, "Ghost Town" the Specials' bleak take on modern life in Britain, was in its third week at number one in the singles charts. Its lyrics remain eerily poignant today: "This town is coming like a ghost town ... government leaving the youth on the shelf ... no job to be found in this country ... can't go on no more ..."
Meanwhile, although the economy was turning the corner, not everyone was benefiting. Unemployment carried on rising until 1985. The gap between haves and have-nots became progressively wider. And it wasn't really until the late 1980s, when the UK economy was absolutely booming, that the "folk memory" of that period began to take hold. That folk memory is still in place. On Friday, Kate Middleton's dress was frequently described as a design appropriate for these austere times, in contrast to the creased taffeta flamboyance of Diana's packaging which, apparently, better captured the mood prevailing in the 1980s.
Yet the mood at the time of the Prince Charles and Diana's wedding was about as miserable as it's possible to imagine. Over the years, we have forgotten all that: we now pretend that the 1980s was one happy sprawling decade of rising house prices, Wham's "Club Tropicana" and champagne-swigging Sebastian Flytes. The genius of Charles and Diana's wedding was to pretend that we were not living in a world of austerity at all. It allowed the great British public to dream. And, as the 1980s progressed, some of those dreams became a reality. So will the marriage between Wills and Kate allow us to dream? Will it allow us to think that austerity, unlike marriage, doesn't last "until death do us part"? Well, part of the dream was ruined on Friday with the sight of the minor royals being bussed down the Mall, a sign of our newly austere times.
Still, the organisers could have gone further, following in the BBC's footsteps by relocating the wedding to Salford or outsourcing the entire event to parts of the Commonwealth where labour costs are a lot lower. Thankfully, none of this happened so we were still able to enjoy the pomp and pageantry to the full. Our dreams have not quite been dashed. Yet turning dreams into reality is no easy task. Sometimes you also need a little bit of luck.
For Margaret Thatcher, the Falklands War marked a turning point. It won her the 1983 election. It was only in her second term in office that she really began to transform the UK economy: defeat of Arthur Scargill's miners (and the concomitant reduction in union power), privatisation (BT, the first major sale, was in 1984) and the rapid increase in the sale of council homes following "right to buy" legislation in her first term. Yet the transformation didn't just rest on her policies.
It also reflected the unexpected – and, in some cases, unintended – consequences of those policies. The defeat of inflation was a good thing in itself but it also led to an unexpected increase in the willingness of consumers to spend, even though unemployment was persistently on the rise. Deregulation of the financial system was mostly aimed at making capital markets work better through greater competition but it also led to a credit boom which further supported consumer spending. And, as the government tackled the budget deficit, long-term interest rates came down, encouraging companies to expand at a faster rate. Replicating these effects is not going to be very easy. At 4 per cent, inflation may not be as low as the Bank of England would like it to be, but the extent to which it can fall is tiny relative to the declines seen through the 1980s. At the time of the 1981 royal wedding, retail price inflation was 10.9 per cent, down from more than 20 per cent a year earlier. It eventually reached a trough of 2.4 per cent in 1986. Rather than seeing deregulation of the financial system, we're on the verge of seeing re-regulation.
Trust in markets has gone, to be replaced by faith in the ability of policymakers and regulators to get things right: it's an understandable reaction given the events of recent years but must be anathema to anyone of a Thatcherite persuasion. It also suggests that, unlike the 1980s, credit growth is unlikely to take off any time soon. And while Mr Osborne wrestles with the budget deficit, the aim of austerity is not really to drive interest rates down but, instead, to prevent them from rising.
While the UK sensibly wants to avoid a Greek-style fiscal crisis, stopping rates from rising is a bit of a hollow victory. So what needs to be done? The deficit undoubtedly needs to be tackled, even if the economic and political rewards for doing so may not be immediately obvious.
There is, in my view, no great urgency to tackle inflation: the Bank of England would be wise to keep rates unchanged, partly because the weakness of the economy will drive inflation lower in the next twelve months or so anyway. And the government needs a strategy to rebalance the UK economy not towards exports in general but towards far greater economic engagement with the fast-growing nations of the emerging world.
But perhaps we shouldn't worry too much. While the Specials were at number one 30 years ago, the number one spot today is held by LMFAO (so I am reliably informed by my daughter, Olivia) with their "Party Rock Anthem". The lyrics are nothing like as depressing: "Party rock is in the house tonight ... everybody just have a good time ... and we gon' make you lose yo' mind ...". Maybe things aren't so bad after all.
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