Economics: A missing link in the White Paper

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The Independent Online
NOTWITHSTANDING the presence of eight Cabinet ministers at its launch last week, the Government's much-trumpeted White Paper on Competitiveness is unlikely to be hailed by future generations as a work of enduring historical significance.

What a contrast with the White Paper on Employment published almost 50 years earlier to the day, which began by boldly committing the British government to maintain 'a high and stable level of employment after the war'. John Maynard Keynes, who more than anyone inspired it, remarked that this first sentence was 'more valuable than the whole of the rest'.

Keynes's belief that governments could and should do something about unemployment by manipulating the overall level of activity in the economy remains at the centre of political and economic debate half a century later.

'Full employment' has become a shibboleth in Labour's leadership election, for example. The party's 'modernisers' have to swear allegiance to the concept in order to convince the 'traditionalists' that they amount to more than the human embodiment of a few pages of opinion poll findings. Even Conservatives cannot afford to be dismissive; Kenneth Clarke sells low inflation as a precondition for achieving high employment rather than an end in itself.

Even so, the electorate remains cynical. Private polling by the Labour Party has found that voters love the idea of full employment, but distrust any politicians who claim they can deliver it. The performance of the past 20 years may appear to justify such cynicism, but the loss of faith may also have been partly self-fulfilling.

The 1944 White Paper was not pure Keynes, but rather a compromise between the Keynesian optimists in the Economic Section of the Cabinet and the sceptics in the Treasury. It described five methods by which the level of spending (and therefore employment) in the economy could be kept high.

These included variations in interest rates and spending on public works to offset periods of low private investment. National insurance contributions were to be cut during downturns and deferred income tax credits paid during depressions. The budget was to be balanced over several years, rather than in every year, to avoid exacerbating the economic cycle.

The White Paper also urged (but did not seek to enforce) moderation in pay settlements to restrain inflation. It proposed extra help for depressed regions and said that the Government should help workers to change jobs by supporting training and encouraging provision of low-rent housing.

The record of the 25 years following the White Paper suggests at first glance that this must have been a reasonably successful prescription. Unemployment was more often below 2 per cent than above it, far lower than Keynes had thought sustainable and much lower than the 10 per cent seen today. Inflation averaged 3 to 4 per cent in the 1950s and, although it accelerated in the 1960s, it never reached the heights seen in the following two decades. Upturns and downturns in growth continued, but were neither as large nor as long as those in the past 20 years.

But did the active pursuit of Keynesian policies outlined in 1944 have much to do with this? Probably not. Post-war governments did not have as much freedom to manage the economy as the White Paper implied. The level of the pound was fixed under the Bretton Woods system. Expanding the economy through tax cuts or public-spending increases was soon undermined by a rising trade deficit, producing the so-called 'stop-go' cycle. Interest rates were hardly an active tool of policy - they were determined largely by the need to defend the exchange rate or to fund the government's borrowing.

To the degree that governments did try to manage demand, they destabilised the economy by misjudging the lags between policy changes and their impact on the economy. The so-called post-war Golden Age was as much the result of luck as judgement.

Europe was able to grow rapidly as it caught up with America by importing its technology and techniques. The steady expansion of world trade opened new markets, while cheap energy kept production costs down. Rapid productivity growth enabled the economy to meet the aspirations of workers for higher living standards and capitalists for higher profits without the need for an inflationary squabble over shares of national output.

If the White Paper helped, it was because the mere stating of a commitment to full employment helped to boost what Keynes called 'animal spirits'. This kept the Golden Age more stable than the boom of the 1850s and 1860s, which it otherwise resembled.

Lord Skidelsky, Keynes's biographer, argued at a seminar organised by the Social Market Foundation last week, that the Keynesian policies were only actively pursued in the 1960s, when they went a long way to sowing the seeds of their own destruction. Governments around the world tried to boost their economies: Britain 'dashed for growth', the US cut taxes and France and Germany took similar measures.

Inflation was accelerating as the 1960s ended, partly because Keynesianism had been applied with much less caution than Keynes would have wished. The nascent problems were exacerbated in the 1970s by an ill-advised loosening of policy by Edward Heath's government, by a surge in commodity and oil prices and by the floating of the pound.

Lord Desai, sacked from the Labour front bench last year for having the temerity to expound views that lack the approval of opinion pollsters, argued that the simultaneous rise in inflation and unemployment which followed can be seen as a crisis of profitability.

Profits eroded across the developed world as the scope for 'catching up' with the US was steadily exhausted, intensifying the conflict between workers and their employers. Capital fled to take advantage of new opportunities in South-east Asia, leaving Western governments with private economies inadequate to sustain the rapid growth of their public sectors. From being a positive influence in the years after the war, the White Paper's commitment to full employment became a millstone.

The idea of using expansionary tax and public-spending policy to avoid economic downturns was effectively disavowed in Britain in the mid-1970s. In 1981 Geoffrey Howe tightened fiscal policy in the teeth of recession, while in 1988 Nigel Lawson loosened it as a debt-fuelled boom took hold. The results are all too familiar.

So what is left of Keynes? Lord Desai argues that his great legacy was the idea that national governments hold their economic destinies in their own hands, but that this notion is out of date because countries are more open to international trade and capital flows. Policies to boost spending at home leak out into greater demand for cheap foreign imports, and demand for British goods is more dependent on overseas markets.

Employment creation has become increasingly difficult as manufacturing has migrated. Inflation may be subdued by the supply of cheap imports, but excessive consumer spending will still burn itself out in growing trade deficits. Traditional Keynesian policies may only be able to cut unemployment by about another half a million.

The best hope for the future lies in devoting a far higher proportion of national spending to investment, which in turn demands a higher share of national income devoted to profits. The welfare state and the tax system should be reformed to provide better support for the poor while reducing disincentives to working more.

More will have to be done to keep people in touch with the labour market. The proposal for training vouchers in the Competitiveness White Paper should be extended, as should the pilot schemes which allow the unemployed to exchange their benefits for subsidies to employers.

But how can this be paid for? Only by the Government spending less and taxing consumers more. This prescription is nowhere to be found in the White Paper on Competitiveness and will no doubt be absent from the manifestos of Labour's leadership contenders. But if the aspiration of the 1944 White Paper is to have any enduring relevance, the medicine will eventually have to be taken.

(Graph omitted)

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