Letter: Dangerous medicine for the economic disease

Sir: Your manifesto for economic recovery (22 October) is to be applauded for recognising that institutional as well as policy changes are required if any recovery is to be durable. Some of your proposed institutional reforms are sensible, such as delegating decisions on monetary policy to an independent central bank free of the short-term temptations that face politicians. Others, such as privatising Treasury forecasting, are little more than gimmicks; there are plenty of independent forecasters already and, with only a couple of exceptions, their recent performance has been at least as bad as the Treasury's.

However, you fail to recognise that it is in the labour market that institutional change is most urgently required. The sad fact is that the current recession was precipitated by the need to prevent inflation accelerating at a time when there were still nearly 2 million unemployed. Although wage settlements are falling, they still average 4 per cent, despite unemployment approaching 3 million. If your proposed fiscal and monetary measures are successful in regenerating growth, past experience suggests that wage inflation will begin to accelerate again as unemployment begins to fall towards the 2 million mark. Maintaining unemployment at this level simply to contain inflation is both socially undesirable and economically inefficient.

Tackling this requires institutional changes to facilitate two sorts of policies. On the one hand, there needs to be a serious attempt to upgrade the skills of the unemployed so that they can compete more effectively in the labour market. On the other hand, employers must agree among themselves to limit wage rises as the labour market tightens and not to indulge in a self-defeating 'wage-

wage' spiral. Only in this way can we be sure that the competitiveness gain from the recent fall in sterling will not be eroded. Without such changes to the way the labour market functions there is indeed little chance of any recovery being durable.

Yours sincerely,

CHARLES BEAN

Professor of Economics

Centre for Economic

Performance

The London School of Economics

and Political Science

London, WC2

26 October