<<<	speeches
The search for the Holy Grail - if there is one Samuel Brittan: Queen Mary College 06/12/04. Introduction It is a good idea often to start such talks by making a confession. Mine is that I regard myself as a writer rather than a speaker. The main reason why I am at the moment accepting a number of speaking engagements is to draw attention to book of mine entitled Against the Flow - Reflections of an Individualist - due out in January (Atlantic Books, £19.99).. It puts together essays from a variety of sources - not only my Financial Times articles, sometimes in extended versions, but also longer essays hitherto scattered in a wide variety of publications. The book ranges in subject matter from foreign policy to religion and some potted biographies. Rather than attempt to cover the whole ground, I think it best to base myself on one of the essays which I am told might be of interest to this group - namely the changing economic role of government over the last half century. The Three Periods The period under review begins with the early 1950s. The Korean War ended in 1953 and the real postwar era can be dated from then. Politically the last half century can be regarded as the Tory half century - with three intervals of Labour power, 1964-70, 1974-79 and 1997 to date. But this does not mean that the public philosophy was in any sense Tory - whatever that word might mean. For most of the time prevailing attitudes might loosely be called social democratic. And even since the advent of Thatcher and Blair, social democracy is still a bigger influence than pessimistic social democrats are ready to acknowledge. On the economic side I shall make a three-fold division. But this is largely a matter of convenience and there would be many other ways of slicing the cake. The period up to 1973 I shall call the Not so Golden Age. The one from 1973 to 1992 I shall call The Time of Troubles. The period since then I shall call, following Mervyn King, the Governor of the Bank of England, the NICE decade, because the economy has been on a "non-inflationary consistently expansionary" course despite all political arguments and social tensions. The Not-So-Golden Age The two decades up to 1973 have often been described by international economic historians as The Golden Age. For although it was not recognised at the time the developed world was going through a period of low and stable inflation, full employment and reasonably steady growth. In speaking of the UK I have called it "not so golden" because there was growing dissatisfaction with Britain's economic performance and envious comparisons with other countries - as well as a series of headline sterling crises. The Conservatives fought the 1951 election, which they won, on Churchill's slogan "Set the People Free." But the main chance of a real dash for freedom was thrown away. After the Conservatives returned to power a bold scheme to float the pound and free the country from the throes of never-ending runs on sterling had been proposed - "Operation Robot" - named after the two civil servants and one Bank of England official who devised it. The Chancellor, R A Butler, was in favour; but Churchill overruled him on the advice of his wartime confidant Lord Cherwell and the way was open for 20 or more years of preoccupation with sterling and the balance of payments. Meanwhile so-called league tables began to circulate showing that continental countries were growing at a faster rate than the UK. The gathering discontent was not a matter of mere numbers. There was a widespread feeling that despite the expansion of educational opportunity and increased prosperity that the country was still run in a class ridden way and what mattered was not what you knew but whom you knew - and possibly how you held your fork. One best selling book was Michael Shanks's The Stagnant Society. Some of these feelings emerged very clearly in John Osborne's play Look Back in Anger and in the early novels of Kingsley Amis. These had their counterpart on the business side. The electrical industry was dominated by three vast bureaucracies. One of them, AEI, was run by Lord Chandos who gave his real name, Oliver Lyttleton, to part of the National Theatre. The interviewer approached him through a series of carpeted rooms, each larger than the other. A journalist knew that if he said or wrote anything that displeased, he might be reported to his editor - or more probably - the managing director whom Chandos was more likely to know socially. Indeed I was once so reported by a Bank of England director whom I had the temerity to ask for some factual evidence to back the observations he was making "off the record". If there is one word which summarises everything against which the reformers were reacting it was "Fuddy Duddyism". There was bound to be some sea change. The reformers were split between those who pinned their hopes on more competition and those who drew their inspiration from French type indicative planning. Businessmen were just as split as economists or politicians, and probably in an even more muddle-headed way. The reappraisal began well before Harold Wilson formed his Labour overnment in 1964. There were some earlier acts of liberalisation, like the abolition of resale price maintenance by Edward Heath. There was also the first attempt at a forward look at public spending, following the Plowden Committee which reported in the early 1960s. "Europe" too put in its appearance. Having failed to take part in the negotiations which led to the Treaty of Rome, the Conservative government of Harold Macmillan applied belatedly in 1961 to join the EU (then called the "Common Market") - only to have its application vetoed halfway through negotiations in the famous intervention by General de Gaulle. The latter was much mocked for announcing that Britain was an island; but he was not so far off the mark about the country's psychological unreadiness. Unfortunately both the planners and the free marketeers had the ground cut off from under their feet by the return of sterling and balance of payments crises. The first three years of the Wilson government of 1964-1970 were dominated by a futile attempt to prevent sterling devaluation and then, when that failed, by devaluing to another fixed exchange rate. Even after 1967 the Treasury could not divest itself of its balance of payments mentality; and when devaluation seemed slow to work, it threw up a ridiculous contingency plan "Operation Brutus" for going back to a wartime siege economy. Domestically, the government's main form of intervention was devoted to futile attempts at "prices and incomes policies". The hope was to keep down costs that way and avoid the need to devalue. Amazingly, neither the Macmillan nor the Wilson governments could see any virtue in stable costs and prices other than in their effect in promoting British exports. There were any number of wage freezes, guiding lights and solemn and binding concordats. Perhaps the worst effect was the attempt to control prices to give the unions an apparent quid pro quo for wage restraint. The Time of Troubles The Time of Troubles from 1973 onwards had an international as much as a British context. The Yom Kippur War of that year helped to trigger the first oil price explosion, which was much more severe than any of the subsequent alarms on this front. The two subsequent decades 1973 onwards saw double digit inflation and the end of post war full employment. The problems affected the whole industrial world, but affected Britian particularly severely. The Conservative Government of Edward Heath (1970-74) had to cope with an unfortunate legacy. After the 1967 devaluation, inflation did not retreat to its earlier creeping 2 or 3 pc creeping level, but jumped to 6 - 7 per cent. Yet at the same time unemployment also shot upwards; and in the 1971-2 recession, newspaper headlines proclaimed the then horrific total of "one million unemployed". The combination of unemployment and inflation, labelled "stagflation", puzzled economists almost as much as it did politicians. According to the accepted historical canon, it was the miners' strike of early 1974 which brought down the Heath government. But far more significant in fact was an earlier strike in the same industry at the beginning of 1972. The miners' victory then was more significant precisely because it took place in a recession and before there was any thought of a world energy shortage. The economic cards should have been on the government's side. But it was defeated by the violent new tactics of the National Union of Mineworkers symbolised by the flying pickets which roamed around the country preventing fuel from being delivered. The international side is too often neglected. Until the early 1970's world inflation had been held in bay by the Bretton Woods dollar standard. Under this system the main industrial countries tied their currencies to the US dollar under a system of "fixed but adjustable" exchange rates. The emphasis was on the fixed aspect with adjustment being regarded as a defeatist last resort. The counterpart was that the US itself acted as the anchor country and maintained reasonably sound money policies. These were thrown to the wind during the inflationary financing of the Vietnam war in the 1960s. By 1973 the world was on a floating exchange rate system unconstrained by domestic monetary discipline. Thus there was nothing to stop the main industrial countries from over-reflating in 1972-73 and indulging in wishful thinking about the rate of economic activity and economic growth which could be sustained without accelerating inflation. A more perfect recipe for the Opec cartel was hard to imagine. When Labour came back to office first under Harold Wilson in 1974 and then under James Callaghan in 1976 it inherited an inflation rate racing towards double digits. Its initial response was more of the same: that is pay and price controls which it hoped would more easily be accepted under a party which had been created by the union movement. During the whole Labour period of 1974-79, the Chancellor of the Exchequer, Dennis Healey, who would have much preferred to have been foreign secretary, poured out anathemas on all schools of economic thought. He once declared that he wished to be to the economic forecasters what the Boston Strangler was to door-to-door salesmen. He came to share the alarm about the decline of the profitability of British industry and claimed that at tripartie meetings he had to make the case for industry himself. He was also prepared to make some pragmatic gestures towards the control both of public spending and of monetary growth. The shift away from post-war full employment policies towards a preoccupation with limiting public sector borrowing and a tentative approach to monetary targets was thus apparent during the Labour period. It was dramatised by a series of runs on sterling invariably followed by public expenditure clampdowns, fiercer than anything attempted before or since. The conversion from postwar demand management to a new "sound money consensus" was often attributed to the conditions imposed by the International Monetary Fund in its 1976 loan negotiations with the UK. In fact government policy had already moved most of the way before the IMF deal was done. The change was symbolised by James Callaghan's speech to the 1976 Labour party conference -- widely and correctly attributed to his then son-in-law Peter Jay -- in which he declared that governments could no longer spend their way into prosperity. The Thatcher government came to office in 1979 in the wake of a series of public sector strikes known as the Winter of Discontent, which reflected the last throes of the Incomes Policy. The assessment of that govcernment is still a matter of acute political controversy, which affects even the most academic attempts to be objective. In retrospect the two main achievements were the belated attack on union power and the privatisation of state-owned industries. The latter was at first regarded as an impossibly utopian project, but was later copied by governments of many different political colours all over the world. Unfortunately much of the discussion among economists and economic commentators during the Thatcher period was on technical questions of monetary control, which you will be glad to hear I shall drastically abbreviate. The truth is that the government did not find any monetary indicator which conformed to common sense observation of what was happening to the economy. One effect was to build support for British membership of the European Monetary System, which had started without the UK in 1979. It was noted that some countries, notably France, had managed to import German price stability by tying their currencies to the German mark inside the European Exchange Rate Mechanism and realigning as little and as seldom as possible. After much opposition from Thatcher herself, John Major when chancellor managed to force through British membership in the autumn of 1990. But by then the case for the D Mark anchor had been enormously weakened by the German reunification of 1989 which imposed a large budgetary burden on the German government. The Bundesbank maintained high interest rates to offset the inflationary effects. This interest rate policy was however quite unsuitable for the UK which had entered one of its worst postwar recessions and one which was particularly resented because it hit the talking classes in the south east of England. Thus on September 16, 1992 John Major's Government was forced to withdraw from Europeam Exchange Rate Mechanism. Whether wecall that day Black or White Wednesday it destroyed the reputation of the Conservative party for econoomic competence,which it has not fully recovered to this day. The NICE Decade Yet the economy did turn round and there began what I have already called the NICE decade. Not only did inflation fall back to a low and fairly steady rate of around two per cent; but this was accompanied by a remarkably steady if modest growth in almost every subsequent quarter since then. Either this turnround came too late to save the Conservatives in the 1997 election; or economic issues were drownded by other ones such as sleaze. The marks of the post-ERM policies were inflation targets and a greater role for the Bank of England. Operational independence for the Bank of England was inaugurated by the present Labour government in 1997, a few days after it came to office. But if you were looking at some purely economic charts you would not know when the government changed. And indeed the shift to the new regime of inflation targets and greater role for the Bank began with a Bank-Treasury public dialogue popularly known as the "Ken-Eddie show." he most interesting feature of the 1990s was not so much low and stable inflation itself, but that it was accompanied by a continuing drop in unemployment to levels not seen since the early 1970s. Some of the credit can legitimately be granted to the Labour "New Deal", which put emphasis on retraining and on pressure on the unemployed to take jobs and temporary subsidies to employers to take them on. Even more important in my view was the belated effect of the reduction of union power to price people out of work arising from the Thatcher measures of the 1980s. Labour leaders could not of course publicly admit this. But privately they were keen to emphasise how little of the Conservative union legislation they had reversed, some quiet backsliding. One murky feature of this otherwise Nice period has been a protracted debate on whether to join the euro. The debate has been muddled by an unhelpful dispute between the little Englanders and the euro enthusiasts. Yet for those of us who treat government as a device rather than a totem, it does not matter so much exactly where the centre of power is located. The British economy is equally capable of progress under a strong European federal government with appropriate decentralisation and a single currency, or under a national government with an independent pound regulated by the Bank of England Monetary Policy Committee. The danger is that it gets the worst of both worlds: a weak European confederation, with enough power to stifle market forces and price people out of work, but without the power or drive for genuine reform. Public opinion has been for long resolutely opposed to dropping the pound; and Tony Blair would have been well advised to put the whole issue on ice for his first two administrations. His reluctance to do so had little to do with economic technicalities and reflected far more the urgings of Foreign Office and Cabinet Office officials who wanted Britain to have a seat at some imaginary European top table. Conclusion: Productivity and All That Looking back over the whole half century what can one conclude about the policy record? Many officials will say that I have concentrated far too much on macroeconomic policy and crisis management and have not said enough about the efforts to improve British productivity. Although the means have differed, this has been a bipartisan preoccupation of almost all British governments starting from the postwar Anglo-American productivity teams sent out by Stafford Cripps to Gordon Brown's efforts today. Today there are a great many specific polcies, which ministers undoubtedly believed are improving the supply side and making the economy "more competitive". But what the present government finds it difficult to appreciate is that the culmulative effect of a great many individual measures, which might in themselves be desirable, produce an irritating and cost-increasing business environment. [REPEAT THIS SENTENCE] Unfortunately the Blair Government's academic praetorian guard is not as familiar with the US economic analysis of government failure as it is with the standard writing on "market failure". Over the last half century the most impressive feature is how stable the underlying productivity trend has been and how little affected by the huffing and puffing of governments. From 1870 until 1950 the best estimate is that UK output per hour grew by one per cent per annum. There was a temporary acceleration due mainly to post war catch-up: but since then it has settled down to a fairly steady two per cent. Overall growth trends have been somewhat more variable than productivity ones because of factors such as fluctuations in the working population. Even so they have still proved pretty stable and resistant to attempts to change them. The obvious conclusion is that economic policy makes less difference than those who discuss it like to think. Productivity growth, and growth in general, are like happiness. They will be achieved best if you do not think about them and concentrate on specific tasks. So far so good. But when I was called upon to give evidence to what is still the Upper House of Parliament I did ask myself why respectable officials carry on with all this seemingly fruitless productivity talk, apart from the need to earn their bread and butter. On reflection one can find a rationalisation. There are a lot of special interest pressures for policies that actually worsen performance and make no kind of sense: agricultural support, attempts to pick winning industrial companies; defence procurement from more expensive but British sources and environmental policies known as NIMBYism. If these pressures were not resisted productivity growth might not stay at two per cent but actually go down. If somebody can say about some special interest measure, "But Chancellor, what will this do to productivity?" it may help to fight it off. Even such limited success depends on not revealing the nature of the game. At the risk of undermining my own subject, I will dare to say that the last half century has been excessively preoccupied with the economic role of government. We were at all times in danger of forgetting - until rudely awoken by the attack on the New York Twin Towers of September 11 2001 - that the primary role of government is to look after the physical security of the population and that all else is secondary. For all our economic problems, most British people have had a far higher standard of living than the vast majority of the human race in all past history; and the time could be coming for Lord Keynes's "Economic Possibilities for our Grandchildren", in which attention would shift to more important matters. That is if the attempts of religious and other fundamentalists to destroy the European Enlightenment and the appeasing reaction of Europe's leaders do not derail us on the way.
<<<	speeches
Site designed and managed by Andrew Heavens - andrewheavens@ftnetwork.com