MONEY New optimism
Nicholas Davenport
Wonders will never cease. The usually pessimistic National Institute of Economic and Social Research has actually made an optimistic forecast in its latest Bulletin. According to their analysis the reflationary measures taken in mid-July have had an immediate and substantial effect on consumer demand for cars and other durable goods and there has been a lift-up in private housing (thanks inter alia to the weather) and as exports have been a good deal better than expected, the Institute now puts the rise in national output in the first half of 1972 at 41 per _cent to 5 per cent above the level reached in the first half of this year. This is slightly better than Mr Barber's estimate and will encourage the Chancellor to box the ears of the three financial journalists who falsely announced the coming of a new reflationary package last week.
Actually the Government has anticipated the Institute's suggestion that as unemployment would fall only gently during 1972 further grants or loans at nominal rates of interest might be made to local authorities and other public bodies on condition that they spent the money within a short period of time. Mr Barber announced a new public expenditure programme of E185 million on November 24 and is now considering whether any of the investment programmes of the nationalised industries can be advanced. My own preference is for cheap money loans for public works. The clearing of large body of unskilled labour which sites for the buildings always requires a would help to absorb the hapless unemployed school-leavers. The other suggestion of the. National Institute that the raising of the school-leaving age should be made next year instead of 1973 will dismay the already terrified teachers.
The pessimistic side of the National Institute's Bulletin, which is generally lurking underneath, is its assertion that "there are few signs that the rate of wage inflation has been slowing down recently," and that there is "little assurance that any substantial further reduction can be anticipated." This is contrary to the figures which Mr Carr recently produced and to his and Mr Heath's expectations. Mr Carr has said that basic hourly wage rates rose 8.1 per cent in the second half of 1970 and only five per cent in the first half of 1971 against 6.6 per cent and 4 per cent in the same periods for average wage earnings.
The National Institute admit that hourly wage rates have been declining recently but in September their index was still 12 per cent up as compared with September 1970. Further, they say that none of the important wage claims now being made (covering a quarter of the total labour force) has yet been settled — who wants a strike before Christmas? — but that they are going to be settled against the background of a 10 per cent rise in retail prices over the past twelve months. So they apparently anticipate settlements of around 9 per cent and as output rises next year they expect a resumption of the wages drift which will lead to a rise in average wage earnings of over 9 per cent. This would be a serious threat to the Government's expansion policy.
I do not accept the Institute's forebodings. They seem to me to be ignoring the effect of the CBI members' promise to limit price rises to five per cent and to the resolve of the four key members of the NEDC at their last meeting — Sir Frank Figgures, the director general, Sir Douglas Allen of the Treasury, Mr Campbell Adamson of the CBI and Mr Vic Feather of the TUC — to consider ' threshold ' wage agreements as a practical way of controlling wage inflation on a voluntary basis. The ' threshold ' wage agreement was first proposed by the TUC and at first was opposed by the Government. It means an award which contains an additional clause that if during the course of the agreement retail prices rise by more than a certain figure (the ' threshold ') there would then be a supplementary increase in wages. Mr Blackaby of the Institute argues in a special article that everything would depend on the size of the basic settlement and on the figure fixed for the 'threshold' and thinks little of the chances of any significant de-escalation of wage claims' But if the TUC are willing to try the experiment, for heaven's sake let us make a start.
I agree with Mr Blackaby that because of the time-lag before the 'threshold' becomes effective the wage agreement would really have to be valid for over a year. When I read in the vulgar press the statement that the Queen is getting her first pay rise after nearly twenty years I wondered when it became standard practice for the trade unions to demand pay rises annually. Turning up the dustY pages of my post-war column the truth became instantly clear. Governments fronl 1945 onwards forced the trade unions to make annual claims because their male' droit application of Keynesian economicS made them use the annual finance bill to control demand and dish out deflation. It began under Dalton who increased indirect taxation; it was continued under CripPs and Gaitskell and carried to extremes bY the Tory Chancellors who added dear money to the cost-inflation trends of higher taxes. I was vehemently writing against the Tory Chancellors at the time because their annual finance bills were enraging the trade unions and because British wages were then relatively not high' "Keep prices stable" their governments cried and the next day up went Bank rate by one per cent and added another 10 per cent to the weekly rent of a Council house. "Don't upset the cost of living with, your wage claims" they cried again .00 with the next budget up went purchase tal( on a whole range of household goods. The, result of all this Government-applieo deflation, putting up the cost of living, vi85 a worsening of the wage-cost inflation.
Now at long last governments have realised that by deflating the econonlY, through higher taxes, dearer money an° rising prices they will not get the trade unions to behave more rationally because these measures drive them mad with resentment, which is not a rational state 01 mind. And at long last the trade unions are beginning to realise that by putting 1.11) their wages too rapidly they are creating worse unemployment because they are, also driving the employers mad ally causing them to lay-off every man the consider too expensive to employ. explained the economics of this elemental' psychology in my Split Society in 1964. I believe that Mr Heath sees the economic truth more clearly than hie predecessors for he has used his finance bills to reduce direct and indirect taxatioll I also believe that Mr Feather sees th truth more clearly than his predecessorS They might well come together on a wage policy at the NEDC if only Mr Wilse would stop making cheap gibes ab0S throwing people out of work and standirl on your own feet. How he loves to keer standing on his head!
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