THE ECONOMY
Time to try a short, sharp shock
JOCK BRUCE-GARDYNE
Iam afraid it does not look as though the Treasury's annual weekend retreat at Chevening unearthed the philosopher's stone required to solve Mr Major's current conundrums. That, perhaps, is unsurpris- ing, for they have been with us for a long time. They centre, of course, on the notorious propensity of the British eco- nomy to throw up rapidly escalating levels of pay settlements which feed upon each, other. Mr Major, like his predecessors, specialises in apocalyptic warnings about the consequences for jobs of pay increases unmatched by productivity. The trouble is that these warnings describe consequences which are palpably unrelated to the experi- ences of individuals. To take the latest example, does Mr Major or anyone else believe that they can persuade the nation's GPs to turn down their 13 per cent wage increase — a wage increase recommended for them by the Top People's Pay Review Board, no less — for fear that if they accept it they will price themselves on to the dole queue? They would surely be very silly-billies if they believed any such thing. Yet unless some means are found very shortly to cap the wage and earnings explosion, it is going to turn Mr Nigel Lawson's inflation 'blip' into something more akin to a rocket. And apocalyptic warnings about the consequ- ences of double-digit wage increases in both the private and public sector are simply not perceived by the recipients of these awards as having any relevance to them.
I am afraid that we have to look back to the last period in which earnings inflation reluctantly responded to treatment. In 1980, at some cost, in terms of unemploy- ment, the wage-price spiral finally seemed to unwind. It is assuredly a most depressing prospect that we should be forced to return to the days of mass redundancies in order to abate our appetites. But unfortunately it is not obvious that Ford's shop floor payroll will see anything threatening to them about a 10.5 per cent increase in their earnings unless and until they are con- fronted with evidence of an immediate collapse in the company's order books. And of this there is no sign whatsoever at present. On the contrary, the combination of a stock market at record levels, at continuing fall in the level of unemploy- ment and the fact that the Government's own preferred monetary indicator, Little Mo, continues to hover far above the target range set for it in last year's spring budget surely suggests that the economy is continuing to run ahead at something like full speed. Against this background, wring- ing our hands about the consequences of double-digit wage settlements is not going to get us very far.
It looks increasingly as though the fall in the exchange rate in the closing weeks of the old year, sanctioned by Mr Major, has been coming home to roost. This was because the main pressures on the pound were either political, reflecting the back- lash from Nigel Lawson's resignation, or international, reflecting the magnetic attraction of the deutschmark in the im- mediate aftermath of the collapse of the Eastern European governments.
Against pressures of this kind, Bank of England intervention would have presum- ably involved throwing good money after bad; and a further rise in our own interest rates might have been reasonably regarded as masochistic.
Nevertheless, it has surely been obvious from the beginning of the latest slide in sterling that a substantial part at least of the ground lost would have to be recovered if it was not to constitute a dangerous relaxation of monetary policy. Mr Major, unlike his immediate predecessor, is frank- ly in no position to disregard the signals from his own chosen monetary indicators. He might at this stage do worse than follow at least one of Mr Lawson's examples. It may be recalled that in the high summer of 1987 Mr Lawson caught the markets on the hop with a wholly unexpected one per cent jump in interest rates. It was a classic Lawson ploy. But unlike some of his ploys, this one actually worked. The impact on the exchange rate was all the more drama- tic for having been unexpected. In these unregenerate times it might, I am afraid, now take two per cent on base rates to achieve the same effect. And Mr Major would undoubtedly have his work cut out selling such a proposition to his `patronne'. But if he is genuinely in earnest in his determination to call a halt to the present stampede, then the 'short, sharp shock' of a 17 per cent base rate is surely much more like the medicine required than improb- able warnings of retribution at some stage in the future for those who concede and those who accept double-digit increases in their pay cheques.
I realise that such a suggestion will be regarded as the height of irresponsibility by what might be called the 'One Club' school of criticism of Government monetary poli- cy. Likewise by the CBI which clings to the illusion that our salvation lies in an export drive by British industry on the back of a lower exchange rate. But how anyone can believe that we can add an export boom or even an export 'blip' (to coin a phrase) — to the existing pressures on the internal economy passes my understanding.
The timing of such an exercise is of course, crucial. But if we are now moving into a period of somewhat calmer weather in the foreign exchange markets, then the moment to strike may be approaching — as Chancellor Lawson demonstrated two years ago. If so, we should reflect in passing how fortunate it is that we did not fall for all that splendid guff about the desirability of immediate entry into the European exchange rate mechanism. For if we had, such a contrived ambush on the pound would by now have been beyond our reach.
And in that context I was interested to see that our excellent Governor Leigh- Pemberton of the Bank of England, has gone ape again. He clearly embarrassed the other end of Whitehall in a recent radio interview by saying that, in contrast with the official Treasury line, we need not wait to bring our inflation rate down to the average of those of the other community countries before we sign on the ERM dotted line, since the act of joining would itself bring about a sufficient restraint on domestic inflation to enable us to bridge the gap. Now the Governor's own officials know better than that. So it looks as though the Governor needs reminding that so long as our level of interest rates is so far above those prevailing in the other coun- tries within the monetary system, joining it would unavoidably oblige us to move our domestic rates of interest down towards the community mean — not presumably what he had in mind.
Perhaps the notion of an independent central bank which would conduct our monetary policy free from the wicked wiles of politicians is not quite as perfect as It sounds. Politicians are, maybe, not the only ones to have their flights of fancy.
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