The Economic Consequences of Mr Wilson
THE CASE FOR DEVALUATION-2
By RICHARD PRYKE
MR WILSON has thrust the knife of deflation deep into the British economy, which is once again being sacrificed on the altar of the pound sterling. By a process of sympathetic magic the economy is to bleed at home in order that the pound should grow stronger abroad. Mr Wilson is the latest in the line of economic witch-doctors which stretches from Winston Churchill (and Montagu Norman) in 1925, through Snowden in 1931 and Butler in 1955, to Selwyn Lloyd in 1961.
The economic consequences of Mr Wilson can be forecast by examining those of his pre- decessors. In July 1961, which is the most nearly comparable situation to the present one, there were 259,000 unemployed. By February 1963 the number had risen to about 650,000 after allowing for the exceptionally bad weather. Today we have 264,000 out of work. However, the domestic economy is already in a weaker condition than it was when Selwyn Lloyd raised his knife. He justified his cuts by saying that pressure on demand was too strong and that a little blood- letting was in order. Today it is openly admitted that the cuts will lead to unemployment—known, in Mr Wilson's Newspeak, as 'redeployment of labour.' This government is the first since the war openly to repudiate the great principle to which lip service at least has always been paid, that full employment is our first economic priority.
Not only is the economy already weaker than it was in 1961 but Wilson has used a longer knife than Lloyd. In his July measures the Conservative Chancellor raised the £210 million of extra taxes by a 10 per cent increase in purchase tax and other indirect taxation. Wilson has in addition used hire- purchase controls, increased Post Office charges, raised direct taxation and slashed the investment programmes of the nationalised industries.
The Government calculates that the direct effect of its cuts will be to reduce domestic demand by £500 million. These direct cuts will have an in- direct ripple effect as those thrown out of work or put on short time reduce their own expenditure. There is now every prospect that, instead of the stagnation which is usual during our periodic deflationary bouts, we shall experience a drop in our national income. As every I per cent increase in the national income is equivalent to about £300 pillion and as Labour was hoping that the growth rate would rise to 4 per cent, the tragic waste of the nation's resources can be appreciated.
As a result of this exercise, Mr Callaghan tells us, the nation will no longer be in deficit in 1967. This is slightly doubtful, because of the rising price of copper due to Rhodesia, but anyway the respite from our balance of payments difficulties next year would only be temporary. There is no
Until his resignation last week in protest against the Government's deflationary measures, Mr Pryke was assistant to Dr Balogh in the Cabinet Secretariat. He has now rejoined the Department of Applied Economics at Cambridge. reason to believe that deflation has a favourable effect on exports, but it does reduce imports temporarily, because consumers have less money to spend, and manufacturers, faced by falling production, import less raw materials. In addition firms run down their stocks of imported goods, only to restock later, with a damaging effect on the balance of payments, when expansion recom- mences.
The Government should have faced the fact that the balance of payments is now in a state of fundamental disequilibrium. At any respectable rate of growth the trade gap widens dangerously, and the underlying position seems to have been getting worse. The balance of payments deficit has grown larger, boom by boom. In 1955 it was £280 million; in 1960 it was £460 million and in 1964 it reached £770 million. Even in 1965, which was a year of very modest growth, there was a deficit of around £300 million. At Mr Brown's late lamented 4 per cent there would be a balance of payments deficit of anywhere between £250 million and £500 million. The only permanent contribution which the Government is making towards getting us into balance is to cut defence spending abroad. Defence cuts were heralded by Mr Wilson in the spring of last year, re-affirmed in the National Plan, reiterated by Mr Callaghan in his budget speech and are now once again brought forth with a flourish. However, the £75 million or so which Mr Wilson hopes to save in 1967-8 will only go part of the way towards closing the gap especially as the cost of maintain- ing troops abroad tends to rise all the time.
A fundamental weakness in our economy is our low and fluctuating rate of investment. Every time production falls and under-capacity working in- creases British businessmen slash their investment programmes. On any rational view firms should go ahead with their investment in the expectation that the factory will not be ready until after the slump is over. However the experience of even our largest companies shows that firms are ex- tremely shortsighted. When the economy starts to expand the necessary capacity is never ready, im- ports are sucked in to make good deficiencies at home and the trade gap is widened still further by large quantities of foreign machinery imported by British businessmen in the course of their invest- ment boom.
The irrational behaviour of British firms is just one example of the industrial weak- nesses which it could have been expected that a Labour government, with its belief in state inter- vention, would tackle. During the last few years it has become clear that British industry is seriously inefficient, partly because of its defective structure and partly because of its out-of-date products. Various methods could have been used to remedy these faults but all of them would be likely, if used with sufficient determination, to arouse busi- ness opposition. This is true in particular of com- petitive public enterprise which, as I have argued elsewhere, is necessary to assist national .pkinning
and to provide a new source of enterprise and initiative in those industries which are mono- polistic and inefficient.* New public enterprise has often been advocated by Mr Wilson and was one of the principal economic tools suggested in Labour's major policy statement, Signposts for the Sixties, but it is ruled out now that Labour's principal aim is to reassure the speculators.
In this situation the Labour party should have devalued. Though devaluation has now become a dirty word it is a perfectly legitimate economic device.If a country consistently imports more than it exports, it should probably adjust its rate of exchange so that its exports become cheaper in terms of foreign currency and its imports dearer. This will encourage foreigners to buy more of its goods and discourage home consumers from buy- ing foreign goods. However, the country which devalues will have to prevent its prices increasing to such an extent that the price advantage which it has secured through devaluation is lost. It must also ensure that it has sufficient industrial capacity available to be able to sell. In order to benefit from devaluation the Government must therefore depress demand to free resources for exports and it must stop wages rising too fast by means of an incomes policy. Superficially this resembles the policy which Mt Wilson has adopted but its aims and its longer-term consequences are very differ- ent. Any unemployment created after devaluation will quickly disappear as the production of goods for export increases and the rise in production should stimulate investment.
It would be wrong, however, to think of de- valuation as providing an easy or permanent solu- tion to our economic problems. It is a necessary but not a sufficient condition for their solution. It would give the Labour government time to modernise and reform our industry. Mr Wilson no doubts thinks that he has purchased a breath- ing space. He has not: what he has done is the exact opposite—he has winded the British economy. This is Labour's Munich : a great and terrible act of economic appeasement.