MAJOR SURGERY HURTS
Suddenly, with one bound, the headline writers are free. After seven weeks in the chains of Saddam Hussein, they have escaped to another madman hell-bent on destruction: John Major. This man Major, the newspapers report with horror, appears to be on the verge of imposing on innocent Britain a regime of unbearable cruelty: a recession.
The Confederation of British Industry is aghast at it, the Labour Party condemns it and the stock market is scuttled by it. Recession: the 'R' word, the unthinkable. To judge by the astonishment and distress, one would think that nobody expected this sort of pain. Of course, everyone was in favour of lower inflation and wanted Major to get tough. But no, we did not expect bankruptcies, higher unemployment or anything actually unpleasant.
Major had said at the outset of his chancellorship, 'If it is not hurting, it is not working' — a phrase which is likely to be associated with him for a long time. Yet few seem to have taken him seriously — perhaps remembering how he kept his head down and his nose clean as Chief Secretary to the Treasury during the now unfashionable boom of the late 1980s. They thought it was yet another politician trying to sound macho.
In fact, for the past 18 months and more, the Government has been doing its utmost to damp down the economy. The only hosepipe being used has been interest rates and, for a long time even very high interest rates did not seem to be working. But now growth has finally been subdued; the strategy has finally found success. It is this success which is being treated as an unex- pected disaster.
The bleatings of the Confederation of British Industry and the trade unions should be ignored. These organisations do not really have a significant stake in containing inflation. They represent com- panies and workers who can live with inflation because they can raise their prices. It is pensioners and others with fixed interest savings who suffer most at the hands of inflation. This is one of Mrs Thatcher's oft-repeated stories which hap- pens to be true.
The evil which most offends the CBI and the trade unions is not runaway inflation but recession or even (in that delightful new expression) 'a growth recession'. In a recession, companies go bust just as they are doing right now. One leading accoun- tancy firm in London is so overwhelmed with offers of bankruptcy work that it is turning away business. In a recession, workers are laid off, and pay, the British dream, grows more slowly than inflation. That is yet to come.
The Labour Party's condemnation of the slowdown is rich. It would have some credibility if only Labour had criticised the previous boom. The 1988 boom is what made the current slowdown necessary. Only because we grew substantially above- capacity for a while do we now, inevitably, have to grow substantially below-capacity or even decline into a recession. We should have heard Neil Kinnock saying in 1988, 'Interest rates are too low, the money supply is growing too fast, unemployment is falling too fast.' But we heard nothing of the sort. Labour is quite happy always to criticise the growth rate as being too low. Never, as far as Labour is concerned, should growth be moderated in order to make the succeeding downturn less severe. It seems that even after the horrendous up-down cycle of the early 1970s Labour has learnt nothing. Unfortunately the press and the City have not learnt their lesson any better. Very few voices were heard in 1988 saying, 'Slow down, there will be a high price to pay for this boom.'
Late in the day the City decided it wanted a slowdown; earlier this year it marked down shares when it felt that the slowdown was not coming quickly enough. But now that the policy it belatedly deman- ded is actually bearing fruit, the City is, perversely, dismayed. After so many years of profits growth the stock market analysts could hardly believe that profits could actually fall and that dividend payments, could be cut. They too expected toughness without pain.
In terms of pure economic policy, Major should now ease off a little. The slowdown may have been harder to impose than expected but it will have its own momen- tum. Interest rates could come down by one or two points without stoking up an inflationary fire. Ostensibly Major is wait- ing for the headline inflation rate to come down but in fact his continued squeeze may be as much political as economic. He may want a short, sharp, anti-inflation shock so that he can get the economy recovering again in time for the next election. If so, it is a sad reflection on how the economy is still managed in this country. The economy is simply too important to be run to an election timetable. As we have said before on these pages, only when the Bank of England is given the absolute responsibility for keeping inflation down will Britain be rid of inflation for good. New Zealand has given its central bank the duty of beating inflation. Their unions have just agreed to a 2 per cent pay rise.
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