Who will save us?

Ralph Harris

For all who have grasped the fundamental monetary nature of inflation, the economic issue at this election is not the price of milk, mortgages or mousetraps but the general, continuing and accelerating debasement in the value of the £ at home and abroad. That debasement has followed the record growth in the money supply of between 20 and 30 per cent a year since Mr Heath took charge in 1970.

What is it that tempts so many politicians to play with the fire of inflation? The plain answer is that monetary expansion appears to offer a soft option by which governments can dodge awkward choices between unemployment and alternative ways of improving the working of a free economy in the face of obstruction from trade unions.

At the heart of the economic problem is the inescapable condition of limited resources against which competing demands are exerted by the sectional interests of unions, farmers, firms, regions, government departments, for the rival claims of consumption, investment, exports, welfare. In an environment of stable money, the division of incomes (i.e. claims over resources) is settled in however rough and ready a way by changes in relative market prices.

The unwelcome consequence is that if the general price level is held stable by monetary restraint, some prices (including wages as the price of labour) will rise less than others and may not rise at all, or may even fall in declining trades. Changes in relative prices call for adjustments which are particularly disturbing in a pampered, rigid economy where immobile labour, restrictive practices, dying ducks, subsidised stay-putters, and what Professor W. H. Hutt calls the "strike-threat system" impair the responsiveness of labour and capital to the very shifts in demand and supply on which progress depends.

How much easier — in the short run — for government to squirt money around the economy and foster the illusion that everyone can get more without anyone having to move or get less; that all workers irrespective of skills or location can enjoy full employment without moderating their wage demands; that all firms can be kept in business without earning their own keep; and that the party men can spend more without the voters spending less.

Alas, after a brief boom while stocks and idle capacity are used up, reality reasserts itself with a vengeance. Inflated demand sucks in more imports, frustrates exports, sinks the floating pound, drives domestic prices higher and — witness the miners — sharpens the very conflicts which it was the dream of expansionists to banish.

So far from solving the problem, reliance on incomes policy first diverts attention from the true cause of inflation while things get worse and then spreads a paralysis of the pricing system on which our eventual hope of an efficient adjustment mechanism — as well as our freedom—must rely. As Professor C. J. Grayson, head of the Price Commission under Nixon's Phase 2, recently warned businessmen (no less than labour leaders and politicians), we are simply "building our own cages" and have no escape except to "get back to the competitive market system."

Because of the delayed-action effect of monetary expansion, we have yet to reap the harvest of past excess which indicates a fall in the value of money nearer 20 per cent in 1974 than the 10 per cent of the recent past. In that case, whatever Mr Heath cooks up with building societies, interest rates must go still higher if the saver is to be left with a margin above the fall in value of his money and the tax on 'unearned' income.

Clearly, the sooner we stop inflating the money supply the sooner the fever will subside. Faced with a devil's brew of escalating demand and declining real output, the urgent desideratum remains for a large reduction in the budget deficit. Since taxes, whether on goods or take-homepay, already inflame the symptoms of inflation, the most effective way for government to live within its income without resort to the printing press is by cutting expenditure.

'Economies are anyway long overdue in such bloated spending as the capital projects of public authorities, the enfeebling subsidies to nationalised and private

industry, the spawning bureaucracies, and the misplaced generosity of indiscriminate welfare in cash and kind. In a forthcoming book from Churchill Press ominously entitled Must History Repeat Itself?, Mr Antony Fisher concludes with a ten-year programme that could bring income tax down to 15 per cent, with no surtax, capital gains tax or VAT.

To ease the withdrawal symptoms from inflation and assist the processes of adjustment, the monopoly power of unions must be prevented from pushing wages so high that a large number of workers and firms are left stranded once the Chancellor refuses to float them off on a rising tide of monetary inflation. The present picketing by miners of docks and power stations, however apparently 'peaceful,' points to the critical reform. Strikers should lose their privileged exemption from the ordinary law on conspiracy which now enables them collectively in furtherance of an industrial dispute to inflict damage in ways that would be illegal if done by other groups or by individuals acting alone.

I can hear a chorus from shrill treble to growling bass objecting that resolute action to clip public spending and curb labour monopolies is "politically impossible" and I concede it is not on the horizon of the three party manifestoes. But 12 per cent inflation, a statutory incomes policy and a three-day week were not in Mr Heath's prospectus in 1970, any more than devaluation, prescription charges and "In Place of Strife" featured in Mr Wilson's euphoric pledges of 1964.

To judge from the mostly business-as-usual electioneering we have been witnessing, it is impossible to see any early escape from our present 'cage' of unavailing and crippling controls under either Mr Heath or Mr Wilson. Things will have to get worse before minds are concentrated on the fundamental redirection of economic policy based on monetary and competitive disciplines.

If you take the view that the sooner the rude awakening comes the quicker the reconstruction will start, you might grit your teeth and vote Labour for an early convulsion. Likewise, if you think the Conservatives will relearn their lessons better in opposition, you can bite the bullet and let Labour ruin things for a while — if they started their taxation/nationalisation nonsense, it would last a matter of months, not years.

On a dispassionate review, the

only ground for positively porting Mr Heath is if you thin', him sufficiently practised a' somersaulting to turn back ellA such indelibly dirigiste a" damaging policies as pay and price incantations, Wedgwood-Walker tinkering, inkering, Whitewash's compromising ofporativist, consensus consulta; tions with the weary worthies 0' the TUC, CBI, NEDO, NFU, el mon uncle EEC aussi. Of course, you should not be doctrinaire in voting against Con. servatives. Indeed, there are solve,. I would welcome the chance 0' supporting such as Boyson, Baer!: Body, Bell, Bruce-Gardyne, Dri Cann, Deedes, Dykes, Eyres, Hal (Joan), Lamont, Lawson, Finsberg' Griffiths (Brian), Ridley, Wate' Marten, Thatcher, Proudfoot, Spicer (on approval), Benyon (the white hope of Huyton), and Hove (the last hope of salvation). On Labour etc candidates I,,t would be combining business W,it'; pleasure for me to vote for Jenkrns (Roy), Prentice, Pardoe,Willja (Shirley), Walden, Maxwe'

Fletcher, Houghton, Tavern(mouth and all), Grayson SE) and Hargrave (SidcuP).

Who else then will save us? r)-„iler surest hope is that we will save ourselves as soon as we can be ?0 free from the palsied, paralysin°: grip of the puny party pontiffs.

Ralph Harris is Director of the Institute of Economic Affairs.