The DEA: What Went Wrong?

By BRIAN READING

‘PrHE Department of Economic Affairs . . . I was set up on the 16th October, 1964, and began work in the same evening.* This quotation, from DEA's first Progress Report, illustrates the dynamism unleashed at its creation. Its primary task was to secure sus- tained and more rapid economic growth and it was given a status commensurate with the im- portance of this task; its first head was the Deputy Prime Minister, Mr George Brown. Yet within two years the economy was stagnant, the National Plan in ruins, the Voluntary Produc- tivity, Prices and Incomes Policy a write-off and the DEA apparently defeated, demoralised and decapitated.

Undoubtedly the general economic climate was unfavourable to growth, but this cannot be pleaded in mitigation of the DEA's failure since it is in just these circumstances that there is most need for such a ministry. In fact the Depart- ment's failure was inextricably bound up with the overall failure of Labour's economic policy which was due to bad management rather than bad luck.

Under Labour, the DEA and Treasury were so placed that they were bound to interact to produce no policy where either, left to itself, had a sporting chance; while the politicians, for their part, collectively showed a pathological inability to reach decisions and accept the consequences of these decisions. An economic 'counsel for the prosecution' and 'counsel for the defence' only make sense if the judge and jury play their part. Overwhelmingly, responsibility for this alarming state of affairs rests with the Prime Minister; 'keeping all options open' is foolish, undignified and ultimately painful when it involves standing irresolutely with one foot on the boat and the other on the bank. The result has been two years of near-stagnation and a continuing balance of payments crisis culminating in the most severe squeeze and freeze on record (to ensure con- tinued stagnation).

In pursuit of its growth objective, the DEA was given responsibility for long-term' policy and the 'real resources' side of the economy. The Treasury, however, retained the task of correcting the balance of payments deficit with responsibility for 'short-term' policy (in particular demand management) and the 'financial side' of the economy. But the long term is simply a succession of the short and it was nonsense, for example, to make the DEA responsible for growth over the next five years while leaving the Treasury with effective control of growth over the next two years. Like tomorrow, the DEA's turn never comes. Equally, the real resources and financial sides of the economy are simply reflec- tions of each other.

This artificial division of responsibility was like putting two drivers in equal charge of the same dual-control car. Fortunately both drivers wished to reach the same destination, a viable balance of payments and faster growth. The over- riding objective of economic policy is to raise living standards as rapidly as possible and a balance of payments surplus is sought as a means to this end and not as an end in itself. Deflation, Brian Reading served as Economic Adviser to the DEA from November 1964 until his resig- nation this month.

high unemployment and stagnation can only be justified as means of achieving balance of pay- ments surplus if it is believed that alternative methods would indirectly lead to even higher unemployment and greater stagnation.

Less fortunately, there is usually more than one possible route to an agreed destination. In-

formed writers have attributed to the Treasury

support for the so-called 'Paish' theory. Broadly speaking, this supposes that if the economy were

run with a slightly lower pressure of demand for

labour, say equivalent to 2 to 2+ per cent unem- ployment, the growth in money incomes would

moderate. Initially, while the economy is being

adjusted to the new situation, the growth in out- put would slow down or stop, while produc-

tivity would probably fall. But once the higher level of unemployment had been achieved and maintained, output should expand again and productivity rise as rapidly as with the previous level of unemployment. Given the slower growth in money incomes, costs and prices should rise less rapidly and our international competitive

position would improve. The balance of pay- ments wpuld then cease to be a constraint on growth and `stop-go' could be brought to an end.

Against this it is argued that if the Paish theory were wrong the consequences of pur-

suing it would be a grievous cost in idle resources

and lost growth; even if right, it should be chosen only if there is no better way of im- proving the payments problem. The chapter in the National Plan on the balance of payments

indicated that the DEA stood for a realistic

appraisal of alternative direct measures for cor- recting the underlying balance of payments prob- lem and an objective assessment of the long-run costs of not discovering such methods. It is signifi- cant that nowhere in the Plan is the case discussed for running the economy permanently at a lower pressure of demand.

The dispute between the opposing philosophies could not be resolved by technical argumenta-

tion and analysis since in each case a course of action was being advocated for the future which had not been tried in the past. The proof of the pudding would be in the eating. A political de- cision was, therefore, necessary and until it was finally reached things were bound to go very wrong.

Chronic indecision on the part of the Govern- ment was the root cause of the failure of the

National Plan. The target of 25 per cent growth between 1964 and 1970 was a political choice; it is impossible to forecast that far ahead and in any case the object of the exercise was to improve on past trends. However, the examination of the implications of 25 per cent growth was a wholly worthwhile exercise since it identified the obstacles to faster growth and indicated the areas in which policy changes would be required.

But from the outset it was obvious that this growth target could not be achieved if the slow-

down in the initial years of the Plan period was at all prolonged or severe. Further deflation as a means of correcting the balance of payments was

manifestly incompatible with the Plan. The Government's acceptance of the Plan should therefore have been tantamount to a rejection of further deflation. It soon became apparent that this was not the case. It was, therefore, utterly irresponsible of the Government to pretend to accept the Plan and attempt to foist it on to the nation at large. How many industrialists were tricked into making wasteful and profitless in- vestments by false promises of rising demand?

Fortunately the deception was shortlived and the July measures this year dispelled any lingering doubts. The circumstances which occasioned these measures (and the planners themselves) have been made the scapegoats for the Government's col- lective failure to face the real issues. But in fact they simply determined the timing of the Plan's collapse.

Incomes policy is another case in point. Some such policy would have been pursued whether or not there had been a plan. A voluntary policy was at first chosen because it held out the best hope of long-run success. As the Plan put it: Since the war several attempts have been made to secure price and cost stability . . . these essentially short-term and partial policies met with varying but limited success. The present Government are convinced that a policy for stable prices and the planned growth of money incomes can best hope to succeed i/it is devel- oped with the full agreement and co-operation of management and unions and designed as a long- term and comprehensive strategy . . . (Page 66.) Yet less than a year later the Government saw no alternative to a short-term incomes and prices freeze. But since a freeze can easily be seen to have failed while success only becomes apparent with time, it had to be complete. The Government could not even trust itself to decide fairly between good and bad productivity agree- ments. As a result, the freeze has so alienated management and unions that, on its own reckon- ing, the Government has ruined the chances of effective restraint when it will be most needed —that is, in the next re-expansionary phase. (Unless, of course, we are to have permanent state control of all wages and prices.) I have concentrated on the two main aspects of the DEA's work, the Plan and incomes policy, in relation to overall government policy. Space alone precludes examination of the other aspects. But its chances of success in these other fields have been considerably reduced by its failure on the major issues. If the views implicit in the establishment of such a ministry had been fully accepted, we might never have had to clamp down on economic growth, although other un- palatable things would have been necessary in- stead, such as import controls, export subsidies, more effective cuts in defence expenditure, tighter exchange controls and so on. Equally the Treasury, if given a free hand, might have pre- ferred to deflate earlier though ultimately less

severely. We might by now have been resuming

growth albeit with a higher level of unemploy- ment but with smaller external debts. Either course would have been better than the vacilla- tion betwixt and between, for which neither ministry is culpable.

The future prospects of the DEA are at least brighter than at any time since 1964. The present sharp rise in unemployment has already begun to shift the accent from the external balance to the waste of home resources involved in cor- recting it with deflation. Public opinion will soon be rooting for the DEA. Moreover, in its more detailed work, particularly on the industrial side, some progress is being made, although results cannot be achieved overnight. I personally still believe that, if we had a government which was prepared unreservedly to accept a 4 per cent per annum growth target as the overriding ob- jective of economic policy, this could be achieved. The economy must be given this chance even at the cost of slaughtering many a sacred political cow.