Devalue now, float later
What precisely has gone wrong with the Government's overall economic strategy? In some respects there has been a remarkable consistency of action with pre-election proposals, notably in the reform of taxation and of industrial relations law. In others there has been a remarkable willingness to adopt the politics of consensus, notably in the fields of regional policy and subsidisation of industry. It hardly seems sensible to agree wholly with the dogmatists of the right that the error has been a lack of ruthlessness in pushing to extremes the laissezfaire doctrines favoured by some sections of the Conservative party in opposition; nor does it seem right to insist, with more centrist and left-wing opinion, that the error lies in the extent to which pre-election doctrines were followed. The advocacy of this school is now again moving behind the idea of an incomes policy — and there have been indications that the Government is leaning in that direction as well — despite the lamentable failure of the last effort of this kind, and the fact that such a policy, and the wages squeeze which inevitably accompanies it, does little more, if successful, than place a temporary dam in the way of union demands which, when burst, makes the situation worse than it was before. The truth of the matter appears to be that many politicians and most commentators are now in a state bordering on panic, so great do they feel their helplessness in the face of an incomprehensible, terrifying, and potentially politically destructive inflation to be.
Economic policy and pure politics interact. Everybody knows that this interaction exists, although it usually seems that few economists pursue their analysis of economic problems with this knowledge in mind. Two factors prevented the full enactment of the Government's pre-election policies : the 'at a stroke' measures were quickly thought out and underresearched, and a caution innate in the Prime Minister's character prevented him from going ahead with them immediately after June 1970; and the brute size of the inherited and increasing unemployment. It is generally agreed that the squeeze on the money supply most favoured by able right wing economists—involving especially heavy cuts in public expenditure —as a solution to inflation, increases unemployment, though this is a fact that the most politically articulate of the school, Mr Powell, evades (though he does not deny it). No government, with so many other controversial measures in the pipeline—especially the European policy which has had to be legislated upon—could afford to embark on a genuinely radical monetary programme, and the Chancellor went so far as to advocate a generous money supply policy in his last Budget speech. At the same time the old Macmillan policy of high public spending and generous subsidisation had run its course of usefulness, and was declining in both popularity and efficacy: besides, in the form in which it was inherited, and at the levels of spending then current, the consensus or Keynesian policy would make impossible the tax reform programme to which the Conservatives were committed. A eomPrv ‘,rv mixture of policies has emerged, for governments trY vii`at', hard not to commit political suicide. The difficulty is:the given wage inflation, the hostilities and division created ainta industrial relations policy, the rise in costs on entrY the Europe, and the shortage of time before the next election, compromise seems unlikely to work.
We are dealing with politics as much as economics when survey the economic situation : measures must be sPen°1s1itb-iettos i possible as well as economically plausible, and it is presume that the measure of politics in any governrrlet°i00 economic policy increases as time passes from an ell any victory. This is wholly proper; for the economic policY c11 -in, government has two purposes : first, so to order Prices/ the , comes, investment and exports as to keep the balance ° ease i whole economy on an even keel, to produce a steadY inert, in in the prosperity of the individual, and a steady grcivittaise the resources of the nation as a whole; and second, t° cis of enough money through taxation to spend on other the community—defence, social welfare, education and act Of many needs which trouble ministerial consciences. .1trelY these ends are political: the economics of the matter! rfaces a technique. The principal difficulty the Government now rie, , t is that it is failing politically in the economic sphere. xtra. many achievements stand to its credit—tax reforni, edvan. . ordinary spending on schools, substantial if piecemeal4.a.00 10 ces in the social field, some containment of wage infla‘li big , spite of the drama attending the successes of severaleace unions, repayment of international debts and a healthY 19,eistra. of payments for the nonce at any rate. Mr Heath's AdOltence q tion has other achievements less certain of general acc,ePfuro' , but all central to ministerial strategy—the passage of itsi rela' (I pean Communities Bill, alas, virtually certain, industrial WaY' 1 tions legislated for and radical pensions legislation on 5 be' Nonetheless, the aura of failure and uncertainty persist cause the European policy arouses no popular enthlisialp'30 1 cause inflation has not been contained but seems ra115e because industrial relations are in continual crisis SP, u`-.(j01 E ' dt1 ti the Government has changed its mind deeply orl I, tare subsidies, because the Chancellor's 5 per cent growt" a -tiosv5 is unlikely to be reached and because unemployment l only marginal improvement and persists at a high level.
Unemployment is the crue of the Government's t°,.aildic3,; difficulty. More risks might well have been taken with r economic policies had the spectre of unemploylnent ev015' always on the increase not been continually set beforec bee° ters. The Government, to put the matter I: bluntlY, 113' raic afraid of experimenting with ' right-wing ' or liberal W11°ot, ideas because these seemed certain to increase unernPlAcre terra if only in the immediate or very short term. The !rid' hit i53 1973 and the early part of 1974—was the first year rtil?f membership of the EEC; and this term, with all its -e"'ate (but very short term, in the Government's sanore view) problems of rising prices, industrial erosion and at'llnernployment, was already sacrificed. If the current 041,1°r1 got out of hand, the dangers in the middle term u be increased, and the long term—in which electoral viceeWu ., ould have to be won—would become very dangerous ati• In consequence, and with the Treasury offering an ere arm, Mr Heath and his team have fallen back on the ,,Policies of injecting public money into public works, regions, into failing industries.
d and fewer people will now deny that the money that by the Government through public spending, flowing in from the balance of payments surplus, has Lusuationary effect. The supply of money is one of the few Where governments can intervene directly against in4:11; If it be politically impossible to restrict domestic iet"ti,s1IPPIY, it still remains open to any government to rege suPPly of money produced by a balance of payments y qs. This can be done by floating the pound, or, less radit hY substantially widening the margins of the exchange tiat.;6s go on as they are going at present, another de.stnn will shortly be forced upon us. This danger was rer ed in Mr Barber's last Budget speech when he gave wWarning that, unlike Mr Callaghan, he would not go to jail to defend the existing parity of the pound. The point be: that a late devaluation, one that comes after the world gn to believe it is inevitable, is of much less value ,cslevaluation that comes as a surprise, before the specuLlat.uave been able to gamble on it. The 1967 Wilson de101°n had lost half its effect before it was announced and qt the other half long since. Devaluation limits the money the' its directly at inflation, improves the competitiveness the country and rescues us, for a time, from being caught eb of international inflation. If we do not do it soon 'Atto be forced to do it later. It follows that the course of 41 for Britain may be to devalue soon and float later. 4heie t's e SS, something has to be said about the Governil,essive domestic spending programme. Public spend01 a ritain is extremely high, given our resources, our situq,." our lack of economic growth. It is unlikely that lui.rther restrictions can or should be placed on ' social ' that it, on health, welfare and education. But a amount of money is being pumped into both the reseed into industry; and this, as Mr John Davies has said, erhIlIS both a substantial concession on the part of the fa'tbent to political pressure and a reversal of their own ti,,about the proper financial attitude of the state to Those former beliefs were never very sophisticated. tto Pie fact of the matter — and this was the strongest dill emerge on the Government's side in the recent second ig) debate on the Industry Bill — is that our competitors hstantially subsidise their industries : free trade has bleeen a magic potion, nor the force of the market so Rion and equitable a judge as to ensure an advantageous tiedfl international trade to the industries of a nation Ped °Y their government over the industries of a nation bar,t, every turn. On the other hand — and this was the e'bt in the Government's case in that second reading the new measures are actually less discriminating r the Labour Government's system dismantled so hastily 5vere last election. Moreover, they envisage a bureaucracy leWhelming power, little responsibility to anybody, and ibavs.s critical acumen. The wholeheartedness with which les recanted his own economic liberalism was as inbra -ailY deficient as the fervour with which he originally ceti it. In terms of efficiency of administration, the new plans invite the severest criticism. It is improbable that we can progressively eliminate subsidy and place our industry wholly on a free market basis : but that should be the clearly understood aim, and any alternative should be clearly understood to be forced upon us by some specific national need.
What then of unemployment? Though government and politicians cannot yet openly say so, it is clear that a measure of unemployment much larger than we have found acceptable hitherto is endemic in industrial society at its present historical stage. Whatever they are allowed by the exigencies of politics to say in public, ministers can no longer safely give the attack on unemployment that over-riding priority allowed ever since the end of the war, after which all other aspects of economic policy seemed as though they could reasonably be sacrificed to the sustaining of very high employment. Unemployment can be got below the economically irreducible minimum only by social and political actions. But since the state of being unemployed is often corrosive for a younger man, however generous unemployment benefits may be, a warm welcome should be given to recent proposals by a study group of Conservative MPs, recently published as a Conservation Political Centre pamphlet, which suggests, among other things, earlier retirement, to make more space in the workforce available for those less than sixty years of age, and more sophisticated retraining schemes for younger and older alike.
We have said nothing in any detail about a prices and incomes policy. It is saddening to learn that the government is considering a return to such measures. The climate is wholly wrong for them, for, in their present mood of belligerency, the unions will do their best to deny co-operation in a voluntary policy, while a statutory policy — supposing Mr Heath is prepared to eat more words than Mr Wilson — will run the risks of defiance, of failure, of a collapse of confidence in Mr Heath, and certainly will heap up trouble for the future. A less political objection is that a prices and incomes policy is both unfair and inefficient. It cannot be made to work without a truly massive bureaucratic apparatus such as normally appertains to the fully socialist or socialised state; and it attacks the symptoms rather than the causes of inflation. Though there has been a snowballing effect in the wage demand field in recent years, due to the exercise of their bargainpower by tough trade union leaders acting against weak or helpless governments, the basic cause of excessive wage demands is inflation itself and the causes of inflation are to be found in a combination of low productivity, inequitable taxation systems and too generous a money supply. The first of these ills may be alleviated if not remedied by a more efficient system of industrial subsidy, the second may be dealt with in the taxation reform programme, and the third can in part be tackled by a devaluation followed by a currency float.
Early on in the life of the Wilson government The Spectator called for an early devaluation, as the prerequisite for economic freedom, at least for a time. The wisdom of that call was amply shown in the evolution of events. We renew the call now. It is a call for what the French call a ' cold ' devaluation — one carried out in relative calm — rather than a ' hot ' devaluation, carried out in crisis. But, while it is a prerequisite, devaluation would nonetheless be only the first step to economic success, and the time gained by it would have to be used gradually to shift around the mixture of elements which go into the making of economic policy. The programme we envisage starts with devaluation, goes on to a floating currency, and involves a more judicious and critical dispensation of subsidy to industry than any which now seems likely. It is a programme with radical elements, though it is not a wholly radical programme. It has, however, other compelling characteristics : for, to be carried out, it will involve the assertion of the interest of this country in the international community and the assertion of the interests of the whole nation against sections at home.
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