The Attack on Profitability and Shares
By NICHOLAS DAVENPORT WALL STREET apart, the cause of the Stock Exchange slump at home is not difficult to find. It- is the attack on profitability which this Government has de- liberately engineered and the further and fiercer attack which it is now contemplating. A similar but less authentic alarm has been smashing Wall Street into the worst slump since 1929. Last year the gross trading profits of U K companies were down 51 per cent.—in the second half of the year actually 12 per cent. down on the first half of 1960. That is bad enough, but if we are to take recent ministerial speeches seriously it would appear that the Government is now ready to dictate profits as well as wages—and it could not, of course, do one without the other. Having failed after ten years to secure adequate national growth with reasonable price stability it now seems to have taken fright and to be in danger of taking absurd and hysterical action.
At the Conservative Women's National Con- ference Mr. Lloyd warned both sides of industry that if breaches in the 21 per cent. rule for wage restraint were generally made the Government will be forced again to the kind of measures which they had to take in July.' Mr. Maudling, who has previously made speeches attacking dividend increases, was much more explicit at a party rally in Lincolnshire. 'An incomes policy,' he said, 'that is, a policy about the level of wages, salaries and dividends, has now become a necessary and permanent part of government in any modern society. . . . If the pressure of rising wages is to be contained there are three choices: general deflation, general determination of the Government on levels of pay and prices or effective co-operation between Government, employers and employed.'
Let us credit our Colonial Secretary, who had seen some economic mistakes when he was President of the Board of Trade, with the ele- mentary knowledge that it is impossible to run a free capitalist economy on full employment without price inflation. If his colleagues had listened to the advice so persistently and patiently given in this column they would have planned, and exercised some control over, investment, both at home and overseas, long ago. As I have always argued, a building control would have been the simplest to operate and would have saved them most of the wage-cost inflation that came from pressures in the labour market. But they set their Tory faces stubbornly against any form of physical control. In desperation last year, when the was under attack and damned near to devaluation, they turned to mild economic planning and a voluntary incomes policy, hoping that co-operation between employers and trade unionists on the National Economic Develop= ment Council would cause a wages policy of restraint to be acceptable. Now they realise that the NEDC, with its feeble set-up and staff, will not have the slightest influence on indi- vidual wage claims. They may even have noticed that even in countries like Sweden, which have a national wages policy working smoothly enough, wages have been rising faster than the agreed policy allowed. The rebuff to Mr. Lloyd's 21r per cent. rule in the dockers' settlement and the realisation that the rise in wages this year will probably be of the order of 4 per cent. to 5 per cent. apparently caused something like panic to seize our laissez-faire Ministers.
But to come back to Mr. Maudling's alterna- tives. The first—a general deflation with a tighter credit squeeze and perhaps a 10 per cent. Bank rate—is the one favoured by Mr. Lloyd and his hard-faced henchmen at the Treasury. But it is not one which the nation would tolerate. It means running the economy at a greater degree of under-capacity than even Professor Paish would advocate. It means prolonged and massive unemployment. And it would bring an end to business confidence, a further and disastrous decline in profitability (costs rising as output falls), a sharp curtailment of industrial investment and a check, not a boost, to exports.
It would also mean the resignation of the Prime Minister, for on more than one occasion Mr. Macmillan has declared his aversion to massive unemployment as a cure for wage inflation. Would the nation seriously consider Mr. Lloyd, the harsh deflationist, as a successor to the mildly Keynesian Mr. Macmillan?
The second alternative --government dictation of wages and prices is also one which the nation would never accept from a Tory Govern- ment fast losing its popular support. Although this idea has been broached by other Ministers besides Mr. Maudling- on the grounds that labour could not be expected to forego wage claims and so enlarge profits unless heavier taxation on profits transferred the profit wind- fall to the Government-- it cannot he regarded as practical Tory politics.
So, we come to the third alternative— co- operation between Government, employers and employed. The Prime Minister has not made it any easier by his recent abuse of 'selfish' em- ployers and 'arrogant' trade unions ('Some em- ployers,' he said, 'selfishly secure in the knowledge that they can recoup themselves from higher prices [since when?] will give way to un- reasonable demands. Some- trade unions arro- gant with organised power will grab ton large a slice of the national cake'). Does he really think that these people are unpatriotic because they pursue their sectional interests? They can- not do otherwise, for, living in a free capitalist society, each must be impelled by the profit motive. Left to themselves they usually find a way to compromise. If the trade unions push wages too high the employers' last redress is to close down the plant to avoid a financial loss, as the Ford Motor Company threatened, in effect, to do this week at Dagenham. But if the Government tried to fix both wages and prices it would, inevitably, end up with a strike on the part of both capital and labour.
No solution to the economic crisis is to be found in striking heroic but unrealistic political attitudes about wages and profits. But there is a lot to be said for taking powers to do reasonable and helpful things. For example, the Government could legislate the prohibition of work-sharing agreements between managements and workers which have been responsible for so much hoard- ing of labour. It could legislate the complete abolition of restrictive practices and retail price maintenance. It could substitute controlled 'quality' investment for `quantity' investment by abolishing the general investment allowances and making these tax allowances dependent upon the approved nature of the investment (which would have to be designed to promote the ex- Port trade, technical innovations and greater productivity.). It could remove the new fuel-oil tax and other indirect taxes which go to increase our production costs; it could stop budgeting for a huge surplus and allow consumer demand to grow normally. In other words,' it could cause output to expand, production costs to be reduced and the wage-cost inflation to be at least con- tained. All that is needed is a revolutionary change in economic thinking and planning at the..Treasury. The coming departure of Sir Frank Lee (and perhaps his political boss) could be the occasion for a clean sweep of the traditional Policies which have landed this country in the worst economic mess since 1945.
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