THE ECONOMY
Of smoke signals, and the shape of things (maybe) to come
JOCK BRUCE-GARDYNE
lot of our members,' we were told last week by one of the CBI's in-house economists, 'had been planning price in- creases on exports. Because of the steep rise in sterling, they can't have them, so they have to raise domestic prices instead.' Well, as the late Mr Tony Hancock used to say, 'That's very nice — that's marvel- lous.' German businessmen confronted with a falling Deutschemark are prone to hold their export prices, and seize the opportunity to grab extra market share. Ours, it seems, wait for the pound to rise and then judiciously put up the price-tags at home to give a fair chance to importers. Great sportsmen, the members of the CBI. It's true that ten days ago the signals from 'the authorities' got tangled. 'I some- times wish,' one of them (the 'authorities', I mean), said to me the day after the banks — apart from Citybank — failed to hear Threadneedle Street aright, 'that we could occasionally do things without everybody noticing.' An idle wish, alas! But on this occasion the trouble was that people didn't notice — or at any rate pretended not to. The Bank of England nodded and winked like one afflicted with St Vitus's dance to indicate its pleasure that interest rates should come down a smidgen — not too much, you understand, but at least a smidgen. And it didn't happen for what seemed like days and days. Devotees of the 'cock-up' theory of history would pass, off the incident as no more than that. Devotees of the alternative conspiracy' theory have a different ex- planation. Their explanation is that the clearers are thoroughly browned off with the 'authorities'. They have a pile of accumulated grudges against both the Chancellor and the Bank of England, and felt the time had come to go on strike in protest. If Nigel Lawson wanted them to cut their base rates let him come out and say so. They were fed up with trying to read the coded signals, and then taking the can if sterling went skittering. The Chan- cellor should make his mind up. As usual it's storm-in-teacup stuff. The Chancellor is fed up with the clamour from the CBI for lower interest rates when what they mean is cheaper sterling so that they really can put up prices with impunity. And who can blame him? Yet in practice the Treasury is no keener to have a repetition of 1979-81, when it was pilloried for destroying industry' by allowing sterling to soar to $2.40, than the CBI is. Besides, if the dollar slide is now upon us the markets will talk down interest rates whether £M3 behaves itself or not. It's all a matter of stage-management. The CBI, which like the Bourbons learns nothing and forgets nothing, expects the Chancellor to frog- march interest rates down precisely as he did last autumn, thus scaring money out of sterling once again. Understandably the Chancellor is not minded to repeat that aberration. He is quite prepared to go to modestly cheaper money. But he intends to be dragged reluctantly like a Speaker to the chair. And quite right too. So let us turn for light relief, to the alternative Chancellor. Let me start by a personal caveat. I continue to cling to the conviction that the Labour Party is not electable. Mr Kinnock, our bargain- basement Harold Wilson, ducks and dodges to convince us that he leads a bunch of socially concerned swingers. But the consequences of years of appeasement of the hard men by his predecessors cannot be erased. Messrs Scargill and Benn will continue to scare the daylights out of the floating voters. That, however, is not the current wis- dom. The current wisdom is that the vagaries of our electoral system, coupled with the fact that Mrs Thatcher is said to have got upon our collective nerves, might yet hand the palm to Mr Kinnock. So the City is disposed to listen to the Chancellor- in-waiting. Last week Roy Hattersley offered it a carefully considered piece of his mind (or more precisely, I think, of the mind of Mr Henry Neuburger, the former Treasury mandarin snatched by Michael Foot) on the subject of 'government bor- rowing'. Mr Hattersley started with a ritual de- nunciation of 'slavish adherence' to 'arbit- rary targets' set for the Public Sector Borrowing Requirement, the notion of `crowding out' private sector investment by additional investment in the public sector, the treatment of asset sales as reductions in the PSBR, the haphazard treatment of nationalised industries as being within the PSBR or outside it, and the failure to distinguish between capital investment and current spending. All these are familiar Aunt Sallies which attract approving nods from a City audi- ence. In fact there has been nothing remotely 'slavish' about the observance of PSBR targets, which have been regularly overshot by substantial margins; and while some public sector investment is un- doubtedly 'productive', an awful lot — the cash for Concordes, De Loreans, Humber bridges, clapped-out coal mines and such- like — is nothing of the kind.
At any rate Chancellor Hattersley will `put public sector and private company borrowing to finance investment on a similar footing. The same criteria will apply to potentially productive government invest- ment.' (His italics.) If his colleagues want to give a shoal of ships away to Poland, or to proceed with what the Bishop of Durham calls 'very carefully worked out investment in communities and in coal' i.e. keeping miners burrowing away to dig out fag-ends of coal seams the NCB and everyone would be far better off without then they will have to think again. Or alternatively, Mr Hattersley will have to.
The key passage in his presentation, however, was his promise to 'announce an objective for the debt-GDP ratio . . . my main concern will be with its underlying long-term trend. This will help reassure the markets that they will not be expected to absorb an unacceptably high amount of debt with consequent adverse effects on interest rates.'
That depends. For as Mr Hattersley readily acknowledged, 'guidelines about the debt income ratio . . . offer no assur- ances about inflation. Indeed, since higher inflation tends to lower this ratio, thus warranting a more expansionary fiscal poli- cy, this guideline by itself gives a perverse indication about the appropriate response of fiscal policy to inflation.' Indeed it does. So, in the words of the Scots divine, 'we recognise the deefficulty, and pass by on the other side'.
To be fair, Mr Hattersley promises to tell us more in due season. 'Later in the year I will spell out the other nominal targets that I will use in order to allay fears on this score.' These will be awaited with interest. Nominal GDP? A target band for the exchange rate? We shall see. But the trouble is that while such signals may tell us what our destination is supposed to be, they do not tell us whether we are, at any given moment, heading there or heading in the opposite direction.
In the end the dilemma facing every modern British government was well sum- med up by Lord O'Brien when he was Governor of the Bank of England and Lord Barber was 'dashing for growth' in 1972. 'There is,' he gently reminded us, `no such thing as a monetary policy which will at the same time promote expansion and restrain inflation.' There still isn't.
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