21 JUNE 1975, Page 30

Skinflint's City Diary

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Since Mr Wilson has now joined the ministerial chorus rejecting a wages freeze, it is evidently imminent. The current attempts to produce a Mark II social contract may yet give birth to a face-saving formula, though even through the rosiest spectacles Mark I ranged from failure to non-existence. The nonsense of expecting union cooperation is neatly exemplified by the cynical hypocrisy of the rail union saying no matter how unjustifiable or unpayable it demand, it will be pursued, but they are quite happy to join afterwards in condemning others for pursuing similar claims.

There is increasing pressure for a pay freeze from inside the Civil Service, from several politicians of different hue, from NIESR, and from a number of the more pontifical journalists who are making increasing reference to the subject. These are signs of a policy for three to six months hence. But before we all get resigned to its inevitability, let us consider whether wage control works and what its effects are.

It'certainly appears to work. The 1948 Cripps freeze drastically cut the rate of pay increase; the Selwyn Lloyd pay pause of 1961 also reduced the rate; the 1966 Labour freeze was at least partially effective, and the incomes policy which followed contained the rate while forcing up productivity. But the rate of rise also tumbled in 1952-3 and in 1955-7 when there were only credit squeezes. So as in all other such arguments we must separate what happened from what might have happened: correlation is no proof of cause.

There are other factors which may be at work. It used to be said that high unemployment would reduce the rate of wage demands — the much-discussed Phillips curve — but since 1969 Britain has definitely broken away from this trend as can easily be seen by regression analysis. Whether this happened because of union power or other causes is hard to say but the National Institute for Economic and Social Research warned in March that "there is no way of knowing the scale of unemployment required to produce any given change in the inflation rate". And now they are saying what is in effect a logical extension of that — that unless there is control of wages there may be increasing inflation or large unemployment, or both.

But pay controls have little hope of much success if the TUC fights them, and with the current refusal to face facts there is not much chance of cooperation. And even if the government did manage to enforce its will the result may not be as helpful as they think: the dam effect ensures the trend continues, freezes do not increase productivity, and any effect is short-lived. Despite the shortsighted pleas of many companies, it is probably preferable that 'the government stops insulating us from the economic consequences of our actions, and allows free bargaining to run its logical course.

With unrestricted wage increases the short-term effects would be disastrous. Companies would go bust in droves, inflation would soar in a way Chile might blanch at, the balance of payments and sterling would plummet. But in the medium term the effect would be a salutary realisation that keeping Britain a low wage economy does not entail low unit labour costs — probably the contrary.

The medium-term result might be more flexible union approach and more labour-saving capital equipment investment by companies. Since politicians have tried to hide reality for so long the route would be painful but the destination is worth trying for. Total bargaining freedom may appear to be yielding to union power, but in the 'absence of other constraints reality would ensure that power was used responsibly, which might mean longer-term views for enlightened self-interest. And investment to save expensive labour is desperately needed and the new equipment might help drag Britain into the 1950s at least.

Waiting for Godot

Perplexed strangers accost me at parties and ask what the stock market is doing and where it is heading. The plain answer is that on both a rational basis and on its own lunatic emotionalism, there seems no way of predicting what is going to happen in the near future. After. a healthy strong market which induced chartists like David, Fuller to prophesy continued rises,. it has taken a battering in the wake of sterling. And, more ominously, .every time there is a technical rally a rush of sellers comes forward, which is usually a . bearish sign.

And yet, and yet. So many people have said that the FT Index will be at least 400 by the end of the year that most people seem to believe it. And institutions still have money despite the buying of recent months and the flood of rights issues, and the interest rates available are not tempting the cash into the money market at current rates of inflation. Which is the classic indicator of a bull market.

On the other hand, inflation is running at 25 per cent and wage demands are as high as ever with little immediate prospect of an improvement in either, which cannot be very good for companies. And the long-awaited consumer downturn seems to be materialising. With so many companies pretty precariously poised, that could be enough to precipitate a general recession.

But, as the civil servants are wont to say, on the third hand, the latest issue of Economic Trends from the Central Statistical Office shows that most of the leading indicators for the British economy are pointing upwards, and there are signs that world trade might well start picking up next year.

With such confusing and conflicting pointers to the future, it is hardly surprising the pusillanimous fund managers are all sitting on their hands and waiting for the other one to move first. They have cash but are undecided — once some other demand pushed up the index by some 20 points, they would all suddenly wake up and be in there fighting for stock, but if the index continues to drift downwards they are going to stay cautious. I am a coward — I do not forecast. The evidence as I see it is there, draw your own conclusions.