Winning the economic war
Tim Congdon
While the fighting has intensified in the South Atlantic, there has been a curious lull in hostilities on the home front. Critics of the Government's economic policies have gone rather quiet. It is not hard to explain why. The main weakness of the Thatcher experiment has been its timescale. Sound money and free market policies have worked in many countries and on many occasions, but they have always taken a long time. In their early years pro- grammes of economic liberalisation can be very painful. Perhaps the most celebrated example, the Erhard currency reform of 1948, was considered as late as 1951 to have been a serious mistake for the West German economy. It was only in the mid-1950s that people began to talk about the Wirt- schaftswunder.
The Thatcher Government's opponents have assumed that the British electoral term is too short. Many of them secretly admit that the policies would succeed if pursued with enough determination for a sufficient- ly long period, but they doubt the political staying-power of such an abrasive ap- proach. Until two months ago they took it for granted that the Conservatives would lose their parliamentary majority in 1984. The Thatcher experiment would therefore be scuttled before any of its benefits might emerge.
Now the position has changed. The pro- bable outcome of the Falklands crisis would have been to strengthen the Government's populaty even if the Opposition had handled the affair with some degree of political competence. In the event the Labour Party has bungled terribly. As a result there is a distinct possibility that Mrs Thatcher will win the next general election and that the policies with which she is so closely identified will have the time they need to reach a favourable conclusion.
There has also been helpful economic news. By chance the timing of the landing in San Carlos Bay coincided almost exactly with-that of the announcement of the April retail price index. It showed a 9.4 per cent rise in the previous 12 months. The Govern- ment has achieved one of its symbolically most important objectives — single figure inflation. Over the two years to the general election the rate of price increases is likely to decelerate further.
Viewed from an historical perspective, the cost of controlling inflation has been appalling. If an economist had been told in 1967 that there would simultaneously be three million unemployed and 9.4 per cent inflation 15 years later, he would have regarded the forecast as a macabre joke. But attitudes have shifted. From an elec- toral standpoint the crucial issue may prove to be not the level of unemployment, but the direction of change at the time voting takes place. Here, too, the trends are reassuring. The rate of increase in the jobless total has slowed down sharply in re- cent months. There is a good prospect that the numbers out of work will stabilise or start falling by early 1983. With skilful editing of history and suitable phrase- making about leanness and fitness, it may even be feasible to present 1980 and 1981 as a period of great advance by British in- dustry. That would be a caricature, but a few marginal voters may be persuaded.
And what would happen if the Conser- vatives were re-elected in 1984? It is an unattractive and perhaps a callous thought, but the three million unemployed would be a potential economic asset instead of a per- sistent electoral liability. The reason is that at some stage they will seek new jobs and so provide the manpower for a sustained period of rapid economic growth. In the 1950s and 1960s the binding constraint dur- ing the expansion phase of the stop-go cycle was invariably a shortage of labour, ex- pressed in excessive wage increases. Because of the resulting lack of competitiveness, there were frequent balance of payments difficulties. In the late 1980s there should be no labour shortages and no balance of payments difficulties.
All this is a horrifying prospect for the tribe of leftish leader-writers, SDP activists, morally indignant trade union leaders and Sir Ian Gilmour who have warned us so often that the Government's policies would end disastrously. Their favourite target has been 'monetarism', about the meaning of which they have, however, been a little vague. With the aid of certain Sunday newspapers they have led us to believe that the vagaries of sterling M3 have no effect on inflation, but are responsible for misfor- tunes as diverse as race riots in Brixton, inner-city problems in Toxteth and the threatened closure of aluminium smelters in Invergord on .
What proposals will the reflationists start peddling now? Will the realisation that theY are no longer on the offensive force them to strengthen their analysis and add fresh bite to their polemic? The impression given by their most recent statements is that it will not. Take, for example, a column by Mr Peter Shore in the Observer of 23 MaY. He summarises his recommendation as the replacement of 'passive government' by `active government'. 'We shall,' so he says, `have to plan for economic growth and in- dustrial change, and intervene in the economy to achieve them ... Human in- telligence, with all its imperfections, must once more be brought to bear on the forces of the market.' He fills out his allotted eight hundred words with a few remarks about 'a range of measures' to rig interest rates, the exchange rate and the international flow of capital, but otherwise does not introduce any ideas of substance to his readers. Of course, no one would question the prerogative of politicians to write emPtY bluster like this. But there is at least an ex- pectation that the bluster will be entertain- ing. The objection to Mr Peter Shore, Sir Ian Gilmour and their associates is not so much that they are wrong, but that they have ceased to be interesting. There is something risible about pontificating on the need 'to plan for-economic growth and in- dustrial change' nearly 20 years after George Brown set up the ill-fated Depart- ment of Economic Affairs. Keynesianism became boring about 15 years ago, monetarism became boring about three years ago, and today the critics of monetarism have become boring too, In consequence, the economic debate is shif- ting from labels and terminology t° weighing the advantages and disadvantages of particular institutional arrangements and policy approaches. Wreckage from earlier theoretical battles is still littered over the newspapers, but there is a developing con- sensus that the size of the budget deficit and the rate of money supply growth are impor- tant economic variables. Monetarism, if in a diluted and flexible form, is securely en" trenched.
Because of this, and signs that the economy is recovering without deliberate reflation, the Government will adhere to the broad outlines of its original strategY. There may be minor tactical adjustments here and there, but they will not amount W much. As the critics' arguments become more hackneyed and their language more dreary, the intellectual opposition will seal increasingly unconvincing. It may seem ugly and even a little ghoulish to suggest that the Government's domestic policies will receive another
chance as a side-effect of a military dic- tatorship's delinquent behaviour which has led to a silly war and unnecessary loss of life. When considered with detachment, the whole business is miserable and ludicrous. It should certainly not be a pretext for na- tional self-congratulation, let alone rejoic- ing. But as the cogency of the case for what Sir Ian Gilmour calls 'the good old expan- sionary measures' is waning, it would not be too unjust if the Government's economic policies were allowed to continue and Mrs Thatcher was re-elected thanks to General Galtieri.
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