In the City
Monetarists and Phase 3
Nicholas Davenport
The endless economic wrangling between Friedmanite monetarists and Galbraithian managerialists, not to mention the neoKeynesians, reminds one of the early theological disputations in the Christian church when a synod might be called to decide how many angels could stand on the head of avin. The arguments which are now going on among City economists about the interpretation of the figures or targets given by the Chancellor in his 'Letter of Intent' to the IMF are redolent of this old theological mysticism. I am sure they will be looked back upon in years to come as quaint examples of the nonsense which economists used to talk.
What is exercising the City economists at the moment is the amount of gilt-edged 'tap' issues requited in 1977-78 to meet the monetary objectives of the DCE (domestic credit expansion), the increase in sterling MS (money supply) and the PSBR (public sector borrowing requirement). I have guessed the amount myself at only £2,500 million, which makes me a bull of the giltedged market, but I see that one of them Tim Congdon puts it at between £3,000 million and £3,500 million-with the upper figure as the most likely. As I have a high professional regard for this young man, whom Messels stole away from The Times, I will give his argument.
First, the DCE target laid down in Mr Healey's Letter of Intent to the IMF was £7,700 million and the PSBR envisaged for 1977-78 was £8,700 million. As Mr Healey widely undershot his DCE target for 197677 it is now generally accepted that the money supply target is the important one to observe. Indeed, both political parties seem agreed upon this point. Mr Healey has said 'We are not printing money now' and Mr Jack Jones, while asking for a lot of impossible things, has admitted that labour must avoid demanding ridiculously high wages which would mean printing 'confetti money'. Incidentally, this was recognised as a well-deserved snub for Mr Clive Jenkins who has been talking of 30 per cent claims.
According to Tim Congdon the money supply growth in 1967-77 turned out to be 71/2 per cent much lower than the Chancellor had estimated but may be much higher in 1977-78 because the PSBR estimate depends upon so many doubtful assumptions an inflation rate of 12 per cent, a rise in public sector pay of 8 per cent, and a rise in private sector pay of no more than 10 per cent. Indeed the budget was based on the understanding that 'an agreement on pay increases after July 1977 would hold the rate of increase in earnings close to that experienced under the present pay limit'. In point of fact the earnings index, which includes overtime, rose by close on 11 V2 per cent in the twelve months ending in February while the prices index rose by 16.2 per cent.
The cut in living standards is therefore beginning to bite and it is obvious that the present mood of the unions will force the Government to abandon its present idea of a rise in public sector pay of 8 per cent and in private sector pay of around 10 per cent. Its constraint over the public sector can only be through the strict application of its 'cash limits' and over the private sector through its tolerance of a further rise in unemployment. So Mr Healey will probably have to admit a nominal rise of over 10 per cent for Phase 3-with more flexible 'kitty' bargaining and trust to luck that resort to overtime working will really be justified by increased productivity. If the Government were to take up Mr Jones's suggestion of 'output bonuses' linked to productivity there would be no risk of inflation. Mr Jones is clearly keen to avoid a wage explosion of confetti money.
Tim Congdon takes no account of any sensible outcome of the talks but concludes that the Treasury will have to take firm measures to control the money supply and that, after making allowance for redemptions, the Bank will have to sell gilt-edged stocks to the non-bank public up to £300 million a month or £3,600 in the financial year. I do not go along with this estimate for the following reasons. First, I think that the Bank has learned its lesson that it must avoid ever again acting in a panic as it did on 7 October last year when it raised Bank rate to 15 per cent and began issuing billions of
'tap' stocks with preposterously high coupons, adding up to £2,000 million on the annual interest bill payable to moneylenders. It will therefore tend to go slow on the issue of 'tap' stocks and allow the rate of interest to fall naturally. It has indeed bowed to the inevitable and cut Bank rate again by another 1/4 per cent last week, bringing it down to 81/4 per cent. It was 5 Per cent in September 1971 — before the Heath-Barner monetary inflation drove it up. The Bank is at last beginning to realise that when a world recession falls upon a depressed. economy, like the UK, when unemployment starts to rise in a sinister relentless curve, there is really nothing Yuu, can do except make money cheaper an" cheaper and even give it away until it entices businessmen to risk some new venture and employ a few more people. I liave lived through such times. Mr Healey is too young to have experienced the great dePtession but he is learning and will fullY, appreciate the need for cheaper an° cheaper money when the world sumant economic conference opens in London next month. He will then be told that the less developed third world cannot buy °nit exports because it is debt-ridden (arounu $180,000 million) and cannot meet its high interest bills. It is the third-world countries who need reflation not the rich Americans, or Germans and that can only be done they are given cheaper money and a debt moratorium. The second reason why I do not accePt Tim Congdon's fine calculations is because I know 'that realistic politicians, like rvir Callaghan and Mr Healey, regard the economists' abracadabra as something of a joke. They know that the monetary target,' can be thrown completely out of line by rea events in the exchange and money inarketsi Suppose that there is a further inflow ° foreign money into sterling and into tit' gilt-edged market, attracted by a comintgs surplus on our balance of paymen a (approaching £1,000 million) and by further fall in Bank rate. The monetal 'targets' would have to be disregardedw and in all probability exchange controls 0)_, have to be imposed on inward capita; movements as Tim Congdon admits as the Bank would call for extra `sPei.ciif deposits' from the clearing banks if loan money increased too much. The 1:),`-' A and MS 'targets' are really only advertsC.: to impress foreigners and the IMF and Ore economists, not to mention the situ!) monetarists in the 'shadow' cabinet.
h
When it comes to talking hard ens od politics to union leaders Mr Callaghan amic Mr Healey will surely drop the eeonu jargon about DCE and the money ply and use their common sense. I have gested what common sense may Produce.; and therefore remain a bull of the gi edged market and of some equities too if
talks reach a favourable nonV
inflationa,;
conclusion based on pay bonuses profit-sharing) for higher productivity.
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