Economic controversy
Nicholas Davenport
The latest bulletin of the National Institute of Economic and Social Research is somewhat confusing, controversial and, I think, misleading. Because it appeared to be very bearish it caused equity shares at the end of a long account to fall more heavily than they need have done. The City, of course, will only have read the abridged version given in the daily press, which was that between the second half of last year and the first half of next the annual rate of growth for the gross domestic product will be about 3i per cent and not the 5 per cent estimated by the Treasury and recently confirmed b'y the Chancellor. Although the Institute expects consumers' expenditure to rise strongly by about 5 per cent this year it contends that the up-turn in investment which should follow it will not be sufficient to maintain the economy's forward momentum given the present development of exports and public spending. This estimate ignores the fact that according to the recent company surveys of the CBI and the Financial Times the projected spending on plant and machinery is the highest reported since 1968-69 and up to the peak of 1964. The OECD experts in Paris recently pointed out that over the past year much of our capital equipment had become obsolete and that companies would come up against a capacity shortage sooner than they had bargained for. The continuing rise in wagecosts makes that all the more certain. Fewer men will be employed and more machines will be wanted.
The Institute is, of course, right to frighten us about the accelerating rate of wage-cost inflation. It estimates that average wage earnings will increase by about 12 per cent over the next eighteen months with prices beginning to accelerate slightly from now on. It expects retail prices to be 7 per cent to 8 per cent higher by the end of the year and another 9 per cent higher by the end of 1973. As the CBI members have just agreed to extend their price restraint for three months the first estimate must surely be guesswork but the Institute may be right in thinking that the new conciliation and arbitration system which the TUC and CBI are agreeing to set up outside the Government may lead to more rather than less inflation. That is quite Possible. The move towards equal pay for Women it also regards as potentially inflationary. Two other policies are also " work
ing in the wrong direction " — the introduction of 'fair rents' and the effect of EEC entry on food prices. The next wage bargaining round, we must all agree, is therefore getting under way against an unfavourable background. We must certainly expect no wage restraint on the part of the trade unions.
But it is surely ridiculous of the Institute to suggest that because their controversial estimates point to the need of some more reflation to keep growth running at the rate of 5 per cent per annum, more restraint is required on the prices side than on the wages side, so that consumer expenditures may increase. If prices are not to be allowed to rise at all to match the rise in wages profit margins will be cut, company profits will fall and less finance will be available for industrial investment. That is the road to less growth and eventual stagnation in the economy. And what bad psychology! If the militants who are forcing the unions to make unreasonably high wage claims see that the Government is weakening and preventing the employers from making reasonable price adjustments they will inevitably demand more. The only way to deal with bully boys is to stand up to them.
Economics without psychology, as I am always saying, is nonsense. Economic surveys and estimates of the national product without reference to the national psyche are useless. It does not appear that the Institute understands the psychology behind the wage inflation. In the 'twenties and 'thirties the working class of this country were unfairly treated by the ruling class. The Full Employment White Paper of 1944, written under Keynes's influence, introduced fair play for the first time in economic management. Bargaining power then began to pass to the trade unions except when governments imposed a severe enough deflation to cause widespread unemployment. When Harold Wilson abandoned his attempt to impose an incomes policy and an Industrial Relations Bill — which was much on the lines of Mr Heath's Act — power passed completely to the trade unions in the national dialogue. No amount of unemployment is any longer a deterrent to excessive wage claims. The strong arm unions can call national strikes and hold the country to ransom. So they are getting their own back — in retribution for their sufferings in the past. The Government can, of course, cut the money supply in half and bring on company bankruptcies and unemployment. This policy has been rejected by the present Government. Mr Patrick Jenkin, Chief Secretary to the Treasury, told a Conservative summer school at Cambridge in July that it was politically "wholly unacceptable." It would, he said, choke back the growth of demand and that of the economy. But it is strange that a Conservative government should go to the other extreme and finance industrial strikes! Having poured out £3,000 million by way of taxation reliefs, having subsidised the lame ducks, the regions of high unemployment and the public boards which are in deficit, it seems to have lost its money senses.
The Chancellor's big mistake was not to control the direction and quality of its money inflation. He has allowed speculators and the rich to make millions out of property and shares and the rate of interest to rise to a level which kills genuine industrial investment. This does not improve industrial relations. The militant workers can still claim that it is an unfair society. Everyone is on the grab but, they say, the Government has allowed the speculator and the investor who can touch the money supply of the banks to grab the most. At long last the Bank of England has issued a directive to the banks to stop supplying property and share speculators but the damage has been done and the unions are going to make them pay for it.
The economic outlook, according to the Institute, is therefore both promising and unpromising, not to mention confusing. It permits "a rapid expansion of output for the next two or three years and requires, in the short period at any rate, a sharp increase in consumption." This, it adds, is the most favourable possible situation for the introduction of a formal prices and incomes policy, which, of course, we shall never get in the present frightful state of industrial relations.
Labour and the nation will therefore have to learn the hard way. This is made clear by Mr George Ray in his report on labour costs and international competitiveness. Although labour costs in Britain are comparatively low because employers pay much less directly by way of social security charges, wage costs per unit of output in manufacturing industry have risen faster in Britain than in other major industrial countries. This implies a poor outlook for our exports, which in real terms have been stagnant this year, unless sterling is allowed to depreciate further than the post-Smithsonian 7 per cent. When unemployment reaches a million this winter Dy no fault of the Government, the trade unions may change their wrecking tactics and begin to talk economic sense.
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