Sunday, 15 February 2015

Sent To Scare You

Part 1

Last year, I wrote an article called Tales of the deficit which discussed how the Conservatives were misrepresenting the budget deficit in order to win votes. This made me think, why is this strategy so successful? I've noticed that 1970's economic failures are still being used to scaremonger us today. So I set out to find out what really happened in our past; using as many neutral sources as possible. After  reading round the subject at length, I was confident that I had looked at enough variety of historical information to be sure that I had arrived at an accurate account  - and this is what I found out...

Some things were going right in the 1970's, living standards were improving and there was a boom in home ownership; banks were newly allowed to provide mortgages and house prices were low in relation to wages. Other things were going wrong, due to new increased competition from
globalization, the UK's industrial sector, the backbone of the economy at the time was struggling. An oil crisis on the supply side exacerbated things and inflation rose way too fast reaching 26% in 1975 - high inflation is bad news as it causes major economic instability.

Workers in the UK found their pay packets being devalued as inflation was rising faster than wages.  Understandably, in response to this workers wanted  pay rises to match inflation, but the Unions went further negotiating unhelpful above inflation pay rises using strike action as a lever.

The problem was that the pay rises just continued the inflationary cycle and made the 1970's economy worse. The Unions just wanted their members paid and did not care to agree to any wage caps imposed by the Tory governments of Edward Heath 1970-74 and Labour governments of Harold Wilson 1974-76 and James Callaghan 1976-79. At this point the Unions were arguably taking advantage of their powerful status, with for example the miners demanding a four day week in July 1977.

The economy of the 1970s was framed around Keynesian policy eg full employment and the state injecting capital into markets during a recession. Indeed, Keynesian ideas had been the dominant economic policy in the UK since 1945, and had  up until the 1970s created prosperous times; In 1957 Conservative Prime Minister, Harold Macmillan gave a famous speech saying people had never had it so good.

In the 1970s there were many strikes causing economic problems, 9 million working days were lost during Edward Heaths government, there was a 3 day week for a short time, rubbish was uncollected and at one point in Liverpool dead bodies stacked up with no workers to bury them.

Part 2

In 1979, a Conservative Government arrived with Prime Minister, Margaret Thatcher. She was an ideologue who had a profound conviction that new monetarist policies were needed to improve the UK economy. Monetarists are for example interested in Privatisation, and are keener to control
inflation than keep unemployment low. Thatcher had been mentored by the right wing Keith Joseph. Mrs Thatcher viewed the Unions as a problem and introduced new legislation to weaken the Unions power, she closed many coal mines and steel works. Indicative of her hard line approach was a comment she once made where she described the striking miners as 'the enemy within'.

Some new legislation to  reduce  Union strength was needed, but Thatcher went further than necessary; now employers were more powerful than employees, the Unions were weakened. This was disappointing as Unions serve as a valuable counterweight against employers taking advantage.
Bosses have remained more powerful than workers ever since;  ideally new law today would give both sides a more equal status.

The economy did require some of these policy changes to be fit for purpose when Thatcher arrived. However the situation was a bit like a patient going to see a doctor with a bad foot, but instead of treating the foot, Margaret Thatcher amputated the patients entire leg off, and did little to soak up the blood. Supporters of Thatcher argue - yes her changes were radical, but what the economy needed was 'tough medicine' - but this gives nothing to justify her approach.

It's easy to criticise with hindsight agreed, but more could have been done by Thatcher to mitigate the damage and support industry during economic reform. Whole communities, in the North of England, where people had worked in the steel and coal industry for generations were decimated by the closures. Industry could have instead - been restructured to be more competitive and left open. But at least, she left redundant workers some benefits to scrape by on.

Under Thatcher in 1981, there was a recession.  Unemployment, which had been regarded as high at 700 000 when Thatcher took power in 1979, shot up to previously unheard levels of 3 million, staying near 3 million until 1986. She had more success in lowering inflation however. Later on in the 1980s Thatcher deregulated the financial markets causing a Yuppie economic boom in the late 1980's, home ownership increased, finally the economy started to recover after her reforms. Many commentators felt this was a vindication of Monetarist (Tory) policy over Keynesian (Labour) policy but this is inaccurate analysis.

If you can imagine a scale with a Keynesian extreme on the far left and a Monetarist extreme on the far right, in the 1970s we were a little too left, Thatcher was correct to want to move us to the right in principle, but she moved us too far right, in an idealistic, stubborn manner which caused us a lot of  unnecessary economic problems. 

GDP has been increasing steadily for all governments since 1970. However if you look at the Gini coefficient graph below you can see how inequality in society was low in the 1970s but massively increased under the 1980s Conservative government.

Real household income per head had  increased in both the 1970s and 1980s under both Tory and Labour governments. But there were severe economic policy problems under Margaret Thatcher also, just as in the 1970s.

Margaret Thatcher gets a hard time generally, except from those in denial. But maybe she genuinely believed  idealistic monetarism alone was going to cure all. Perhaps her mistakes were more a personal intellectual failure, as opposed to a deliberate attempt to cause people problems.
Thatcher got some things right and more things wrong. Margaret Thatcher's premiership ended in 1990 with a humiliating coup led by her own cabinet. To this day, people remain impressed by her strong leadership and hard work.

Part 3

The late 80s banking boom was followed inevitably by a bust and second recession in 1991,92 with the John Major Conservative Government 1990-97 having  an unfortunate  exit from the Exchange Rate Mechanism in 1992. The banking created recession of 1991,92 mirrors the credit crisis crash of 2008. Both were caused by overly deregulated financial markets.

Tony Blair cleverly recognised that the way forward was a mixture of the best bits of Keynesian and Monetarist policy. Blair adopted the better of Thatchers reforms and dropped the worse ones. He mitigated the worst inequalities of the free market with  for example Tax Credits. Generally Blair's government, with Gordon Brown as Chancellor was  successful economically, for certain the Blair Labour Government 1997-2007 was a better economic time for the UK than the Thatcher period.

Blair got this right, we can't escape the free market, even if we want to. If we can buy something cheaper elsewhere we do. But he wisely realised that an unregulated free market is a recipe for disaster. So he left the market leading the economy but introduced some checks and balances to it, although he could have done more to regulate money markets.

Gordon Brown took over as Prime Minister in 1997-2010. Facing a global financial crisis,  Brown borrowed heavily in in 2008,9 it's true, but economists argue that heavy spending during a recession, stimulates the economy, mitigating the worst of a recession and overall costs less than doing nothing at all.

Currently, the ghosts of 1970's economic failures - are sent to scare you - when it suits, but what about the failures of the Conservatives in the 1980s? The Conservatives want to trick you into believing that Labour in 2015 are the Labour of 1975 but this is false. They want you to think that if Labour get in, inflation will be at 25%, our electricity will be switched off and  rubbish will be piling up in the streets, but don't believe it.

Actually Cameron's policies are very right monetarist on our scale, further right than Thatcher even. In the short term, Cameron's policies may create more boom mirages but in the long term these policies will only cause more problems and inequality, just like Thatcher's did. Miliband's pledge to introduce more regulation to financial markets is a great idea. Miliband's Labour, which avoids ideological extremes and has picked out the best of Tory and Labour policy from the last 50 years is in fact a much safer bet for our economic success in 2015-2020.