The unreconstructed

An old Labour academic claims that lack of demand is the main cause of unemployment. Yvette Cooper, a new Labour MP, says this Keynesianism is as out of date as the monetarism which followed
August 19, 1997

This should be a good time for a book on full employment. A tour through past policy failures, a plea for the plight of the jobless, and a list of job creation remedies-these ought to be bedside reading for every cabinet minister.

What a shame, then, that John Grieve Smith's book is so out of date. His passion is not in doubt, nor his ability to explain baffling economic concepts. The trouble is that he traces only two views-that of the so-called "new orthodoxy" he wishes to attack, and his own, expansionist, remedy. Yet both positions are decades behind the times. The "new orthodoxy" owes more to Geoffrey Howe than to Nigel Lawson, never mind Kenneth Clarke. Meanwhile, his own remedy reaches further back to the incomes policies of the 1960s. More importantly, Grieve Smith fails even to admit the existence of the new approach taken by the present Labour government.

Take the "new orthodoxy." Grieve Smith claims it has three central tenets; that only monetary policy should be used to affect demand; that the government budget should always be balanced; and that the solution to unemployment is to persuade the jobless to accept lower wages.

This, says Grieve Smith, has been the prevailing wisdom of Tory governments for two decades. It is responsible for current high levels of unemployment; it is deflationary, and reflects the belief that unemployment does not matter too much.

But this is not true. Although Tory chancellors may have talked about balanced budgets, they never delivered them. The Tories left the British economy with a structural deficit of more than 2 per cent of GDP. Nor could they be accused of always erring on the side of deflation. Nigel Lawson exacerbated the boom in the late 1980s; Kenneth Clarke was poised to do the same in the late 1990s.

Grieve Smith maintains that the main cause of unemployment is lack of demand for labour. He argues that demand should be expanded using fiscal and monetary policy, with inflation capped through pay policy. Is he serious? Not even Ken Livingstone would argue that the problem of the British economy at present is lack of demand. Consumer confidence is back to levels last seen in mid-1988. True, unemployment is too high (still at 1.63m), but the idea that by boosting demand you benefit the unemployed is ludicrous. Those struggling on the edge of the labour market would end up the victims of another plunge into boom-and-bust.

To be fair to Grieve Smith, he finished his book before the current overheating. None the less, he is far too sanguine about the effectiveness of pay policy. Of course the government should make clear to employers and employees (including the bosses who pay themselves huge bonuses) that the rises they agree could scupper prosperity. But the statutory system that Grieve Smith proposes is not feasible.

Gordon Brown's Budget lays down firmer foundations for the unemployed. First, it recognises that business confidence depends on real macroeconomic stability. Second, it acknowledges that stability is not enough: the economy has supply-side weaknesses which means it hits the inflationary buffers too quickly when demand rises. Third, it is targeted towards people who face particular obstacles to getting jobs.

By handing operational control of interest rates to the Bank of England, Gordon Brown has done more to promote stability than any government since the war. On the supply-side he has made progress, too. Compared to our main competitors, Britain does badly on both investment and skills. Fixed investment in Britain is only 15.1 per cent of GDP-less than any other EU country apart from Ireland and Sweden. Meanwhile we have fewer 18-year- olds in education than any other EU country-only 52.7 per cent. No wonder the economy is too sluggish when good times arrive.

To boost investment, the new Budget includes extra allowances for small and medium sized businesses, a reduction in corporation tax, and abolition of the incentive for large companies to hand out dividends rather than reinvest their profits. Education and training picked up the largest share of new resources, allocated from the reserve and the windfall tax.

No matter how much the economy grows, some groups are likely to remain excluded from work. The welfare-to-work reforms aim to include them through full time training, and by direct subsidies to employers to take on the young and longterm unemployed. Grieve Smith and the Tories both argue that such measures merely substitute one employee for another. But in an expanding economy, helping those who are least attractive to employers into work boosts the capacity of the economy, even if, in the short term, a job goes to someone who has been out of work for two years rather than to someone who has just lost a job. In my own constituency, Wakefield council operates a small scale job subsidy programme; employers who take advantage of the subsidy (between ?20 and ?45 per week) say that without it they would simply poach someone already in work.

The challenge is to achieve a balance between higher growth in the economy, and giving the unemployed the help they need to get jobs. Grieve Smith's approach is well-intentioned, but it would make matters worse.
Employment: a pledge betrayed

John Grieve Smith

Macmillan 1997, ?15.99