One of this magazine’s contributors commented that Lobster was the only magazine in which you would find economics and UFOs. Though this isn’t true – Nexus, for one, often has both – I knew what he meant and took it as the compliment he intended; and though there are no UFOs in this issue, here is a smidgeon of political economics.
For years now Chancellor Gordon Brown has taken the credit for the UK’s low interest rates and low inflation. In his speech to the Labour Party conference on 27 September this year he said, for the umpteenth time: ‘Britain today has the lowest inflation for thirty years…. [and] the lowest interest rates for forty years…..’
Brown boasts of the UK’s low inflation: yet the entire industrialised world has low inflation, so whatever the causes are, it isn’t something unique he is doing. He boasts of Britain’s low interest rates but never offers international comparisons. In ‘Britain’s exports are taking a pounding’, Roger Bootle,(1) noted that the pound in 2004 is 20% up on its average 1996 value, the year before Labour came to power in 1997. (The Bank of England put up UK interest rates as soon as Brown gave them the power to do so.) Bootle stated the (rarely stated) obvious:
‘..with US interest rates at 1.5%, euro zone rates at 2% and Japanese rates at zero, you can readily see why UK rates at 4.75% seem so attractive.'(2)
And thus, via the ensuing overvalued pound, we have the ever increasing trade deficit and the continuing loss of manufacturing jobs.(3)
In ‘Interest and politics really don’t mix’,(4) Brown’s economics advisor, Ed Balls, puts his (and Brown’s; though really his) decision to give the Bank of England independence to set interest rates squarely at the centre of this achievement. It has given us the ‘economic stability’ of which he and Brown have made so much in the past 7 years. As for ‘economic stability’, it depends where you look. Since 1997 house prices have tripled and private debt topped a trillion pounds in July.(5)
Thatcherism continued
Brown-Balls have simply continued the economic policies of the Thatcher government. Like them they have no exchange rate policy: get inflation under control, they believe, and everything else will follow. Indeed, Brown has warned of the perils of an exchange rate policy. On 10 June 1999 he said that while he understood the concerns of exporters,
‘Anyone who thinks that dropping the inflation target to replace it with an exchange rate target, or running inflation and exchange rate targets at the same time is the right way to achieve domestic stability is failing to learn the lessons of the 1980s.'(6)
Like the Thatcher government, Brown is committed to controlling inflation simply by using interest rates – mocked by Ted Heath in the early 1980s as ‘one club golf’. This has maintained an overvalued pound which helps keeps inflation down (by making imports cheap) and benefits the City of London as (relatively) high UK interest rates attract the world’s capital. But it damages the exporting sector of the economy, mainly manufacturing, because the high pound raises export prices.
Before Labour was elected in 1997 Brown decided that the way to keep the City off his back was preemptive surrender, give them what they wanted: unrestricted credit creation, negligible regulation and (comparatively) high interest rates. And all this for a sector of the economy which produces something under 6% of the UK’s gross domestic product.(7)
The mystery of Gordon Brown is how he has managed to maintain a public image as being some kind of lefty, when he is that familiar figure, the Labour chancellor, ignorant of economics, who embraces the old economic orthodoxy (Jim Callaghan was the same). Writing in Prospect in March 1998, Robert Chote of the Financial Times noted that Brown’s actions in the first few months of his tenure as Chancellor:
‘…..has won him rave reviews from the International Monetary Fund, which guards the flame of orthodox economic policy around the world. After Brown’s début speech to the IMF’s ministerial committee in Hong Kong last year, Stanley Fischer, its deputy managing director, rushed up to congratulate him on one of the best such contributions he had ever heard.’
Shown the ropes
Brown was carefully shepherded into the views he now holds. The late John Smith took Brown to the heart of the globalising lobby, the Bilderberg meeting, in 1991.(8) When Shadow Chancellor Brown chose an economic advisor, he picked Ed Balls, leader writer at The Financial Times, home of some of the leading British advocates of globalisation.(9) It was Balls who fixed meetings for Brown with US government economists and academic experts at Harvard, where Balls had been a post-graduate student.(10) On his American visits Brown was inducted into ‘the Washington consensus’, a recent expression denoting two old ideas: let the bankers have what they want; and in economic activity private is always good and public always bad; and the more recent idea: always do what the big companies want (a.k.a. globalisation).
Brown, we are told by his supporters, is incredibly clever. I have my doubts. It is difficult to take seriously someone who looked at the catastrophe that was the first Thatcher government – when the ‘Washington consensus’ was introduced here – and decided to copy it.
This is the man who has spent close to a billion pounds on private sector advisors, in the struggle with the Greater London Authority over privatising the Tube. (11)
This is the man who, after the second Labour election victory, wrote in the Wall St. Journal, of his ambition to create ‘an enterprise culture genuinely open to all’,(12) the latest shift in the key phrases he uses. These have gone from ‘equality of opportunity’ (democratic socialist Brown), to ‘opportunity for all’ (social democrat Brown), to ‘enterprise culture open to all’ (free market true believer Brown). And what had prompted this grand statement on Brown’s part? Someone had done some research and discovered that, to quote Brown, ‘the rate of small businesses formed in the poorer areas was just one sixth of the more prosperous areas’. A revelation! The poor don’t have…….. money!
In macroeconomics, Brown appears to live in a dream world of theory – the same dream world inhabited by Nigel Lawson and Geoffrey Howe – in which all you have to do is keep inflation down and bully the lazy proles into work (and being more enterprising) and everything else will slip into place via the market mechanism.
Pity about manufacturing – and the imminent end of North Sea oil and gas – but, hey, there’s always ‘the knowledge economy’. And if that fails, something else will turn up, won’t it? Won’t it?
Notes
1 The Sunday Telegraph (Business) August 15 2004.
2 Bootle used to be the chief economist for the Midland Bank, before Midland was taken over. The Midland, historically, had the biggest exposure to British domestic manufacturing and Bootle has spent the period since 1980 warning of the dangers for the British domestic economy caused by the high pound.
3 See for example, the press release from the GMB on this in August <www.labournet.net/ukunion/0408/gmb5.html>
4 The Observer 8 August 2004 <http://politics.guardian.co.uk/economics/comment/0,11268,1278471,00.html>
5 <http://news.bbc.co.uk/1/hi/business/3935671.stm>
6 The Guardian 11 June 1999. A classic straw man move, this, as no-one was suggesting dropping the inflation target. And to which lesson of the 1980s is he referring?
7 Evaluating the precise contribution of the City to the British economy is impossible. In practice you make a guess at what proportion of the British financial services sector the City constitutes. That financial sector is variously reported – i.e. guessed to be – between 6% and 7% of the UK GDP. See, for example, <www.archive.official-documents.co.uk/document/dti/dti-comp/tchap3.htm> and <www.google.com/url?sa=U&start=7&q=http://www.ifsl.org.uk/uploads/RP_IFM_6_1998.pdf&e=7627>
8 Unbeknown to his colleagues, or biographer, Andy McSmith, John Smith was in the Bilderberg inner circle, the steering committee, at the time.
9 The other is The Economist. Two writers at The Economist are the so-called rapporteurs – i.e. minute-takers – for the Bilderberg meetings.
10 Hugh Pym and Nick Kochan Gordon Brown: The First Year in Power, (London: Bloomsbury, 1998), pp.39 and 113.
11 His major assistant at the Treasury in this enterprise was Shriti Vadera, a former banker, who, before joining Brown at the Treasury, was advising the government of South Africa on how to privatise the SA telephone system. (David Taylor, ‘The woman who keeps saying no to Bob Kiley’, The Evening Standard 9 March 2001) Commenting on her in ‘Don’t repeat this fiasco on the Tube'(The Evening Standard, 7 June 2001), erstwhile editor of The Times, Simon Jenkins, noted that she had ‘spent £100 million of public money on fees trying – and failing – to impose a similar [to Railtrack] scheme on London’s Tube. If she were in local government she would be surcharged for such wanton extravagance.’
The one billion figure quoted above comes from Jenkins’ column in The Evening Standard, 24 October 2003: ‘The Treasury’s attempted privatisation of the Tube is said to have cost close to £1 billion in fees. These sums are so horrendous that the National Audit Office dare not look at them. They come too close to the Chancellor.'(emphasis added)
‘Close to’ is unsatisfactory but Jenkins received a stream of insider leaks about the struggle over the Tube which he used to write a series of savage pieces in the Standard about Tube privatisation.
12 Quoted in ‘My Maggie Mission’, The Daily Mail 19 June 2001.