Gutless Gordon

Doh!

It’s difficult to remember now but just over a year ago, in July 2007, the Independent could write that “The prospect of a snap election was increased by two weekend polls which showed that the change of prime minister has given Labour a “Brown bounce” after the departure of Tony Blair”. Labour had a 7 point lead over the Conservatives in the polls and had just won two by elections.

How things change. At the Conservative party conference that October David Cameron announced plans to raise the inheritance tax threshold to £1 million. Overnight the Conservatives saw a 6 point Labour lead in the poll turn into a 3 point lead for them.

Gordon Brown, the man who became Prime Minister after a sham of a Labour leadership election, called a sudden halt to talk of an early election, admitting that he’d considered it, but explained that he “wanted to get on with my job of putting my vision of what the future of the country was to the people of the country” before he held it.

His claim that he was not influenced by opinion polls convinced no one. Cameron said “The Prime Minister has shown great weakness and indecision”, and then Liberal Democrat leader Menzies Campbell said “We are talking about loss of nerve”.

A pattern of behaviour soon began to emerge. In October 2004 the new European Union Constitution was signed. The Labour party manifesto for the 2005 election stated clearly “We will put it (the Constitution) to the British people in a referendum”. Then, in early 2006, both France and the Netherlands rejected the Constitution in their referendums and the document died.

But, like a ‘Halloween’ movie, it rose from the dead, this time as the Lisbon Treaty in early 2007. But in August Brown decided that the Lisbon Treaty was, in fact, so different to the Constitution that Labour’s 2005 manifesto commitment to a referendum no longer held. Again, he claimed that opinion polls showing a 2 to 1 majority against the treaty were not a factor.

It was difficult, however, to find anyone who actually agreed with this view of the Lisbon Treaty. From his own party, Austin Mitchell MP said “If it looks like a constitution, if it smells like a constitution, if it reads like a constitution, so far as I’m concerned it’s a constitution”. Valery Giscard D’Estaing, one of the authors of the Constitution, said “The difference between the original Constitution and the present Lisbon Treaty is one of approach, rather than content. The proposals in the original constitutional treaty are practically unchanged”. Danish Prime Minister Anders Fogh Rasmussen said “The good thing is that all the symbolic elements are gone, and that which really matters – the core – is left”. Angela Merkel, the German Chancellor, stated that “The substance of the constitution is preserved. That is a fact”. The Irish Taoiseach Bertie Ahern proudly stated that “90 per cent of it is still there…These changes haven’t made any dramatic change to the substance of what was agreed back in 2004.”

The game was given away in a speech at the London School of Economics when Giuliano Amato, another who drew up the Constitution, said “The good thing about not calling it a Constitution is that no one can ask for a referendum on it”. Brown now said that “The proper way to discuss this is in the House of Commons and the House of Lords, and I believe Parliament will pass the legislation”. Like the election in October, the promised referendum was cancelled.

And the pattern has continued. In the week before the Labour conference in September a group of MP’s contacted the party’s National Executive Committee asking for nomination forms to be sent out. They cited a clause in the party’s constitution which states that nominations “shall be sought each year”. But after a meeting attended by Brown the NEC refused to send out the ballots citing a ‘convention’ of not doing so while in power. It went on to say it did not want to encourage “internal debates”.

That now makes three elections which this un-elected Prime Minister has run away from; the general election he was considering last autumn, the referendum on the Lisbon Treaty and the ballot of his own party membership.

In the future psychologists will probably produce entire theses on Gordon Brown’s almost pathological timidity but for now it seems clear that the man who spent so long plotting in the background for the top job doesn’t function well in the glare of publicity it actually brings. The voters will have to wait until 2010 before they finally get their say.

(Printed in The Caerulean, Issue 12, December 2008)

Back to the 80’s

Timeless

It’s never hard to find somewhere in London that is hosting an 80’s night. Charity shops are raided for ra-ra skirts and leg warmers so that people can dance the night away to Wham and Erasure. The 80’s are back in fashion but far more than the music and clothes are back in vogue.
To the party goers rolling their jacket sleeves up like Don Johnson it probably rarely occurs that we face an economic situation very similar to that of the decade of Dynasty and 3 million unemployed. In June Mervyn King, Governor of the Bank of England, said “The lesson of the past fifty years is that, when inflation becomes embedded, the cost of getting it back down again is a prolonged period of sluggish output and high unemployment. Price stability – returning inflation to the target – is a precondition for sustained growth, not an alternative”. This could almost be a justification for the 1981 budget which prompted the famous letter of protest from 364 economists. Like re runs of Airwolf, monetarism is back.

In the 10 years before Margaret Thatcher’s election victory in 1979, inflation averaged close to 12%. Various explanations were put forward. The most popular was the ‘oil shocks’ of 1973 and 1979 when disruptions in Middle Eastern oil production sent prices skyrocketing. Another was the pay demands of trade unions which brought the country to a shuddering halt in the winter of 1978.

Indeed, both of these arguments have echoes today. The rise in oil prices since 2003 has been presented by the government as a major factor in current inflation and the trade unions are squaring up to Gordon Brown and demanding higher pay to match inflation.

In 1979 the incoming Conservative government largely ignored both of these arguments armed as it was with the theory of monetarism. Popularised by Milton Friedman monetarism held that “Inflation is always and everywhere a monetary phenomenon”. The key, indeed probably the only, determining factor in inflation was the increase of the money supply.

The money supply is the total amount of money available in an economy at a particular point in time. It includes cash, deposits, checking accounts, liquid assets and much else besides. The exact make up depends on which measure of the money supply you happen to be using. In essence, monetarism held that if the growth in the money supply matched the growth of the economy then prices would remain stable. If it exceeded economic growth however, the resulting gap would be inflation.

In the case of rising oil prices being a cause of inflation, monetarism held that they were not, that in the 1970’s as now, they were merely price rises reflecting relative demand and supply. Inflation is not the rise in price of a particular good or service but “the increase in the general level of prices over a specified period”

Likewise, the wage demands of trade unions need not be inflationary. If the government raises wages by £X but raises taxes by £X to cover this, the money supply has not increased, rather a portion of it has simply been shifted from one large and disparate group (taxpayers) to a smaller and more concentrated group (the public sector). If the government funds wage increases by taxation, it will not be inflationary, if it funds them through an increase in the money supply, it will not only be inflationary but will prompt another bout of demands in the future.

This is what happened through the 1970’s. Government expenditure eventually reached the limits that taxation could support with marginal rates of 90% but even this was insufficient to fund it all. So the government took to expanding the money supply, “printing money” in the popular phrase of the time, which fuelled inflation. And as wage settlements caused further inflation unions came back with further wage demands. This became known as the ‘wage-price spiral’. But according to the monetarist doctrine of the Thatcher government and its Chancellor Geoffrey Howe, the inflationary factor was not rising wages but the governments’ expansion of the money supply to pay for them.

How relevant is this today? We have inflation albeit not of the double digit variety the Conservatives inherited in 1979. As we have seen, we also have people eager to blame oil prices and public sector wage demands. But what’s been happening to the money supply? Simon Heffer explained back in June.

“There is not inflation because of rising prices, or rising wages…Growth is at present about 2 per cent, and predicted to fall to about 1.4 per cent over the next year.

Inflation, on the bogus measure of Consumer Price Index, is more than 3.3 per cent. Even if we believe these two figures, their sum is about 5 per cent. How fast is the supply of money increasing in the M4 measure? More than 12 per cent.”

This is the real cause of inflation now at its highest rate since 1992. Since Gordon Brown ditched the Conservative spending plans he adhered to in the first Blair administration, public spending as a share of GDP has risen by nearly 5% of GDP to 42% for 2007-2008. This has been paid for by government borrowing which has produced a deficit of 2.8%. This avalanche of cash has flowed straight into the money supply.

It is likely that an incoming Conservative government in 2010 will have to deal with circumstances similar in their fundamentals to the situation of 1979. Sadly, the remedy is likely to be similarly painful with unemployment and higher interest rates. One note of comfort comes from the new monetarist consensus as demonstrated by Mervyn King, it is hard to imagine 300 economists taking up their pens in anger now.

Ultimately it proves the truth of Kenneth Clarke’s observation that Labour governments are elected for as long as it takes them to wreck the economy and Conservative governments are then elected to sort it out.

(Printed in The Caerulean, Issue 11, September 2008)