No Easy Options
In every part of Britain, people are asking:
“What can we do to resolve what the Harold WilsonPrime Minister calls the gravest economic crisis we have faced since 1931?”
The most important contribution we can make is to recognise that there are no easy options. [end p1]
One reason for the economic crisis is our failure, as a nation, to face the realities of economic life.
We have too often sought the easy way out.
General exhortations from governments about how we should resolve our economic difficulties have little effect. [end p2]
It is what we all do which really matters. Individuals can respond only to specific measures taken by governments or to the signals given by price rises or, if we are lucky, occasionally by price reductions.
Individuals can do most to help the country if we respond intelligently and sensibly to such signals. [end p3]
Because we find unpleasant economic realities hard to face, we all too often seek the easy option.
We ask governments to suppress these signals because their messages are too uncomfortable.
We ask for food prices to be subsidised; for all levels of social services to be “free” ; for the pound to be propped up through the Treasury. [end p4]
When the signals being given by the price system are clear, but uncomfortable, we plead for them to be changed.
The reality is that someone still has to pay the “true” price of a subsidised article.
Often, quite rightly, paying a subsidy or providing a service like Health or Education, entails a deliberate transfer of income—from richer to poorer; from younger to older; from healthy to sick. [end p5]
Often, however, the transfer is simply from one pocket to another by the same individual.
He pays taxes, but he also receives subsidies or cash benefits.
There are disincentives to work when the tax is paid, but no offsetting incentives when the benefit is received. [end p6]
This is one reason why the Conservative Party evolved the tax credit scheme, for it would have set off many of these taxes and benefits against each other.
The better-off taxpayer would have made a single tax payment instead of paying tax as well as receiving benefits.
A single net payment would have been handed to the worse-off, whose tax obligations, if any, would have been smaller than the benefits they were entitled to receive. [end p7]
Because the tax credit scheme would have allowed us to get incomes right, it would have restored to prices their proper role.
The role of prices is to give information to consumers about cost, and so about scarcity.
If a product is expensive, this means that the materials, labour, management and capital equipment going into it are also expensive. [end p8]
The increase in the price of petrol since the end of 1973 shows that it now takes more British exports to buy a gallon of oil than it did.
By causing us to economise in our use of petrol, that price increase has resulted in a smaller amount of foreign currency leaving Britain to buy oil than would otherwise have been the case. [end p9]
By responding to the price increase and buying less petrol, we have helped Britain.
Subsidising prices on a large scale, whether food or of the products of nationalised industries, conceals from us the true cost of the resources being used to obtain those products.
It enables us to be more wasteful of them than we otherwise would. [end p10]
When food or electricity prices rise rapidly, as they have done recently, there are good reasons for ensuring that the relatively poor can buy much the same amounts of food or fuel as before: but subsidising food and fuel does more than that.
It means that some will waste these things because they appear cheaper than they really are.
By taking the easy option, and keeping down prices instead of altering incomes, waste is encouraged. [end p11]
This is where the tax credit scheme, which we intend to introduce in stages when we become the Government again, would have helped.
Through it, sufficient income could have been provided to enable even the poorest to buy a fair share of the necessities of life.
Prices would then be able to reflect the true cost of the goods consumers buy. [end p12]
An important way in which we can help to resolve the economic crisis is thus by supporting the government when it decides not to subsidise prices and by refusing to support those who call for further subsidies.
The price system not only indicates the value of the resources going into products.
It also indicates how efficiently businesses are using those recources. [end p13]
Where a firm makes a profit, this is a prima facie indication that the resources it is using are providing a service that is valued by its customers.
Where a firm loses money, this is an indication that its customers do not value the services it provides highly enough, and that the resources it is using could be better used by other businesses.
Of course, calculating a firm's profit is not always easy. [end p14]
A bad performance may be concealed in its accounts for a time. But not for ever.
Sooner or later, an unsuccessful business will get into difficulty.
Either it will have to change its products or methods of production, or it will go bankrupt.
Sometimes we refuse to allow major firms to go out of business in order to preserve the jobs of their employees. [end p15]
With some of these firms, we are again refusing to face realities.
The first reality is that the price of the product of such a firm is just as effectively subsidised as where there is an open subsidy on bread or tea.
The taxpayer makes up the difference between what the firm's customers are prepared to pay for its products, and what it costs to make them. [end p16]
The taxpayer is left with less income to spend.
He accepts a lower standard of living than he might, so that those employed by the business which has failed may maintain, or even improve, their living standards. [end p17]
Moreover, since a large part of such taxation is being paid by businesses which are successful, a substantial increase in the subsidisation of firms that fail would simply put into difficulty an increasing proportion of private industry.
In many cases, we should allow the resources of the firm which fails to move into other activities, where they can pay their way, removing the burden of the subsidy from the taxpayer. [end p18]
Of course, there are two important qualifications to this.
First, there are some situations in which the Government can restore a firm to profitability—by injecting limited finance for a limited period on clearly defined and commercial principles, and by reorganising the firm's management and strategy.
This was our policy for International Computers when we were in Government and for British Leyland only the other week. [end p19]
It is a far cry from the wholesale, open-ended nationalisation to which this Government is in the main committed.
Their policy must fill us with pessimism when we consider the history of the major nationalised industries in this country.
Can anyone believe that a state-owned British Leyland could become an ICI or GEC?
Is it not more likely to become a Post Office or a British Rail? [end p20]
Socialists argue that a major problem of British industry is that it has invested too little in capital equipment.
But the case for the State providing the finance which enables a firm to buy new capital equipment must be that each pound's worth of its output will be produced with fewer men than before. [end p21]
Otherwise it is axiomatic that costs will go up.
What happens to total employment in the firm will depend on what happens to its output.
If the firm's sales rise sufficiently, it may be able to maintain employment. [end p22]
But state-financed capital equipment can be introduced profitably only if the firm produces a given output with fewer men.
All too often, state aid provides the easy option.
It sustains uneconomic manning levels, and does so at the expense of all taxpayers—of the whole nation. [end p23]
The second qualification to what I have said about allowing unprofitable firms to go bankrupt, is that many of us, understandably, wish to avoid redundancy when major firms fail.
In the short term, we argue, those made redundant will become unemployed.
Consequently, the State will have to pay little more if it subsidises the firm to keep men at work than if it pays then unemployment benefit. [end p24]
Because we all hate unemployment. Many of us approve of subsidies being given to firms in difficulties in order to keep men and women at work.
As this is such an emotive question, we need more than usual to look closely at the issues.
The Government puts very clearly the case for subsidisation. [end p25]
But there is another side to the question. It is this.
We live in a world where we can continue to raise our living standards only by moving steadily into the activities that will be profitable tomorrow, as other countries begin to engage in the activities on which the UK specialises today.
Otherwise we shall not earn the foreign currency we need to pay for our imports. [end p26]
Experts tell us that we are entering a period where the actual production of an increasing number of products will be carried out in less-developed countries.
The UK will concentrate on the finance, marketing and administration associated with today's goods and services, and on the direct provision of tomorrow's.
It is not enough to concentrate only on one side of the problem whether it be the employment side or the efficiency side. [end p27]
Difficult though it may be, we must strike a balance between the heartless policy of adding to a pool of unemployment when a firm runs into financial difficulties, and the mindless policy of never having men and women available to move into tomorrow's jobs.
The present Government's policy of resisting any redundancy when bad management, declining markets or advancing technology lead businesses to fail, merely guarantees that workers will not be available to fill tomorrow's jobs. [end p28]
We shall become one of the poorer countries in Europe, with little economic development.
Our real incomes will rise slowly, if at all.
And an unbearable percentage of those incomes will go in taxation to subsidise the employment of a growing percentage of the labour force in unprofitable firms, with out-of-date products or overmanning. [end p29]
A London employment agency advertises:
Tomorrow's jobs tomorrow.
And an ever higher standard of living to go with them, however valueless they are to the nation!
We shall all pay the price of this policy in a reduced standard of living and an increasing tax burden. [end p30]
The National Enterprise Board will turn out to be the National Ossification Board.
We must evolve a humane policy to ensure that people move out of today's into tomorrow's occupations.
And we shall not evolve such policy until we all recognise the realities I have outlined. [end p31]
Our Continental partners combine generous benefits with farsighted retraining schemes so that men and women who leave today's jobs are available for tomorrow's. [end p32]
One element underlying this policy must be a recognition that if tomorrow's activities are to develop effectively, a proportion of them will need to be carried out by new organisations, with new groups of people working in them.
In the past, we have been too ready to shore up organisations that have outlived their usefulness.
By doing so, we have set in motion the process of ossification which the Government is working so assiduously to extend. [end p33]
We must not suppose that we are all going to stay in the same jobs or industries all our life.
We must not be afraid of the challenge of changing jobs.
In practice, this is already happening to a far larger extent than most of us realise.
From 1970–73 the number employed in manufacturing dropped by 500,000.
The number employed in other activities went up by 689,000. [end p34]
For example, among other occupations, there was an increase of 208,000 employed in education, of 97,000 in medical and dental work, of 100,000 in insurance, banking, finance and business services.
The last item was particularly important, since in 1974 private exports of services and returns by way of interest, profits and dividends from overseas together amounted to the equivalent of 60 per cent of our visible exports.
Some American economists summarise the meaning of economics in one sentence: “There's no such thing as a free lunch.” [end p35]
They mean that someone has to pay for all “free” or subsidised goods or services.
Wherever “no-one” pays for something, the truth is everybody pays.
There is no such thing as a Government grant, only a taxpayers grant.
However much we conceal true prices from consumers, the full cost of the resources that go into them must be paid by someone. [end p36]
But we still try to avoid reality—to seek the easy option.
We complain that rates are too high but complain again when local government services are cut to hold them down.
Of course, the organisation of local government finance will have to be changed.
But, in the end, we all pay in full for the services that local government provides. [end p37]
Yet we resist accepting the reality that nothing is free.
This is one reason why the government's revenue/expenditure equation is out of control.
Inflation itself is another because it leads government revenue to fall behind its expenditure.
The Government's subsidies to business will increasingly be a third. [end p38]
As a country, and as individuals, we have pretended to ourselves that somewhere the government has resources which are separate from those of the community as a whole. But it does not.
There is no easy option. There is no bottomless pit of money.
Increasingly, rapid inflation is our worst problem.
Inflation is a threat to our political and economic systems. [end p39]
It is doubtful whether our political system could withstand for long the divisions it causes.
These arise from the pressures which it imposes, especially on the living standards of those who save and lend compared with those who do not. [end p40]
Not least among those who bear these burdens are those whose past savings have generated the pensions on which they have to live today.
All these ways in which we ask governments to give us the easy option contribute significantly to inflation itself.
They do so, not least, because they add to the huge public sector deficit which increases the money supply and so makes inflationary pay and price increases certain.
They are reinforced by the delusion that if as a country we receive incomes in excess of the current value of the output we produce, this does not matter. [end p41]
The delusion is that goods on which to spend the extra money will appear—as if by magic—from somewhere.
Those who perpetuate the delusion seek the easy option, not of producing more, but of nevertheless trying to consume more, taking resources away from others. Perhaps from the rich or from profits.
But there are too few rich and too few profits. [end p42]
They cannot make up the difference between an increase in national output of 2 per cent to 3 per cent per annum, which is the maximum our economy seems able to achieve, and pay increases of 30 per cent to 40 per cent.
With a roughly constant volume of output on which to spend our incomes, we find prices rising at much the same rate as our incomes. And both rise increasingly fast.
Some trade union leaders justify higher wages by saying that wages are lower in Britain than in other countries, like France or Germany. [end p43]
This totally confuses cause and effect.
German wages are higher than British wages because Germany's output per man is higher.
To pay ourselves Continental wages while we still have British productivity simply ensures roaring inflation.
Before we can safely pay ourselves those wages we shall need to do what those countries have already done: instal more up-to-date machinery, improve our management practices, change the attitudes of the unions and keep down manning levels. [end p44]
It is higher incomes which, today, are causing higher unemployment.
Were it not for one thing, this might now be curing our inflation.
I have already argued that as individuals and groups we can respond only to clear and unambiguous signals.
The unprofitability of an employer, caused by wage and salary increases that outrun improvements in productivity and sales, is a very clear and quite unambiguous signal to his workforce. [end p45]
It is significant that, faced with such signals, trade unionists in the private sector of the economy are responding to the facts.
Wages and salaries in private industry are rising significantly less quickly now than in the public sector.
The threat of bankruptcy for one's employer, and unemployment for oneself, is a powerful factor causing a return to reality. [end p46]
Unfortunately, the public sector is at present almost wholly insulated from such realism.
As one newspaper put it over the railway pay claim, public sector workers are saying to their employers: We want the cash you don't have because the government will pay up in the end.
The result is that the pressures which are beginning to reduce pay increases in the private sector do not operate in the public sector. [end p47]
If a private business is bankrupt, then it is bankrupt.
In the public sector, the fact that a nationalised industry is technically bankrupt is irrelevant.
Workers not only threaten to strike—and indeed do strike—to obtain pay increases of 30 to 40 per cent.
They strike in order to get the key to the Bank of England. [end p48]
They thereby ensure that wage and salary payments, which cannot be made by the bankrupt organisations that employ them, are made instead by government, through the printing presses of the Bank.
This simply pushes up prices and reduces the standard of living of the rest of us.
What is perhaps most worrying today is that the government is extending the proportion of the economy which is not subject to the pressures working on private industry. [end p49]
As the Treasury tries in vain to hold down the Government's borrowing requirement, and so the money supply, Mr Benn and Mr Foot work to increase it by their eagerness to subsidise businesses which lose money.
They are handing out yet more keys to the Bank of England.
Those who have keys can then seek higher and higher pay rises, certain that they can get the money to pay these.
But Government cannot go on handing out monies to finance increases in labour costs which the nationalised industries cannot afford. [end p50]
A revitalised British economy can be based only on a willingness to face the realities I have described today, to accept that there are no easy options.
We must see that incomes are fair, but prices realistic.
That unprofitable performance in private firms is sooner rather than later accepted as a signal that those employed by the firms must move to new activities.
That even in the public sector there are limits to uneconomic activity. [end p51]
That our desire for a humane society does not lead to an ossified society.
That, as a country, we do not continue to tear ourselves apart by squabbling over how to share out incomes that we have not yet earned.
What can individuals do to resolve the economic crisis?
We can recognise that the true crisis is social and political so that it can be resolved only by changed attitudes. [end p52]
We can stop asking governments to stifle the signals that the economic system gives us.
We can accept that there is not—that there never was—such a thing as a free service.
There are no easy options now.