Mature economies are battling to expand rapidly; while this may mean nirvana for some theorists, it could spell hell for Britain’s Labour Party, writes Victor Keegan in London
LOOSEN your seat belts, the world is slowing down. According to the latest figures from the Organisation for Economic Co-operation and Development (OECD), the 15 economies of the European Union expanded by 4,8% a year between 1960 and 1973, then by 2,5% between 1973 and 1979, 2,3% in 1979 to 1990 and an estimate of only 1,9% between 1990 and 1998.
The anti-growth lobbies might as well pack their bags and go home and the motorway tunnellers likewise because their job appears to be being done for them very successfully by natural economic forces.
If present trends continue, growth will be down to 1,5% a year by the millennium and heading downwards thereafter. This will bring nirvana for “steady state” growth theorists who believe – with some justification at the moment – that most growth is illusory because the benefits of the extra goods generated are offset by the disbenefits to the environment involved in the production process.
But heaven for steady-statism could be hell for the British Labour Party, which has invested a lot of political capital in reviving the country’s long-term growth rate. It is a real problem because if growth fades so too will sources of tax revenue; but the population will go on ageing and the demands of the welfare state will continue to expand.
It is difficult for mature economies to expand rapidly simply because they start from such a big base. The United States economy, which dominates the new information age, is going through a miraculous period. Yet growth has been only 2 to 2,5% because its expanding sectors are a small part of the huge economy which even now accounts for more than 36% of the output of the 28-nation OECD area.
Another reason mature economies find it difficult to grow fast is that much of their extra output is invisible. What is invisible is difficult to count properly let alone to cost.
A new branch of the dismal science is opening up to study “weightless economies” where extra output has no physical manifestation. We will have to get used to all this because that is where the jobs are coming from.
In these circumstances it is right that the defining characteristic of socialism as redrawn by New Labour – as the UK Labour Party has become known – should switch from provision to enablement. Instead of providing an impossible safety net for the millions who are disenfranchised from work, New Labour will use the resources of the state to enable people to help themselves back into work.
This by itself is no panacea as can be seen by the fact that the recent huge increase in graduate output has not obviously increased Britain’s ability to expand faster. Instead it has raised a new potential danger – that graduates trained with unmarketable skills may need to be “dumbed down” to take less skilled jobs, rather than trained up.
There is no alternative to a massive supply-side assault on training, if only because the dangers attached to an overskilled work force are minimal compared with the consequences of having an underskilled one. Labour has an impressive array of supply-side proposals.
For a good idea of how these measures might slot into a changed macro-economic framework it is worth reading Professor Richard Layard’s new book, What Labour Can Do. Layard has been a big influence on Labour’s supply-side policy but his comments on monetary and fiscal policy, and his impassioned plea for a single currency – which Labour is reticent about – may merely be running a little ahead of the game.
He argues that, in or out of monetary union, the UK would have to keep the Budget deficit to a sub-Maastricht 2% of gross domestic product over the business cycle simply to prevent the national debt from escalating.
And what’s so bad, he says, about ceding control over monetary policy, the abuse of which has landed Britain with three of the seven biggest recessions in G7 countries since the 1950s?
New Labour is preparing well to educate and train people to gain a better chance of sharing future increases in the national cake – even if slower growth reduces the rate at which the cake is increasing. What is less clear is whether it will do anything to correct the existing maldistribution of income and wealth. The decision to wimp out of raising the top rate of tax is not encouraging. If economic growth slows, then the problem of redistributing economic power to poorer people that was taken away from them in the 1980s and 1990s will become more acute.
Globalisation of the economy undoubtedly makes the whole exercise much more difficult to do – and maybe impossible. But it would be reassuring if we knew there was one political party at least thinking about it.