Wilson's Last Chance

...Each period of boom has begun with a moderate payments surplus and with the government worrying about inadequate growth and high unemployment...

...These obstacles to economic expansion have been enhanced by Britain's balance of payments problems...

...For the first year or so the government should aim at a growth rate of no more than 2.5-3 per cent with almost all of the growth coming from investment and exports...

...In a period of stagnation few industries will be expanding and taking on new workers...

...The gnomes began to mutter that they had heard this tune before, as indeed they had, and pressure on the pound continued until Prime Minister Wilson was ultimately forced to ram through Parliament a bill providing legal sanctions for a price and income freeze...

...But the large firms as well are often a mixture of ignorance, timidity and sluggishness that impedes modernization...

...Family firms especially will stay in business with low or even no profits as long as jobs are provided for all relatives...

...Wilson valiantly resisted the temptation to place further restrictions on British investment overseas in his austerity program...

...Accordingly, when the economy is expanding the capital goods industry becomes a bottleneck holding back the rest of the economy...

...it encourages management to use unproductive labor rather than invest in machinery...

...This cycle was run three times during the period of recent Conservative governments, and each time the government made the same mistakes...

...The other major factor contributing to Britain's economic difficulties is the conservatism of labor...

...Meanwhile, a two year freeze should be placed on prices...

...Further complicating matters, small and inefficient family firms abound in Britain (to pick an extreme example, some 290 of the 350 companies in the pottery industry are family firms...

...If a payments deficit develops or if the growth threatens to go too fast, the government should act immediately with minor adjustments before the situation gets out of hand...

...This caused a tremendous drain on reserves over and above that caused by the trade deficit...

...There are only four possible courses open to the British government...

...The tendency toward managerial inaction is aggravated by the lack of domestic competition...

...While there are numerous exceptions, British industry seems to be largely governed by a live and let live ethic...

...This is likely to entail up to five years of apprenticeship, a cut in pay at least initially, and a loss of seniority...

...Labor devalued the pound in 1949 and Wilson does not want this label pinned on his party...

...But consumer demand then forced imports up at a rate two or three times that of the economy as a whole...

...The money raised through the payroll tax and the selective employment tax, and some of the money from the increased taxes on consumption should be given back to industry in the form of large tax allowances for investment...

...One is a perpetually stagnant economy...

...Forced to choose between security and opportunity, the overwhelming majority of British managers come down on the side of security...

...Company presidents and directors, unable to understand and evaluate the proposals of their scientists, often use "common sense" to dismiss with "it will never work" ideas that would revolutionize their companies and double or triple profits...

...If these measures or others similar to them are taken, Britain will regain its position as a prosperous industrial power with a contented and thriving people, as well as its important position in world affairs...

...At the end of two years the income and price freezes could be lifted, but wage increases would have to be limited to increases in productivity...

...Workers made redundant will almost always be able to find new jobs, but they may have to learn a new trade and/or move to a new location...

...None the less, despite all the hostility of the unions to unemployment, whether or not euphemistically called redevelopment, Wilson won his votes of confidence...

...Hopefully, even in Britain when management sees its labor costs rising, without being able to raise its prices to comperate, and at the same time sees machinery made cheaper by the tax allowances for investment, it will decide to increase its investment...

...The more efficient firms, instead of cutting prices to garner a larger share of the market, are content with a smaller share and a higher profit rate, allowing inefficient firms to survive...

...Even after support for sterling was obtained from the U.S...

...And even where British exports are competitive, they are losing ground to foreign products because of ignorance and notoriously poor salesmanship...

...If the worker is one of the lucky few who have saved enough to buy their own homes, he will also be reluctant to go to a more prosperous region because these regions have housing shortages, and because he will probably have trouble selling his house in the declining area...

...These are usually too small to be able to afford research and development, and too set in their ways to learn from the experience of more progressive competitors...

...It is a rare company which, having called in outside consultants and followed their recommendations, does not find its profits substantially increased, frequently by 20-40 per cent or more...

...James A. Cousins Jr., a Yale graduate student, is currently working on a book on British politics...

...When stripped of its verbiage, it turned out that its primary effect would be to delay excessive wage increases for four months while a powerless government board prepared a report which according to past experience, the unions would ignore...

...Instead, of course, the deficits grew and as holders of sterling took a dim view of Britain's prospects for avoiding a devaluation of the pound, they sold sterling for gold or other currencies...

...In a labor-short economy the introduction of labor-saving machinery would unquestionably result in higher income and increased employment over-all, but the workers involved are understandably less concerned with the general good than with their own immediate welfare...

...Even where there is considerable competition, its effects are not always what might be expected...

...Winston Churchills are few and far between in the business world...

...Beguiled by the fact that the trade deficit was only a small fraction of Britain's total trade, they chased the illusory phantom of minor adjustments which would offend no one and ended by doing nothing in the hope that the problem would cure itself...

...Instead of bringing the expansion of the economy to a complete halt, the new leaders merely tried to slow it down and to attack the payments deficit directly by an import surcharge and restrictions on outflows of British capital to the non-sterling area...

...The only way to do both of these things simultaneously was to bring expansion to a screeching halt with tax increases, higher interest rates and other restrictive measures...

...Furthermore, many of the more modern industries will be among the hardest hit by the austerity program...

...among the great powers, is on the verge of bankruptcy...

...The government may yet be forced to do this, but will try to avoid it at all costs...

...Responding to criticism of his masterful inaction, Wilson with great fanfare introduced a Prices and Incomes Bill...

...And those few union heads who are inclined toward moderate positions are often pressured by militant shop stewards and rank and file to take stands they realize are harmful...

...and the central banks of other countries, the pound was still in danger because the holders of sterling were afraid the government did not have the courage to take the tough measures necessary to protect it...

...Concluding from the payments surplus during the stagnation period that this had indeed happened, the Conservatives pulled out the stops after two or three years and sent the economy into a roaring boom, once again without any attempt to channel it...

...With its long and cherished history of class conflict, it seems unable to perceive the possibility that it has common interests with management...

...Since this course would relegate Britain to the role of a relatively minor power, London cannot be expected to make a clear cut decision to follow it...

...He announced a policy of wage restraint and said wage increases should be limited to 3.5 per cent annually so as not to exceed gains in productivity, but then silently watched the unions increase hourly wage earnings more than 10 per cent last year...

...Initially, a two year incomes freeze required by law and strictly enforced would be necessary...

...This seems a bit premature...

...Making a virtue of necessity, he declared that his austerity program would lead not to unemployment but to redevelopment of workers from the inefficient and stagnant industries to the modern and growing ones...

...During boom periods manufacturing investment has been very high, at times increasingly by 15-20 per cent in a single year...

...Companies of other countries have salesmen scouring the world for buyers...

...But while there has been some gradual improvement, the British have been remarkably stingy with investment in labor-saving machinery...

...The new subsidy for manufacturers based on the number of their employees should be rescinded...

...What is more probable is that the government will make a series of "temporary" cuts whenever pressure on the pound becomes too great, and that these temporary cuts will turn out to be permanent and will cumulatively result in ending most of Britain's overseas activities...

...The most important element in such a plan would be measures to increase investment in modern equipment...

...Of course, a major overhaul of the tax structure would be necessary...

...The symptoms are economic: a slow growth rate and a balance of payments deficit that represents 5 per cent of Britain's total trade and is the most immediate cause of the trouble...

...They were partly successful...

...Thus the wildcat strikes that plague Britain...

...The third choice is cut backs on spending overseas...

...Britain starts with the handicap of an industrial labor shortage, a result of slow population growth, the large number of workers in service industries, and a small agricultural population (which in other European countries serves as a labor reservoir for industry...

...The best way to encourage investment specifically in laborsaving machinery would be a payroll tax...

...But Britain will have to do this anyway if it enters the Common Market, since the value added tax will be used by all of the EEC countries...

...The unions tend to regard any reforms advanced by management as attempts to defraud labor of its hard won gains...

...Any resulting gains in productivity must be protected from exorbitant wage increases...

...Per working day lost, these are much more harmful than strikes for which the company and its customers can take precautionary measures...

...But the Conservatives did not at the same time seriously attempt to prevent wages and prices from jumping during the period of stagnation...

...As a remedy, the Conservative governments in general removed the brakes they had previously placed upon the economy, sending it booming ahead with tax cuts and low interest rates...

...In addition, Labor tried to encourage investment in depressed areas by tax allowances and a system of licenses, and to increase the mobility of the work force by requiring severance pay and providing retraining facilities...

...But the disease is cultural and political: businessmen more interested in getting into the right clubs than increasing their profits, workers who want to be paid more than they earn, and a government until now more eloquent in oratory than vigorous in action...

...Thus far, he has merely taken unpopular but absolutely necessary measures to prevent an even more unpopular devaluation of the pound...

...Very few companies concentrate on increasing their percentage of an industry's sales...

...The high wage increases and the drain on Britain's gold reserves caused by the Rhodesia crisis and the seamen's strike produced another crisis of confidence in the pound...

...If Wilson has such a plan he has not told the British people about it...

...Since management has been unwilling to cut its profits to pay for these wage increases, much of the cost has been passed on to the consumer through higher prices leading to inflation...

...The relatively new phenomenon of management consultants in Britain provides striking evidence of the validity of many of the old criticisms of British business leaders...

...This would equalize the tax burden and have the effect of penalizing inefficient firms, which now pay little tax because of their low profits, and reward efficient firms by allowing them to keep whatever extra profits they may get from added efficiency...

...The capital goods industries, which must be the backbone of any modernization of British industry, are now looking forward to some of their worst years since World War II...

...Many firms simply are unaware of the profitable markets that exist...

...Though it loses a smaller proportion of working days through strikes than many other industrial countries, including the U.S., it does have more wildcat walkouts than its principal competitors...

...If the above measures have had the desired effects and there is a payments surplus, then the growth rate can be allowed to slowly increase...

...In very few have scientists or engineers penetrated the upper management levels...

...Although this lag is partly attributable to Britain's alternating periods of boom and relative stagnation, even during the high points its growth rate has been below that of its European competitors...

...Finally, the government had to do what it swore it would never do: introduce one of the harshest austerity programs in British history...

...For the first year or so of economic expansion the Conservative governments usually have ignored the balance of payment deficits, no doubt hoping they would go away...

...The situation is exacerbated by a general feeling of mistrust between labor and management, with the latter occasionally adding a dash of contempt for good measure...

...Following this, Wilson went before the annual trades union and Labor party conferences three weeks ago and demanded votes of confidence...

...At the same time, industry lost much of its incentive to export since it could easily sell all it could produce on the domestic market, where the shortage of goods also helped to Irive up prices...

...The auto industry is already feeling the effects and the other durable consumer goods industries will not be far behind...

...One of the best means of increasing investment would be to replace Britain's corporation tax by a value added tax-a kind of sales tax placed on the output of each firm rather than on its profits...

...The shortage of labor and aggressiveness of the unions have combined with the sluggishness of both management and government to produce large increases in wages over the last few years unmatched by corresponding increases in productivity...

...When a proposed change will cause some workers to lose their jobs, resistance is even greater...

...Instead of announcing a program of harsh economic measures with great fanfare, it introduced restrictive measures in driblets and denounced those worried about the pound as "moaning minnies.' As a result, confidence in the government and in the pound sank to a new low and the pound fell on the world markets...

...British companies tend to sit complacently at home, waiting for business to come to them...

...In the Midlands, for example, where only a few months ago there was a labor shortage of more than 35,000 workers, job openings have declined to less than 2,000, while unemployment has risen considerably...

...Given Wilson's desire to stay in office, this is a most unlikely choice...

...Unfortunately, Harold Wilson at this point failed to follow up these good beginnings with the much more important and more difficult actions required to hold down wages and increase investment...

...That is certainly an improvement over his past actions, or the lack of them, but the fundamental faults in the economy have not been attacked...

...The national union leaders might be expected to take a broader view, however they are almost all men whose ideas were formed in the '20s when labor conflicts were acute and violent...

...It also tried to encourage exports by improving and increasing the number of commercial officers in British embassies and High Commissions overseas, and by giving more aid to exporters through the Board of Trade...

...In recent years they have devoted only 16.6 per cent of the Gross National Product to investment, as compared to 20.3 per cent for France and 25.7 per cent for Germany...

...Nor is it unusual to find a firm exporting to Germany, say, with no one in the firm knowing German...

...Yet this feeble measure was too much for the Minister of Technology, Frank Cousins, who resigned in protest and returned to his Transport and General Workers Union vowing to lead a crusade against the bill...

...Although management's deeply ingrained amateurism and the antagonism of management and labor will change only with time, the government can spur these changes while at the same time tackling some of the purely economic weaknesses...

...This tax also has the advantage that it can be rebated for exports, thus lowering prices and making for greater competitiveness...

...Therefore as soon as the above measures are put into effect the brakes on the economy should be gradually removed...

...The growth rate of the economy slowed to 2 per cent in 1965 and the payments position improved, actually showing a slight surplus in the last quarter of the year...

...Only in this way can Britain step up her productivity cnough to supply the exports to pay for the imports necessary when the economy is expanding...

...Blue collar workers, for example, are often invidiously restricted to washing facilities and other accommodations inferior to those for white collar workers...

...After nearly two years of assuring the citizens that their economic problems were only temporary and due to chance events like the recent seamen's strike, Prime Minister Harold Wilson has gone on nationwide television, invoked the spirit of Dunkirk, called for a supreme national effort and defended new austerity measures that will throw the economy into a recession...

...This has particularly affected the capital goods industry, which is dependent upon the investment of other industries for its sales...

...And the British National Export Council, composed of businessmen and civil servants, was created to stimulate exports by informing businessmen of opportunities for selling goods overseas...

...But in announcing this as a "voluntary" six-month program, which everyone knew would fail, Wilson created new doubts about the government's ability and determination to take the necessary unpopular steps...

...When the payments deficit reappeared on its quadrennial schedule, they were rather hurt and bewildered by the reproaches of the gnomes...

...The British economy can continue growing at a reasonable rate for quite a while, at least past the next general election, if the government gradually eliminates investment, aid and defense spending overseas...

...If it does not, there is little in store for it but economic decline, internal strife and reduction to international nonentity...

...Given the dearth of industrial labor, Britain can only increase production by increasing the productivity of its workers...

...Unfortunately, the very backwardness that makes many firms perfect candidates for consultants' services also makes them unaware of the benefits of such services...

...While such increases were not too serious for British exports in the early '50s, in the last few years they have become so high that many British products are no longer competitive in world markets...

...Since 1958 Britain's economy has grown by only 32 per cent, compared to 41 per cent for France and 57 per cent for Germany...

...During the long stretches when the economy has been shaky, however, business has been very cautious...

...Past experience gives little reason to suppose that this will happen to any great extent...

...The second is devaluation of the pound...

...But it is not enough to call upon the nation to make sacrifices without offering a plan of action that will make these sacrifices understandable as a positive contribution to a better Britain...

...The fourth alternative is to attack the structural defects in the economy...

...In 1965 alone, average hourly earnings increased by over 10 per cent while the productivity increase was only 2-3 per cent...

...Often a firm will react to competition not by investing to improve efficiency but by cutting back and accepting lower and lower profits...

...The Labor government came to office in 1964 in the middle of one of these payments crises, swearing that it had learned from the mistakes of its predecessors and determined to avoid the evils of the "stop-go" economy...

...This labor shortage has limited the expansion of some firms and idled parts of others...

...Having waited until the very last moment, the Conservatives found themselves forced not only to stabilize the economy but to restore world banking confidence in the pound...

...In addition, now that foreign producers are able to undersell British firms in their own market, more and more goods are arriving from abroad...

...At this juncture the government made its big mistake, failing to recognize that the essential problem was psychological: to convince Britain's creditors that it meant business in its efforts to protect the pound...

...The engineering industry, for example, needs 10 per cent more workers than it now has...

...When the government pulls out the stops and lets the economy expand again, as it will have to a year or so before the next general election, the payments deficit will reappear and the ensuing crisis could well lead to devaluation...

...The most favorable tax structure in the world, however, will not get business to invest more unless it thinks that it will be able to sell its goods...

...While there is a temptation to pass off the crisis as one of the ills to be expected of a nation which is experiencing a change of life after losing an empire and giving birth to the Beatles, its roots go deep into the British economic and social system, revealing a serious and fundamental malaise...

...The forcefulness with which he addressed his constituents and the firmness the government has shown in enforcing the incomes freeze has led some political savants to proclaim a "new Wilson" who has eschewed expediency and mounted his white charger to lead the crusade for a new Britain...