Labor's 'Stop-Go' Dilemma

...In fact, the compromise was by no means so unsuccessful as many British and foreign commentators have alleged...

...The Conservatives recaptured control in 1951 primarily because the country was tired of the austerity of the '40s...

...But even though the Chancellor stated his case with a candor at once heroic and frightening, it is surely permissible to wonder if the government will in the end be prepared to face the implications of this policy...

...At the same time the government introduced a whole series of measures to remedy the structural weaknesses of the economy...

...Wales, the North and the Southwest...

...Consequently, the Wilson government is faced with several critical questions today...

...The government was skating well, but on dangerously thin ice...

...It ignores the love of ideas, the irrational passions of racial and religious prejudice, the charismatic appeal of the man on the white horse who has so often confounded the prophets and changed the course of events...

...A number of accidents in the early summer of 1966????the most important being the seamen's strike????precipitated a crisis of confidence and a run on the pound...

...It is easy to visualize the vicious circle which might then develop...

...For these reasons, I do not believe it is by any means a foregone conclusion that the policies promulgated with such brutal clarity by Callaghan will be carried through to the bitter end...

...In any case, the second assumption is more fragile still...

...In addition, the voters themselves were disillusioned by the unemployment that followed the Conservatives' 1961 deflationary measures, and by the inadequate social investment during the 13 years of Conservative rule...

...and there is no doubt that by the end of 1967 the trade balance will be comfortably out of the red...

...Labor was forced to put through the most comprehensive package of deflationary measures proposed by any British government since 1945...

...Given this atmosphere, it is at least possible that capacity will rise more slowly than the Chancellor expects...

...While the overall approach seemed sober and unspectacular, it nevertheless appeared to be working...

...By October 1964 the economy was already grossly overheated, demand was pressing on the limits of capacity, the country was running a massive balance of payments deficit, and still there was a large program of public investment in the pipeline...

...The balance of payments deficit declined, and wage inflation slowed down (though not to the extent that the more optimistic members of the Cabinet had expected...

...If so, is there any way to prevent the kind of balance of payments crisis that has sooner or later confronted Britain every time it has tried to expand at that rate...

...By spring 1966 one could sensibly hope that Britain might be out of the balance of payments woods within a year or so, and that the "economic miracle" which had eluded the country for so long might at last take place...

...In other words, the feeling is that an indefinite prospect of slow growth and high unemployment will not help revive business confidence...

...Yet despite what the government has already done to foster regional development, and the promises to do more, it is doubtful that its policies will significantly reduce pockets of regional unemployment in the next three years...

...I have always felt that this formulation did violence to the facts of history...

...Should Britain return to the growth target of around 4 per cent envisaged in the 1965 national plan...

...or it could devalue the pound sterling, and risk the charge that Labor was the party of fiscal irresponsibility and economic prodigality...

...If the government does in fact accept the philosophy of the budget, then the prospects are gloomy...

...Other chancellors have attempted to tread this path before, and have had to turn back because political pressures proved too strong...

...These advances, though, were purchased at the price of high unemployment and a severe drop in private investment...

...Harold Lasswell, politics is really about one crucial question: "Who gets what...

...The dilemma can be stated very simply: Labor won in 1964 and 1966 because it promised a faster rate of growth and an end to the old Tory cycle of "stop-go...

...indeed, it might even crack of its own accord...

...Since the end of World War II, the twin issues of economic management and social welfare have dominated British politics to the virtual exclusion of all other considerations...

...Second, it assumes that the growth of capacity will proceed on its projected path irrespective of governmental action...

...The package proved successful...

...The sharp increase in personal consumption during the '50s then enabled them to stay in office until 1964...

...Unfortunately, though, Labor took office not at the depths of a recession, as it had expected to do, but at the crest of a boom...

...First, it assumes that it is politically possible to maintain unemployment at a level significantly higher than the British people have tolerated, except for brief periods, since the War...

...By the fourth quarter of 1966, Britain was running a surplus on current accounts...

...Labor regained power in 1945 primarily because the electors feared a return to the unemployment and stagnation of the '30s...

...Callaghan said the growth in the economy should not outpace the expected rise in productive capacity, suggesting a continuation of the considerable margin of spare capacity that now exists in the economy...

...For a government with a paper-thin majority in the House of Commons, either course presented immense danger...

...Yet if the Lasswel-lian formula does not fit all political systems of all periods, it has fitted Britain's remarkably well for most of the last 20 years...

...In the absence of solid evidence that it can or cannot work, there is a strong a priori presumption that the growth of productive capacity must partly depend on business confidence...

...A massive deflationary bite out of home demand corrected the imbalance between imports and exports...

...A statutory halt on income and price increases brought wage inflation to a dead stop...

...Both assumptions are exceedingly shaky...

...The new Labor government therefore faced a painful choice: It could deflate the economy, and correct the balance of payments deficit through the traditional methods it had denounced so vehemently during the campaign...

...For there are two major weaknesses in the economic philosophy implied in the budget speech...

...In that case, how could Labor avoid an unacceptable level of unemployment, like that which inflicted such electoral damage on the Conservatives four years ago...

...The tiniest mistake, and the ice would crack...

...No British government has actually carried out the policy the present Chancellor of the Exchequer has said he intends to follow, though several have proclaimed their intention of doing so...

...If it treats that philosophy as an intellectual smoke screen behind which alternative strategies can be devised, the prospects will be a good deal brighter...

...This imbalance has made even a comparatively low national unemployment rate socially and politically intolerable because of its effect on the poorer areas...

...Labor narrowly won in 1964 by convincing the electorate that Britain's economic growth rate under the Conservatives had been too low...

...Thus the government tried to combine a moderate dose of deflation with a prices-and-incomes policy that would moderate wage inflation...

...It is impossible at this point to predict final answers to these questions...

...And of course, that is precisely what happened...

...But for alternative strategies to be implemented a year or 18 months from now, the basic decision to formulate them will have to be taken very soon indeed...

...This familiar sequence underlines the dilemma now facing the Wilson government, and the major issue around which British politics seems likely to revolve for the next two or three years...

...With no room left for maneuver...

...If one takes at face value Chancellor of the Exchequer James Callaghan's recent speech introducing this year's budget, the government would appear to have opted for modest growth and high unemployment...

...It is true that the government is trying hard to correct the structural imbalance between the more prosperous regions and depressed areas in Scotland...

...Paradoxically, it may well be that the greatest danger facing the British economy is not the current slow growth and high unemployment, but rather the danger of trying to maintain a deflationary program for too long????and being forced into a sudden, and ill-prepared, change of direction...

...This last danger can be avoided ????but only if the government recognizes it in time...

...In striking contrast to France, with its problems of decolonization, or to West Germany, where foreign policy has frequently taken priority, Britain has been almost wholly preoccupied by what the Chartist agitator J. R. Stephens once called the "knife and fork question...

...Or should Britain settle for a much more modest growth rate????implying the indefinite perpetuation of the present margin of spare capacity...

...The combination of policies, however, was not working fast enough to satisfy foreign (and British) holders of sterling...

...Should it regard last July's deflationary measures as a temporary expedient or a permanent change of direction...