On the rocks

On 4th March 2019 the New York Times published The Curious Case of ‘Failing Grayling’ – the Conservative government’s transport minister. Soon it issued an embarrassing retraction: “Because of an editing error … this article misstated the amount that … Chris Grayling’s misadventures had cost British taxpayers. It is 2.7 billion pounds, not 2.7 million.”

Chris Grayling’s outrageous blunders have surely forever blown the Tory party’s reputation for competence. And yet the myth prevails. Its power must be addressed, because the evidence of Tory party economic incompetence is sound and goes back a long way. The myth reflects the lack of confidence many have in alternatives to the dominant economic orthodoxy; and in Labour’s own record of economic management. That, in turn, may reflect the excessive deference shown by Labour governments to conservative economic orthodoxy. A brief look at the history of Tory and Labour economic policies shows this.

One of the most incompetent of Conservative chancellors was Winston Churchill. In April 1925, egged on by the City of London, and against the strong advice of John Maynard Keynes, he made the decision to resume convertibility of pound sterling at the pre-first world war rate. This triggered a catastrophic and prolonged economic crisis. Deflation and a massive rise in unemployment followed.

When miners were told their wages would be cut as a result of deflation, they prepared to strike – and were threatened with a lockout by mine owners. That in turn triggered the prolonged 1926 general strike. Exports fell, and the run on the Bank of England’s gold holdings forced Britain to bow to the fate of ‘vassalage’ to the United States. The deregulation of finance associated with the international gold standard led to a vast international debt inflation, which in turn led to the deflation of the stock market bubble of 29 October 1929 – accelerating the global economic collapse now known as the Great Depression.

Six years of job losses, bankruptcies and deflation had followed Churchill’s great blunder. His failures led to the election of a Labour government. But the 1929 Labour government’s deference to the ‘May Committee’ and its proposals for fiscal consolidation, made things worse. Austerity led to a party split and was followed by the election of a national government headed up by Ramsay MacDonald. Soon after, in September 1931, speculative attacks on sterling forced the austere ex-Labour chancellor and fierce opponent of Keynes, Phillip Snowden, to finally release Britain from the Churchillian ‘fetters’ imposed by the gold standard.

Fast forward to the extensive economic failures of the ‘Barber Boom’ in the early 1970s – financial deregulation failures that played a leading part in the great financial crisis of 2007 to 2009 – or to the ‘Lawson Boom’ in the late 1980s – which included tax cuts and low interest rates that blew up a massive property bubble. But attention too must be drawn to John Major’s decision as chancellor to sign Britain up to the European exchange rate mechanism (ERM) in October 1990 – at a deflationary exchange rate designed to keep interest rates high, exports expensive and unemployment rising.

The consequence of ERM membership, as academics Werner Bonefeld and Peter Burnham detail in an important paper, were catastrophic for Britain’s economy and for millions of people. Between 1990 and 1992 unemployment rose by 1.1 million to 9.8 per cent of the total workforce. Bankruptcies increased dramatically, from 9,365 in 1989 to 35,940 in the first nine months of 1992. During the same period, company liquidations rose from 9,427 to 24,825. Manufacturing output contracted and the volume of retail sales declined dramatically. Gross domestic product (GDP) growth dropped from 2.1 per cent in 1989 to minus 2.2 per cent in 1991 until it ‘recovered’ to minus 0.6 per cent in 1992. “High real interest rates, pressure on public spending and loss of revenue intensified the fiscal crisis of the state,” wrote Bonefeld and Burnham.

The then chancellor, Norman Lamont explained that rising unemployment and business failures “were a price worth paying” for the defeat of inflation. Neil Kinnock’s Labour party appeared to concur – when Labour backed Lamont’s ERM strategy. The political consequence of this effective collusion between the two political parties was reflected in the results of the 1992 general election. A post-election analysis, by amongst others professor John Curtice, spelt out clearly what the consequences were.

“From the beginning of the campaign on 11 March, the parties were neck and neck in the opinion polls, with Labour fractionally ahead. The commentators predicted a hung parliament; the only question, it seemed, was whether Labour or the Tories would be the largest party. Even the exit polls suggested a hung parliament.”

The result, when it came on 9 April, was one that nobody, not even the Tories, had expected. The government had 42.8 per cent of the vote, Labour 35.2 per cent. The Tories had lost only a fraction of the vote they recorded in 1987. Labour, admittedly, was well up on its 1987 vote; but its share was still lower than it recorded in 12 consecutive elections between 1935 and 1979.

When later that year sterling crashed out of the ERM on ‘Black Wednesday’, 16th September 1992 – the Labour party’s already damaged ‘ship’ was beached alongside the wreckage that was the Conservative party. Despite the damage, the Tories went on to enjoy five more years of power.

A similar fate awaited the Labour government of 2007 to 2010. A determination by both the Blair and Brown governments to placate the City of London and echo Conservative calls for ‘light touch financial regulation’ led ultimately to the defeat of Labour in 2010.

There are lessons in this history for today’s Labour party. Neoclassical economic policies may serve the interests of the ruling classes, but they inflict painful losses on the majority. If Labour is to win a general election then collusion with ‘Failing Grayling’ and his colleagues in the Conservative party will invariably lead the public to conclude, as they have done in the past: “Better the devil you know than the devil you don’t.”