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Making the least worst choices

The latest news on unemployment is grim. This will continue to be a year of difficult choices and high economic stakes.

Sometimes we can feel we have been here before.  In 1975 with the British economy in trouble, government ministers and officials met with the US executives of Chrysler to see if the car manufacturer’s operations in Scotland could be saved.  The head of the Policy Unit at the time, Bernard Donoughue, recorded in his diary that the government was determined to be a tough negotiator.  However, the pressures were too great.  Donoughue wrote, ‘more public debt was used to bail out an American multinational to provide more car capacity than we need.  Contrary to our industrial policy…’  Yet the decision was judged the least worst, given the alternative of a deterioration in the terms of trade and an immediate increase in unemployment.

Such are the pitfalls that await government ministers attempting to help struggling industries in downturns.  Making the right decisions is not easy especially when thousands of jobs are at risk.  The car industry has requested help in this downturn and other industries are suffering too.  These requests contrast with the billions of pounds of support for banks and the £150bn of ‘Quantitative Easing’ (effectively printing money).  While the quick action taken to rescue the banking sector last year arguably saved our economic system from collapse, there is still more to do.  At the same time, rising unemployment presents us with a new challenge.  Labour needs to be proactive in its approach.

The latest news on unemployment is grim.  Figures released last month showed unemployment rose over 2 million for the first time since 1997, a rise of 421,000 over the year.  The unemployment rate was 6.5% in the three months to January, an increase of 1.3% over the year.  The claimant count, those claiming Jobseekers Allowance, rose 138,400 in February.  That was the largest monthly increase on record, going back to 1971. The claimant count rose by almost 600,000 people over twelve months.

Unless economic confidence returns soon companies will continue to face tough trading conditions leading to more redundancies.  Employment data tends to lag behind business conditions.  Other measures are being tried, such as pay cuts, in attempts to retain valued and skilled labour.  Wage inflation is declining (it is highest in the service and public sectors).

The past two recessions, in the 1980s and 1990s, offer some guide.  The unemployment rate rose to 11.9% in 1984, or 3.28 million people.  In 1993, it peaked at 10.6% or 3.03 million.  It feels as if jobs are being shed much more quickly this time but the claimant count is at or below the same levels as at the equivalent period in the dark days of those recessions.  This provides some context although this downturn has been caused by a financial meltdown which makes it unique.  As the financial sector contracts, so does the economy in the absence of countervailing forces.  Financial stability has yet to be restored, which means that deflationary forces may yet prevail and in the last few months the world has seen a sharp deterioration in economic activity.  Draft IMF forecasts last month were reported to show that UK GDP, which was forecast in January to drop 2.8% in 2009, was expected to fall 3.8% this year and fall by 0.2% in 2010.  Official revised predictions have not yet been published.

The outlook for jobs therefore remains poor and uncertain.  Unemployment is likely to rise over 10% and over three million out of work.  This is bad news for the individuals and families affected.  It also has implications for our economic prospects.  As David Blanchflower, a member of the Bank of England's Monetary Policy Committee, stated in a speech in Cardiff last month, 'As redundancies rise and house prices fall, more British households will face the grim prospect of experiencing both unemployment and negative equity in their homes.  Forced selling in the housing market could lead to further downward pressure on house prices, pushing more households into negative equity.  In this case, mortgage arrears and defaults will arise, putting further pressure on the financial sector.'

Blanchflower argued that '...any fiscal stimulus that is being planned should be concentrated on maintaining employment and sustaining labour demand, perhaps through expansions of public sector employment where appropriate.'

In an earlier speech, Blanchflower outlined measures he believed should be considered.  These included raising the school leaving age to eighteen, investment in ‘shovel-ready’ infrastructure projects that can create jobs, a boost for funding for the public and not-for-profit sectors for a couple of years, and an additional fiscal stimulus worth up to £90bn.

Additional government borrowing has to be managed carefully.  It will in any event rise with the ‘automatic stabilisers’: in recession welfare benefits increase and tax revenues decline which together act as an economic stimulus.  It is here that the Conservatives are being particularly irresponsible.  Borrowing should increase in such a slump (including discretionary borrowing), so we avoid a financial collapse leading to full-scale depression.  The Conservative approach is to raise the stakes on government borrowing but it is difficult to know if this is driven by a belief that now is the time for government to tighten its belt (which would be near economic suicide) or by political calculation.  The evidence for a well-thought through Tory approach to this crisis is hard to find.  To those facing redundancy, David Cameron’s Conservatives have little constructive to say.

Labour must ensure it has a comprehensive strategy to boost employment that is easy to explain to people.  There should be four elements.  First, the newly unemployed should have a clear route to benefits and advice (the Jobcentre Plus website could be improved for a start).  Second, policy towards family and communities should be adapted to deal with rising unemployment.  The boost to child benefit is a step in the right direction here.  Third, a clear and rigorous approach to bail-outs is needed.  Fourth, serious and fast consideration should be given to measures such as those advocated by Blanchflower.  In today’s economy where there is such a premium on skills it will not be easy to establish government as ‘employer of last resort’, desirable though this is.  However, the government can get close by ensuring measures to expand demand are focused where there will be maximum impact on employment.  A working person will contribute to economic growth.  It makes more economic sense to have a person in work, even paid for by the taxpayer, than unemployed.

This will continue to be a year of difficult choices and high economic stakes.  It is difficult to make policy when events are unfolding so quickly.  Pressure for government interventions will remain.  It is quite possible that Quantitative Easing will start to get the economy going again this year.  Still, at the next General Election people will want to see Labour has in place a clear and bold strategy to combat unemployment.  We must not let them down.

This article previously appeared in Tribune magazine.
Stephen Beer, Friday 27 March 2009.
Tribune 27/03/09, 27/03/2009

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