New Labour’s economy: healthy, sluggish, dull
Are boasts of economic stability merely celebrations of lethargy?
One of New Labour’s proudest election boasts is that it is ‘the party of economic competence’, which has brought unparalleled stability to the British economy.
Unfortunately, nobody seems to be questioning exactly what Labour is celebrating. It is certainly true that the economy has experienced several years of stability. To paraphrase Gordon Brown’s monotonous intonation, ‘there has been no return to boom and bust’.
But a stable economy is not the same as a dynamic one.
Rather, you could see today’s stable economy as suffering from chronic lethargy. Growth is sluggish and productivity is rising slowly. Britain may not have suffered from a ‘bust’ – but it has not enjoyed a ‘boom’ either. Yet New Labour welcomes this situation, as it does not involve instability.
A closer look at some of New Labour’s economic bragging illustrates this point. For example, it is true that inflation – or price instability – is remarkably low, at 1.9 percent over the past year. But it is simple-minded to jump from this fact to the conclusion that the economy is healthy.
While high inflation is often a symptom of underlying problems, it does not follow that low inflation is a sign of economic health. Inflation can also be low because there is little dynamism in the economy.
Tony Blair’s recent boast that Britain is experiencing its lowest mortgage rates for decades is essentially just a variation of the point about inflation. The amount borrowers pay for mortgages appears to be low, because inflation is minimal. This is because the real mortgage rate is the headline rate (the amount that borrowers appear to pay) minus inflation.
For instance, if somebody is paying a lender six percent on a mortgage and the inflation rate is two percent, the real rate of interest is four percent. A real interest rate of four percent is not particularly low, but a headline figure of six percent looks low, when compared to the headline figures of 14 or 15 percent in the 1990s.
If the British economy is judged according to its dynamism – the key measure, if it is rapidly to deliver higher living standards – rather than its stability, a different picture emerges. From the perspective of genuine economic strength the economy is far weaker.
A key indicator of economic dynamism is real investment: that is, investment within companies rather than financial speculation. By this standard the performance of the economy is mundane.
A recent study by the Institute for Fiscal Studies (IFS), an independent economic think-tank, illustrates this point (1). The study showed that official Treasury figures systematically exaggerated the level of business investment in the UK. The report concluded that, although investment as a proportion of Gross Domestic Product (GDP) has risen slightly since 1995, the change is minimal:
‘Broader measures show that investment spending has risen as a share of GDP but continues to be relatively low as a share of GDP in the UK relative to these (other) countries. Suggestions that there has been a sea change in the level of UK investment are difficult to reconcile with the range of available evidence.’
So in diplomatic language, the IFS is arguing that the government hyped up Britain’s investment figures. Far from there being an upsurge in investment, the real level remains sluggish.
To be fair to New Labour, the party does say that it believes in economic growth. But with stability as the key priority, if there is any conflict between stability and growth, it will always be considered ‘prudent’ to put stability first. Since economic growth can potentially stoke up instability, New Labour will always view it with anxiety.
The British economy is only healthy in the sense that the most staid middle-aged man is healthy. Although it is unlikely to get into trouble, there is little chance of anything exciting happening. New Labour’s celebration of this situation indicates its limited horizons.
Daniel Ben-Ami is the author of Cowardly Capitalism: The Myth of the Global Financial Casino, John Wiley and Sons, 2001 (buy this book from Amazon (UK) or Amazon (USA)). He is also a contributor to Cultural Difference, Media Memories: Anglo-American Images of Japan, Continuum International Publishing Group, 1997 (buy this book from Amazon (UK) or Amazon (USA)).
Taking stock of technology, by Daniel Ben-Ami
(1) Nicholas Bloom and Stephen Bond, UK Investment: High, Low, Rising, Falling?, Briefing Note No 18, April 2001
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