Created 5/1/1996
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Shadow Chancellor of the Exchequer Gordon Brown's thoughts on the British Labour Party's Medium Term Growth Strategy, from the Guardian

A Chance to Grow on Richer Soil

At the heart of the debate about modern theories of growth is a simple contention: while crude, free-market dogma has failed Britain, good government intervention can make a difference.

Labour's New Economics is based on a clear analysis of Britain's industrial decline--that our shrunken industrial base is now too weak to sustain high levels of growth. It is underpinned by an explanation of this lack of capacity, namely that investment in industry, people, and infrastructure has been too low for too long.

The New Economics also explains the Tories' ideological failure. For them, opportunity means the absence of government. Instead of acknowledging the necessity of active government, fifteen years of laissez-faire short-termism has discouraged long-term investment in industry, skills, and technology.

Labour's new approach has a prescription for change. Government cannot be a substitute for the market, but government cannot abandon its responsibilities to the economy. A partnership economy means government and industry working together to boost investment, which is the key to growth. Government intervention is essential if we are to achieve the investment we need in education, innovation, infrastructure, and industry.

That is what endogenous growth theory means, as I first argued a year ago in a pamphlet entitled How We Can Conquer Unemployment. For economic growth is not, as the old classical appoach argued, largely determined by factors beyond the influence of government.

But the Tories have not and will no learn from the experience of other countries or from their own failure. The economy, starved of long-term investment, with too few successful firms and not enough skilled workers, does not have the capacity to sustain anything other than sluggish growth. And it is why every British boom soon becomes a painful bust.

Mass unemployment, rising poverty, higher taxes, inflationary difficulties--all these are symptoms of this deeper structural weakness which plagues the British economy. Until a British government begins to take is responsibilities seriously, high unemployment and another boom-bust cycle are likely to be the pattern of the future.

For it is the shrunken capacity of the British economy that explains why unemployment remains well above 2.5 milllion and has never fallen below 1.5 million since 1979. It is this shrunken capacity and the resulting slow growth that explains why we had a record trade deficit thorughout the recession, and why we cannot afford the public services we need.

The government's best forecasts for growth in the 1990s amount to a mere 1.6 percent per year. Growth during this decade will thus be even slower than the 1.7 percent per year since 1979, the lowest average since the second world war.

The Tories will choose to measure growth rates over years that suit them. But the stop-go nature of the British economy means that, whenever they proclaim another economic miracle, people throughout the country fear for their jobs.

Last month's interest rate increase was a perfect illustration of the Chancellor's policy failure. Mr. Clarke tried to claim that the increase was a reflection of the economy's strength. The fact that he was forced to raise interest rates to choke growth so early into the recovery--even though output is barely back to its 1990 peak, investment remains depressed, and unemployment is still very high--shows how serious the capacity constraint on growth has become.

The publications of the minutes between the Chancellor and the Governor o fthe Bank of England have since shown that the Chancellor went into the meeting with 11 different reasons why he did not want to raise rates. But he left the meeting convinced by the Governor that he could no keep inflation under control, in the face of rising skills shortages and inflationary bottlenecks, without choking the economy. Even the current sluggish recovery is too strong for the weakened British economy to bear.

Clarke is discovering that an expansion of demand alone cannot deliver the growth, jobs, and public services that we need. Policies to expand demand can only succeed if there is room to grow. Inflation is merely a symptom of the lack of growth capacity. Expanding the supply side capacity is therefore crucial if we are to sustain higher rates of growth than the Conservatives without accelerating inflation. There are no quick fixes--merely expanding demand will not solve the problem of undercapacity, as Nigel Lawson showed in the 1980s. Instead, the same policies which can cure the long-term problem of inflation are also the policies which can deliver higher growth and lower unemployment. Labour's New Economics means attacking the problems of slow growth, high unemployment, and rising inflation at source, by rebuilding Britain's industrial capacity and curing the structural weakness in the economy.

Labour's New Economics demonstrates that we can only solve the twin problems of unemployment and inflation through new partnerships between government and business to boost investment in industry, skills, and infrastructure. On spending, the policy challenge is not how to cut public expenditure all round but how to raise the levels of public and private investment. And across the sweep of economic departments, the issue is not a choice between government subsidizing industry and government doing nothing, but instead how govenrment and business working in partnership can create long-term growth.

These are the new dividing lines in British politics. The divide is one not just between issues of economic competence but also of social justice. For Labour's New Economics is also a new Fairness Agenda suited to the demands of the modern economy in which we live. Long-term unemployment and low pay in work are the most important new sources of poverty and unfairness in Britain. Which is why policies to boost economic growth and reequip the workforce with skills are the route to economic efficiency and social justice. And it's why we need a reshaped welfare state, underpinned by a minimum wage, to support independence in work rather than dependence on benefit.

In short, economic prosperity and soical justice are intimately linked and cannot be separated. The Tories do not understand the proper role of government in a modern economy, which is why they have failed to deliver either. Labour, however, can deliver both. No one doubts that it is Labour which stands for a fairer society, and good and efficient public services. But what the New Economics demonstrates is that today it is Labour, and not the Tories, which is truly the party of economic competence.


Created 5/1/1996
Go to
Brad DeLong's Home Page

Associate Professor of Economics Brad De Long, 601 Evans
University of California at Berkeley; Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax