Sunday, June 10, 2007
How Labour put the squeeze on industry
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


Last night I dreamt of Mandelson again. Okay, now I have your attention, and have probably generated some alarm, perhaps I should explain.

I do not, I should say, dream often of our European trade commissioner and joint architect of new Labour. The correct quote from Daphne du Maurier’s Rebecca is, of course, “Last night I dreamt I went to Manderley again”. But I could not help thinking of him when reading a new book on Britain under Tony Blair.

Mandelson was musing recently on the Blair years. To paraphrase him, new Labour had expected hostility from the Daily Mail, and it has not been disappointed; Middle England is treated to a daily dose of anti-Blair vitriol.

What surprised him was the hostility of The Guardian, the paper for which new Labour could have been invented, and for which the Thatcher and Major years were something akin to the dark ages. The expansion of public services under Blair could have been made for Guardian readers, while the jobs it generated fattened its appointments pages.

But the paper has been dumping on the Blair government for some time. To the creators of new Labour, enemy fire was one thing but this kind of friendly fire was almost too much to bear.

Now a new book, written by Guardian economics editor Larry Elliott and Dan Atkinson, a former Guardian colleague, now his counterpart on The Mail on Sunday, attempts to hit the Blair (and Brown) record where it really hurts, on the economy.

Fantasy Island (Constable £7.99) sees the legacy of the Blair era as “a seedy dream world mired in debt and bankruptcy, facing a looming crisis of employment and employability, trying to find the money for a diplomatic and military role that it cannot afford”.

The consequences of the rise in debt will, they say, be “a millstone round the economy’s neck in the decade to come, a blinding hangover that will hobble economic activity and consumer spending for years”. The question for the economy is whether it will be a “full-scale crisis” or whether it can be contained as “a severe economic downswing”. Either way, thrift urgently needs to make a comeback.

You may think all this is hard to square with other recent pronouncements on the economy. Bank of England governor Mervyn King, for example, has pointed out that the growth and inflation record in Britain in the past 10 years has been the best in the G7. The authors, indeed, acknowledge that in the difficult times ahead the Blair years will be seen as a “golden age”, just as the 1950s and 1960s were in the turbulent 1970s. The problem, they argue, is that the Blair golden age was built on an illusory prosperity.

We come back to a familiar debate. Is debt about to bring us down or has its rise (with more almost certainly to come) been the natural consequence of lower interest rates and rising house prices?

The Bank of England pointed out in its latest quarterly bulletin that the net financial position of households (assets versus liabilities) is barely changed from 15 years ago and the idea that consumption has been “funded by a tidal wave of debt” is misleading. Debt has risen, but so has wealth. Debt is 1.6 times annual income, but wealth is just over seven times income. There is no evidence it is all going to end in tears.

Where they are on more solid ground, in my view, is in asking whether the “creative” industries, of which the government is inordinately proud, can ever be big or successful enough to make up for decline in other areas. It is noticeable that Gordon Brown, long suspicious of the City, has recently cosied up to it, appointing Ed Balls, Tonto to his Lone Ranger, as City minister.

Back at the start of the Blair decade, things were different. Labour promised in its 1997 manifesto to strengthen and expand Britain’s industrial base. In fact, manufacturing output has barely risen in 10 years and its share of the economy has declined to less than 15%. Nearly 1,250,000 manufacturing jobs have gone.

Most striking of all is the trade deficit in manufacturing. In 1997 it was £7 billion; last year it was £59 billion. That may exaggerate the decline under Labour – in the late 1980s the deficit briefly topped £17 billion – but it is still pretty startling, particularly for a country that until 1983 had never run a manufacturing deficit in peacetime.

This partly reflects the fact that demand, particularly consumer demand, has been strong during the Blair era. There is also the mathematical equation in which strong capital inflows into Britain have to be balanced by a current account deficit – the balance of payments has to balance – and manufacturing has, unfortunately, been the fall guy.

In the early 1980s, industrialists called on government to “leave the bloody stuff in the ground” when North Sea oil pushed sterling higher and undermined manufacturing. The modern equivalent of oil has been the City and investment flows, and manufacturing seems particularly vulnerable to sterling strength. German industry, in contrast, seems to do well even when grappling with a strong currency.

The bottom line, however, is that Britain’s industrial base has been allowed to decline too far. The manufacturing industry we have is productive – it has raised output per worker by 50% since 1997 – and innovative. But there is not enough of it. The idea was that when faced with low-cost competition in basic manufacturing we would move up the value chain. So we have, but we have lost a great deal on the way.

Elliott and Atkinson point out that some of the sectors on which we preen ourselves, such as design and business services, are at least partly dependent on having a viable manufacturing sector.

We may not, in other words, have seen the full effects of the rundown of British industry. The relentless decline of UK manufacturing troubles them. And I have to say it troubles me.

PS: There are many things I could finish off with this week. Should David Beckham get a knighthood? Of course, if only on economic grounds; there have been few more successful British exports and British brands in recent years, and Lady Victoria has a nice ring to it.

I could carry on last week’s oil theme, and respond to the many readers who objected to the fact that I did not mention global oil production is at a peak. I didn’t because it isn’t, as I’ve said before, though I noted the threat from the Organisation of Petroleum Exporting Countries to cut investment if consuming nations keep talking about switching to biofuels.

I can’t let the week pass without mentioning the Bank of England’s monetary policy committee (MPC), which sensibly decided to leave interest rates on hold at 5.5%, amid signs that its previous hikes may be starting to have an impact.

But I have to touch on the striking finding of the government’s new National Housing and Planning Advice Unit, chaired by former MPC member Steve Nickell. It produced the eye-catching conclusion that on unchanged policies housing for the poorest 25% of the population, typically first-time buyers, will be 10 times their earnings in 20 years.

The unit’s initial report, Affordability Matters, is a call to arms, and in particular a call for more housebuilding. Its affordability model, developed by Reading University, has some interesting properties, so: if real incomes rise 1%, house prices will rise by 2%; if interest rates rise 1%, house prices will fall by 3%; if the housing stock increases by 1%, house prices will fall by about 2%; and if the number of households increases by 1%, house prices will increase by 2%.

Many first-time buyers, of course, continue to look for a housing crash to deliver affordable homes into their laps. The report says this does “not reflect market fundamentals – demand for housing, driven by economic and population growth, continues to outstrip available supply”. The best long-term way to make housing affordable, in other words, is to have a lot more of it.

From The Sunday Times, June 10 2007


David - when do you think global oil production will peak?

Posted by: Minh at June 10, 2007 04:09 PM

Difficult to say with certainty - depends on the oil price as well as geology. The late 2020s seems to be the mainstream consensus.

Posted by: David Smith at June 10, 2007 07:51 PM

Do higher oil prices bring the peak closer (by encouraging overproduction) or push it further out (by making prospects that are expensive to extract more viable)? I would say the former, as the oil price doesn't affect the energy return on energy invested in the prospects that are difficult to extract. Production of the tar sands in Canada already has an ERoEI approaching 1:1.

Posted by: Minh at June 11, 2007 09:43 AM

Ahh...Fantasy Island - A declining manufacturing sector, but a knowleage economy of innovation and design offsetting it. Wait a moment - Italy - yes - Italy has been though this
(a) bloated public sector and non jobs to offset failing tradable industries.
(b) a knowledge economy renouned for incredible design and innovation from farrari to fashion to furniture - the great hope of the country to offset this decline.

Trouble is - that was in the 1980s. From 1981 to 1991 - Manufacturing/tradables sharply dropped as part of GDP. Government expended to over 50% of GDP to offset this decline.

Its knowledge economy was a real one. A nation renouned for innovation and design. By the 1990s the economy was split into the nullifiying government and bloated public services, and myriad small family businesses eeking out small market niches in the private economy.

The huge growth and burdens of their infernal public sector and government snuffed out thier knowledge economy.

There are a hundred stories I have of battling the mad rules and regulations from living in Italy - from the banking system to sending a parcel. But this sums it up.

To goto get your residence permit stamped, and you find it needs two stamps. Both employees own a stamp which is their designated job role you see. Of course, they cannot both be standing around on the same day, as the government is on a austerity drive and employees both non-jobs for the price of one by making them work alternate days.

So you have to have a permit processed which would take 5 mins anywhere else, you find you have go in one day to get one stamp, and then take a day off to go in the following day to get the other stamp from the other employee. What should take 5 mins takes two days to support two non jobs and 'full employment'!

Is this where we are heading?

Posted by: J Law at June 12, 2007 07:36 PM

Peak oil is featured on the front page of todays independent

The article is discussed here:

Posted by: Minh at June 14, 2007 09:56 PM

There's nothing like an old story. Asking the Oil Depletion Analysis Centre, a peak oil body, for a view on BP's Statistical Review of World Energy is a bit like asking the BNP whether they support increased immigration. There are some excellent people associated with the ODAC. notably Colin Campbell, but they are coming at it from a particular viewpoint. The BP Statistical Review is always worth studying. Interestingly, there is a body of opinion which says peak oil is all got up by the oil companies to keep the price high. I don't, I should say, accuse the ODAC or BP of this.

Posted by: David Smith at June 15, 2007 10:11 AM

Of course the ODAC/ASPO are never going to say peak is a long long way off, but the same could be said about BP et al in the opposite case. Chevron are an example of an oil company who are saying we could be close to peak. Late 2020s sounds optimistic to me, from what I've read, but even in that case we probably needed to start preparations 10 years ago.

The charts in this article certainly seem to suggest to me that the picture is a bit worse than BP at least are saying!

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