Stephen Beer, Blog, Stephen Beer

Stephen Beer (www.stephenbeer.com)

Sunday, April 05, 2009

Labour must work to boost jobs - Tribune and Compass

Sometimes some of us can feel that we have been here before. In 1975, with the British economy in trouble, Labour Government ministers and officials met executives of Chrysler in the United States to see if the car manufacturer's operations in Scotland could be saved.

Bernard Donoughue, the head of the Downing Street policy unit at the time, 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 option, given the alternative of deterioration in the terms of trade and an immediate increase in unemployment.

Such are the pitfalls that await 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 the downturn and other industries are suffering, too.

Their requests contrast with the billions of pounds of support for banks and the £150 billion 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 that unemployment rose to more than two million for the first time since 1997 - a rise of 421,000 over the year. The unemployment rate was 6.5 per cent in the three months to January - an increase of 1.3 per cent over the year. The claimant count - those claiming Jobseekers Allowance - rose by 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 12 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 previous two recessions, in the 1980s and 1990s, offer some guide. In 1984, the unemployment rate rose to 11.9 per cent - or 3.28 million people. In 1993, it peaked at 10.6 per cent or 3.03 million people. 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 earlier 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. In the past few months, the world has seen a sharp deterioration in economic activity. Draft forecasts from the International Monetary Fund last month were reported to show that Britain's gross domestic product, which was forecast in January to drop 2.8 per cent in 2009, was expected to fall 3.8 per cent this year and fall by 0.2 per cent in 2010. Official revised predictions have not yet been published.

So the outlook for jobs remains poor and uncertain. Unemployment is likely to rise over 10 per cent, with more than three million people out of work. Of course, this is bad news for the individuals and families affected. It also has implications for the economic prospects of the whole country.

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: "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 18, 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 £90 billion.

Additional Government borrowing has to be managed carefully. In any event, it will rise with the "automatic stabilisers". In times of recession, welfare benefits increase and tax revenues decline - which together act as an economic stimulus.

It is here that the Tories are being particularly irresponsible. Borrowing should increase in such a slump (including discretionary borrowing), so we can avoid a financial collapse leading to full-scale depression. The Conservative response is to raise the stakes on Government borrowing. It is difficult to know if this is driven by a belief that now is the time for the 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. For a start, the Jobcentre Plus website could be improved. 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. Third, a clear and rigorous approach to bailouts is needed.

Fourth, serious and fast consideration should be given to measures such as those advocated by Blanchflower.In the modern economy, where there is such a premium on skills, it will not be easy to establish the 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 not easy 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 that Labour has a clear and bold strategy in place to combat unemployment. We must not let them down.
Compass » News » Labour must work to boost jobs says Stephen Beer

This article appears in Tribune this week.

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