Jubilee - or Groundhog Day?

Inflation over 9 per cent.  More vacancies than unemployed. A Conservative Government worrying over the cost of living and an excess profits tax. Interest rates rising. Cold war getting colder. We’re talking about 2022, yes? Well, no, actually. That may sound familiar, but that’s also what was going on in 1952, the year the Queen came to the throne. So has Britain anything to learn from what happened then?

The backdrop to accession year was, of course, very different from today. Her new Majesty’s subjects were poorer, thinner, addicted to smoking, badly-housed and shorter-lived, and moving only slowly out of the social patterns of the past. Economics, too, were driven by the experiences of the 1930s. But there is still something to be learned from how they handled some of the recurring problems of economic management.

Another country?

Victory in war had left Britain debt-burdened and capital-constrained. In 1951 only half the households in England had their own fixed bath, toilet, running hot water and stove. Tough for families, which were still large: you couldn’t get the pill on the National Health Service until 1961. And life expectancy in the early 1950s was only 69 years, compared with today’s 81.

Wartime import controls and shortages persisted, even rationing. (At the time of the accession, the cheese ration had just been cut to an ounce a week.) Above all, Her Majesty’s subjects were much, much poorer than they are today: average pay was £9 per a week for men, £5 for women.

Note the difference. Equal pay for men and women, starting with the civil service, was announced in 1952, but with the inevitable caveat: “by stages”. Gender equality was still a long way off. But multiply either £9 or £5 by 20, to get a rough value of those figures today, and you are still way below today’s £568 average regular weekly earnings.

For this or other reasons, we were a lot thinner.  Shorter, too. But in so many other ways health was worse in the 1950s, not least because nearly two-thirds of men smoked (and the proportion of women smoking went on rising until well into the 1960s).

There wasn’t much time or energy for culture wars: and there weren’t many students to take to the streets. The school-leaving age had only recently been raised to 15 and only one in 20 went on to university. Britain didn’t “swing” till the 1960s, and the major reforms to the law on homosexuality, divorce and abortion didn’t come till late in that decade. If the country had shifted to the left in the 1940s, it remained small “c” conservative throughout.

Politics, politics…

It was back to politics as usual after the war, with an anti-socialist Tory party furiously resisting nationalisation by an anti-capitalist Labour Government. Yet underneath there was more common agreement. Politicians on all sides had been brought face to face with the “idleness, ignorance, disease, squalor and want” identified by Sir William Beveridge in his 1942 report. All subscribed, more or less, to his prescriptions.

If the NHS was the creation of a Labour Minster, the parallel restructuring of state education had been hatched by a Tory one. Both were nurtured in the back rooms of the wartime government, where a younger generation of politicians and civil servants put their minds to making this post-war period better than the last.

Keynes rules, sort of …

Equally, pre-war depression and dole queues had led to a post-war economic consensus that was strongly Keynesian, with the over-riding objective of full employment. This survived the transition from Labour to Conservative Government in 1951: the similarity in economic policy led The Economist to conflate the successive Chancellors of the Exchequer, Labour’s Hugh Gaitskell and the Tories’ Rab Butler, into a single practitioner of “Butskellism”. 

So even a Conservative Government, avowedly determined to be less interventionist, found itself using direct controls over hire purchase and imports in its efforts to “manage” demand. It began to look to monetary policy to play a bigger part, but this was far from the targeting of monetary aggregates that defined monetarism in the Thatcher years. Economists like Lionel Robbins argued that a worsening of the external balance would be the key indicator of a lack of “financial discipline”. This obsession with the balance of payments continued right into the 1970s, bringing down at least one Prime Minister in its wake.

In the 1950s this preoccupation was exacerbated by the retreating tide of empire, which had still left a vast “sterling area” of countries that either used the British pound or pegged their currencies to it. The system brought much business to the City of London, but a major headache to economic policy-makers. Access to other currencies had to be rigorously controlled, in order to conserve the area’s reserves. The maintenance of external stability took precedence over the pursuit of economic growth.

Now and then…

So much has changed. The sterling area of countries that either used the British pound or pegged their currencies to it is a distant memory.  The “floating” pound is no longer a reserve currency. The balance of payments has vanished from the headlines, although it’s hard to look at post-Brexit trade figures without wincing.

Monetary policy, however, has (almost) gone full circle. It rose to technical pre-eminence in the early 1980s, passing to independence and pragmatism in the 20 years from the mid-1990s.  Now it is mired in uncertainty. When, as the Bank of England’s Governor told MPs recently, most of today’s inflation isn’t in its control, rises in interest rates perhaps have more in common with the “disciplinary”, finger-to-the-wind signalling of the early 1950s than to a scientific analysis. The Monetary Policy Committee will be tested as never before.

The pendulum has swung back to dependence on fiscal policy and direct intervention. The fiscal response to a “cost of living crisis” has been more proactive than either Gaitskell or Butler contemplated.

Who pays?

In 1952, as in 2022, commodity prices had been pushed up by the economic rebound from disaster (world war then, pandemic today). Then as now, war exacerbated this inflation (Korea then, Ukraine now). Britain’s import prices rose 60 per cent in the early 1950s, and the labour market was tight. Defence spending had had to be increased. And the infant National Health Service was costing far more than predicted. The cost of servicing public debt, up £41 billion this year, would also have seemed drearily familiar 70 years ago.

Even so, in the early 1950s both Labour and Tory chancellors held on to the fiscal reins, worrying about the pressure of demand in a tight labour market. Whether they did so to best effect is debatable. Both certainly, indeed deliberately, choked off investment with the aim of protecting consumption.

In 1951, the Tories avoided doing too much on the fiscal side, beyond an increase in income tax reliefs and a cut in food subsidies. But while they lifted some internal controls, they resorted to still more controls on imports, which helped the balance of payments at a cost to the domestic economy. And, then as now, their rise in interest rates almost certainly came too late.

Still, the combined outcome wasn’t too bad. Wages rose to match prices, but did not set off an inflationary spiral. Inflation subsided rapidly as import prices fell; so did excess demand. By 1952-53 unemployment was rising and wage inflation was below 4.5 per cent. And the dip into recession was mercifully brief. Today’s Chancellor would probably settle for such a result with relief.

He is dealing, however, with four critical differences. 

The first is timing: his predecessor in 1952 was new in post, with three pre-election years ahead of him in which to work his way through a cost of living squeeze, without a neighbour in No.10 under pressure on all sides. 

The second is the risk that war in Ukraine (and its after-effects) will go on much longer than the Korean crisis, perpetuating import pressures, particularly on food prices. 

The third is a different mix of spending pressures, particularly from an ageing population.

And the fourth, probably most critical of all, is the state of the labour market.

Gut economics?

In the early 1950s, Britain had no foreknowledge of the endemic wage-price spiral that would bring it to dependence on the International Monetary Fund in the mid-1970s. When today’s Prime Minister exults to his Cabinet that unemployment is the lowest since 1974, those with longer memories are inclined to mutter: be careful what you wish for. What’s more, the labour market in 1952 had two powerful shock absorbers: immigration, and the huge pool of “economically inactive” women, who moved in and out of the labour market through the cycle.

Today the UK lacks both shock absorbers. The long inflow of European migrants has reversed, and female labour force participation has risen to over 75 per cent. The risk that a tight labour market will persist, and help to trigger a wage-price spiral, looks that much greater.

So this Chancellor’s strategy looks very different: to try to push the inflationary bulge through the economy’s gut as quickly as possible, by handing out subsidies and trying to hold the line on public sector wages, while hoping everyone else will do the same. The loss of trade union power feeds those hopes (the rail unions illustrating the difference).

He certainly qualifies for a Butskellite certificate, since (as the Institute for Fiscal Studies has pointed out) the overall effect of his changes is progressive, even if the tax balance has been tilted against earnings relative to other income. Taking the latest measures into account, indeed, the IFS calls it “serious redistribution”, with a minimum wage earner on £16,200 actually some £340 better off than last year.

The reasons why…

The social rationale is that the poorest are hardest hit, while the economic rationale is that at times of crisis, it is cheaper for the state than for individuals to borrow. So the Chancellor’s latest package switches from energy consumer loans to cost-of-living grants. But he is obviously at risk of raising expectations that the state can protect everyone: expectations that, going forward, he could not fulfil. 

For even before the latest package, as the IFS also points out, the overall tax burden was a higher share of national income than at any time since the late 1940s. The full effect of inflation on benefits has yet to be reflected in the spending figures. The pressure on the Bank of England to balance a fiscal boost with monetary tightening has clearly increased. And the promise that measures ranging from hand-outs to a brake on energy taxes will be “temporary” has yet to be tested in the fire of pre-election politics.

Taking tough

Seventy-odd years ago, it was not the Tories’ Butler, but his predecessor and alter ego, Labour’s Gaitskell, who put the dilemma most plainly:

“Higher prices for imported raw materials…are pushing up our cost of living more and more. A tough Budget can give only limited help here…it can, and should, ensure that excessive demand does not add its influence to that of high costs.  But it cannot directly reduce a generally high level of costs to any material extent…”

Rishi Sunak will know that like those predecessors as Chancellor, his job is to speak plain, and do things nobody likes. He will still have plenty of opportunity for that.

All figures as close as possible to May 1952 and May 2022. Definitions ofter change over times so there are not always consistent time series. Purchasing power is from the Bank of England’s index. * 2019 prices **From birth, UN data

Guest Author: Baroness Sarah Hogg, Former Frontier Economics Chairman