Churchill beckons Blair down the road to ruin

Sunday Times (London)

September 26, 1999

'World trade and home consumption are both moderately good ... The United States has had a year of abundant prosperity ... the value of sterling money abroad has been raised ... and the present troubles of our export industries are the consequence of it."

No, this is not some present-day economist summarising the world situation. It is John Maynard Keynes, writing his Economic Consequences of Mr Churchill, about three-quarters of a century ago. Keynes's effort to persuade the then chancellor that he was committing a colossal error by returning to the gold standard at its pre-first-world-war value fell on deaf ears; Britain's economy was set for hard times.

The parallels with today are striking. The UK economy is in good shape but it is threatened with being locked into the euro, probably at an exchange rate that will favour continental European over British industries. Fortunately, things have changed since 1925, when the government would certainly not have considered consulting the public on such a key economic decision.

But even if today's British voters thwart the prime minister's pro-euro ambitions in a referendum, the nation will suffer some serious Blair-induced economic consequences if he persists in his policies. This is not to deny that he deserves credit for neutering his hard left, tackling welfare reform and building on, rather than reversing, the economic reforms pushed through by Lady Thatcher. Nor to detract from his chancellor's courage in spearheading a much-needed revamping of competition policy.

But there is a dark side to the period of moderate prosperity that Britain is experiencing. It is providing the prime minister with the illusion that his cost-increasing measures will have no effect on the competitiveness of British industry. It disguises the fact that the regulations drawn up almost daily by his various ministers will stifle innovation and risk-taking; that his reliance on the advice of captains of declining industries will lead to policies which ensure that the growth industries of the future find a more congenial home than the UK; and that centralised control of the health and education sectors will produce a steady decline in the quality of service.

Let's start with cost-increasing regulations. Mr Blair can perhaps be forgiven for signing Britain up to the social chapter. But he did not have to accompany the signing with regulations that are a businessman's nightmare. In a survey conducted for the international law firm Lovell White Durrant by City Research Associates, more than 80% of the directors of the 50% of companies who were in favour of the social chapter complained that the new rules had increased bureaucracy and costs. Similarly, Mr Blair had to honour his other manifesto commitment to establish a nationwide minimum wage. And to introduce a working-time directive. And to extend parental leave. And ... well, you get the picture. New Labour has justified each one of these thousand cuts cuts to profitability and competitiveness, but it has failed to explain why the patient might not die from the combination of all of them. And the first to go will be the companies on which Britain must depend for a bright 21st century. These are the small firms that have provided almost all the new jobs in Britain and in America.

The Lords Marshall, Sainsbury and Hollick, to name just a few of the prime minister's important advisers, preside over big businesses that are hardly models of successful enterprise. They are more likely soon to be ghosts of Britain past than engines of a bright economic future. These estimable gentlemen and their big business colleagues do have one advantage: their still-massive organisations can cope with new regulations. They have the lawyers and lobbyists to shape those regulations so that their impact is tolerable. They can spare a few of their thousands of employees for extended parental leave. And they have access to government on all levels should they need a bit of relief from particularly burdensome rules.

This is not true of the small, entrepreneurial businesses that will dominate the industries of the future. Ask any small businessman in Cambridge how difficult it is to expand his high-technology premises. Or how he will manage should the chancellor go forward with his plans to impose some Pounds 300m in new taxes on small consultancies and contract workers. Not to mention the costs involved in enforcing the working-time directive and the minimum wage. These burdens create special difficulties in a country notorious for its thin venture capital market, and afflicted by a brain drain that has sent innovators scurrying to America to see their dreams realised.

Indeed, because I serve as a consultant to companies in the media and energy industries, I can testify from personal - and perhaps biased - knowledge as to the effects of some of the regulations that have spewed out of government offices. In order to protect a few coal miners' jobs, the government has banned the construction of new gas-fired generating plants. Never mind that these are cleaner and cheaper than coal-fired power stations. Or that this interference in the market has caused several distortions: the price of existing plants that beat the ban has risen because competing stations cannot be built, providing their owners with a windfall profit of the sort that new Labour railed against just a few years ago; and the burning of dirty coal has replaced the use of clean natural gas, at the same time as the deputy prime minister is trying to reduce pollution by discouraging the use (by others) of their cars.

So, too, in the media industry. Since BSkyB is a sister company to this newspaper I will resist the temptation to detail the multiple and stultifying regulations to which it is subject. Instead, let me cite a list in which I have no involvement. Planning restrictions designed to prevent superstores from competing with higher-cost retailers. Rules that in effect govern the types of fuels different industries may use. Record-keeping requirements that the Federation of Small Businesses says can drive a small firm under and that Patrick Minford and Andrew Haldenby estimate will add Pounds 4.6 billion annually to business costs. This proliferation of regulations troubles the prime minister - or so he says. As a result, an elaborate minuet is performed: a new regulation is promulgated, causing an outcry from affected parties, which leads to a review by the relevant minister and a cutback in some of the proposed regulations. This is invariably accompanied by a No10 announcement trumpeting the "reduction" in the regulation. Net effect: an increase in regulation.

The piling of regulation upon regulation is not the only deterrent to those who would consider gambling their companies' futures on some new idea. These extra rules also end up protecting incumbents from challengers, implying to fledgling entrepreneurs that trespassing can be a costly error.

An equally threatening economic consequence of Mr Blair is a looming decline in the quality of both the health and education services. The long-term competitiveness of any nation depends on a healthy and - increasingly - on a well-educated workforce. Evidence from economies as disparate as the former Soviet Union and the United States proves that it is impossible to improve these services from the centre. In the case of education, centralised supervision and the judgment of educrats is no substitute for the judgment of parents as to whether their children are being well taught. But unless they are very rich, parents and their children are prisoners of the education monopoly.

The prime minister is fond of saying that "what counts is what works". He has demonstrated that the current system doesn't work by avoiding sending his children to failed schools - incurring the wrath of his party in the process. Why then does he not eliminate the current centralised Whitehall system that is ruining the lives of so many youngsters? The government seems to understand that competition can bring down the price and raise the quality of food, cars and jeans. Why not education? Surely, competition from good schools for students will put more pressure on bad schools to improve.

Mr Blair must also understand the long-term consequences of his healthcare policies. If the scandalous state of health in Britain is not raised, productivity will fall, or at least not rise as much as it should. Few would deny that health and productivity are linked or that endlessly pouring money into the health service but attempting to direct its use from Whitehall is a futile exercise.In the end, the economic consequences of Mr Blair will depend on how unambiguously he has imbibed some of the teachings of those who understand that markets, not ministers, must be relied on to produce an efficient economy. This does not mean abandoning the drive for the fairer, more decent and inclusive society to which the prime minister so intensely and properly aspires. But his goals can be reached only if more and more wealth is created to devote to those who cannot help themselves. And, yes, to satisfy the chancellor's desire to redistribute wealth to those he feels deserve it more than those who made it.

Unfortunately, Mr Blair chose to spend his holiday in Italy and France - two economies that can hardly be the model to which Britain should aspire. Perhaps next summer he can be persuaded to inhale the entrepreneurial air of Silicon Valley, with its billionaire job creators. In California the summer weather is fine, the expatriate British community the largest in America and the workforce so prosperous that tennis courts abound. If Mr Blair is sincere in his desire to eliminate that "something fundamentally anti-meritocratic about (Britain's) culture", and to elevate the social standing of entrepreneurs - as he assured the British Venture Capital Association - he needn't bother with his proposed Pounds 50m fund to help risk takers.

Better to remove the barriers that inhibit their progress than to appoint a new set of bureaucrats to dole out funds with the extra regulations that will inevitably follow. His alternative is to stick with those of his policies that are destined to have dire economic consequences. Which brings us back to Keynes, who in 1925 asked himself how Mr Churchill could do "such a silly thing" as lock Britain into a ruinous monetary system. "Partly, perhaps," Keynes wrote, "because he has no instinctive judgment to prevent him from making mistakes; partly because, lacking this instinctive judgment, he was deafened by the clamorous voices of conventional finance; and, most of all, because he was gravely misled by his experts."

Mr Blair was truly Churchillian during the Kosovo war; let's hope that the parallel does not extend to economic policy.