I’m excited, of course, about the possibility of Labour taking a new direction in the UK. But I can’t be too excited until it challenges the worst economic policy of recent history, one that hasn’t been challenged within official circles since the 1970s.
The policy is very simple and repellent. Most people I’ve spoken to didn’t know it was a policy and find it hard to believe that it is. The policy is: Keep unemployment at around 5% at all times. Yes, actually. Let’s have that again. Make sure that one out of every twenty people looking for an honest way to earn a modest living is unable to find one. That is the policy.
Think about what it means. On one hand, you have governments that complain endlessly about the number of people on unemployment benefits and the cost this imposes on the nation. You have them spouting rhetoric about making work pay and crowing about their job-creation achievements. Yet the same governments deliberately implement policies to ensure that the unemployment rate stays at 5% all the time.
Why do governments do this? Economists calculate something they call the NAIRU – the ‘non accelerating inflation rate of unemployment’. If you maintain unemployment at the NAIRU, which in recent years is calculated at around 5.25%, then you supposedly protect the economy against a growing rate of inflation. Keeping unemployment high keeps wages on the bottom end low – far below productivity: if you won’t accept a wage-cut, there are plenty of unemployed people, who will likely work for even less, to replace you.
In practice, this means that governments can spend as much as they like on wars, on giving tax breaks to the rich, and on funding banks to lend out ever-larger mortgages to push up house prices, effectively providing a state pension to those amateur asset managers we know as the aspirational middle classes. Governments can do all this without worrying about inflation, since high unemployment creates so much drag on wages. The poor live in a permanent recession so that the upper middle classes can enjoy a permanent boom. Yes, that is really the policy.
The NAIRU lies at the heart of all the modelling that guides policy in Treasuries and central banks. Nobody can question the government’s effectiveness in maintaining it. In the UK unemployment hasn’t been below 5% since 1975, barring one slight dip between 2003 and 2005. The latter was a small policy accident resulting in unemployment being a little beneath the targeted NAIRU; it was quickly corrected.
It wasn’t always like this. Beveridge’s 1944 report recommended that the government seek to ensure that unemployment never rises above 3%, and it should only be allowed to get that high on occasion, ‘to cover seasonal slackness, change of jobs and fluctuations of international trade’. He advocated full employment, defined as unemployment below 3% – usually well below, as the minimum target at which any government’s economic policy should aim. It was achieved by the British government, which for the most part kept unemployment well below 3% from the time of Beveridge’s report until the 1970s.
Inflation was a known threat, but the idea of fighting it by deliberately generating unemployment was regarded as just not an option. Joan Robinson’s Economics: An Awkward Corner, published in 1966, reads as follows:
Supporters of [a certain] view maintain that a ‘moderate’ amount of unemployment, say between two and three per cent over all, would be sufficient to keep wages in check and secure stable prices. The evidence for this view is very sketchy. It might need much more. But, in any case, deliberately to adopt such a cold-blooded policy is out of the question.
What was then an unthinkably cold-blooded policy is now ingrained so deep into standard procedure that we hardly even notice it. Yet maintaining the NAIRU is far from being the only effective means of controlling inflation. For most sorts of inflation it isn’t even the most efficient. It is simply a means of placing the whole cost of controlling inflation upon the very poorest.
Why is this standard policy? Why is it not a horrible joke? And how can any government be allowed to complain about the size of the welfare bill when it pursues a deliberate policy of depriving millions of people of any opportunity to earn income through work? Obviously those people are going to claim benefits – what else can they do?
Sometimes governments claim to pursue full employment, but they intend for the NAIRU not to count. The NAIRU is handily defined as ‘structural unemployment’ (which is nonsense – unemployment is always a policy choice). The ‘unemployment gap’ is then defined as the difference between the NAIRU and the unemployment rate. When unemployment is at the NAIRU, the gap is zero, and a zero gap sounds like success; it sounds, in fact, a bit like full employment. But would you like to celebrate it with the 1.8 million people looking for work and unable to find any, meanwhile demonised for daring to claim benefits? Or with the low earners who haven’t seen their real wages move since the 1970s?
We need to stop being desensitised and remember how cold-blooded an idea the NAIRU really is. Corbyn’s Labour needs to embrace real full employment as a core policy. And it needs to show up the cruelty, the hypocrisy, and the blindness of any government that refuses to support it.