If we can sustain long-term growth, a brighter future will be assured.
Britain has been through three serious recessions, and three major bouts of inflation within 20 years. An entire generation has known only economic turbulence. Economists who predict bad news have had the advantage of generally being proved right. Scarcely had the recovery from the 1990-2 recession started than they began to predict the next inflation, the next balance of payments crisis, or both. This dismal science is alive and well and living in Britain.
It is worth, once in a while, reminding ourselves that it was not always like this. The generation that grew up in the 1950s and 1960s experienced a high degree of economic stability. And this went hand-in-hand with what was, in comparison with what followed, a golden age of low-inflation economic growth. It may not have felt like a golden age at the time, just as school days rarely feel like the happiest days of your life. But it was.
Alec Cairncross, first head of the government economic service in the 1960s, describes the second decade of this period in a recent book, The Legacy of the Golden Age (Routledge), which he co-edited with his daughter Frances Cairncross: 'The 1960s in Britain were a kind of economic apogee, the high point reached before the tribulations that followed. The national income grew faster than ever before - nearly half as fast again as in the 1950s when the prime minister thought we had "never had it so good". Unemployment remained below 2.5% of the labour force and for most of the time was under 2% - far below the levels of the next two decades. Inflation, although a cause for serious concern, averaged under 4% for most of the decade, only rising to 5%-6% in the last two years.' This is what the current generation of politicians mean when they talk about ending the boom-bust cycle and creating sustained non-inflationary growth, with a 1950s and 1960s style expansion, alongside inflation that, for preference, would be lower than the average of the 1960s. Are they talking pie in the sky, or is a new golden age attainable?
One measure of economic success in that period, very low unemployment, is almost certainly not in view. The rip-roaring Lawson boom of the late 1980s produced a sharp fall in unemployment. But the national rate in 1990, the lowest in recent times, was 5.8%, 2.5 times the highest rate of the golden age.
One can be more cheerful about inflation. There is a danger, at a time when a recession has knocked the stuffing out of the economy, in being over-optimistic on the longer-term outlook. But four things persuade me that such optimism is not misplaced. The first, as the chart (left) shows, is that the three major inflation cycles of the past 20 years have had successively lower peaks. In the mid-'70s, inflation topped 26%; in the early '80s 22%; but in 1990 'only' 10.9% and it was lower than this on an underlying basis.
Secondly, the devaluation of sterling post-16 September 1992 has not fed through to significantly higher prices, or at least not yet. The rule in these matters is never say never, but the omens are so far encouraging. Thirdly, there has been a dramatic change in labour market attitudes. In many sectors, the annual pay increase has ceased to be the norm. Pay increases have dropped below 3% for the first time since the golden age.
Fourthly, and perhaps most importantly, both borrowers and lenders have been through a painful learning curve. Financial liberalisation in the 1980s produced a credit-driven boom, and a credit-created inflation. In a period of easily-available finance, there was no benchmark against which to judge what was prudent and what was foolhardy. Too many people and companies opted for irresponsibility and too many lenders allowed them to do so.
If I am right about low inflation, is there any guarantee that we will get the growth to go with it? None at all, but there are one or two encouraging signs. For one thing, the recession has pushed the economy so far below its trend rate of growth of 2.25% a year that it is not asking too much to expect three or four years of above-trend growth, say, 3% a year or more. The Treasury has assumed as much in framing its medium-term financial strategy. A long recession could be followed by a long, and reasonably strong, upturn.
There is also encouragement to be drawn from the productivity performance of industry during the recession. Productivity held up well and, in manufacturing, is currently growing by 7% to 8% a year, a rate that in the late 1980s was being hailed as an economic miracle.
Ultimately, an economy's long-term growth performance is determined by the strength of its supply-side. Supply-side improvements were achieved in the 1980s but there was also the tendency to settle for the easy business of satisfying the rampant consumer, rather than looking to the future. This is the task now. Companies should look beyond the immediate cyclical upturn to sustaining long-term growth through innovation, modernisation and far-reaching supply-side improvements. If this is done there is no reason why the l990s, which started as a dark age, cannot take on some of the characteristics of the golden age.
David Smith is economics editor of The Sunday Times.