Britain’s ‘New Deal’?
“Build, build, build” was the mantra set out by the British Prime Minister Boris Johnson last week in the town of Dudley. Infrastructure spending will be the way out of the current malaise. On the surface, his plan sounds bold. Using billions of pounds of public money to improve railways and hospitals sounds more like a traditional Labour pledge than a Tory one.
The intent is noble. Anyone journeying around this green and pleasant land can’t fail to realise that our towns are in need of more than just a lick of paint. But saying that infrastructure spending alone will return us to growth takes a stretch even the PM isn’t capable of. His plan to build the economy out of the crisis is reminiscent of a seven-year old’s understanding of how an economy works. “Build more! Make more!”.
The problem with the PM’s plan is that it is a clear attempt to keep unemployment as low as possible, whatever the cost. Employing people to build bridges and fill potholes is a good public service, but it won’t grow the economy. In bad times, what an economy needs is not jobs. It needs increased productivity and savings derived from those jobs. With the best will in the world, paying six people a pittance to repaint a double-yellow in Ipswich, for the sake of keeping down unemployment, won’t do this. In the Soviet Union, everyone had a job, but nobody was producing anything valuable.
Boris Johnson has been desperate to compare his own plan to Roosevelt’s fabled ‘New Deal’, which promised to save America from the Great Depression by laying down new highways and putting up countless public works. But Roosevelt found out the productive limits of infrastructure spending the hard way. Across the 1930’s, US industrial production and national income fell by around a third, and the public works programmes failed to put a dent in unemployment numbers, which stayed above 15% until 1940. It was supplying the Allies in Europe with domestically produced weaponry, as well as America’s Pacific war with Japan, which eventually rescued the US from the worst manufacturing slump in its history.
In all our countries, we will spend the next two or three years discussing how to recover from the fallout of the COVID-19 pandemic. I will wager now that few of the plans put forth by the political establishment at that time will address the most important question of this episode. And it’s this: why did the governments of the developed nations have to intervene in their economies in such an extreme way?
The truth is that most of the state intervention carried out in Europe and America since March would not have been necessary if our households and our businesses had savings to fall back on. But they don’t. Before the pandemic, British household debt was almost £1.3 trillion, 30% of Americans had less than $1,000 in savings, and corporate debt in both countries was at record highs. No economy in such a shape can withstand a shock like a lockdown. Or any shock, in fact - if it hadn’t been the coronavirus, something else would have had the same effect: a cyber hack, an energy meltdown, financial collapse or a nuclear exchange in Korea.
This is why it is so futile to suggest solutions as oversimplified as the one which the PM cooked up this week. Britain doesn’t need more low-paid jobs, or more welfare, it needs more assets. It needs to produce more and sell more. And most of all, people in the country have to save what they earn. That way, missing a paycheck is irritating, but it’s not a calamity. Any state solution, from left or right, which doesn’t acknowledge this glaring blind spot is a non-starter.
In any case, I hear there are plenty of construction jobs in Bristol putting up new statues. I expect I’ll have company.
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