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Keith Marsden: Labour should think again about the leader who is taking them to disaster
SHOCKED by the Parliamentary expenses scandal, and suffering in the recession, British voters have shown their displeasure with Gordon Brown's Government in this month's local and European elections.
Yet despite this drubbing at the ballot box, the Parliamentary Labour Party expressed confidence in Gordon Brown's leadership. Following his supposedly successful management of the economy as Chancellor, the majority felt that he was best qualified to lead Britain out of recession. This, they claim, was caused by external forces alone, not by Brown's policies.
The facts show otherwise. Britain's economic downturn began when its house price and household debt bubbles inevitably burst, beginning with the run on Northern Rock in September 2007. These bubbles had swollen, relative to average price and income levels respectively, to higher levels than in the US and other major economies.
In relation to their long-term average, British house prices soared by 88.5 per cent from 1997 to 2007, according to the Organisation for Economic Co-operation and Development. In the US, the rise was 64.5 per cent. Britain's household debt went up from 104.8 per cent of household disposable income in 1997 to 176.9 per cent in 2007, compared with 64.3 per cent and 105.8 per cent respectively in the US. The rises in Germany and France were considerably lower.
Gordon Brown tolerated, and even encouraged, the formation of these bubbles for several reasons. The traditional sources of Britain's economic strength, the mining and manufacturing industries, shrank overall during his term as Chancellor. Total mining sector output, including oil and natural gas, dropped by 31 per cent from 2000 to 2007. Total manufacturing production was stagnant. The gross value added in constant prices of all production industries combined fell by 3 per cent from 2000 to 2007. Their employment level dropped by nearly 1.1 million over the same period.
These trends were not an inevitable result of shifts in comparative advantage that are said to occur in advanced economies. Real manufacturing output rose at an average annual rate of 2.2 per cent in the US, 1.2 per cent in Germany and 1.1 per cent in France from 2000-2006, according to the World Bank.
So to achieve respectable overall GDP and employment growth figures, and to create the illusion of steady progress, Gordon Brown needed rapid expansion of financial intermediation, and real estate plus business services. Their output soared by 48 per cent and 33 per cent respectively from 2000 to 2007, compared with 19 per cent for the whole economy. Their combined employment level reached nearly 6.7 million in 2007, an increase of over a million.
Rapid expansion of consumer credit also boosted demand for wholesale and retail trade (including motor trade and repair, personal and household goods), hotels and restaurants, and transport and communication. Their value added (in constant basic prices) rose by 25.6 per cent, 21.4 per cent and 48.5 per cent respectively from 2000 to 2007.
These booming sectors, with their inflated salaries, bonuses, and profits generated by unsustainably rapid credit growth, also filled Brown's tax coffers. Thus despite the decline in corporate, personal income and national insurance tax revenue from the production industries, he was able to fulfil Labour's 1997 election promise to expand public services.
The value added in health and social work went up by 26.3 per cent from 2000 to 2007. Employment in the broad classification of "other service activities", mostly in public administration and government services, soared by 1.3 million from 2000 to reach almost 10 million in 2007 (nearly a third of all British jobs).
So the boom in the financial and real estate sectors served Gordon Brown's political interests well. And he was by no means a passive bystander to their growth. He urged them along in several key policy speeches. Introducing a policy document entitled "Homebuy: Expanding the Opportunity to Own", he insisted that "this Britain of ambition and aspiration is a Britain where more and more people must and will have the chance to own their homes".
Ignoring the incapacity of many house buyers to service their mortgages at inflated house prices, he took this message to City bankers in successive Mansion House speeches. He promised them "light-touch regulation". He had already transferred in 1997 the responsibility for Bank regulation from the Bank of England to an inexperienced Financial Services Authority. He had also removed housing costs from the price index which the Bank used to control inflation.
He praised the City's "innovative skills", bragging in 2006 that it was responsible for 40 per cent of the world's over-the-counter derivatives trade (which include the now infamous re-packaged sub-prime mortgages). He also gave financial institutions a false sense of security by telling them that "I am determined to ensure that we can lock in greater stability not just for a year, or for an economic cycle, but in this generation".
With this encouragement and assurance from the Chancellor, it was too much to expect bankers to forgo juicy profits and bonuses by avoiding innovative, but unduly risky, lending practices and instruments. Because of the large size and global reach of Britain's financial sector, and the many new-fangled financial instruments it created and/or marketed, Gordon Brown cannot honestly deny any responsibility for Britain's recession, or its spread to other economies.
Of course, the bursting of the housing and credit bubbles in the US has aggravated the global impact. They have similar origins as those in Britain – a reckless expansion of mortgage and consumer credit to financially-unsound customers, the creation of new, opaque derivatives based on these programmes, and their sale to over-credulous, richer clients.
Some of the political and social motivations of the Democrat-controlled Congress in pushing sub-prime lending programs also echoed Gordon Brown's. The nearly synchronised bursting of the British and American bubbles has reduced the availability of trade credit, and trade volumes. So countries that have maintained more prudent financial policies, like Germany, Korea and Singapore, have been adversely affected.
Taking these facts into account, Britain's Labour legislators should think again about sticking with their present leader. They may
fear that a change, requiring an immediate General Election, would result in a crushing defeat at the polls. But they have several candidates with integrity, personal charisma, and managerial competence
who could win greater respect from voters, whether in Government or opposition.
Keith Marsden is a member of the Council of the Centre for Policy Studies, was formerly an operations adviser at the World Bank and senior economist in the International Labour Organisation.
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