The hon. Member for Croydon, South (Sir W. Clark) gave some reasons why we are suffering from unemployment. The weakness of his argument is that all the factors that he mentioned were present as recently as 1966, when unemployment was under 1·5 per cent. He has not, therefore, hit upon the entire explanation.
The Chancellor's proposals will make little difference to the economy because, in spite of what the right hon. Member for Sidcup (Mr. Heath) said—and I agreed with much of what he said—they are based largely on the same old fallacies. I do not believe, and apparently the Government do not believe, that the Budget will even stop unemployment from rising. I should describe the Budget in the words of the Red Book as "Nil" or "Negligible."
Todays's unemployment is due not to some mysterious or unintelligible forces, as some propaganda has tried to persuade us, but to simple and unnecessary mistakes in economic policy which can be rectified. It is possible, in my view, to return to full employment in a few years, and to keep it there, if rational economic policies are followed. If that were not true, we would not have been able to maintain something like full employment for 25 years after the war and hold unemployment at barely 1·5 per cent. as recently as 1966.
We all agree that the oil cartel intensified the world cost inflation of 1973. But if anyone argues that that made full employment impossible in the 1980s, why is it that unemployment is now only 4·1 per cent. in Austria, 2·9 per cent. in Sweden and 1·9 per cent. in Norway, compared with 11 per cent. or 12 per cent. in the United Kingdom? Therefore, those theoretical answers simply cannot be right.
The broad truth is that unemployment nowadays is caused by a failure to keep the flow of total money demand and money costs in some reasonable balance. If the flow of money demand is kept up to the level of money costs, high employment and high production will be maintained, whatever the population and, broadly speaking, whatever the state of technology. If demand falls well below that level, unemployment will rapidly increase. Indeed, that is what a recession is. It is not just a mysterious visitation from Heaven.
If total demand is deficient—this is what so many people neglect today—a certain proportion of the labour force are arithmetically bound to be unemployed, through no fault of their own in the great majority of cases. That is why, during the past two years, we have daily read about firms and factories closing down—from Linwood and Consett to Freddie Laker and the rest. Many of those enterprises would have been perfectly viable if reasonable economic policies had been followed. That is why we have an economy in which virtually nobody except the banks can make any profits at all.
In the last two years we have seen a world deflation of demand made more intense by an additional old-fashioned deliberate deflation in the United Kingdom, and now, in addition, in the United States of America. It is largely a re-run of the 1929–33 deflation, always associated with President Hoover in America and Dr. Brüning in Germany. Indeed, it has been accompanied by almost exactly the same muddled intellectual arguments, some of which we have heard today.
All the consequences of the new deflation here were perfectly predictable. I am not being wise after the event. In the debate on the Chancellor's first Budget of June 1979, my judgment—I quote only one sentence—was:
It will accelerate price inflation, increase unemployment and reduce production."—[Official Report, 18 June 1979; Vol. 968, c. 976.]
That is exactly what has happened in the last two years.
All this has been done in the name of checking what is called inflation. Of course, it is true that if excess demand in the economy is forcing up prices unnecessarily, it is sensible to siphon off that demand, as has often been done in Britain since the war. But to cut down demand still further, when there is a huge surplus of real capacity, is a self-defeating absurdity. It must be better to use all the real capacity that we have, whatever the effect on money values, because that must mean a higher real income for the community as a whole.
Since 1979 the Government have, at one and the same time, cut total money demand and failed to hold down money costs. The inevitable result is that we now have something like 20 per cent. of the real economy and of our real productive capacity unemployed. That means an annual loss of possible national income running at the rate of £40 billion to £50 billion per year. That is vastly greater than all the variations of the PSBR and the detailed rises and falls in taxation.
Ministers say that we cannot afford more houses, better education, electrification or more naval escort ships, or whatever, without sacrificing something else. With unused capacity, however, that is untrue. Having more of one thing does not mean sacrificing something else if there is real productive capacity unemployed.
Of all the fallacies that make up the Prime Minister's rather schoolgirl economics, the most absurd is the question "Where will the money for expansion come from?" I shall give my answer to that question. Some of it—in spite of what the right hon. Member for Down, South (Mr. Powell) said—will come from the billions of pounds now leaking into refuge overseas. If the right hon. Member for Down, South thinks it over, I think he will find that the weak point in his statistical argument was that he forgot the gold reserve. However, I shall not pursue that further this afternoon.
Even more of the money will come from the £12 billion or £15 billion that we are now spending in paying people to do nothing—the total cost of unemployment. As those people are put to work building houses, restoring investment, public or private, improving our defence equipment, and so on, the money will then come from the increased national income, real and monetary, which that increased activity will inevitably generate.
In the next round of reflation, the growing incomes of those finding work will themselves generate new savings, new Budget revenue and new demand for industrial products. It is because reflation works in that way that, like deflation, it is cumulative, although in the opposite direction. It soon finances itself, as the post-1932 reflation and any number of successful reflations since, including that of 1977–78, clearly prove. But one first has to start the process. One first has to "prime the pump", as we used to say when these things were rather better understood than they are today.
Deflations do not stop automatically while, like the Chancellor of the Exchequer, we just watch and pray. The Great Depression did not end in the United States in 1933 until Roosevelt completely reversed the deflationary policies previously followed. Deflation did not end here until Mr. Neville Chamberlain, as the right hon. Member for Sidcup rightly pointed out, reduced interest rates in the summer of 1932 to 3½ per cent. and, incidentally, put a general 10 per cent. tariff on all manufactured imports. If the Prime Minister would do today just the two things that Neville Chamberlain did 50 years ago, the situation would be transformed.
There are two other myths that have to be eradicated from the minds of the Prime Minister and the Chancellor of the Exchequer. First, it is not true to say that we cannot cut interest rates and expand investment at the same time. The Prime Minister seems to think that there is a pile of money locked up somewhere in a safe or a stocking or something of that kind. The truth is that, as production expands, incomes and savings and revenue will be increased, and the quantity of money can then also be perfectly safely expanded. Interest rates can be brought down—as they were after 1932 for a series of years—with expansionary results on the whole economy.
People seem to forget history altogether. The whole experience from 1939 to 1951—if not to 1960—shows that interest rates do not have to be left to be determined by market forces. Of course, it is true that if they are left to be determined by market forces, they will be determined by market forces.
The right hon. Member for Sidcup, in rightly saying that it is absurd to make us wholly dependent on the United States' interest rates, did not draw the obvious logical inference that it was the gratuitous folly of the Government in throwing away exchange control two years ago that made that situation very much worse.
The other myth which needs to be eradicated—I was glad to have the agreement of the Minister about it earlier today—is the belief that the so-called PSBR—which is really little more than a fetish in terms of serious economic argument—is the same thing as a Budget deficit. It is not. This year, as last year, we have a surplus of current revenue over current expenditure. The surplus figure this year is £8, 359 million—or nearly £8½ billion. Public capital expenditure this year will exceed the total of the PSBR by just under £7 billion. In point of fact, the PSBR is money borrowed to create lasting capital assets. That is a perfectly reasonable procedure to follow—one that private industry follows and one that has very little crucial significance for the economy as a whole.
Although none of these are the real problems of inflation, there is a real problem. That is the prospect of what started the whole cycle and what the Government have done nothing to solve—the problem of cost-inflation. The real change since the successful full employment policies of the 1950s and 1960s is the growing power of organised groups in our economy, and those of other countries, to escalate pay settlements far above any possible rise in output, as we learnt in 1975–76.
But this exposes another crucial weakness of the deflationary solution. It is sometimes assumed by Conservative Members that when the deflation is relaxed—and it now seems to be gently relaxed—all will be well ever afterwards. But, of course, it will not. As soon as the economy picks up, if there is no control or restraint over money incomes, cost-inflation will start all over again. All the sacrifices and suffering, after a short time, will have been borne for nothing. It is the deflationary solution, not the reflationary one, that is short-sighted and merely postpones the problem until a year or two later.
For these reasons a successful, sustained reflation must include measures—little though we may like it—for restraining pay inflation. That may involve in time a complete reform of our present methods of pay settlements which are neither modern nor up to date. If West Germany Austria, Norway, Sweden and other countries can solve this, I do not believe that it is impractical in this country. However—and here is a note of hope—in the early stages of reflation in this country, so much real capacity is now unemployed that this part of the problem should not be so acute at the start of recovery.
The crying need, therefore, is to expand both investment and current demand at once, bring interest rates right down—as was done in 1932—ease both budgetary and banking policies; let the exchange rate fall; and let us pay people to work instead of paying them to do nothing.
Every month of further deflation and waste is doing further permanent damage to our national economy. Huge damage has been done in the past three years through intellectural muddle, political folly and a dash of partisan self-interest. Even worse could follow if unemployment rises much further. If we want to get rid, as I hope we do, of the nasty signs of extremism that are emerging in some parts of the country because of the level of unemployment, the first job is to get rid of the bunch of befuddled extremists now sitting on the Treasury Bench.