Queen’s Speech

Lord Desai Excerpts

Wednesday 16th May 2012 Lords Chamber

[Lord Desai]

My Lords, it is a great pleasure to follow the noble Lord, Lord Tugendhat. Before I get to what I want to say, I offer one suggestion to his excellent proposal. I have thought for a long time that, in order to curb high salaries, we should consider adding the wage bill of top executives to the profits and putting corporate tax on all that. Perhaps I may use old-fashioned terminology: let us consider production workers and non-production workers. The wages of production workers are outside this but the salaries of non-production workers are added to profits, and tax is put on both of them. I have always believed that moral exhortation is neither here nor there. It is when it hits the pocketbook that companies will behave themselves.

I want to take up the challenge before us all; namely, what is happening and how we can make things better. In the week since the gracious Speech, the situation in the eurozone has worsened more than we ever thought would be possible. I presume that in the next week or so we may see a serious crisis in it. I start with a proposition which reflects on the speech made by the noble Lord, Lord Skidelsky. Yes, it is possible that there is denial and cognitive dissonance. But if a lot of countries simultaneously are in denial and in cognitive dissonance, it behoves us to ask whether there is another explanation than wilful obstinacy for doing what has to be done.

No Governments want to be unpopular or to have austerity. If a Government choose austerity, there may be a reason behind that. After all, over many years, we have all been brought up on Keynesian economics. Why have we suddenly gone off Keynesian economics, not only in this country but across Europe? Even in the United States, often cited as an example to the contrary, there has not been a major boost to the economy since the first year of the Obama presidency.

I have always thought that there is another explanation for why Governments do not adopt more borrowing and spending to get growth now and to get themselves out of the problem. I believe that this crisis is not like other crises of the past. It does not come from a lack of effective demand. Keynes was always worried about oversaving. This is a crisis of undersaving and we have been in it for many years. In one way, this crisis started in the 1970s when we began to lose manufacturing industry across most OECD countries. There were few exceptions. A lot of the manufacturing industry, especially the low and medium-technology manufacturing industry, moved east or south to where it was wanted. That led to a huge hollowing out of the job market for unskilled or semi-skilled manual workers.

Countries which had a good welfare state put all those people into long-term unemployment and have sustained them. Countries which did not have a good welfare state, such as the United States, let the wages of those people drop to a very low level. In America, we have seen stagnation in the average wage. People who cannot be in manufacturing are in very low paid service-sector jobs. Across Europe, we have maintained long-term unemployment and those who are in employment have been able, for a while, to increase their wages. However, even there, there is a lot of inequality because in the service sector you have either very highly paid jobs—for example, financial services—or very low paid jobs in the retail or restaurant trades and so on.

We have had an economic transformation. For a while, we have filled the gap of manufacturing employment with service sector employment and borrowing. Personal borrowing fuelled demand for us for a long time. Corresponding to our undersaving—savings practically disappeared from western society—there was always saving in Asia. Basically, all that saving in Asia was used by us to perpetuate employment, but it was not a sustainable model. If government borrowing had been self-liquidating, and every time the Government borrowed money there was a sufficient multiplier effect and the debt retired itself, we would never have been in this situation. The point is that even European Governments, including France and Germany, were borrowing and running deficits at full employment level, because that was the only way in which they could sustain their welfare states. If that model is not feasible, we have to do something.

I am sorry to be so gloomy, but I do not believe that we will get out of this any time soon. A lot of people think that there is some magic potion that will get us growth. There is a lot of micro-thinking on cutting red tape and this and that. But all those things, even if you did them, would not increase the growth rate immediately, and when they did they would increase the growth rate by no more than one-quarter of 1 percentage point. It is worth doing, but it is not enough.

The issue that we face is whether we can spend our way out. As the noble Lord, Lord Skidelsky, said, we have a problem. The corporate sector is sitting on surpluses and not investing, and the government sector has decided—the noble Lord rightly disagreed, as a lot of other people have—that the Government should borrow more money and get out of it that way. This is the central problem to which the Government have not yet seen a solution. Just as once upon a time we used to believe in crowding out, we now want there to be crowding in, which is not happening. Just because Governments do not spend does not mean that business spends, so I think that there is a missing link in between.

I suggested when we discussed the Budget that there was a way out for the Government, and I know that the Minister will pooh-pooh my suggestion as he did once before. But if there is a windfall gain from an asset sale, such as the Government had from selling Royal Mail for £28 billion, you could say that you cannot spend that money because there is a big liability, yet money is fungible. If you get £28 billion when you did not expect it, there must be £28 billion somewhere else that you can release. The Government should decide on the very low rate of growth that we have achieved. The negative numbers may be slightly more positive and we may not be in a double-dip recession, but that does not matter—we are now counting growth in basis points, not even percentages. What is true and what the OBR has said is that this is going to be a very difficult year. Given that asset sale, or any other asset sale that the Government might plan—I hope they do—we should allow ourselves a little bit of slack. Perhaps they could spend the money not on infrastructure investment but in immediate vouchers to those poor grannies whose tax they have increased. Give the grannies £1,000 per granny and you will see a revival in the economy.