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From International Socialism (1st series), No.52, July-September 1972, pp.3-4.
Transcribed & marked up by Einde O’Callaghan for ETOL.
The world economy is clearly on the upturn. In the US all the indicators combine to show that output is now something like one eighth bigger than this time last year. In Japan, the economy is expected to grow, in real terms, 60 per cent better next year than last. West Germany, according to the most recent report of the Bundesbank, has moved out of stagnation and entered into the early phases of a boom. And in the UK too, all indications support the Tories’ new found optimism. The economy looks like going into 3 to 3½ per cent annual growth, in real terms, over the coming period.
The authorities everywhere are more than usually worried about the coming boom. Karl Schiller, West German Economics Minister, was reported to have said recently that, although the boom was imminent, it had not yet arrived ‘Thank God’! Talks at Chequers towards the end of May were devoted overwhelmingly to the problems that the boom is likely to raise, above all the problem of prices. John Connolly, ex-US Secretary of the Treasury, when asked whether his leaving office would signal a change in the policy of controls, said no. Despite his own yearnings for unrestricted ‘free enterprise’, he stated that controls must stay until the economy learned to behave itself.
They are rightly worried. The western economies have gone through a period of relatively high unemployment with something like two million on the books in Europe and six million in the US. They have also gone through a period of set-piece confrontations between labour and capital in which government has been used to exploit the unemployment in order to restrain wage demands and with that to stop the upward drift of prices. It has not really worked.
In the US, for example, the rate of inflation in the first quarter of this year, that is after something like six months of Nixon’s ‘New Economic Policy’ of wage and price controls, was 6 per cent as against the long run government target of 2½ per cent. In Britain the most reliable price indicator of the Department of Employment rose 6.2 per cent in the six months to April, faster than it was rising in the last six months of last year. In other parts of the world the picture is very similar, with increases in the last twelve months of nearly 8 per cent in Holland, nearly 6 per cent in France and West Germany and 6 per cent in Sweden. Even in Japan prices rose by nearly 5 per cent in the period.
First, the confrontations with labour have more or less failed throughout the world. In the US, Nixon’s ‘phase two’ policies broke when his guidelines of 5.5 per cent wage increases were ignored by the Pay Board, which was forced to give or to allow increases of 42 per cent to railroad workers, large pay rises to longshoremen and so on. Over here, confrontation with the miners, and even with the railwaymen, failed to produce a result anywhere near the government’s unofficial pay norm. In Japan, the ‘spring offensive’, the organised wage claim round, has gone on without reference to official tightening of belts. Similarly, in West Germany, Italy and France.
Second, the labour market looks like becoming extremely tight, with the virtual disappearance of skilled unemployment. In Britain as a result of the relative success of government policy in getting big firms to ‘shake out’ their hoarded labour in a period of recession and to take advantage of severance pay arrangements to facilitate this, it will be difficult to increase production without employing more workers. The May figures for unemployment showed a dramatic fall. A fall as great or greater is likely over the summer months as skilled workers, who used to be hoarded by big firms in recession, are drawn in from the unemployment rolls. The same sort of thing is bound to happen in the US, with obvious consequences in bargaining power in industry and in wage push. In West Germany the increase in unemployment has not been so great or so long lived as to prevent arrangements being made very recently for workers to be recruited as far away as Venezuela. What all this means is that the onset of the boom will result in pressure on that part of the labour market, namely organised skilled workers, that is able to exercise leverage to push for higher wages. It means accelerated wage-push inflation.
Third, we can expect over the coming months a dam break by big business throughout most of the world, since in most countries it has been subject to price constraint of one sort or another since 1970 in some cases, 1971 in others. The CBI is still running a price limit of 5 per cent. A similar ceiling was imposed in the US by the Nixon ‘New Economic Policy’ last August as part of the administration’s conversion to the Galbraithian type of control where key prices, key businesses and key unions are subject to control and everybody else is expected to fall into line. Throughout most of Europe, certainly in the Scandanavian countries, the Benelux countries, Finland, Ireland and so on, some sort of price freeze has been in effect. Given the relative failure of the system and the increased leverage of organised labour in the coming period, we can expect big business to break out of restraint, slap on increased prices and so lead to a wage-price spiral appropriate to high boom conditions well before capacity working is reached.
Fourth, amongst the factors in the shift from the current inflation norm to a much more serious rate of inflation is the working through the system, not only in the US but in the rest of the world, of the huge US fiscal deficit which is the largest in peacetime history.
Fifth, will be the effect of the likely increase in ‘waste’ expenditure particularly on armaments. Although Nixon, early this year, asked Congress for a mere $750 million increase in the arms budget for the fiscal year 1973 (which starts in July 1972), he tagged onto the request obligational authority for nearly six times that amount (that is, authority to spend at his discretion). Add in the increase in Vietnam expenditure – unforeseen at the time of the budget request – and one can see that the increase in ‘waste expenditure’, which is of course inflationary, is likely to be substantial in the US and, by derivation, in the rest of the world. For US’ arms expenditure corresponds increasingly to the ‘Fortress America’ military posture and is accompanied by pressure on Western Europe and on Japan to carry more of the load. The Japanese military budget is already planned to double over the next five years. Corresponding ‘retaliatory’ increases by the state-capitalist countries are another possibility.
The Moscow summit agreement will not affect this perspective, on the contrary, it will make it even more likely because the agreement is a quantitative one. It is a freeze on the number of missiles deployed. There is no restriction on qualitative improvements in the missiles that do exist, which means that the present number of missiles, some of which are MIRVed in the States, almost none of which are MIRVed in Russia, some of which are obsolescent in both countries, will need to be replaced by more modern missiles. The majority of missiles in both countries are land based and are being phased out in favour of submarine based missiles, all of which increases the expenditure per particular vehicle and all of which changes the kind of expenditure from being expenditure on a tried technology to a technology which is as yet fairly experimental. This traditionally means that costs per unit of output, and therefore total expenditure, run riot and break all bounds. So one can see the Moscow agreement itself as allowing an almost riotous rise in military expenditure even though it might appear to be an agreement to freeze the strategic deployment at its present quantitative level.
Sixth, and last of the factors making the prospect of inflation worse over the next year or so is the lack of agreement between the Western capitalist countries on almost every economic question affecting them, whether it be currency or the price of gold or trade or a common attitude towards the new markets that might be opening up in Russia or China, relations with the underdeveloped world and so on. In fact, the only weapon left open to them to impose their will on one another is the weapon of competitive devaluation but it is a weapon which in itself is less effective than it has been in the past, if only for two reasons. One is that an increasing proportion of world trade is being conducted within the multi-national corporations which are, by virtue of their international operations, insulated from the major effects of devaluation and the other is that the missing proportion of workers’ consumption is made up in imported goods and that as a result any increase in the price of these goods through devaluation immediately triggers off economy-wide or nation-wide wage demands.
To sum up. There are six factors which make one expect huge increases in prices over this coming year: First, the workers have not been defeated in this period of confrontation, with unemployment relatively high and with the economic prospects less favourable for workers than they will be; second, the prospect for fairly rapid re-employment of unemployed skilled workers (and it is the skilled workers that form the fist of wage push); third, big business has seen its prices restrained during a period of cost increases and will react to any wage push with a dam break of price restraint; fourth, the immense US fiscal deficit can be expected to work through in higher prices in the US economy and to spread internationally; fifth, military expenditure is bound to go up almost uncontrollably despite the Moscow summit; sixth, the lack of agreement between Western capitalist countries and their probable use of competitive devaluation will trigger off internationally concerted wage demands.
Each capitalist country has the option of trying to elbow the others aside, in finding larger markets, as the US is doing in pushing the West Europeans away from the Russian market and in trying to corner the minute Chinese market, as the Japanese are doing to the West Europeans in East Europe, as the British capitalists are doing in hustling the Germans in Italy and as everybody is doing in forcing the Japanese to open up their own home market, as the Japanese are trying to do in breaking into the Siberian market, although at this stage with US help, and so on. But in order to do this they have to be able to control prices and in order to control prices they have to institute wages policy or prices and incomes policies. Already Nixon has been converted to permanent wages policies. Controls are going to remain in the US. Heath also an ideological opponent to wages policies, is coming round to the view that they are inevitable as an explicit policy instrument, not the shadowy implicit instrument they are at the moment. The recent poll of chairmen of 70 of the top companies in this country shows that 45 out of the 70 advocate an incomes policy. Incomes policy is essential for capitalism in the coming period of price inflation and will be seen by capitalists to be the fundamental instrument for continued competitiveness.
For us the immediate future is important because it opens up the prospect of the growth of political interest amongst large sections of the working class. The lesson of the near-runaway inflation, which threatens over the next few months, is that in spite of their ideological aversion to government intervention in the day to day running of business and of the economy, the Tories have intervened and will go on intervening. Modern capitalism cannot keep the state, and therefore politics, out of the workplace. Two vital things are changing in the workers’ environment: one, they are almost forced to compare their own position and their own claims nationally and even forced to do so internationally, because as wages policies spread internationally and as the resistance to government intervention in wage bargaining, and therefore to ruling class politics, grows internationally; the demonstration effect, for example, from the US to Britain and from Britain to the US can also be expected to grow. International capitalism has made the world a small place. It has become a small place for workers too.
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