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ALTIF transcripts: The Barber boom and bust


The Barber boom and bust

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Gripped by sluggish growth and low investment, the UK decides to solve its problems by embarking on a “dash for growth” – spending big and cutting taxes. We talk to economic historian Duncan Weldon about the Heath government’s disastrous 1972 “Barber Boom” (named for the chancellor Tony Barber) and what lessons it holds for Boris Johnson’s wayward administration.

Presented by Jonathan Ford and Neil Collins.

With Duncan Weldon.

Produced and edited by Nick Hilton for Podot.

Sponsored by Briefcase.News

Jonathan Ford 00:06 Hello and welcome to a long time in finance with Jonathan Ford and Neil Collins, in partnership with briefcase dot news, the service that brings intelligent curation and analysis to your media monitoring.

With inflation nearly at 10%, and an energy crisis going at full blast, the government seems unsure how to respond: put the brakes on, or spend your way out of trouble. Now Boris Johnson’s instinct is to spend public money like a drunken sailor on 24-hr shore leave. But his Chancellor, Rishi Sunak is a little more circumspect, perhaps because he’s been reading up on the early 1970s. And in particular, the so-called Barber boom of 1972, an ill-fated dash for growth that ended in disaster for the UK economy, curtains for the Prime Minister Ted Heath, in a decade that became a byword for runaway inflation, just as the 1930s were for runaway unemployment.

So we thought we’d go back and look at the Barber boom, how much responsibility does it bear for what came afterwards? Barber himself was he a fool by name or just plain unlucky? And what parallels are there, if any, in the situation we find ourselves in now, and I’m delighted that we’re joined today by Duncan Weldon, author of a brilliant new book, Muddling Through, which charts the causes of the British economy from the lives of the last two centuries. So he should be able to provide a bit of perspective, I think, Neil,

Neil Collins 01:31 Absolutely. And I think the title of the book is very apt to describe the British economy. Somebody once said, the British economy is a bit like a bumble bee. When you look at it, you think it cannot possibly fly, but then it does. So we muddle through.

Jonathan ford 01:48 Anyway, welcome, Duncan.

Duncan Weldon 01:50 Thank you very much.

Jonathan Ford 01:51 I think we should start by talking a little bit about the Barber boom itself, and how it came about? What was the logic behind this very odd kind of description, that dash for growth, I think that was what it was actually called at the time?

Duncan Weldon 02:03 That’s very much what it was called at the time. So you know, to put the Barber boom in context, I think you need to start in 1970 with the election of Ted heath’s government. And, you know, Ted heath’s government is what we would nowadays call Thatcherite. He was really trying to do the same sort of deregulatory reforming agenda that Margaret Thatcher succeeded in 10 years later. That’s why people call themselves a Thatcherite right now, rather than a Heathite.

Neil Collins 02:30 Because she succeeded. And he failed.

Duncan Weldon 02:34 He started saying, I’m going to deregulate the economy, I’m going to introduce more competition, we’re going to be less status than we’ve been. And you know, this is going to be tough, but we’re going to do it,

Jonathan Ford: And he’s going to cut taxes as well.l?

Duncan Weldon: And he’s going to cut taxes as well. But two years in, it is not going very well, the British economy has slowed. Unemployment has gone above a million for the first time since 1940. And that’s sort of the context in which you get the great Heath government U-turn in which they both back away from lots of this reforming agenda, and instead really hit the accelerator in terms of fiscal policy. You know, the Barber boom, 1972-1973, the government is explicitly aiming to grow the economy by 10% in two years. This is the dash. This is a huge expansion they’re going for. And partially that’s done by huge tax cuts. So the 1972 budget, you’ve got tax cuts worth something like 3% of GDP, you know, big increases in income tax allowances, big increases in investment allowances, firms, the next year, they cut VAT, which has just been introduced very recently, from 10% to 8%. This is really hitting every accelerator they’ve got from a macro point of view, trying to push the economy forward.

Jonathan Ford 03:51 And what was the logic of the dash? Why do we think growth is saying… you want to kind of gently press on the accelerator rather than floor it largely because, yes, you generally do burn your tires out and then have a crash?

Duncan Weldon 04:03 Well, the hope was you were going to get this sort of two years of really, really strong growth and this was going to kickstart and unlock stronger growth in the long term that you know, a lot of it was thinking we’re cutting taxes, we’re putting up investment allowances, there’s going to be a huge capital investment boom from British industry. Once you’ve done the dash for growth, you will then be moving at a faster pace because of all of this capital investment, was the theory.

Neil Collins 04:28 The fact that of course the UK economy had never managed to grow 10% over two years in recorded history, it was just a sort of minor irritant at the side.

Jonathan Ford 04:38 Not enough ambition I think. And okay, so they do all this and as you say in the middle of it, Ted Heath has a bit of a wobble, but the wobble doesn’t interrupt the dash for growth. The dash for growth continues. It’s just he stops trying to deregulate and impose rules on the unions. Is that right?

Duncan Weldon 04:59 Yes. So you back away from that sort of structural reform of the labour market, and you press down harder on sort of your macro policy levers to try and force the economy to grow faster. But you know, the context is, if you look at the early 1970s, in Britain, you’ve got the oil price shock, which we know about, you know, in sort of October 1973. The Yom Kippur War and the oil embargo. You’ve got a labour market, which looks very different to our current labour market, much stronger unions pushing for higher wages. You’ve got the floating of the pound, sort of the breakdown of Bretton Woods. So suddenly, you’ve got this free floating pound. And you’ve got this really sort of, you know, aggressive fiscal policy acceleration. And just as important, you’ve got a newly deregulated and liberalised bank lending market, particularly in mortgages, helping inflate house prices. So if you sort of step back and you look at it, you think, you know what could go wrong on inflation? Well, everything that could go wrong went wrong. At the same time.

Jonathan Ford 06:00 Can you just very quickly explain to us the impact of Bretton Woods, which you mentioned, which was a kind of fixed currency system that had operated since the Second World War. It was basically scrapped because It all depended on the Americans and they pulled out in 1971. But what was the impact of that?

Duncan Weldon 06:18 Yeah, so from the late 40s, until the early 70s, you know, the value of the pound had been fixed against the dollar. And it was adjustable, you know, it was devalued in the late 40s. It was devalued again in the late 60s, but generally it was at a fixed value. And that caused all sorts of problems for the British economy in terms of managing that fixed exchange rate. But abandoning Bretton Woods, letting the pound freely float, for the first time in decades, in the early 70s, put a whole host of new problems. So the pound is allowed to float against other currencies, at a time when the British economy is not looking like a great bet for international investors. So what you get is severe depreciation in the value of the pound, which obviously pushes up the cost of imports, adding more to inflation. If you’re trying to pick the best moment to float, and it wouldn’t be in the early 1970s.

Neil Collins 07:09 I think you can probably say, it was a uniquely bad moment to float the pound and impose the reforms. The other one, of course, was what was called competition and credit control, the replacement for the old bank rate, and in the end produced neither competition nor credit control. What was it though, it was a different method of trying to control the money markets. Whereas in the past, it had been essentially done through bank rate and the position of the governor being able to bully the banks into doing what they were told, competition and credit control was going to scrap all this. And of course, it would be a brave new market-led world. I think I’m right to say it was a disaster from start to finish. It was eventually scrapped.

Duncan Weldon 08:00 Yeah. So you got a huge a huge bank lending boom in the early 70s. So you’ve got your tax cuts, increased government spending, and huge amounts of liquidity coming out of the banking system. Again, it’s everything that can go wrong on inflation went wrong.

Jonathan Ford 08:14 Okay, so let’s get back for a second to Mr. Barber himself, Tony Barber. He wasn’t supposed to be chancellor in 1970. It was supposed to be Ian McLeod. But he then rather unfortunately died almost immediately after the election. What’s the judgement on him? Was he just not up to it? Was he an idiot? Did he completely fail to kind of get a grip? It seems to be pretty poorly written up by history. Is that fair?

Duncan Weldon 08:38 He is pretty poorly written up by history. You know, he’s most famous for making, you know, one of the worst macroeconomic policy judgments of any British policymaker in the 20th century. That’s not a great, you know, epitaph to have. And I do think you’ve got to be fair to him. At the time, you know, a wider problem was how policymakers in Britain and elsewhere sort of viewed economic policy, this is still an era of what you might think of as hydraulic Keynesianism. That’s a new one, the business cycle has been…

Jonathan Ford 09:13 The end to boom, and bust would be another way…

Duncan Weldon 09:21 We’ve conquered the essential problem of the business cycle. There isn’t going to be another depression. And actually, we think we understand how the economy works. And we call it hydraulic, because we think we can pull and push certain levers and the economy will react in a, you know, a precise way. And in particular, this is the world of what economists call the Phillips curve, this relationship between unemployment and inflation. And we think that as unemployment falls, inflation goes up, and as unemployment rises, inflation comes down. This seems like a stable relationship. So, you know, from Barber’s point of view, he’s sitting in the treasury, his economic advisers are telling him that we understand if you pull these levers, the economy will grow. You don’t need to worry so much about inflation because of where unemployment has been, you’ve got room to get unemployment past a million, you’ve got room to bring down unemployment, without provoking more inflation, this illusion that they’ve got much more control than they do.

Jonathan Ford 10:20 So it’s a bit like, you know, they’re sitting in the control room, and the lights are flickering in what seems to be a suitable way. And they don’t realise actually, that the whole system has gone to hell in a handcart.

Neil Collins 10:31 not connected to the engine rooms…

Jonathan Ford 10:34 Three Mile Island.

Neil Collins 10:37 How much do you think it was because of the relationship between Heath and Barber. Barber always struck me and I was there at the time as a weak character. And Heath was a really stubborn bugger. I don’t think there’s an instance where the relationship between the Prime Minister and the chancellor has worked, except where it’s been essentially a pair of equals rather than a subsidiary. How much do you think that’s fair comment?

Duncan Weldon 11:08 I think that is fair. Heath was certainly on board with the dash. From Heath’s  point of view, unemployment going above a million is a disaster. He’s aware he’s facing reelection within a couple of years. If the dash for growth had worked, if we’d got 10% growth in two years, that would have obviously set him up very nicely for his reelection in 1974.

Neil Collins 11:28 He could have been world King, actually, if he’d managed to do them.

Duncan Weldon 11:33 Exactly. I think, yeah. A strong Prime Minister, relatively weak Chancellor, more of the policy decisions are being made in number 10 than number 11 Downing Street. Okay.

Jonathan Ford 11:44 So that may be a moment to flip it forward to the present day where we have no mid term Prime Minister, not so much in the middle of a U-turn is sort of just sort of going round in circles occasionally crashing into pyramids of baked beans.

Neil Collins 11:59  It’s really impossible to discern anything which you could describe as an economic policy under Johnson.

Jonathan Ford 12:12 Critically, we have a relationship between a Prime Minister who for all his sort of weird waywardness, has quite a strong grip on his cabinet and a chancellor who lest it be forgotten, not only was unexpected, like Barber to get the job because it was supposed to be Sajid Javid, originally, but accepted essentially subordination to number 10 In order to get the job in place of his predecessor. Are we looking at a similar kind of dynamic between number 10 and number 11 today that we had in the early 70s?

Duncan Weldon 12:47 I think it’s a dynamic matches changed a lot. I think completely, when Sunak got the job. He was very much, you know, subservient when putting someone that number 10 can control into the treasury. But you know, by the start of this year, you know, after the pandemic, when we’d had the furlough scheme, you know, Rishy Sunak was the most popular politician in Britain, Boris Johnson was struggling at the start of the year. And it looked like actually the chancellor had sort of emerged as a much stronger figure. I think we saw that at the spring statement in March, where presumably the prime minister would have liked much more support for households straightaway, but the chancellor was able to sort of stand his ground and say, I don’t want to do that.

Neil Collins 13:28 Well, I would challenge some of that. Sunak was very popular as long as he was writing the checks. Is that something that anybody can do? It’s when you had to stop doing that and start talking about tax increases, that he suddenly looked a lot less convincing. I was never impressed with what he did. And certainly what he said, because the two did not agree. I feared that when it came to actual policy, rather than what he was claiming to do, he was essentially taking dictation.

Duncan Weldon 14:00 It’s interesting. And if you look at you know, it was one of the weirdest budget speeches, I can remember at the spring statement. What we know, we know that the tax increases at the spring statement and the budget before are the most substantial tax increases since the early 1990s. We know that they will take the tax share of GDP to the highest it’s been in decades. So we know it was objectively a tax rising budget, yet much of it was cloaked in the language of I’m an instinctive tax cutter, I want to cut taxes in the future. You can’t put up taxes to the most in four decades was calling yourself a tax cutter.

Neil Collins 14:36 It is a demonstration doesn’t it have listened to what the government says and bet on the opposite happening but also…

Jonathan Ford 14:41 …but also it’s an illustration of a man who is not really in control of his own policy. If this is like a man holding up a newspaper to show you still alive, you know? I’m saying they’re making me say this. It’s not me.

Neil Collins: Yeah, I think that’s true. I think I’d split.

Jonathan Ford: But let’s not get too stuck in the personalities. Fascinating, though. I mean, if you look at where we are now compared to where we were in the early 70s, the Barber boom period. Are there any parallels really? Or are we really living completely in a different world now?

Duncan Weldon 15:17 You’ve got the high inflation, you know, inflation the highest in 40 years at the moment, I to expect it to go higher, you’ve got a big energy, price shock and energy price shock, which is actually sort of comparable in scale and speed, although the economy is thankfully, less energy intensive than it was in the early 70s. You know, manufacturing is a much smaller part of the British economy than it was. So you’ve got a bit of insulation there, I think the really big difference is, you’re in the early 1970s, you’ve got a lot of imported inflation, and a lot of domestically generated inflation. The picture is slightly different at the moment that still at 85% of the inflation we’re experiencing at the moment is imported. It’s the food price shock, the energy price shock, supply chain disruptions coming out of the pandemic. There is some domestic cost pressure. But most of it is still imported. And I think the big difference, you could look at the latest unemployment figures and say, unemployment is under 4%. It’s the lowest it’s been since the 1970s. That the structure of the labour market, the structure of the jobs market is radically different to in the 1970s. You know, one in five British people today are a member of a trade union, compared to more than half in the 70s. The wage bargaining process operates very, very differently. So, you know, I mean, at the moment, you know, real wages are falling. Price rises are moving faster than wages, there isn’t much evidence of that sort of workers trying to bid up their wages, to protect themselves, fixing up prices getting into that sort of vicious circle. Yeah, that’s the big difference. For me,

Neil Collins 16:55 I would add another parallel, which is the money supply. Under Barber, the money supply essentially ran away. It was only measured by the sort of nerds in the city who kept saying this is asking for trouble. And we’ve had something very similar in the last couple of years. And the monetarists, in fact, have been warning that this inflation was coming for at least two years now the likes of Tim Condon, who is a sort of dyed in the wool, monetarist who did predict all this long before Ukraine and the and the knock on effects from Russian embargoes, and all that sort of thing. So I think that is an extremely uncomfortable parallel, what happens now on the monetary side is going to make a big difference to how bad the recession is next year. And I think that the the Treasury don’t really seem to have the expertise to deal with this. And certainly, I don’t think the bank does they hardly mentioned it nowadays.

Duncan Weldon 18:03 You did, you did get a big increase in the money supply in 2020-2021. I mean, it’s peaked, and it’s come down. But if you work on that sort of model, that there’s an 18 to 24 month lag, that yes, inflation is high this year, maybe into the start of next before starting to come down. What’s interesting to me is, we did get very fast money supply growth. We also got very fast money supply growth in 2009/10. Again, when you got big QE programmes, for the first time. This one seems to be having more of an inflationary impact than the last one, maybe the difference is that government spending was a lot higher, government’s deficit was a lot higher, you know, this bag of QE that we’ve just had, seems to have financed more government spending, whereas the last one, ended up just stuck in reserves rather than making its way into the economy.

Jonathan Ford 18:50 Yeah, we had Paul Tucker on podcast a few weeks ago. And he very much made that point, that it was a mistake that the government had not reversed some of that QE more quickly, or the Bank of England did not reverse that QE more quickly.

Neil Collins 19:07 Far from reversing it, they actually increased it in 2020. I mean, that was a real serious policy error.

Jonathan Ford 19:14 So thinking again, about Barber and his boom, and also what the lessons are for the present day, if you were in Rishi Sunak shoes, what would you do now? And would you do anything that Tony Barber did? Or would you reject everything that he suggested?

Duncan Weldon 19:31 I think yeah, the lesson from Barber’s time, which I’d be telling the chancellor would be, you know less about what your policy tools and levers do than you think you do. You know, be be cautious. Be sceptical. Don’t think that by doing x that will cause y, relationships between different variables change over time, be cautious. I would at least reassure the chancellor, the things don’t look quite as bad as they did on the inflation front in the early 70s. And I think the advice I’d be giving to him now is to think, you know, when Andrew Bailey, the governor of the Bank was doing his last press conference, you know, he the analogy that is communications people clearly told him to use because he used it five or six times in the press conference was that I’m walking a narrow path, on the one side between very high inflation, and on the other side between an economy that looks like it might be slowing quite sharply.

Neil Collins 20:26 It’s a tragedy, isn’t it, but it’s not up to him to walk this narrow path. It’s up to him to get the bloody rate of inflation down to the 2% target.

Duncan Weldon 20:35 This is the problem for the chancellor. Isn’t that clear? The chancellor is on that narrow path. And the chancellor should be able to think okay, inflation is the bank’s problem, let the bank do what it needs to do. I have to worry about how the economy gets through what’s going to be the toughest year for British households since the 1950s. If you look at the, you know, the forecasts for real income, I mean, what the chancellor should be doing is prioritising supporting people hit by this sort of imported energy price shock. That’s really the best he can do now and hope that’s enough to prevent the economy slipping too much. I mean, he shouldn’t be going for a dash for growth. If that wouldn’t be my advice at all

Neil Collins 21:14 A dash for disaster, or dash off a cliff. And we should remember what happened to the next election after after the Carber boom. J

Jonathan Ford 21:22 Should he should he have a windfall tax?

Duncan Weldon 21:24 Yeah, I mean, I think he will. And I think he I think he almost certainly should at this point, I think yeah, the some of the some of the chief executives have made it very hard for him not to buy talking up quite how high their profits are going to be this year.

Neil Collins 21:36 Yeah, well, the other thing is, of course, they’re throwing huge sums at Green projects, which presumably will produce a terrible return. And that would be far better if they were taxed now. And they could allocate their capital in a more rational way, which is far better than paying Dane gal to the day dane, which is what they’re threatened and what they’re currently doing, saying we’re going to spend 20 billion here and 20 billion there. And, you know, look how good we are. They should get on with the business that they know what they’re doing, rather than trying to pay that sort of bribe to the administration. They take their lumps with the with the windfall tax.

Jonathan Ford 22:17 Is there anything you think that’s potentially out there a great big rock in the water a bit like some of the things you described in the early 70s, which could change the world as we know it? Obviously, you can’t know exactly how we’ll do it.

Neil Collins 22:28 short of nuclear war?

Jonathan Ford 22:31 Well, yeah, obviously, short of nuclear war. And then, to a certain extent, the question of dashes for growth, and so forth, longer such a big issue.

Duncan Weldon 22:41 The lesson I think, when you go back and you read the diaries, and the papers, from the time is just how unimaginable, everything that happened was until it happened, you know, the idea, we’re gonna get the kind of inflation rates we did in the 70s. If you’d written that six months before, everyone would have regarded you as mad. And you know, if you look at the situation we’re in now, with inflation at 9%, highest since 1982. You’ve only got to go back six or seven months and the Bank of England and most economists and the consensus forecasts were for inflation at about four and a half or 5%. The inflation rate is twice as high as we expected it to be six months ago. And now we’ve all just sort of accepted that, you know, it’s quite worrying how quickly things can change.

Neil Collins 23:26 just goes to show forecasting is always difficult, especially for the future.

Jonathan Ford 23:31 On that wise note.

Neil Collins 23:37 That was a long time in finance with Jonathan Ford and Neil Collins. Editing and Production is by Nick Hilton. And our sponsorship partner is briefcase dot news. Join us again next week.

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