Andrew Lilico: How British politics would be changed by recession

Despite the credit squeeze, the Northern Rock affair, falling house prices, high oil prices, and the expected slowdown in the economy next year, mainstream economic forecasters are not at this stage expecting a recession.  And neither am I, yet.  But two and a half years to the next General Election is ample time, in terms of the economic cycle, for matters to turn nasty.  And if the economy did turn nasty, there is the risk that the sort of policy emphases we adopt today will be irrelevant to what are perceived as the major challenges in two and a half years’ time.  So it seems worth doing a bit of alternate futures thinking now…

During a recession, I suggest, the following seven political issues would be materially affected.

1. Macroeconomic management — Macroeconomic management has not been much of a political dividing point over the past ten years.  It has been a political issue — perhaps the biggest of all, for Tony Blair won two General Elections on the basis that the economy had been managed soundly.  But there has been very little political dispute over matters such as the inflation target or the government’s fiscal rules and whether these have, in combination, delivered optimal macroeconomic management. Yet in the past, when economic recessions were more regular, macroeconomic management was among the most central issues of political debate.
2. Unemployment — Unemployment is not an issue in the UK, and has not been so since perhaps 1994.  If there were to be a recession, unemployment would rise — though almost certainly not to the three million plus levels of the early 1990s and early 1980s.  Political parties would need policies to respond to rising unemployment.  Parties that chose active macroeconomic management (e.g. aimed to “borrow-and-spend their way out of recession”) might claim that that was their answer to unemployment.  Parties preferring to do something else would have to offer an account of how their preferred solutions would address unemployment.
3. Welfare benefits — During the late 1970s and through the 1980s, schemes for delivering unemployment benefits and income support were major political debating points.  How generous the schemes were, what incentives there were to find work, benefits to assist in retraining, the merits or otherwise of private unemployment insurance schemes, high marginal rates induced by benefit tapers, the slippery slope into incapacity and disablement benefits, and many related issues would come back onto the political agenda with a vengeance.
4. Housing — In recent years the form that housing has taken as a political issue has related to concerns about affordability in general, concerns about affordability for key workers in certain regions, allegations that there is an urgent need to build more new houses, and consequently concerns about building in green spaces and increased urban densities.  If there is a recession, this political context will change very dramatically.  House prices will fall markedly, and affordability will disappear as an issue.  In a context of falling prices, there will be much reduced pressure to engage in largescale new-build programmes overruling the will of local people.  The issue in housing will cease to be how to get more of it and how to make it cheaper, but instead the issue will become one of labour mobility — people with negative equity may be unwilling to move house and realise losses, meaning that labour mobility decreases, exacerbating unemployment.
5. Regional policy — Recession would be unlikely to be spread evenly over the country.  It is very difficult to say in advance where it might bite most, especially since (a) I’m not yet expecting one at all; and hence (b) I don’t know what exactly might be causing it.  Suppose that we assume the cause is a major correction in house prices, simply a result of the market returning to equilibrium, with the result that consumption and investment fall whilst people rebuild their balance sheets.  It is perhaps natural to assume that the greatest such falls would occur in London and the South-East, so perhaps these would be the regions hit hardest.  This would result in a major change of emphasis in regional policy.  Instead of such policy being aimed at dispersing enterprise and jobs away from London and the South-East, often by providing subsidies for businesses to locate elsewhere, regional policy might become more focused on assisting London and the South-East to escape from a malaise.  This would also have potentially profound political consequences, since it would be a recession that impacted most on relatively more Conservative-voting regions.
6. Social Cohesion — Issues of social cohesion have been relatively significant in recent years as Britain absorbed two great new waves of immigrant: the asylum seeker (usually bogus, in practice) and then the Eastern European.  But up to now, insofar as this involved economic elements, these were about whether immigrants had preferential treatment for local authority housing, or whether immigrant labour was very cheap and bid down wages, or whether immigrants claimed benefits and hence imposed a tax burden on others.  Recession would bring a new and vicious element: envy.  British-born people without jobs or otherwise under pressure will envy the jobs of immigrants, and are likely to suggest that immigrants are “stealing our jobs” (even though that’s not remotely how the economics of these situations work). Features of immigrant communities that seem merely irritating or even charming when times are good may start to seem very burdensome when times are harsher.  On the other hand, since a significant component of recent immigration has involved footloose Eastern European workers, if jobs become scarcer they may well move away from the UK to pastures greener — at which point we shall doubtless face scare stories in the press about Britain’s “collapsing population”.
7. Regulation — In a recession many businesses will fail, and many practices that one got away with during good times will be exposed. Both of these factors will create pressure to increase regulation in various ways.  But of course at the same time businessmen who were quite content to have all sorts of regulation when times were good — for it deterred new firms from entering their markets — will say that there must be significant deregulation for their industries to survive.  Political parties will need resolutions to this paradox.

Doubtless there are other political issues that would also be changed. But even seeing these seven we can understand that many policy areas of recent concern — fox-hunting, human sexuality, House of Lords reform, the European Union, foreign military adventures, and many other such — are issues that have had the priority they have because we have had the luxury of good economic times. 

Comments

[Tony Makara]

Good article Andrew, Labour will certainly fall short in all the areas that you mention. As you rightly say up until now Labour haven't really had to answer any of the big questions. This has been bad for them as a party because it has allowed them to sink back into a comfort zone.

It will be particularly interesting to see how Labour cope with rising unemployment. All their tall talk has been about full employment, more people in work, even though the NewDeal has done much to mask the true rate of unemployment. On the subject of welfare and re-training Gordon Brown has promised re-training time and time again but only ever comes up with 'Work experience' programmes which are 'Workfare' and not training. Workfare is a government cop-out, it doesn't provide a job or the training.

On the macroeconomic front it will be interesting to see how Labour deal with a decline in sterling once interest rates continue to fall, that will push the price of all imported goods up, which will only add to already rising levels of food inflation, this in turn will put pressure on wages and so on.

Social cohesion is an interesting point. Labour has allowed 2.5 million immigrants into the country over the last decade, that is equal to half the population of Scotland. All these people will have to be working, or on welfare. Either way it will foster resentment when unemployment rises. These people will also need housing and public services, again we are back to David Cameron's point about the numerical strain on our national infrastructure.

The most worrying aspect of economic turndown is that Labour do not have the strategy to cope. In office they have grown lazy, complacent, even indifferent. Labour do not know how to cope with economic turndown. The public will see that.

[London Tory]

Andrew

I spent over 20 years working in a major Government spending department. I would add a few caveats to your statement-

# Unemployment is not an issue #

It should be, and it is a failing of our Front Bench that this subject is not currently higher on the radar. We still have 2.7m people on Incapacity Benefit, largely shunted there from JSA (IB). Over 50% of I.B claimants suffer from either "stress"- i.e. the thought of getting a job, or a "bad back"- what could happen if they got out of bed before 10am.
The New Deal is a vast waste of public money. We are currently training a whole army of teenagers to be 'sound engineers' , they inevitably come off the scheme, fail to find a job, and go back onto it 13 weeks later. JCP issues each of them with an alarm clock at the start of the scheme, the rationale being that if anyone finds a job on their own merits, the DWP claims this as a "job entry", as without the alarm clock the unemployed person would never have been able to get up on time to attend the job interview. The DWP also encourages claimants, when reporting that they have found work, to leave dates and employment details blank on their ES40 cards so that they may be filled in later by staff, to enable their offices to meet Government targets for placing people in work.
As was again demonstrated by the ludicrous PCS leader Mark Serwotka during the recent strike, the DWP is not fit for purpose in terms of delivering a really radical welfare-to-work agenda, and its functions should be handed over en-bloc to the private sector by a future Tory Govt.

[Teck Khong]

Andrew, it’s an excellent synopsis of the consequences of an economic downturn. However, I am not sure if a gradual recession would produce an immediate and sharp rise in unemployment, but rather an initial loss of migrant workers to other parts of Europe and the world. Unemployment rates might therefore not impact on the government during the current parliament, and with self-repatriation of migrant workers, the government could even gain a beneficial effect through a reduction of pressure on housing and an easing of problems related to social cohesion.

A sharp and sustained recession could certainly produce more dramatic effects within the reference time frame.

[Tony Makara]

London Tory, the NewDeal is nothing more than a government mechanism for giving the 'appearance' of lower unemployment. All those involved in the NewDeal, including those on the work-experience, get their P45s back, don't physically sign-on, so they disappear from the unemployment figures, although of course they are still on the dole. The NewDeal is a very expensive scam on the British public.

I don't subscribe to the Alan B'Stard school of thought in saying that every person on the dole is a freeloader, however I do feel that welfare reform is necessary. Job-matching is a good idea when it can be made to work but with 1.6 million on JSA and only 600,000 vacancies we have to be realistic about how many can actually work. Thats why its foolish for the Conservative party to continue Labour's drive to push mothers into work. The focus must be set on helping those on JSA find work first and that must be further defined by setting the focus on the young and the fathers of young families.

On training I believe there should be a special training allowance introduced in which the long-term unemployed can sign-up to attend a nine-month course of study at college, this would mean them having to sign-on unmolested for that time. Its better to pay someone nine months benefit, have them train, then have them skilled and off the dole queue than to have them anchored to a lifetime of benefits.

Workfare should not be considered as an option. It is a cop-out. It provides neither job nor training but it just another way of fiddling the figures. Training is the key, but even then we won't be able to employ everybody. That is why I have argued for a public works programme for the long-term unemployed. With the state already paying JSA, rent and council tax, it makes sense to pay the extra to make the unemployed 'waged' and use that manpower on social projects.

[London Tory]

Tony

I can tell you from professional experience that a significant majority of JSA/IB recipients are already working in the black economy, hence their reluctance to participate in schemes such as the New Deal, and to consider either re-training or voluntary work. Why bother when the state will pay your rent and council tax, give you £70 p.w pocket money, and you can earn a couple of hundred cabbing, or window cleaning ?

I once made the same point- based as I said on professional experience, to the Grand Dame of the Left Polly Toynbee. She seemed puzzled, and said she thought such a scenario "very unlikely" !

[Tony Makara]

London Tory, in cases of benefit-fraud there should be serious repercussions. However I think we have to be careful about tarnishing all the unemployed because of the actions of the few. I'm sure that the vast majority of people who are out of work want to get back into work as soon as possible.

A major problem is that after a certain amount of time many probably 'give up' learn to cut their economic cloth accordingly and get used to being out of work. It becomes not so much a lifestyle of choice but rather a lifestyle made out of expediency.