Darling sounds like a Martian, but this is not a repeat of Life on Mars

Suddenly everyone seems to be interested in the 1970s. The younger generation – everybody under 30 was born after the 1976 economic crisis – seems to be learning about the 1970s from Life on Mars. I haven’t seen it myself and don’t know if Alistair Darling has, but a recent comment by the Chancellor could easily have come from a Martian.

Asked on the Today programme how the 14 per cent extra pay over two years awarded to Shell drivers fitted in with the government’s inflation policy, Darling said, if I heard him aright: ‘The particular problems in relation to this problem are peculiar to this particular problem.’ So there you have it.

The Chancellor himself is very concerned that we should not return to the atmosphere of the 1970s; not in a time machine, you understand, but via a burst of wage claims in response to the current increase in the inflation rate that arises primarily from higher prices of energy and food.

One reason New Labour liked to think that history began in 1997 was that Labour had been out of office since 1979 and attributed many of its troubles to the impact of the economic crises of the 1970s: average earnings rose by 27.6 per cent in the 12 months to July 1975 (against less than 4 per cent a year these days) and the rate of inflation was 25.9 per cent in the 12 months to October 1975, as the Callaghan government had to admit in a letter that accompanied their humiliating application for a loan from the International Monetary Fund (‘terms and conditions’ applied).

In his recent Attlee Lecture, Professor Peter Hennessy cited Lord Lawson’s observation that the ‘Attlee-ite settlement’ (Lawson’s phrase) and ‘Mrs Thatcher’s stewardship’ had been the dominant political forces of post-1945 Britain. Attlee had set the political agenda for a quarter of a century. As Lawson said in a 1988 lecture to the Centre for Policy Studies while he was Chancellor (1983-89), ‘the two key principles which informed its [the Attlee government’s] actions and for which it stood, big government and the drive towards equality, remained effectively unchallenged for more than a generation, the very heart of the postwar consensus’.

Then came a quintupling of the price of oil in 1973-74 and a miners’ strike over a large pay claim, prompted in part by the greater bargaining power of the miners against the background of shortages of energy. Edward Heath, the Tory prime minister, called an election and lost, effectively unseated by the energy crisis. That turned out to be an early blow to ‘wet’ Conservatism. With inflation rising and the economy slowing, the word ‘stagflation’ came into common usage and the 1974-79 Labour governments had a rough time both with the economy and the negative influence of the union barons and the left on the electorate at large. That was a serious blow to ‘Old’ Labour.

Hennessy said ‘the brute fury of the voters with stagflation made Mrs Thatcher possible’, just as the inter-war years and the Second World War had led to the Attlee settlement.

A questioner at Hennessy’s lecture said there might be ‘good and bad’ consensus, just as there is ‘good and bad’ cholesterol. New Labour’s behaviour in office suggested they had accepted, for all their previous opposition, much of what I would call the ‘bad’ Thatcherite consensus.

Did I just say ‘suggested’ – in the past tense? Is it all over for New Labour? That is how many people now regard the present government and its problems. The usual time-servers are flocking towards the Conservatives.

Which brings us back to the economy. It would be the last straw for this beleaguered government if the settlement of the tanker drivers’ dispute were to prove the prelude to a generalised return to the price-wage-price spiral of the 1970s. And it would not be too good for the reputation of Mervyn King and the Bank of England.

An old pop song runs: ‘I’m gonna sit right down and write myself a letter, And make believe it came from you.’ I don’t know if the Chancellor ever does that with the Governor in mind (though he drops heavy hints in public that the Bank should aim for growth as well as low inflation). But last week Darling received a letter from King and a widespread interpretation was that it was more ‘dove-ish’ than one might have expected from the Governor, who has the reputation of being a ‘hawk’.

The subtlety of the Governor’s position was not helped by a banner headline in the Financial Times: ‘Learn to live with inflation, says King.’ The last thing King and his colleagues want is the idea that above-target inflation rates are here to stay. What he had tried to get across was that, to avoid the kind of nasty recession that would almost certainly occur if interest rates were raised sharply in order to hit the inflation target now, a temporary period of above-target inflation was the lesser of two evils. A huge difference from the 1970s is that the unions are far weaker because of Thatcherite legislation and the competition associated with globalisation.

Another important difference is that wage increases are not automatically linked to price increases arising from an ‘oil shock’ that lowers our real purchasing power. And let us not forget that there was no MPC in the 1970s. Indeed, it is largely because of the inflation of the 1970s that we have an MPC.

http://www.guardian.co.uk/business/2008/jun/22/bankofenglandgovernor.inflation