Tuesday, 28 February 2017

1980s recession


Related: Bad Economics Teaching for the twenty-teens from data on Unistats, 2015 Better Economics Teaching: some off-the-cuff suggestions based on being a 1980s student The British Economic Crisis - a similar book to Robert Peston written in the 80s - Star Courses: the least satisfied, most bored and lowest paid UK graduates, written 2015 Boring Economics Teaching is interesting: how someone managed to teach economics from memories of an old textbook at the peak of the worst recession since the 1930s, and tried to cover-up for government causing the recession. Journal Articles by Professor Les Fishman - unbelievable beliefs - 1980s recession explanations I wrote - UK unemployment 1980s from the Begg 1984 textbook

1980s recession caused by deliberate government policy

The 1984 Begg textbook says what caused the 1980s recession. It was caused by a policy of raising the value of the pound by tinkering with interest rates. As a result, export industries had to close. Begg was a teacher at Oxford Uni when he wrote his first textbook, and recent politicians like a prime minister and a shadow chancellor in the mid 20-teens were students on a PPE course there in the 80s, but said very little about the problem in the teens. As though they didn't know. The Bank of England had to explain to a treasury select committee how the system worked; a report with a neat flow diagram. The bottom line of arrows shows the rate of interest - that government can influence - effecting import prices. In other words it effects whether a lot of UK manufacturing has to close because of a deliberate government policy.

I have a long blog post about being on a college economics course at the time, and imagined that someone might read it and simply not know what the economic problem was, so I started writing what came into my head, but for a proper read you could skip this and try The British Economic Crisis book quoted in full on another post.



I guess something about the teaching of compact economics degree courses in 1984-7 left students like myself unaware of other students' views or anything like that - views roughly suggested by opinion polls, or views of people who wrote books, but we were rather sure of our own views alongside the crushing hopelessness of most economics teaching. I was rather sure on both points anyway, and the recent prime minister and shadow chancellor seemed un-troubled by facts. Like them, I had been to posh school with loads of essay-writing about things like the origin of the first world war and thought that I could have sorted it in a few sides of A4. The difficulty was that people with different views - people like Dave at Oxford - were just as confident. Boris Johnson is reported as writing two essays to himself, pro and anti EU, in order to help him decide on the strength of his own prose.

The Times
, my dad's old employer, reported that everything was wonderful in the UK and that is the view that's now recorded on TV and among pundits. Recent prime ministers, historians and such were at college at the time - they are in their early fifties now - and seem to believe that some kind of painful but useful reform happened in the 1980s. That's self-delusion based on ignorance and bad newspapers. Unemployment was caused by a Kamakazee economic policy that continued until 2009 with support from the three main Westminster parties.

My dad sold advertising space for a few years for The Times and The Observer in the 1950s - he was the same age as Professor Fishman - and kept-up the newspaper subscriptions for ever. I got to know the newspaper habit of putting the paragraphs in order of importance: the proprietor's view at the top, and the contrary facts at the bottom of an article or said in a different way. The Times also noted graduate unemployment in a different way. It said that nearly all graduates from Trinity College Dublin had to emmigrate about that time, even though things were going so well. I remember the article, with a formal graduation picture - like a victorian sports team in dressing gowns - and a list of how few of the graduates remained in Ireland to find work. Ireland had a cheaper currency from 1979 so it missed the worst of the Thatcher recession, but shared the problem of trying to sell to a dole queue in the UK; everything in the UK was not wonderful. Even Micheal Gove, the politician, had a dad who wound-down a business in the early 80s but the Micheal Gove version of events is fiddled. Everybody seemed to have redundant or out-of-business parents.


The Times' proprietor-top-of-the-page view is the one most recorded, for example in Daniel Sandford;s TV History "The 80s" Maybe he read The Times as well. Early 80s unemployment, in this history, was caused by privatisation of a big public sector, but that doesn't make sense except to people who believe blatently untrue things in economics text books written on a pattern set in the cold war. According to the textbooks, the UK was half way to East Europe in the share of GDP controlled by the "Command Economy". It follows, to Daniel Sandford, who studied history at a similar university further south about that time, that 80s unemployment was a bit like the East German unemployment that followed unification and attempts to close or reform firms like Skoda in East Germany. If you asked someone who was in a country like East Germany after unification, they'd probably recognise the process far better than anyone in the UK in the 1980s who just experienced a fiddled exchange rate, a flood of imports that closed all kinds of industry, and fiddles to reduce services we'd paid-for in taxes.

INTRODUCTION: COLD WAR ECONOMISTS - FIGURE 1-4



Degrees of Market Orientation:: the role of the market in allocating resources differs vastly between countries. At one extreme, in the command economy, resources are allocated by central government planning. At the other extreme, in a free market economy, there is virtually no government regulation of the production, consumption and exchange of goods. In between lies the mixed economy where market forces play a large role but the government intervenes extensively.This is a strange point worth repeating. Textbooks like Samuelson contrast the market economies like the US with the state-run economies like the Soviet bloc at the time. What's stated is that the UK is half way between the two. Stated in a strangely blatent and serious way for such a misleading point. I googled "cold war economics teaching" to see whether this has changed now, and the first link that came-up suggests not; words like "social insurance" or "Social Democratic Party" would not fit the definition "Socialism is an economic system that features public (government) ownership and production of goods and services".


The scan here is from my 1984 Begg textbook, written by a teacher at Oxford Uni where they have another short course in Economics, as part of the PPE degree done by so many wannabe politicians from David Cameron to Ed Balls. They both probably stared at exactly the same diagram. A few even went to ordinary colleges like Keele where Claire Short and Priti Patel studied, and looked at the same diagram or something just as misleading.

There are no numbers next to the diagram, but if you take it as a measure of the percentage of GDP controlled by the state - say 50% in the UK at the time - then the picture has a false simplicity to it. Since the 1980s, much more work is contracted-out but public-funded. So still public sector in a way. Other bits are more regulated, like banking, but still private sector in a way. When I started at Keele, National Express Coaches was used to a monopoly on long routes given in hope that they would return the favour by running short routes as some kind of back-room deal. I'd bought tickets on a rival - the tiny Stagecoach service from London to Scotland - but they were small and new and obviously private. Later-on, the roles were reversed. Stagecoach had a skill at predatory under-pricing that far out-gunned the ability of rival bus commpanies or the monopolies and mergers commission, so they could just take-over a 'hood like gangsters. They were specially interested in bus companies that owned valuable bus stations, to be sold after take-over. In a way, the monopoly power transferred to them and they became something a bit like the public sector in the sense of being the establishment or the big organisation with unfair power.

There are other services, called public sector on the statistics, that would have to be re-invented if the public sector didn't so them like compulsory insurance for sickness and unemployment. Every special case bamboozles everyone who isn't much intersted in it, and those who study the subject are not helped by the diagram above,

If you have a look at .gov.uk and the names of the ministries, it's clear that UK government is a kind of big insurance company providing services that we might use at some points in our lives but not at others. There was no ministry of economic command. There was no slice in the spending pie-chart for "propping-up three million pointless jobs in nationalised industries to close in the early 80s". There is no Ministry of Economic Command to spend that budget. Simply not.

This is a breakdown of spending in 2010


This is a breakdown of spending in 1980


As a big insurance company, the state can be more efficient than a private one, and it can also be more inefficient. This is one of the topics that economically-minded people discuss and it's a pity that economcis courses like this didn't promote discussion and evidence either way.

A big public sector GDP can include a large number of payments made by a computer with few staff involved, paying a universal benefit like Child Benefit. The cost can be far lower than some private sector pension scheme like the one my dad tried to work for, which provided some pretty awful annuity deals to fund high sales & admin costs, and wouldn't be able to quote for providing child benefit or accident and emergency services, nor any services like school-fee schemes for the parents who can't pay.

One difference between then and now is the proportion of taxes spent on debt repayment. In these area, the Thatcher government spent more than before. Most borrowers would seek the lowest rate at which to pay interest. I think Disreali was good at finding good advisors and someone knocked-up the idea of a government bond for him - or something like that (it's a long time since history O-level). Economists after 1979 added another constraint when advising governments: if the interest rate can be tweaked-up a little higher than other similar interest rates around the world, funds will tend to flood-in and raise the value of the pound, followed by cheap imports flooding-in and reducing inflation. The treatment has side-effects: higher public debt and demoralised survivers among a bust UK manufacturing industry, because manufacturers deal with international trade much more than the people who commentate like broadcasters and ministers and newspaper owners.

An obvious difference between the 1980s and 20-teens is the amount of people on the dole. Broadly, a policy that puts people out of work will cost a lot in benefits, government schemes, and quite likely other services as well, so a government that is remembered for cutting subsidies to state industries is in fact one that increased demand for public services like benefits.

A third difference is that there are pieces of the public sector that seemed a bit odd, even at the time, but the difference is not clear-cut. Nowadays the fiddles or the problems are PFI hospital buildings, or the the Palace of Westminster that funds staff to do pagentry but not mend the roof, or the nationalised banks. In the 1980s there were another lot, but not so very different. A strange example was that only gas and electricity boards were allowed to sell new cookers. You queued-up at their show-rooms and filled-in triplicate form to order one for you, then they would book one of their own qualified staff to plug it in when  it finally arrived. Nowadays the system has evolved: you go to a private shop, they order a cooker, and when it arrives you can get any Corgi-registered gas plumber to plug it in.

The oddest thing then was a kind of trade war going-on between European countries subsidising over-capacity in their steel industries in kind of game, to find out which one would stop first, close steel works, and make the capacity in other countries more profitable. EU rules wouldn't alloow it now. Lastly, councils and ministries tended to own the organisations that provided services like schools and hospitals in a more clear-cut way than now, so more of GDP counted as public sector. Even so, the proportion of GDP that counts as public in the stats is still high; there was no wave of privatisations big enough to cause 1980s unempoyment.

The Begg course textbook comes back to a similar point on other pages, but in a more detailed and rather opposite way. It says that UK government makes a lot of transfer payments to provide a lot of public services, rather than being half way to a command economy as on the scale above. It even quotes words like "national insurance". The textbook is funny like that; it puts conflicting points of view on different pages, like an encyclopedia.

Talking of privatisation as a cause of three million people being unemployed, there were more jobs on state-owned or council-owned payrolls in 1979, or payrolls that were private but felt a bit like state. No one individual knows the status of all the organisations like the Welsh Water Authority of the Potato Marketing Board, the National Lottery, the BBC, The Cheese Bureau or Universities, that tend to feel a bit like the public sector even if they're private and vica versa. Even ministers and journalists don't know: they tend to assume that it's all part of government under the Merit Good heading.

Anyway, there were not three million less jobs on taxpayer-funded payrolls in 1987 than 1979. I don't know how to research this but it seems too straightforward to be worth researching. Some of these jobs were transferred to privately-owned empoloyers who employed fewer people to do the same thing, One example is the electicity board shops that used to have a monopoly on selling new cookers, just as British Gas and elictricity boards had a monopoly on plugging them in. It was daft and jobs had to be lost, but someone still had to sell cookers one way or another, and there is still a Corgi licencing scheme to replace the old British Gas monopoly on plugging-in a gas cooker. Much of what changed was a rather fuedal way in which government worked, and made itself unpopular, by insisting that people outside of any state payroll could not plug-in a cooker, but the change was not quick and consisted of large public organisations becoming a state regulator and a large private organisation. There was a state-owned railway, but the Beeching cuts had already happened and a lot of the infrastructure - now Network Rail - remains in state hands after a brief attempt to be Railtrack PLC. I think the National Grid remains nationalised, and, as with electricity supply, the private part co-exists.

Nationalised and slightly nationalised industry in 1979 - reminiscence


My recollections of 1970s nationalised industry don't fit the story that privatisation caused 1980s unemployment. Nowhere near. Which is no reason not to write some reminiscences about large organisations trying to do things. so skip down a paragraph if you want to read the next thing. I write this because I enjoy reminiscence.

Before the 1980s, as now, employers like banks or steel works or the odd car manufacturer had swung in or out of public ownership for reasons of policy or panic, but they behaved in fairly similar ways whoever owned the shares. The Chrysler Avenger was just as bad a car as the Morris Marina. Other firms in the private sector had tended to merge rather than invest. There was a trend towards the big and corporate and the nationalised and the council-run, which both political parties seemed to like and encourage.

Car manufacturing is often quoted as an example of a nationalised industry at the time because everybody looked at cars on the street and even tried to mend cars on the street because the factories were new to cheap mass-production as were buyers, and the result was cars that fell apart. Less of the car industry was nationalised than current high street banks and, like them, it had other problems that had caused state intervention as a kind of short-term emergency treatment for the last remaining UK-owned conglomerate. The real state-run attempts to make cars were in East Europe and included a couple of models from Trabant, some Skodas and a car known in Poland that I'm told was known as "The Sock" for its shape and smell. Emmissions laws prevented The Sock and most of the others from being offered for sale in the UK. A delux model of the Trabant was offered for a while before emissions laws caught-up with it and sales ceased. The Skoda did OK, but  by the late 70s most Eastern-bloc manufacturers tried buying-in designs from Fiat instead, and using thicker steel so they didn't rust-through like my brother's Italian fiat 600.

UK telephones were an odd bit of industry. I saw on TV that the Post Office controlled a little empire of other parts of the economy, including telephones, land, and a catering college, but not a lot of expertise in the new generation of digital phone systems. There was a digital scheme called a System X telephone exchange, but that was considered special. The organisation charged £15 a month or so for a landline, but that's the odd bit. It still does, and people still volunteer to pay that kind of amount to the mobile operators too instead of using pay as you go. And if someone reading this knows about the phone industry, I gues they'd say that a lot of low-tec analog infrastructure still exists; there were not a million people made redundant by the privatisation of British Telecom, how ever a good a video it makes on a TV history.

UK car manufacturers still tried making their own models, but had run-out of petrol for the expensive bits of research and development and run-out of nous for having those ideas on the cheap as smaller firms sometimes do. They were like a 70s pomp rick group attempting the difficult 3rd LP. I saw somewhere the there is a firm that can make engines for Foumala 1 cars by cutting moulds out of very hard wood, and do it for some high number of thousands of pounds, but to develop an engine that scores well on comparison charts and avoids bad reputation costs millions - so much that manufacturers now club together to do it. In those days the conventional wisdom was to merge-together rather than club-together. Why one figure has so many more naughts on it than the other is a mystery and good subject for economists. Obviously a good result for something like petrol consumption or starting ability involves a lot of trial and error, but are the trial and error tream as good at nous and innovation as the people at Formula 1? Nobody knows.

Jeremy Clarkson's brief interview with the designer of the Algro car went something like "do you like it?" "no" "was it a result of too many committee meetings?" "yes" "Do you want to drive it for the video?" "no". 1970s cars were OK for steering because they all shared a supplier for that, and somehow they did well on the new sheet metal chassis-less chassis, but other bits of research and development were kept in-house which meant not being done at all because of the cost. The Allegro was made in Belgium while the Marina and MG were made in the UK, but I guess they were all low in comparison charts for things like
  • engines good enough to start in cold weather & score well on comparison charts,
  • undercoat that stopped the chassis-less monocoque chassis rusting through
  • gear boxes that you would want to use as a sales rep driving every day
(sales reps were a post war pointless industry; their cars counted as a business expense so most brand new cars sold to sales reps and then dads would buy them a year or two later)

When you look at the dashboard of a 70s car - there is a Chyrsler Avenger in the National Motor Museum but few 70s cars survive in the wild - you see very scary silver paint and printed wood which scream "fake". (I guess: I have walked past that Chrysler Avenger but don't remember the dashboard.) If the car dashboards could talk they would say "I am a fake. You are a fake for choosing to buy me. Why don't we both just drive off beachy-head in a suicide pact together?" A slush-moulding technique allowed very detailed fake sewing to be moulded into plastic door panels as well, just to make fakery worse. Technology was used as the Blair governement later used technology for PR. And the cars had trouble starting in the morning. You had to fiddle with the choke on my parent's Ford Cortina while the evil engine went "he he he he he. HA HA HA HA HA. he he he he he".

There is a web site somewhere that publishes how many cars or a type survive over time. I haven't got the link but it's good material for economists to prove what was obvious in the 1980s: some cars were slightly worse than others but not much worse.

Something about the prople chosen to design new cars and car factories, their budgets or the fragmentation of some of their budgets and combinations of others, and the people who bought the cars and decided where the market went, and the structure of the pension and share-buying industry that provided only short-term investment - something was bad for research and development. I suppose you could say the same for political parties' relationships with votors, or tabloids relationships with their readers, then and now.

<Digression on colleges>
Digressing from cars to colleges for a second, there was a fault with the customers. They were new to car-buying. A lot were sales reps  looking for status in the car park. They looked for something classy, and the ranges of cars had a kind of class system with woodgrain veneer on the one you couldn't afford, all the way down to the one without a radio at the bottom of the range. They chose rather as people choose college places, looking for the classiest college, discovering that it's too selective, and working down the list from Oxford and Cambridge at the top to Burnley FE college's coaching for mail-order degrees at the bottom. When I chose a course, it was hard to find-out what was on the course and whether it was what I wished to study. Looking on the web, I see that newspapers still encourage people to choose by instutution rather than course, tweaking league table data to promote unpopular courses in popular institutions against popular courses in unpopular institutions. The differences between a course called "Economics" at one college and another one with the same name down the road are glossed-over altogether.
</Digression on colleges>

The Roots Group merged with Chrysler of Detroit that had the same problem, so neither side could help the other. There may be records of how long Chrysler Avengers lasted - probably less than ten years for a lot of them. I knew one still in circulation after ten years would emit a kind of blue smoke if driven faster than 60mph. Another UK car manufacturer was short of money for research and development and got a government bail-out. It produced the Morris Marina, likewise. 1970s and 1980s cars were a spectacle in themselves - the National Motor Museum in Coventry says that factories were new to competative, fast, cheap manufacturing and not every good at it. I'm sure that consumers were not very good at choosing cars either, getting more skilled through the 80s and 90s. TV remeniscences about Ford of Dagenham state how the jobs were organised in a madenning way for people who worked there. My own remeniscences were of patching-up my dad's Ford Cortina with plastic padding, sanded and covered with careful spray and T-cut to fill the rust-holes. Once the gear lever came-off in my dad's hand, revealing tarmac underneath. Morris Marinas were only slightly worse, but sufficiently worse that sales reps (who's employers got a tax rebate and were the only people to buy cars new) only bought Ford and Vauxhall; Chysler and Leyland's Austin and Morris brands were stop-gaps.

UK coal mines were more what you'd imagine of the public sector. British Coal had been in the public sector for as long as NHS hospitals and the thing was run rather more like a ministry, with the benefit of cheap government loans to buy machines. It also had very cheap central accounts systems, rather like government: all pensions were paid-for out of the current account. If the payroll shrank in an area, that area showed a loss in later financial years because it still paid the pensions of previous generations of miners. Like a ministry, the National Coal Board had a head office near Whitehall - in Buckingham Palace Road alongside British Steel Corporation. I expect that was so that National Coal Board could sell coal to British Steel without having to pay delivery costs. There was probably a gateway between the two in the basement.

The pruning theory - dead wood - green shoots of recovery


The pruning-view came-up on Google just now, in the first half of a book synopsis published in the late 80s. The book was called Shaking The Iron Universe, apparently, and there is a link below, but it represents a common view among commentators.
<DIGRESSION>
At the time, international trade had become a lot easier as the port of Felixtowe allowed cheap surface mail for container-sized parcels addressed to the kinds of firms that liked to pay suppliers after recieving money from customers, and could afford high rents in the new retail planning zones. I guess a bit here - I don't have evidence for every clause - but I did see on telly that supermarkets were able to pay suppliers after the retail customers paid the supermarket were a new thing - often based on the ring road with a favour given to the council for planning permission. I am really not sure what I'm saying here but the ideas are worth writing. There was anyway a hike to the value of sterling caused by North Sea Oil. Norway had similar oil but a different system. It put the new tax money in a fund. Maybe it avoided massive rises in the value of its currency. But in the UK, government tends to put all money into the current account and tends to think a high currency is good for no known reason.
</DIGRESSION>
The book reports under-investment as over-staffing or low production per worker. These are close to being the same thing, but if you call it over-staffing then you can dream of a situation in which factories and jobs can close to encouge the others. Metaphors like "dead wood", "prune", and "green shoots of recovery" come to mind, specially if you read the Sunday Telegraph and watch Gardiner's World and are a core conservative supporter who might respond to this message..
The cruel truth was that many of the companies that went out of business, and many of the managers who lost their jobs, got their just deserts. British industry was overmanned and in large part poorly managed. By the middle of 1981, the recession was already lifting, and company bosses - some newly in place, others terrified into action - realised something must be done. Throughout the Eighties, the quality of the manufacturing base improved greatly: proper financial controls were introduced, factories were overhauled, so were industrial relations. - Online Synopsis from The Independant of David Bowen's "Shaking the Iron Universe"
The theory put in this book is that bad product lines like MG closed and that good ones like Morris Marina bounced-back revitalised. Bad Steelite closed. Good staffordshire figurines continued. Bad aluminium bicycle parts at GB Sport ceased production. Good cast-iron ones at Tube Investments stayed in production. Bad small computer firms like Acorn closed. Good computers like GEC's mainframe continued.

I'm not convinced.

What put the steelworks and the car-makers out of work was the exchange-rate hike caused by Sir Geoffrey Howe's interest-rate decsions, and that was what I had gone to Keele to study, as part of an economics degree course, so it should have been an exciting time to study economics. It turns out that an ex shadow chancellor and an ex prime minister went on a short economics course about the same time, and I don't think they learned anything either; I guess they both accepted the official view put in newspapers about what happened to the economy in the 80s.

Talking of excitement, I don't know how to refute an economic argument or talk reasonably about it and the evidence, among people who have opposite ideas. For example, if someone seriously believes that the Olympics benefit the UK economy, I can't easily refute that. I have had a look at a report claiming that London Fashion Week benefits the UK economy, and think I can pick holes in that, but even if someone has an economic point to make, there is nowhere to make it.

The Begg Economics textbook has a paragraph about that, aimed at 16 year-olds, headed "common fallicies", one of which is "economists don't agree about anything". I think that's missing the point. Economists are bad at disagreeing because don't learn their trade in tutorials, so they don't learn from people who they disagree-with, and they end-up arguing against things that they don't really understand. I find the same; I find it very hard to read more than half way through a book about economics without getting too annoyed to continue.

Related blog posts

Related: Bad Economics Teaching for the twenty-teens from data on Unistats, 2015 Better Economics Teaching: some off-the-cuff suggestions based on being a 1980s student The British Economic Crisis - a similar book to Robert Peston written in the 80s - Star Courses: the least satisfied, most bored and lowest paid UK graduates, written 2015 Boring Economics Teaching is interesting: how someone managed to teach economics from memories of an old textbook at the peak of the worst recession since the 1930s, and tried to cover-up for government causing the recession. Journal Articles by Professor Les Fishman - unbelievable beliefs - 1980s recession explanations I wrote - UK unemployment 1980s from the Begg 1984 textbook

The author sells vegan shoes for a living, mainly made in the UK. Veganline.com is the web site.