Last week’s record rise in unemployment had been so well forecast that it passed with relatively little comment. Yet, by any standards, this – rather than the death-throws of the banks – is the real story of the financial crisis. It is only through mass unemployment that the abstract issues of derivatives, sub-prime, quantitative easing and so on become a hard reality on the ground: three and a half million unemployed by 2010.
When you consider the cost in ruined lives, you have to wonder at our scale of priorities. For, within 24 hours the news cycle had turned and we were back to talking about banking regulation and chasing another mouthy Labour minister, the Solicitor General Vera Baird, for talking about green shoots of recovery. A rescue was being demanded for a minor Scottish building society which had gone bust through irresponsible property lending. Where is the rescue for the unemployed, for the real economy?
Our entire political system has become so locked on to the fate of the banks, we seem to have forgotten that the economy is made of people not statistics, and that the object of economic policy should be to secure the most stable living standards for the largest number of them. We have handed some £1.3 trillion to the banking system so far – a sum equivalent to the entire GDP of this nation – in a futile rescue of a discredited financial system. Recovery is conceived almost entirely in terms of financial indicators. The government wants to see Libor fall, house prices stabilise, inflation rise, banks return to profitability. This is to get things upside down. These statistics are of secondary importance to the welfare of the community.
Just consider: the number of people claiming unemployment benefit rose last month by the highest figure ever recorded – 138,000. These are people who have gone from living secure lives on relatively comfortable incomes, to near destitution. Jobseekers allowance in Britain is a miserable £60.50 a week – with no golden parachutes available. Few of us can imagine living on so little. Indeed, no one is seriously expected to live on jobseekers allowance, which is in reality a device to force people into taking whatever job is available, irrespective of their skills. It is a punitive benefit which assumes that those not working are essentially workshy.
So the first thing that will happen is that the newly unemployed – as well as the 2 million already on the dole – will go into even greater debt, as more people take out unsecured loans on credit cards to make ends meet. It is boom time for the other shadow banking system: the loan sharks, pawnbrokers and other purveyors of doorstep debt.. This is the next financial scandal. In around 2 years the Financial Services Authority will be issuing a damning report on its own failure to control unsecured lending.
Unemployment means immense human hardship and creates social problems which endure for decades. One of the most worrying figures from last week – again, largely ignored – is that 40% of the unemployed are under 25 years of age. This is creating a generational dynamic which will cause social harm long after the recession ends. Crime will rise, more families will break up; there will be more teenage pregnancies, more domestic violence, more drug addiction, more mental illness, more heart disease,.. I could of course quantify these in hard financial statistics like the cost in NHS provision – but I refuse to go down that route of fiscal utilitarianism. We should not be focusing merely on the financial cost of unemployment to the exchequer, but on the profound damage to the fabric of society.
Historians will look back with astonishment at the callousness and stupidity of policy-makers in this crisis – not just because they allowed Northern Rock to lend £800m of its “suicide mortgages” even after nationalisation, but because they consistently put the welfare of the banks above the welfare of society. It doesn’t even make economic sense. As we now know, much of the public money that has been handed to the City in loans, guarantees and capital injections, has gone overseas and into paying down banking debt. There has been no appreciable recovery in bank lending to business, as the squeals and cries from the private sector confirm.
A rational economic policy would have concentrated first on creating economic activity by the most direct routes: through spending on public works like houses and schools, and through increasing the financial resources of the least well off, who can be relied upon to spend the money in the shops rather than hoard it in vaults. Only by promoting employment, the creation of real value in goods and services, can resources be generated to revive the financial system – though hopefully on very different terms from the past. It is so obvious that I despair at having to keep saying it. The government appears to believe that it is only by creating debt that an economy flourishes. The entire thrust of policy is to encourage more lending through near zero interest rates and through printing money. This is utter madness.
What we are seeing is a collapse of work as wealth is drained from the productive economy. The Bank of England last week noted that labour costs per employee are falling fast as companies impose a wage freeze and introduce schemes to cut pay. The government is congratulating itself on the “flexibility” of the UK labour market, but it shouldn’t. What plunging labour cost indicate is that the real economy is actually sliding into depression. When incomes decline, shops close and manufacturers go bust – it is one of the most savage feedback loops in economics, and it is only our fixation on abstract financial indicators that prevents us from seeing it.
Printing money in this context will lead inexorably to stagflation – industrial shrinkage overlaid with rising prices and crippling debt. As commodity prices recover, and the pound sinks, British imports will increase in cost and our debt-laden and idle economy will be impoverished more rapidly than anyone can imagine. Savings will be destroyed by rampant inflation while more businesses close. With borrowing heading for £100bn this year, and perhaps three times that in future years, the British state is itself facing insolvency. There will be massive job-shedding from the public sector.
But the government appears interested solely in trying to halt the slide in house prices by boosting borrowing. This is politically suicidal. No Labour government can win an election against a backdrop of over 3 million unemployed. We learned that exactly thirty years ago when the Tories launched their 1979 election campaign on the most successful slogan in political advertising history: “Labour isn’t Working”.