Clement Atlee: Full Employment Austerian?

Fixing the Economists Article of the Week

by Philip Pilkington

The following is an article that I wrote for a newspaper and was never published:

In a recent interview with The Guardian Ed Miliband summoned up the ghost of the post-war prime minister and Labour Party icon Clement Atlee to support his recent austerity push within the party.

Miliband pointed to the fact that Atlee’s government achieved many progressive goals, such as the establishment of the NHS, while at the same time running a balanced budget. While it is certainly true that the Atlee government did run a balanced budget in the immediate aftermath of World War Two this should not be understood without considering the broader context.

According to the Institute for Fiscal Studies the Atlee government achieved a gradual closure of the massive wartime deficits in 1946 and 1947 and eventually ran a budget surplus for a couple of years before military commitments in Korea led to a resurgence in the deficit in 1950. Meanwhile the unemployment rate remained at historic lows, averaging about 2.1% over the five year period from 1946 to 1950. So, how do we account for this?

First of all it should be understood what happened to the economy during this period of post-war demobilisation. During the war years huge amounts of savings were built up by private sector households and businesses. These savings came directly from the spending by the government. If a person was paid wages to build machine guns and tanks and could not spend substantial amounts of these wages because of the rationing of consumer goods they would then necessarily accrue as savings. As demobilisation kicked in and the rationing began to be gradually lifted these savings began to flow out into the economy thus generating demand and supporting employment.

Then there was the fact that the Britain managed to push its current account back into surplus by 1948. By selling more exports than it was buying imports the country as a whole could ensure that additional demand was flowing from abroad which provided further gains in employment. Part of the reason for this was due to import restrictions – as Mr. Miliband himself said in the recent interview:

“This was a government that banned the import of sardines because they were worried about the balance of payments.”

Compare this with the situation of Britain today. While it is true that over the past few years the government has run substantial government deficits these were nowhere near the levels of those seen in the Second World War. This can be seen by the fact that the national debt went from around 125% as a percentage of GDP in 1941 to around 220% in 1946. Contrast this with the increase in the national debt between 2008 and 2013 from around 45% of GDP to around 90% of GDP. In addition to this Britain today runs rather large current account deficits that act as a drain on demand and employment.

This explains quite well why Britain today faces an unemployment crisis while in the immediate post-war years it was experiencing record levels of employment. Comparing an economy with a trade surplus that has massive amounts of cash accrued through forced saving and rationing with an economy crawling out of the largest recession experienced in decades is extremely misleading. While it remains to be seen whether Miliband can make good on his promise of a “society-changing government” it seems highly unlikely that anything like the full employment society that emerged after Atlee and lasted over 25 years will come out of Labour’s misguided aspirations toward austerity.