Britain

on the World Today

MUCH American criticism of Britain’s economic policy has of late been glib and ill-informed. It is commonly implied that a Welfare State necessarily promotes indolence by showering benefits upon its inhabitants.

Britain’s record hardly confirms this insinuation. Production has risen to about 25 per cent above its pre-war volume. British exports have been lifted to 50 percent above their pre-war quantity. To bring her foreign trade into approximate balance, Britain has held her imports 15 per cent below their pre-war volume at the cost of doing without many essentials as well as comforts. Of the state’s estimated 15billion-dollar revenue for the year ending March 31, 1950,more than one third is being spent on social security and education. That is what is being criticized when the British Welfare State is denounced.

The largest single welfare item in the budget is the subsidy which the state is paying to lower the price of food to the consumer. This will amount to 1.84 billion dollars during the current financial year. The system enables the British citizen to buy cheaply such staple foods as bread. flour, meat, fats, milk, cheese, and sugar; of these, all except bread and flour are tightly rationed. In practical terms the state contributes $2.80 a week to the food supply of every married couple with two children. The subsidy has been one of the most important factors in sparing Britain the round-upon-round of wage and price increases which the United States experienced during the past decade.

Britain’s recent remarkable record of industrial peace, sometimes interrupted by awkward local conflicts, is largely due to the social services, including the food subsidy. During the three and one-half years which followed the 1914—1918 war, eighteen times as many working days were lost through industrial disputes as during the corresponding period after the Second World War.

Redistribution of income has ironed out some of the grosser inequalities. A few examples illustrate how the rich have been hit. Before the war a married man with three children and $20,000 a year income from investments paid $5896 in taxes; today he pays $10,220. A millionaire with $400,000 a year from investments, who was taxed $245,880 in 1939, must now pay $377,020. Steep increases of taxation against the wealthy have throughout been accompanied by easier taxes on smaller incomes. This tendency has understandably lessened the Welfare State’s popularity among the minority of bettersituated people.

Actual cost of socialized medicine

Critics of the Welfare State also single out socialized medicine as another instance of socialist extravagance. The gross expenditure for the National Health Service in Britain for the present fiscal year is estimated at 1.4 billion dollars.

Health Minister Aneurin Bevan has said, however, that before this state service came into operation the British people privately or otherwise spent about a billion dollars a year for medical care. The net new cost is therefore around 400 million dollars. In return for taxes of approximately 50 cents weekly per head, averaged over the entire population, the British nation, and particularly the lower middle class and poorer folk, are enjoying the most comprehensive state health amenities in the world.

Socialized medicine has turned out to be the most popular measure enacted by the Labor Government, and the Conservative Party has stated that if it were to win the coming general election, it would maintain the National Health Service with a few economies, such as letting people pay for their false teeth and drugs instead of getting them gratis.

What nationalization does not change

Beyond a doubt, nationalization of industry so far has been a disappointment. It was obvious that the great mass of British Conservatives would condemn nationalization. What was unexpected was the disillusionment which the state-owned enterprises evoked among the organized working class.

It came as a revelation to the labor movement that the mere transfer of an industry from private to state ownership left fundamental difficulties unsolved. Socialist anticipation of greater efliciency was rarely fulfilled. The twin evils of antiquated machinery and ineffectual organization survived the change in proprietors. The Conservatives were able to make political capital from the raising of rates which followed nationalization of the railroads and the electrical industry.

Nevertheless, the charge that some industries which showed a profit before being nationalized are now running at a loss calls for comment. It is usually forgotten that the government is paying 226 million dollars a year compensation to former private shareholders of nationalized enterprises. This burden weighs heavily upon the balance sheets of the new state concerns, and it far more than accounts for the small net losses where they occur. One can imagine the outcry, though, had the Labor Government expropriated the former owners without indemnifying them.

Finally, the bulk-purchasing practices of the British Government are sometimes described as a costly luxury. This is the method, covering about half of all British imports, by which the state buys immense quantities of goods, raw materials, and even whole crops, from foreign countries. As impartial an authority as the United Nations Economic Commission for Europe stated in its 1948 survey: “The explanation of the relatively low prices paid by the United Kingdom for its imports of food and raw materials appears to lie largely in the extensive use which it has made of long-term contracts and bulk-purchase agreements.”

This state-buying afforded Britain substantial advantages in purchasing at prices well below those prevailing in the United States such commodities as wheat, tobacco, timber, cotton, hides and skins. In short, the food subsidy, the National Health Service, and social security have worked well, despite minor defects. They have provided an internal economic stability which, coupled with a fairer distribution of the nation’s income, has averted unrest, yielded rising production, and confined Communism to insignificant proportions.

The high cost of Britain’s exports

Where, then, must the true source of the British economic crisis be sought ? Britain’s balance of payments with the non-dollar world in 1948 showed an 880-million-dollar surplus in Britain’s favor. It is the inability of the United Kingdom and of the British Commonwealth to sell enough to the United States and Canada which has been draining Britain’s gold and dollar reserves below the safety level and which has forced Britain and the Dominions, except Canada, to cut by 700 million dollars their yearly imports from the dollar countries. The reduction in purchases from North America, however, can do little more than plaster the biggest cracks.

For several months we have been hearing the refrain that high-cost British exports are pricing Britain out of the world market. The truth is that while British sales to the United States have been falling off sharply, British exports to the rest of the world have been maintained at a high level, half again as much in volume as before the war.

During the first quarter of this year British exports to the United States and Canada were ten times their pre-war amount in value. Even allowing for increased prices, this is no mean performance. British exports, to all markets, of engineering products— that is, machinery, electrical appliances, vehicles, and instruments — have been averaging about 220 million dollars a month this year, compared with monthly norms of 188 million in 1948, 92 million in 1946, and only 40 million in 1938. They represent more than a third of the total visible exports of the United Kingdom.

The leakage of Britain’s dollars

The cause of the major leakage of Britain’s dollar and gold stocks was the precipitate decline in American buying from the outlying parts of the Empire. Sales in the United States of five British key commodities (rubber, tin, cocoa, wool, and diamonds) earned about 120 million dollars in the first quarter of 1949, but only 60 million in the second quarter.

The biggest single factor inflicting loss of dollar earnings on Britain was the quick rise in United States consumption of synthetic rubber, encouraged by the obligatory use of 68 per cent synthetic in the manufacture of passenger tires. Nevertheless, British prices must come down if Britain is successfully to compete, not merely in dollar countries, but in many other markets where formidable German and Japanese rivalry will soon begin to be felt.

Meanwhile Britain has been straining herself to improve and replace her obsolete industrial plant. She still has very far to go. However, gross fixed investment of all kinds in 1948 marked a rise of more than one fourth over the yearly average of the pre-war decade. Investment in industry in 1949 remains much higher than in pre-war years.

Devalue the pound?

American voices have been raised persistently in favor of devaluing the pound sterling as one of the first remedial measures Britain ought to take.

The argument runs: “Britain is exporting largely to the non-dollar area. She is making bilateral trade agreements with those countries, selling dearly and therefore ready to buy from them at high prices. Thus the world is being split into highand low-cost regions. It follows that sterling’s devaluation is the only method by which Britain could raise her exports to the hard-currency nations and span the chasm between the worlds of pound and dollar.”

Economists in London believe that the British ultimately may have to yield to this American importunity, but they doubt that therein rests the solution. “What assurance have we,”they ask, “that falling American prices will not soon wipe out the competitive advantage Britain might gain by devaluation?” Furthermore, they consider it axiomatic that if Britain devalues, then the currencies of the entire sterling area and of several European continental countries will follow, enabling them to hold their competitive position.

“Moreover,” continue the British, “how do we know that if we cut export prices by devaluing, the United States will abstain from slapping higher tariffs on imports from the British Commonwealth? Above all, sterling’s depreciation would raise the cost of everything the United Kingdom buys abroad. The result of this could well be that we would whizz down the toboggan of inflation.”

Develop backward areas?

Two approaches to a long-term solution of the British crisis have been foreshadowed. One is the large investment of American dollars in underdeveloped countries, enabling them to make a greater contribution to the resources available to the world. This plan would funnel United States capital towards Africa and Southeast Asia as well as to Latin America.

Another proposal, of which Sir Stafford Cripps, Britain’s Chancellor of the Exchequer, is the author, envisages conclusion of a network of commodity stabilization agreements on the pattern of the International Wheat Agreement, This would mean extension of the American government’s home farm-price support program to countries producing rubber and other essential raw materials.