Is unemployment – now rising sharply – set to be the major economic, social and political issue over the coming months and years?
The boom years of the "roaring 20s" ended with the bust that was the Wall Street crash of 1929, followed by the great depression. Mass unemployment led to the rise of Hitler in Germany. In America, the New Deal got people back into jobs through public work programmes. In Britain, Keynes published his General Theory, which warned that market economies had no automatic tendency to create full employment, so government action was needed. But it was only the second world war that solved the global unemployment problem.
"No return to the 1930s" was thus a strong driver to ensure that post-war reconstruction was followed by Keynesian demand management to sustain full employment. For a generation, it was thought that the problem of unemployment had been solved.
By the 1970s, though, the long post-war boom was creating inflationary pressures. Anti-inflationary policies led to the return of unemployment, and this was given a dramatic upward twist by the monetarist policies of the Thatcher governments from 1979. Unemployment topped the 3m mark, before falling during the Lawson boom of the late 1980s, rising again in the early 1990s with Britain's ill-fated attempt to join the European exchange rate mechanism. The subsequent cuts in interest rates and devaluation launched what has proved to be a 16-year era of uninterrupted growth – trumpeted as the "end to boom and bust".
As we can now see, the truth is rather different. The greatest bust since 1929 has been averted only by the part-nationalisation of most of the major banks, plus billions of pounds of taxpayers' money also being made available to create credit, and with the government guaranteeing bank accounts and inter-bank loans.
So, while a global crash may have been averted, will the economy still slide into recession with 2m unemployed by Christmas?
Unemployment will certainly rise. The only question is whether we will see the third-highest unemployment figures since the second world war – after the early 1980s and early 1990s – or whether the coming recession will prove worse than that of the early 1990s?
The bad news is that the boom years were based heavily on the financial sector and the City of London. This disguised a continuing weakening of the economy's manufacturing base. It is true that the divide between manufacturing and services has, in many cases, become blurred. But this doesn't necessarily make manufacturing less important – in many cases, quite the contrary. Britain thus missed out on the huge industrial opportunities around green technologies, where Germany, the US and others have taken advantage while we were celebrating the success of our light regulation encouraging financial risk-taking.
The good news is that action has at last been taken. But the nationalised and part-nationalised banks need to be encouraged to lend to sustainable business. Unemployment won't be solved by labour market flexibility that makes firing people easier, but by functional flexibility, which encourages retraining and reskilling. The government's policy whereby they will only fund a second degree if it is in the same subject as your first degree – and therefore at a higher level – is the exact opposite of what is needed, and should be scrapped. If someone is prepared to pursue a degree in a new subject, and hence at the same level as their existing degree, they should be supported and applauded.
To prevent large-scale unemployment will require long-term investment, innovations in real products rather than financial trickery, and a functionally flexible workforce.