Outlook: Things cannot be that bad if the Dow is off only 27 per cent

Union militancy

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Once a misconception gains common currency, it's hard to stamp it out, however much of a falsehood it might be. A recent instance is the idea that UK shares have fallen by more than their US counterparts. For the Tory press, the supposed difference is explained by the damage being inflicted on the UK economy by Labour's policies of tax and spend.

For others it is simply a conundrum. Sir Howard Davies, chairman of the Financial Services Authority, puts it down to a case of "borrowed grief" from the series of accounting scandals hitting corporate America. "We appear to be getting buffeted by winds from across the Atlantic, rather than any domestically generated bad weather," Sir Howard told the FSA's annual meeting in London's Docklands yesterday.

Sir Howard thinks the UK market less prone to an Enron-style collapse than the US, because of better practice and regulation, so he finds it a bit of a puzzle that "the fall in the FTSE 100 has been greater than the Dow Jones index, which has fallen by only 27 per cent from its peak, compared to our 40 per cent".

Actually it is not a puzzle at all. It's just a misleading comparison. The Dow is a peculiarly old fashioned and unrepresentative index consisting of just 30 stocks. There's no weighting according to market value, and a change of constituents is rare. The stalwarts of the Dow are chosen for being big, stable representatives of US economic activity, and the index is therefore not nearly as volatile as other indices. For an index which like the FTSE 100 reflects what's really going on in US stock markets you have to turn to the S&P 500 and – surprise, surprise – from peak to trough it has fallen by almost exactly the same amount: 40 per cent. Factor in other US stock markets, most notably the Nasdaq, and the fall in US shares may be a good deal worse than in the UK.

What is true is that US shares are still more highly valued, as measured by price/earnings ratios, than UK ones. Of course, that's been the case for years, but if the spate of accounting scandals in the US mean that British profits are now more believable than American ones, the valuation differential should by now have disappeared, if not reversed.

In the US at least, valuations are still far too high, even accepting that reported profits are a semblance of the truth. The present correction may well have further to go. The long-term prognosis for US equities is pretty gloomy too. In a low inflation, ethically correct, low return world, where competition between businesses remains intense, decent earnings growth is going to be exceptionally hard to achieve.

Share price values are ultimately determined by how quickly investors think a company can repay its equity capital, and if investors think it will take a lot longer than previously thought, then shares are destined to remain depressed for some years to come.

None the less, there is a certain madness and hysteria in the way US pundits, business leaders and politicians have reacted to Enron and WorldCom. A crisis in trust has become a crisis in confidence and possibly one of capitalism itself. What has occurred doesn't warrant that sort of reaction. So far we have had two big fraudulent collapses, and a number of more minor cases of the same thing. Apparently professional, respectable and trustworthy people have been caught in collaboration with some very obviously crooked ones in a number of instances. Obviously standards have slipped, but it is hard to argue that the limited number of cases of it that have so far come to light is indicative of systemic failure. What's happened is the sort of thing that occurs after all long bull markets.

Enron may yet turn into something much more serious. If it transpires that the culture of greed and liberally distributed share options that ruled at the height of the last boom prompted American executives across the water front to rig the figures, then the present drama will most definitely turn into a full-blown crisis. American markets, corporations and the country's economy as a whole would take years to recover from such a calamity. But so far there is no evidence of the exceptions being the rule. The fact that US stock markets haven't fallen much further than they already have rather supports the view that the great bulk of corporate America is clean. On the whole, investors continue to believe the reported profit figures. Let's hope they are right.

Business downturns always bring out some of the best sound bites, so here's one from Edward Zander, chief operating officer of Sun Microsystems: "In the boom it's never as good as they tell you, and in the bust it's never as bad as it seems".

Union militancy

Trade unionists pay their dues and in return expect their leaders to campaign for better pay and conditions, not British entry into the euro. So it was that Sir Ken Jackson, who seemed to spend most of his time acting as a cheerleader for Tony Blair rather than his members, lost his job yesterday as general secretary of the Amicus-AEEU engineering union.

It is tempting to see his replacement by a low-ranking and obscure left-wing branch official as a further sign of resurgent union militancy. The engineers have now joined the postmen, rail workers and civil servants in being led by left-wing firebrands with little time for Mr Blair's modernising instincts and love of public-private partnerships.

It is not as simple as that. New Labour is certainly getting a rougher ride of late from what remains its biggest single source of funding. However, Sir Ken has been ousted not because of his proximity to Mr Blair but because he lost touch with his members. The vote often, vote early tactics of some of his supporters did not help his cause either. Nevertheless, the bandwagon marked union militancy is now well and truly rolling. The CBI eagerly greased its wheels yesterday by urging Tony Blair not to wilt under the pressure of public sector industrial action and demands for the tide of Tory labour law to be turned back.

With characteristic exaggeration, this has already been christened Mr Blair's Summer of Discontent by some of our competitors, a description which seems wholly to ignore the fact that Wednesday's local government walkout was only patchily supported whereas in the winter of 1978-79 a quarter of the entire workforce was either on strike or prevented from going to work. That was real union militancy. By comparison, the current wave of unrest is a pale imitation.

Even so, Mr Blair needs to be careful. The last time Labour defied the unions it was thrown out of power for 18 years. The brothers have seen the door half opened with Mr Blair's union recognition law and workplace reforms, and now they want to smash it away altogether by turning the Prime Minister's review of industrial relations legislation into a wholesale repeal of Tory employment laws.

This is not going to happen. New Labour may be playing more to its natural constituency in its second term – witness Gordon Brown's big increase in public spending. But Mr Blair and his Chancellor are equally committed to raising the UK's productivity levels, and that means ensuring that it remains the most deregulated and flexible labour market in Europe.

jeremy.warner@independent.co.uk