My last post was
designed to show clearly that the UK has not been a strong economy
since the Conservatives started running it. Now I would be the first
to say that this proves nothing about how competent the Conservatives
are. It may be just bad luck. My point was about the media debate.
This should be about whether it is the government’s fault that we
have a weak economy, or alternatively whether they have done the best
they could in the circumstances. Instead of that discussion, we have
mediamacro’s presumption that we have a strong economy when clearly
we do not.
The political debate
should really be about economic competence. Mediamacro assumes that
the Conservatives are more competent at running the economy because
that is what the polls say, and the polls say that in part because
mediamacro assumes it. It is a self-reinforcing loop, where the last
thing the media thinks of doing is asking academic economists. How
would I, as an academic macroeconomist, assess competence when it
comes to running the macroeconomy?
The obvious thing to
do is to look at key macroeconomic decisions made by governments, and
how they turned out. I would be particularly hard on governments when they chose to go against the prevailing academic consensus,
and this choice did not turn out well. I have written about this
before on a few occasions: see here
and here
for example. Let me summarise why I think, once again, it is the
Conservatives rather than Labour who have a lot of explaining to do.
We can start with
monetarism, which in its most basic form is setting policy according
to movements in monetary aggregates (the ‘money supply’). It was
a short lived failure.
A particular failure was the 1981 budget, raising taxes in the middle
of a recession, which was famously opposed by 364 economists. The
economists were right: the recovery (properly defined)
was delayed by 18 months. This is not the story told by mediamacro,
but it is an account that fits the facts.
The next economic
disaster was the Lawson boom of the late 1980s, which combined a
monetary and fiscal stimulus that increased inflation. I was once
told by someone close to decisions at the time that Lawson wanted to
reduce the top tax rate to 40% in 1988, and it was thought to be
politically expedient to combine this was a standard rate cut even though we were in the middle of a boom.
Monetary policy involved shadowing the DM, so could not counteract
the fiscal stimulus and other inflationary pressures.
By 1990, the Lawson
boom was becoming a recession, and the Conservative government
decided to formally fix the exchange rate. Their chosen rate was much
too high, as the work
I carried out with colleagues at NIESR clearly showed. Black
Wednesday, when the UK was forced to abandon the fixed exchange rate
regime, rightly lost the Conservatives their reputation for economic
competence for some time to come.
Between 1992 and
1997 the management of the economy was better, but without any major
decisions or events. Widening the definition of policy you can
justifiably credit Thatcher with weakening trade union power, but her
failure to emulate Norway and establish a sovereign wealth fund from
North Sea Oil revenues was a clear mistake.
Under Labour there
were three major macroeconomic decisions, and all three were
successes. First most academics agree with central bank independence,
and I think most would agree that the design of the Monetary Policy
Committee in 1997 was particularly good. Second, the decision not to
join the Euro in 2003 was clearly correct, which was taken after
extensive economic analysis. Third, the decision to embark on fiscal
stimulus after the Great Recession was correct, in much the same way
as Obama’s slightly later stimulus was correct.
Should we count the
financial crisis, and the failure to prevent it happening, as a clear
negative against economic competence? I would argue not, as (a) the
opposition argued for less financial regulation, and (b) the
government did follow the consensus view at the time. If any
institution is to blame, it is the Bank of England for ignoring the
rise in bank leverage. As to a profligate fiscal policy, this is
simply a myth.
The incoming
coalition government set up the OBR, which deserves credit just as
setting up the MPC under Labour does. However their decision to
embark on austerity in 2010 was a huge mistake, which once again
probably went against majority academic opinion, particularly as it
involved cutting public investment sharply. And then we have Brexit.
Although arguably mandated by a referendum, the decision to leave the
Single Market and customs union are down to the Conservative
government alone.
We will be able to
compare the economic policies of the two parties this time when they
publish their manifestos. This post is about track records. It shows
clearly that Labour tend to get things right, while the Conservatives
have created a number of major policy-induced disasters. As with the
‘strong economy’, mediamacro have got it completely wrong about
macroeconomic competence. But I’m afraid, as was the case in 2015
and 2016, it will be mediamacro rather than reality that carries the
day. That, alas, is how democracy currently works in the UK.
