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.