Something odd but familiar was going on when I wrote this post on Labour’s economic record. The Labour leader and shadow chancellor both made speeches that had apparently been months in the making, and which were (I think intentionally) spun as trying to convince voters that they could trust a future Labour government with fiscal management.
Why odd? Because it presumes that there is some real problem to solve. It presumes that the last Labour government managed the nation’s fiscal affairs very badly, and so today’s politicians have to show they would be different. Yet the paper I wrote tells a very different story. The previous Labour government set up fiscal rules that were both responsible and better than rules subsequently adopted elsewhere. Until the financial crisis, they kept to those rules. Here is the basic data: the top line is the debt to GDP ratio, the bottom line a scaled up current balance to GDP ratio.
|Labour Government's Fiscal Record: source OBR
Of course it is possible to find fault, and I do. In hindsight it would have been better if the debt to GDP ratio had been kept nearer 30% of GDP, or even reduced further. But debt to GDP was lower before the recession than when Labour took office, and the current balance was almost zero. Hardly a profligate government. Indeed one of the faults I find, over optimism in Treasury forecasts, has been fixed, to the Conservative party’s credit, with the creation of the OBR.
With the financial crisis everything changed, because this produced the Great Recession. Deficits go up in recessions. There was a small contribution from the government’s attempt to reduce the impact of the recession, an attempt which analysis suggests was successful, so they should take credit for that. It is pretty obvious that you cannot use the fact that the deficit rose in the recession to argue that Labour cannot be trusted with the public finances. Again, the data speaks - look at when the deficit rose in the past.
Of course you could say that the Great Recession was the government’s fault. It should have foreseen the financial crisis coming. It should have known that levels of GDP in 2007 were going to be interpreted, five years later, as a massive economic boom rather than as they appeared at the time as something close to trend. It should have known this, despite the advice it was getting to the contrary from the Bank of England, the IMF, OECD, most economists …. and Her Majesty’s opposition! You can take that idealist view - but not if you were agreeing with all this advice at the time.
So the idea that the last Labour government seriously mismanaged the nation’s finances is a myth. What is more, unlike older myths like the earth is flat, as these charts show it is not something that is generated by perception and which requires expertise to unravel. Unless you are completely naive about the impact of recessions on deficits, a quick look at the data tells the true story. So it is a manufactured myth that distorts what the numbers appear to show. The problem with myths is that after a time, even otherwise good journalists at good places like the Financial Times start believing them.
Now we all know who manufactured the myth. Yet I think most people believe that if a political party started telling a story that was clearly at variance with the facts, it would be found out. In short, people expect journalists and economic commentators to confront politicians who attempt to create and perpetuate myths. In this case they did not. Its also pretty obvious why they did not. The incentive for organisations like the BBC is to stay out of trouble. And who has been making most noise about bias in economic reporting - the government. As any economist will tell you, its all about incentives.
So it really is the duty of academics to speak to truth, as loudly as they can, when it is being ignored by the media. On this topic, the media in general and the BBC in particular have been hopelessly biased in allowing the government to get away with this myth. They have some serious explaining to do.