Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday, 7 June 2013

The last Labour Government: has the influence of economists ever been greater?

The latest issue [1] of the Oxford Review of Economic Policy is devoted to an analysis of the record of the last Labour government (1997-2010). My own contribution is on fiscal policy, but I do not want to talk about that here, as I already have a post covering the main points. Instead I want to reflect just a little on Labour’s entire economic record. One way of characterising this period, which those outside the UK may not be fully aware of, is that it was a government in which the influence of mainstream economics has never been greater.


One of the government’s first acts was to give independence to the Bank of England, under a regime of inflation targeting. Not only was this straight out of the mainstream macro playbook, but its design included elements of transparency and accountability that led economists at the time to label it best practice. (1997 also saw the appointment as deputy governor of the Bank of England of Mervyn King, who in many ways is the central banker mainstream economics might wish for.) In my paper I argue that the fiscal rules that came shortly afterwards were much closer to mainstream academic views than either what had gone before, or what subsequently happened in Europe. Even when those rules broke down after the recession, the instinct to use fiscal policy in a countercyclical way was entirely mainstream. Not to be forgotten is the decision in 2003 not to become part of the Eurozone, which could well have gone the other way if political factors had played a larger role.  


In terms of microeconomic policy, the ethos was generally ‘light touch’ regulation, but with intervention where there was perceived to be a clear market imperfection. There was a particular interest in improving productivity (where the UK had traditionally performed badly in terms of international comparisons), but the interventions were of the kind economists would generally recommend (improving human capital, enhancing competition policies, subsidising R&D), rather than any attempt to pick winners. There was a clear aim to reduce poverty, but again this was done through the tax and benefit system, rather than trying to directly influence market outcomes. (An exception was the introduction of the minimum wage, but that had a lot of support among mainstream economists.) In the public sector there was a continuing trend towards introducing incentives and market processes. There was a deliberate lack of concern about inequality at the top. Now of course not all mainstream economists would endorse all these developments, but I don’t think a newly graduating student of economics would be puzzled by much of this. And of course the fact that these policies reflected mainstream economics did not make them right, as we all found out during the financial crisis.


Why was mainstream economics so powerful? I speculate a bit below, but for this particular administration it may have been in part a political accident - the deal struck between Gordon Brown and Tony Blair, where Blair got to be Prime Minister, but Brown’s Treasury became more powerful than it has perhaps ever been. Of course that does not tell us why Brown himself was so influenced by mainstream economics (his PhD was in history).


So how successful was this ‘government by economists’? As the editors (David Cobham, Christopher Adam, and Ken Mayhew) in their introduction note, if the government had ended in 2007 the verdict would have included many pluses. Over the previous decade the macroeconomy was remarkably stable. Unemployment continued to fall. Although fiscal policy had it failings, the rules had been kept, the budget deficit was not far from a sustainable level and debt to GDP was lower than a decade earlier. The health service clearly got better. As Van Reenan documents, UK productivity continued to improve relative to other countries, and he suggests this cannot be dismissed as just a hangover from the reforms of the previous Conservative government. (See also this CEP paper coauthored with Corry and Valero.) The achilles heel was of course the light touch regulation of the financial markets (discussed in a nice paper by Arup Daripa, Sandeep Kapur, and Stephen Wright). However this too can be seen as a failure of mainstream economics as much as a political error.


It is interesting to speculate whether any government could have avoided having its reputation defined by what happened in 2008. Perhaps it could have: given the recession, the election result in 2010 was surprisingly close. However, once a new government took over, we had the familiar story of the victor rewriting history. To quote from the introduction (but my emphasis), the new Coalition government claimed  


“… that the principal legacy of the 1997–2010 Labour government was an economic policy framework that was both in (large) measure responsible for the financial crisis of 2008 and also unable to address its consequences. As we hope the papers in this issue of the Oxford Review illustrate, this charge cannot be made to stick, and the period of the Labour government was much more interesting and more important for the long-run prospects of the UK economy than this simple ‘external’ narrative suggests.”


I completely agree, but then as an economist perhaps I’m biased.


The last few years have been a painful reminder that there is nothing inevitable about this rising influence of mainstream economics in the UK (or elsewhere? - I would be fascinated by the thoughts of others in other countries.) While it is tempting to link this influence to the colour of the party in power, I would hardly call policies adopted by the Labour governments of the 1970s as reflecting the mainstream economics of the time (e.g. attempts to control inflation through prices and incomes policies). Perhaps a better interpretation is that mainstream economics (which should be neither slavishly pro or anti market) has its greatest influence on less ideological governments of the center, and its just that since the 1980s the traditional political left has been out of the equation. Whatever the linkage, I wonder how long it will be before we again see a UK government so influenced by mainstream economics.

[1] If anyone is reading this late, its the Spring 2013 issue

3 comments:

  1. When I joined the Dept of Social Security as an economist in 1998, economists, statisticians, social researchers and operational researchers in the department numbered around 250. By the time I left in 2007, as far as I recall, the number stood at at least 700, so the commitment to evidence-based policy was backed up by resources for analytical staff.

    ReplyDelete
  2. Nice overview, thanks.

    >> 'There was a clear aim to reduce poverty, but again this was done through the tax and benefit system, rather than trying to directly influence market outcomes. (An exception was the introduction of the minimum wage, but that had a lot of support among mainstream economists.)'

    In the interests of completeness, possibly it's worth highlighting that (part of) the point of the minimum wage was to prevent in-work benefits (introduced as an to incentive to move into work) being captured by employers by reducing their wage rates. ie it was in support of an 'intervention of the kind economists would generally recommend'.

    That was my understanding anyway, for what that's worth.

    Steve

    ReplyDelete
  3. Blair was simply the best post-WW2 political 'salesman' the UK has had. Thatcher was more a child of her time, hard to see it would work the same way today or she would come up with another act.
    Plus the competition was beyond poor.
    After 10-11 year however the 'magic' was gone and Brown was simply the worst man at the worst time so that didnot last long.

    Starting from there he could easily go for coherent/consistent policies. He simply had the backing in society and in Parliament. Which made him look more PMish than Cameron now, people basically like consistency. Too much pressure from all sides. And something Messrs Ed will likely even be less able to do. Even not under the pressure that Cameron has, their policies look hardly coherent and/or consistent.

    No judge at all on the Blair policies. Imho he completely, like everybody else, missed the plot to get his country more competitive (invest in education, research and that sort of things), but as said like everybody else. Messed up completely the EU-file. Both not Macro issues, but probably more important in the longer run.
    The main thing being that they kept working roughly until he left or better could really be blamed for them. You need to have a bit of luck on that. And he got that.

    I agree that there should have been more banking oversight. However 'less' of that was sign of the time and not only the UK. And probably more important the technical expertise was largely lacking and there are some doubts about the conflict lobby and democratic control on regulation at that time. Simply everybody seems to have missed it.
    But as it shows now these points are still nearly 6 year in the crisis not solved. Lack of expertise and doubtful lobby again as probably the biggest obstacles and everywhere over the world.
    It was Blair's watch but blaming him for this looks a bit over the top.

    ReplyDelete

Unfortunately because of spam with embedded links (which then flag up warnings about the whole site on some browsers), I have to personally moderate all comments. As a result, your comment may not appear for some time.