Why are the Conservatives so incompetent at running the economy?

If that question seems odd to you, you are one of the majority in the UK who think the Conservatives are better at managing the economy than Labour. Why do people think this? My guess is that it is very simple. The financial crisis happened while Labour was in power. This led to the largest recession since the Great Depression.

But surely everyone knows that the financial crisis was a global phenomenon that started in the US? Surely everyone knows that if the Conservatives had been in power there would have been just as little financial regulation, so the impact of the crisis on UK banks would have been much the same?

The problem is that most people do not know this. What they hear is the Conservatives repeating relentlessly that it was all Labour’s fault. In his latest party conference speech Cameron says: 

“A few weeks ago, Ed Balls said that in thirteen years of Government, Labour had made ‘some mistakes’. ‘Some mistakes’. Excuse me? You were the people who left Britain with the biggest peacetime deficit in history…who gave us the deepest recession since the war…who destroyed our pensions system, bust our banking system…who left a million young people out of work, five million on out-of-work benefits – and hundreds of billions of debt. Some mistakes? Labour were just one big mistake.”

This line is repeated by the majority of the UK press. It is hardly ever challenged by reporters in the BBC or other TV media. It has become so pervasive, that even some of my non-macro colleagues repeat elements of it back to me. [1]

So what if we take the financial crisis out of the equation, on the basis that it would have happened whoever had been in power. Here is average UK output per head (GDP per capita) since the 1970s.

I have drawn a trend line at 0.55% per quarter, so we can separate any evaluation into trends and deviations from trends. In terms of trends, there is no obvious difference between administrations. The Conservatives were in power from 1979 to 1997, but the trend rate of growth was not obviously better or worse during this period compared to the 1997 to 2007 period that Labour were in power. Fortunately that broad diagnosis is confirmed by those who look at these things more scientifically. [2]

In terms of deviations from trend, we have the major recessions of the early 1980s and 1990s, and the period since the Great Depression. Now the early 1980s was a global recession following a second oil price shock, where all countries were trying to get inflation down, so in fairness I ought to take that period out of the equation along with the Great Recession. However it should be noted that this period of Conservative administrations started with a radical new macroeconomic policy of targeting the money supply, which in its own terms was a disaster as the targets were never met, and the policy was abandoned after a few years. Hardly a great example of being able to manage the economy.

The 1990 recession was more home grown. It was partly a result of excessive inflation caused by bad fiscal and monetary policy under Conservative chancellor Nigel Lawson, but it was made worse by fixing Sterling to the DM at an overvalued exchange rate. So a pretty clear case of macroeconomic mismanagement under a Conservative administration. Then we have 2010 onwards. Rather than recovering from the recession, income per capita has diverged further away from its pre-crisis trend. Now you might say in mitigation that this disappointing post-recession performance has been global, but the UK has been more disappointing than either Japan or the USA. Although the UK, the US, the Eurozone and Japan suffered a major recession, by 2013 both the US and Japan had exceeded their 2007 level of GDP per capita. Furthermore the recovery in the Euro12 was also more rapid than in the UK, but then fell back following the Eurozone crisis. As a result GDP per capita in both the Eurozone and the UK remains well below 2007 levels. The best that can be said for the UK recovery is that it has been as poor as the Eurozone, without the excuse of a government funding crisis. 

Of course there is much more to say about all this, but the point I want to make here is fairly simple. Once we recognise that the financial crisis was a global event, then the three remaining major departures from trend growth happened under Conservative led administrations. In all three cases they can be associated with poor policy decisions taken by those administrations: money supply targets under Thatcher, ERM entry under Major, and austerity under Osborne.

So the idea that the Conservatives are more competent at macroeconomic management is a myth, and if anything the opposite appears to be true. Now I’m not going to discuss here why recent major mistakes seem to happen under Conservative administrations, although that would be an interesting question. Instead I want to focus on why the myth of Labour incompetence persists in mediamacro, and therefore in the minds of most people? There are two obvious explanations. The first is that the media is totally incompetent, and thinks that because the Great Recession happened under Labour, it must all be Labour’s fault. The second is that the media takes its cue from either the right wing press, or from a financial sector that also has clear interests to pursue.

A third explanation I have heard on the few occasions I enter Labour circles is that they are partly to blame, perhaps because they allowed the Conservative narrative about fiscal profligacy to go unchallenged for too long, or because they fail to campaign strongly enough on issues that matter to voters. If you think that, you should read this article by the Australian economist John Quiggin. He says that complaints that the Australian opposition are pursuing a ‘small target’ strategy, focusing on minor differences with the government, rather than confronting the government on the major issues are misplaced. “In reality, some version of the small target strategy is effectively forced on the main opposition party by the way in which our political system and media now operate.”

As evidence for that in the UK, just think of Ed Miliband’s last speech, and the media reaction. As I wrote about here, after the speech the left of centre journalist Jon Snow asked Miliband what the greatest issue facing the next British government is. Miliband responded that it is getting the country to work for most working people rather than be stuck with a more unequal country. There it is - inequality - put at centre stage. But all Snow could do was respond that this was the second time Miliband had forgotten to mention the deficit, and proceeded to rant on about this.

When I wrote that post, it was before Cameron’s speech. I suggested that Cameron would fail to mention the productivity slowdown that is a key factor behind the UK’s poor recovery from the recession, but no journalist would bother to even mention this. He didn’t, and I do not remember anyone even noting this failure, even though Labour talk all the time about the decline in living standards that it has produced. In mediamacro, the deficit is all important, but the decline in average living standards not so much. And people wonder why many potential voters are disaffected from mainstream politics.

In a recent post, the US economist Robert Reich berates the Democrats for failing to campaign on falling median wages and the growing inequality that lies behind it. The reason he gives is simple: money buys votes in the US system, which Jeffrey Sachs calls a plutocracy. In the UK Labour has tried to raise the link between inequality and falling real wages, as my example above shows, but the UK media does not appear to want that discussion to take place. I would really like someone who knows the UK media from the inside to explain why.

 

[1] Isn’t the bit about the deficit just a little bit true? Yes exactly that. Labour’s fiscal policy could have been better, particularly in hindsight, as I detail here. But did it amount to fiscal profligacy - absolutely not. Did it have anything to do with causing the recession - absolutely not. Could a tighter fiscal policy have allowed Labour to do a little more in terms of fiscal stimulus to fight the recession - maybe, but remember that Cameron and Osborne opposed the countercyclical fiscal policy Labour did enact. In what world does that opposition show economic competence?

[2] See, for example, this from John Van Reenen. A less scientific response would be to claim that trend growth was falling under Labour, and that 2007 represented a large macroeconomic boom. You will find many in mediamacro who assert this as a fact, but the evidence just does not support this claim.

Postscript 13/11/14. To reinforce my point about inequality and Labour, here is an extract from Miliband's speech at the Senate House today: "Now I have heard some people say they don’t know what we stand for. So let me take the opportunity today to spell it out in the simplest of terms. It is what I stood for when I won the leadership of this party. And it is what I stand for today. This country is too unequal. And we need to change it." It will be interesting to see how this rather important statement is reported.