Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday, 12 October 2015

Howes that

Geoffrey Howe will probably be first remembered as the politician who brought down Margaret Thatcher by delivering a devastating resignation speech to MPs. Its most famous line (see link above) is his description of negotiations with Europe

It is rather like sending your opening batsmen to the crease, only to find... that their bats have been broken before the game by the team captain"

This cricket metaphor is one poor excuse for the title of the post: a second, equally poor excuse follows.

I personally will remember him as Chancellor when Margaret Thatcher came to power. In 1981 I was a young Treasury economist who happened to be in charge of calculating the economic effects of the budget using the Treasury’s macro model. I was too junior to go to most budget meetings involving ministers, but I did go to one. I was there as the technical backup in case the Chancellor asked a difficult question about the model simulations. I was naturally psyched up, but it turned out for no reason. There were no questions about the simulations, or even about any macroeconomic effects. The most technical any interrogation by the Chancellor got was to ask ‘how’s that figure arrived at?’, to which the reply was ‘by summing the numbers above, Chancellor’. As one senior civil servant told me afterwards, arithmetic was not Howe’s strong point.

Why was there so little interest in the macroeconomic effects of that notorious 1981 budget (of letter from 364 economist fame)? It is difficult to understate the culture shock that occurred in the Treasury after Mrs Thatcher’s election. Treasury ministers, including Nigel Lawson (who succeeded Howe as Chancellor and is now an active climate change sceptic), believed that Treasury advice - including anything from its macro model - was outdated Keynesian nonsense and that monetarism was the way forward. When internal Treasury model forecasts predicted their policies would create a recession within a year, they were dismissed with the assertion that the unemployment impact of tight monetary targets would be small and very temporary. (Unemployment doubled and only returned to 1979 levels in a sustained manner by the end of the century. We got classic Dornbusch overshooting, as this 1981 Brookings paper by Willem Buiter and Marcus Miller describes, probably followed by unemployment hysteresis.)

It may be that high unemployment was necessary to bring inflation down. It may even be that a contractionary budget in 1981 was sensible to achieve a better monetary/fiscal mix. What is almost certainly not true is that this was calculated by Howe, Lawson and Thatcher. Instead policy can best be described by another cricket metaphor. It was as if a batting side had made a respectable score not through skill, but instead by taking wild swings at the ball that went to the boundary by repeatedly just missing the hands of fielders.


  1. It also has to be asked; what would have happened to inflation with more 'normal' economic policy? The oil price spike from the Iranian revolution had peaked, and from memory serves, the wage/price automatic link had already been dropped.

    And it wasn't really until the early to mid 90s that inflation fell to what we now consider 'normal levels'.

  2. Here is Cameron's response to Denis Healey's death aged 98, about the 'IMF crisis' of 1976:

    "Denis Healey told his party hard truths about Britain having to live within her means."

    We will all know when this country has begun to sort out its economics from its politics when most of the media and the electorate know the details of 1976 and 1981, found here elsewhere on this blog, and people's obituaries are no longer used by Prime Ministers to make a point they either know to be wrong and are lying, or are too stupid to have realised and in which case they should resign as Prime Minister, give all their money to charity, and take up anonymous service to the poor.

    1. It was a disastrous decision to borrow foreign currency. Cameron is talking nonsense.

  3. Like Andrew I wonder about the conventional story of 1970s inflation and suspect much of it is a myth. I'm not one of those MMT subscribers who believe deficits and inflation don't matter, etc.

    But in the U.S. context, I believe Volcker slammed on the brakes too hard. There was also a demographic aspect with the boomers entering the workforce. Perhaps Fed Chair Burns did the best he could and the demographic "rat" had to work its way through the snake until inflation came down.

    It is amazing to me that conservative policy makers don't have a better grasp of the issues.

    1. MMT dosen't say "deficits don't matter"
      The limit to government spending is real resources. So if you want to build a school, you need cement and builders, etc.
      There is also a fiscal multiplier as the money is "respent."
      All government spending will come back as tax IF there is no saving in the spending chain. Some money is spent, it is taxed, spending becomes income and is taxed again. It is a maths progression.
      It is that saving that *causes* the deficit.
      Government spending always leads to an amount tax and excess savings.
      To run surpluses you have to have people running down savings and/or increased private debt.
      Conservative policy is based on widely taught lies, such as the money multiplier.

  4. In a debate with Oliver Kamm in 'Prospect' early in the year, you wrote “As an academic I have tried and failed to find a macroeconomic logic to what the government is proposing. Could it be that in reality the deficit is a smokescreen to hide the underlying goal, which is a smaller state? The British people do not want a smaller state, so the only way it can be achieved is by maintaining the myth that reducing the deficit is our top priority.”

    Now turn the clock back 34 years and replace 'smaller state' with 'weaker unions', 'deficit' with 'inflation'.

    1. I don't think there is much doubt about the deficit being used as a smokescreen.

      It's a very simple message - compare the country to a household, claim that we are spending too much, identify groups ('welfare scroungers', 'bloated public sector') as the main cause of this overspend - especially as they don't vote for you anyway - and away you go.

    2. Nice point, and indeed I had similar thoughts at the time. As I explain in the post, I do not think this was the original intention - they really thought the impact of their policy on unemployment would be minimal. I've no doubt high unemployment did help weaken the union movement. But I suspect that if you had offered the government in 1981 a magic wand that would have halved unemployment, they would have taken it. After the Falklands war, less clear.

  5. Howe's special adviser at the time Adam Ridley (sort of) admits in this volume on the 1981 budget that they got the monetary side of the MTFS wrong:

    1. Worth noting that he was never really a strong monetarist though, and enjoyed tweaking Keith Joseph's nose a lot!

      While it is probably true that Howe was never a mathematical expert I have always got the impression he was a decent and fair man.

  6. 'As Smallwood points out, the Treasury and Bank drew the wrong conclusion from the apparent success of the combination of fiscal contraction and monetary expansion in the 1980s and 1990s. "In both cases, the contractionary impact of tax rises and spending cuts was counterbalanced by substantial falls in interest rates, and of the sterling exchange rate at a time when our export markets were growing," he writes. Exports and investment took up the slack left by budgetary cuts.'
    21 Feb 2013


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