Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday, 12 April 2021

Two types of recovery from the COVID recession, or how you cannot effectively fight plutocratic populism by returning to the recent past.


I don’t normally talk about forecasts, but last week’s IMF World Economic Outlook illustrates a point a number of people have made. While both the UK and EU countries are prepared to gradually return what they believe as their non-inflationary level of output from below, the approach in the US is to overshoot, running the economy slightly hot for a period. This table from the Outlook shows expected GDP growth. The key figure is the last column, which shows overall growth from the start of the pandemic to when the recovery is largely complete. It shows how focusing on just 2022 growth, as I’m sure many in the UK and Europe will, is completely misleading.

IMF Economic Outlook April 2021 Forecasts

GDP growth





United States





Euro area





United Kingdom





These are forecasts of course, but they reflect something that has already happened: the US has enacted a large stimulus package ($1.9 trillion mainly directed to individuals followed by at least $2 billion on infrastructure), while any expansionary measures in Europe are projected to be more modest (750 bn recovery fund). I pointed out the planned undershooting for the UK after the March budget. You can see the under and overshooting more clearly by looking at forecast output gaps, although all output gap numbers should be taken with a big pinch of salt..

IMF Economic Outlook April 2021 Forecasts

Average Output Gaps

Average, 2020-21

Average, 2022-23

United States



United Kingdom









The OBR agrees that the UK is planning to approach ‘normal’ from below. As I noted after the budget, forecast UK inflation remains below target and so expected short interest rates hardly rise. The main measure Sunak announced in the budget to stimulate the economy, fiscal incentives to bring forward investment, is modest compared to the US stimulus. The rationale for and limitations of this stimulus are set out by James Smith here.

So what are the relative merits of undershooting compared to overshooting and thereby running the economy a little hot after the recovery? With interest rates stuck at their lower bound, the answer is unambiguous. First, it makes sense to end recessions as quickly as possible, rather than the more gradual end that undershooting implies. Second, running the economy with near zero short term interest rates has various undesirable consequences. Assets prices (including house prices) remain high and banks or other financial organisations may go on risky searches for yield. Economies where interest rates cannot fall are more vulnerable to negative shocks, because fiscal policy often responds more slowly (and erratically) than interest rates.

Third and finally, we need to think about risks. The risks of a more rapid recovery are not a problem in either case, because they will mean a mild inflation overshoot and a quicker rise in interest rates. The chances that any above target inflation (or inflation due to higher commodity prices) becomes entrenched in the US, UK or Euro area is zero. The downside risk is also not a problem if you are trying to run the economy hot, because you will just be running it cooler.

The downside risk if you are planning to undershoot are serious, because that means a more prolonged recession with interest rates unable to fall because they are stuck at their lower bound. It is particularly a problem if you have governments that are committed to some kind of deficit target, because they are unlikely to respond to an unexpected slow recovery with a fiscal boost. This is exactly what went wrong in the UK with 2010 austerity: the expected recovery failed to happen because of the Eurozone crisis, and Osborne kept to his austerity plan.

Yet despite the lesson from the UK and Eurozone of a post 2010 recovery that crashed because of unwarranted deficit concerns, both the UK and Eurozone seem to be making the same mistake (albeit in a more modest way) after the pandemic. They should follow Biden’s example, and use fiscal stimulus to end the COVID recession rapidly once vaccination is complete.

Of course the significance of the Biden plan goes well beyond the macroeconomics of ensuring a good recovery, as both Philip Stephens and James Meadway discuss. (Noah Smith has a much more detailed analysis.) I personally find it rather hopeful that someone who was tagged as being rather dull before an election can turnout to be very different in government. But it is important to realise that anything dull following Trump would be a recipe for a near certain return to Trump. Biden’s plans are not so much seeing the beginning of the end of neoliberalism as a serious attempt to keep the US out of the hands of a party that no longer believes in democracy.

As I have argued elsewhere in 2017, neoliberalism in the two countries where it was created has already been turned into a plutocracy. I wrote

“It would be wrong to say that Brexit or Trump represent an evolution of neoliberalism. Both promote strong restrictions to trade, and so it would be more accurate to view Brexit as a split within neoliberalism. What is clearer to me is that populism is a consequence of neoliberalism as reflected in the policies of the political right.” [1]

And as I argued here, this plutocracy cannot be fought with a return to what went as normal before, because what went as normal before created the plutocracy that we are trying to escape from. Fighting for democracy requires a turn to the left (in economic terms), and that is what we are seeing in the US. The reason is quite simple - without radical economic change in a left wing direction the reasons why enough people in the US voted for Trump will re-emerge. Moving left does not guarantee that will not happen, but it gives democracy a fighting chance. Returning to the neoliberalism that created Trump is just asking for a return of Trump.

[1] Talking about a split in neoliberalism seemed right at the time, but now seems misleading. The opposition to Trump or Brexit on the right has all but disappeared (or more accurately been extinguished), and those on the right who oppose either say nothing or start supporting the opposition to plutocracy. So now I would call Trump and Brexit as just one final stage in the evolution of UK and US neoliberalism into populist plutocracy.

Wednesday, 7 April 2021

Labour should start contesting the Tory record in running the economy


I recently wrote a post entitled “Why are the Conservatives so bad at running the economy?”. By bad I meant both in absolute terms (so many home grown crises: monetarism, ERM, austerity), and relative to the last Labour government. My post was hardly contested, and what criticism i received was easy to bat away. Things like ‘Labour left the economy vulnerable to a global financial crisis’, where the post noted that the Tories wanted even less financial regulation before the crisis. However, as I also noted, Labour have for the last decade been well behind in the polls on who is best to run the economy.

Labour under Ed Miliband made the huge mistake of failing to contest the Tory lies about how Labour profligacy caused the ‘deficit crisis’. As a result, many voters blamed Labour for austerity. Labour are not going to reverse the popular misconception that they are bad at running the economy by being quiet and defensive. What Starmer needs to do (and it has to be Starmer as the media ignores anything else) after the local elections is to go on the attack, by setting the government’s current macroeconomic policy mistakes in a historical context starting in 2010.

He could list there major blunders made since the last Labour government in terms of running the economy.

  1. Austerity. Here Labour usually focus on the costs of this in terms of public services. It is fine to point out the impact of lower public services, particularly showing how austerity left us badly prepared for the pandemic. But this is weak unless it is accompanied by a macroeconomic argument about why austerity, far from being necessary, was actually harmful to the economy. Not just in terms of a delayed recovery, but wages perhaps permanently lower. There was no debt crisis, and many eminent economists supported fiscal stimulus rather than austerity. The golden rule is that in a recession you help the recovery first, because only after a strong recovery will you know how much of a deficit problem (if any) you have.

  2. The coronavirus second wave. By pushing against an early lockdown, Sunak allowed the second wave to gain momentum that required a prolonged lockdown to fix, where many lives were lost. The economy suffered because of this extensive lockdown. The golden rule here is that when cases start rising lockdown strong and early, which saves lives and saves the economy from a more prolonged lockdown.

  3. The Brexit deal. By ruling out any type of cooperation with the EU, Johnson’s Brexit deal created a bureaucracy mountain that has hit exports and many firms very badly. I suspect examples may be more powerful than aggregate figures here.

It is in this context that he can place the big mistake in Sunak’s March budget. A lost opportunity to obtain a strong economy, because once again Sunak was more concerned about the deficit than the recovery. The comparison with Biden in the US is revealing. The lesson from 2010 has not been learnt: in a recession focus on the recovery because only after the recovery is complete will you know how much of a deficit problem (if at all) you will have.

In contrast the first ten years of the Labour government, before the Global Financial Crisis hit virtually every major economy around the world, saw ten years of strong and steady growth. That strong and steady growth allowed Labour to direct more resources into public services, particularly the NHS. Virtually any NHS performance indicator can be used to show NHS performance is far worse now than when Labour left office. 

The reason that no Labour leader has made a speech like this, directly questioning the economic competence of Tory economic management, is that the response from the Tory press and MPs will be to rubbish the claim. The way they will do this is to focus on the Labour profligacy claims about the last Labour government. Better for Labour to say nothing, many will advise, rather than allow the Tory press to remind voters of this past. And from a short term point of view that is correct.

But if Labour keep retreating from this terrain they will allow the myth that they are rubbish at managing the economy to persist. It could lose them elections, because all Tory politicians need to do with any Labour promises is to point back at past Labour profligacy. The Tories will continue to talk about having created a strong economy and no one will contradict them in the media that matters. I fear that this has gone on so long that even some Labour MPs are starting to believe that it is true.

A few years from the next election is the time Labour should start contesting the received wisdom. That will mean having clear lines of response to the attacks coming from the government and right wing press, who will be desperate to preserve the Labour profligacy myth. Here are a few suggestions.

Q) Labour left office with a record deficit of over 10%. How can you claim Labour was not profligate?

A) That deficit was a consequence of the Global Financial Crisis (GFC), and the measures we took to stop the freefall in jobs after banks collapsed. The deficit is likely to be 17% last year. Is that because of Conservative profligacy or COVID?

Q) The IMF/OECD estimate that before the GFC, Labour had a structural deficit of around 5% of GDP.

A) That number is pure hindsight, produced by those organisations to help explain poor growth after 2010. At the time all organisations, including IMF/OECD, suggested very different numbers. The OBR, whose numbers are not revised in hindsight, think that in 2007/8 the cyclically adjusted budget deficit was just 2%, which is not unreasonable given estimates for the output gap made at the time.

Q) Didn’t the Coalition government’s austerity measures save the UK from a financial crisis?

A) No. It is now generally understood that in a recession you should use tax and spend policy to support the economy and not to reduce the deficit. In 2010 the Eurozone crisis led international organisations astray, but the only financial crisis was in the Eurozone. Just as we see today, the Bank of England would buy any UK debt if the markets wouldn’t do so. The idea that the Coalition government saved the UK from some kind of crisis is a myth spread by Tory supporters in the City. 

Q) The Labour government were planning austerity if they were reelected.

A) The Conservatives really do need to make up their mind. Was the Labour government profligate, or was it going to do exactly what the Coalition government did. Of course we cannot know what would have happened if the economic recovery assumed in that 2009/10 budget had failed to materialise, but we can be pretty sure a Labour government would not have continued with fiscal consolidation as the Coalition government did. [1]

Q) Wasn’t the Labour government partly responsible for the damage the GFC did to the economy, because it failed to regulate the banking sector sufficiently?

A) That would be a serious point if the Conservatives had been pushing for more regulation before the GFC. But in reality they were pushing for less regulation, as the Conservatives typically do.

I’m sure there are other lines of attack which need to be covered. In addition, these responses can be supplemented with comparisons of GDP per head or real wage growth under Labour and since 2010, which despite the GFC still flatter Labour.

The argument that Labour are more competent at running the economy can be seen as an essential part of a general attack on the competence of this and past Conservative governments. Just as the Conservatives were incompetent in dealing with the first and second COVID waves, there are also incompetent at running the economy (obsessed with deficits rather than economic recovery), they are incompetent at running the NHS (wholesale reorganisation under the Coalition government now being partly undone by the current government, with all the time trying to privatise), incompetent on law and order (huge delays in trials because of past austerity), and incompetent at looking after public money. 

It is true that this government have handled the vaccine rollout well, because unlike test and trace they have allowed the NHS to do the work. But besides that, the only thing they seem very good at is giving public money to their friends and financial supporters.

[1] An alternative approach, which is more honest, is to say that the Budget of 2009/10 was wrong to suggest substantial austerity so soon.