Fed up with the Conservative Party’s current psychodrama? This could be a useful distraction.
Aeron Davis has a new book out that is a 40 year history of the UK Treasury (HMT). As I found his previous book ‘Elites at the End of the Establishment’ fascinating, and as I’m always interested in anything about the most powerful economic institution in the UK which also gave me my first job, I was looking forward to reading this. It does not disappoint.
Like that previous book it is based on lengthy interviews, in this case with the key political and civil service people at the top of the Treasury over this period. As a result, it is very far from a jargon filled analysis of the details of macroeconomic policy over 40 years. Its brush is much broader, covering many themes from the growing influence of finance (financialisation), neoliberal ideas, and an internationalist viewpoint, but also dealing with the big historical crises of the period. As the book also roughly covers the years I have been working as an economist, what follows is not so much a review as a selected mixture of my own thoughts and those of the author. I’ll do my best to distinguish between the two.
The book starts, appropriately, in 1976 after the IMF crisis. I’ve written about this before based on Richard Robert’s book, and I agree with Robert’s interpretation of that crisis as mainly about fear of devaluation rather than the government no longer being able to borrow. Aeron is right that HMT used the shock of that crisis to re-establish its control of government spending, much as it did later in 2010. However I think the 1970s is more significant because of three large intellectual failures within HMT.
The first, which I discuss in that earlier post, was the pervasive view in the Treasury that it could cheat the Phillips curve using various forms of prices and incomes policy. The second, again touched on in that earlier post, was a failure to adjust to a floating exchange rate regime. It was clear to me while I was working there that while many junior economists understood how floating rates worked, those at the most senior levels did not. Both failures were central to understanding 1976, but were largely corrected by the end of that decade. 
A third failure that was not corrected was how to deal with the bonanza of North Sea Oil. It is today standard in the macroeconomics of resource rich countries that any temporary gain due to the discovery of a finite resource should be largely invested. That macroeconomics was not as developed at the time, but the basic choice for the government of consumption (cutting taxes) or investment was discussed at reasonably senior levels while I was there. Norway made the right choice but the UK did not, although how much that was down to politicians at the time is difficult to tell.
As Davis points out, this failure wasn’t just about North Sea Oil revenues, but was repeated with privatisation and council house sales. During the Thatcher period selling off public capital was treated as just another form of revenue, which is nonsense because unlike taxes it is not permanent. Sometimes people question why the OBR does 50 year forecasts for government borrowing, an innovation that started under Gordon Brown, and the abuses of the Thatcher period are one obvious answer.
A recurrent problem here and throughout any discussion of HMT is to separate out the views of officials and the politicians they served. In my own rather limited and out of date experience, those working in HMT have very varied views, and in a way this is helpful when the government changes. The arguments against can quickly become the arguments for when the political tide turns. One of the strengths of this book and the many interviews on which it is based is to try and tease out what decisions were political and which were down to thinking within HMT.
A good example, which Davis is right to discuss at length, is the pervasive doctrine within HMT that national firm ownership didn’t matter. A quote from an interview with John Grieve sums up the issue:
“On ownership, right from the ’80s, from Big Bang onwards, and indeed before, there’s been a running worry in government and in commentary about are we wise to let foreigners buy everything? … but in fact, there’s been a longstanding policy, successive governments have decided not to do anything about it … And, you know, of course most other countries think this is mad, and that ownership does matter.”
Aeron correctly links this to internationalist, finance orientated and free markets attitudes within HMT, but I also suspect there is a hangover from the period before 1976, when poor UK management, leading to deteriorating export performance and productivity growth, was a constant concern.
One of the points often made about the people working in HMT is how clever they are. That of course does to necessarily translate into good policy. I can think of two examples that illustrate this point which are not covered at length by Aeron Davis: ERM entry in 1990 and Euro non-entry in 2003. In the first case the good work done outside HMT on an appropriate exchange rate for the pound was ignored, and the debacle of Black Wednesday was a direct result. In contrast the opposite happened in 2003, and the intellectual weight of HMT work helped Brown to convince Blair not to join the Euro.
The end of the book is dominated by three crises. The first is the Global Financial Crisis. Aeron effectively shows that no one wanted to hear warnings about the growing fragility of the UK banking sector, but my own personal view is that there was one person in particular who was best placed to react to these warnings, and that was Mervyn King. The book includes the following quote from an official.
“[King] managed to spin a narrative over the next few years that the Bank of England lacked the tools and powers to do anything about it … I call him the Keyser Soze of the financial crisis. The greatest trick he ever pulled was persuading everyone that his responsibility for the financial crisis didn’t exist … Mervyn, can you point to where you said that prior to the financial crisis? Why did you cut the financial stability stuff? You were obsessed with monetary policy, weren’t you?”
Aeron also deals with how the Labour government failed to hold an inquiry into how the crisis had been allowed to happen.
The second crisis is austerity. There are some lovely quotes here, illustrating that what Aeron Davis calls the ‘posh boys’ regarded economics as a political means to an end. Here is a quote from his text.
“Those who had been part of the New Labour regime, such as Ed Balls, Dan Corry or Gus O’Donnell, got rather excited when speaking about economics, even with a noneconomist academic. It was the same with Alan Budd, Terry Burns and Nigel Lawson when talking about the Thatcher years. But for those leading the Coalition, economics was just another consideration in the wider matrix of Westminster party strategizing and news media lobby management.”
What Osborne and Cameron were interested in was media management, and they were experts at it. Unfortunately the advice they were getting proved no corrective to their macroeconomic ignorance. Here is a quote from Aeron reflecting on his interview with Rupert Harrison, Osborne’s economics advisor and now advising Jeremy Hunt.
“When I asked him directly about the broader inspirations of his economic thinking, Harrison responded that he had no interest in macroeconomic thought. His policy views were ‘shaped by more general reading’ and by being ‘a centre-right leaning person’.”
I’m afraid this was painfully obvious from Osborne’s speeches at the time.  The origin of the last twelve years of economic decline can be found in politicians who put party political interest above the health of the economy.
Unfortunately that gap in knowledge and concern was not filled by HMT. Senior HMT officials at the time were more than happy to go along with fiscal consolidation at the low point of a recession. In this sense austerity was also another massive intellectual failure for HMT. However I also think it reflects a key power dynamic within the department, a battle between those trying to control government spending and those managing the economy. This tension has been there since the advent of Keynesian economics, and is the basis for repeated calls for the two roles to be split into separate departments.
I have set out my own views on this, as part of the Kerslake review, in a post here. As Aeron Davis notes, one of the unintended consequences of first Bank of England independence, and then the creation of the OBR, was to diminish the weight of macroeconomists within HMT. Nevertheless, all those running HMT should have had a good understanding of Keynesian economics. I accept that they could do little to change the overall policy of Osborne/Cameron, but the cuts in public investment in 2011 and 2012 that did so much damage to the recovery were not a core part of that policy, and I think the HMT could at least have tried to prevent them.
The third crisis was the Brexit vote in 2016. Aeron Davis argues that the Leave vote was not only devastating to most Treasury officials (many were economists, after all) but also that it reflected past failures in Treasury management. To quote
“For one, I hold the Treasury (and successive governments) responsible for ushering in an economy that was so unbalanced and unequal. Years of trickle-down economics, and years of favouring finance over manufacturing, large foreign multinationals over home-grown companies, large asset-holders and rentiers over others, London over the regions, monetary rather than fiscal activism had had a cumulative impact. Austerity economics only exacerbated such trends, with several commentators linking that to the vote outcome.”
Of course any vote that close can have many things that help tip the balance. To the extent he is right, the Brexit vote represents a fitting ending for the book, as it represents many of the themes the author examines coming home to roost. In fact it is not the end, as there is a postscript entitled ‘reckless opportunists gain control’, which covers Johnson and partygate but not Truss’s ill-fated reign.
It should be clear from this short review that this book is not just an interesting overview of the Treasury over the last 40+ years. It is also an invaluable record of what some of the key political and official actors involved in UK economic policy thought they were doing at the time and how they view that in retrospect. I thoroughly recommend reading it to anyone interested in the recent economic history of the UK.
 I say largely because the new Conservative government’s advisors did not foresee that money supply targets would lead to a large appreciation in sterling a la Dornbusch, which decimated UK manufacturing.
 Austerity, by which I mean embarking on spending cuts in a liquidity trap recession, represented ignorance of everything Keynes talked about in the General Theory, as well as state of the art macroeconomics. On the positive side a form of fiscal council (the OBR), something that I had argued strongly for, was created after being rejected by Gordon Brown. On the whole it seems easier for new rather than existing governments to introduce reforms that take away discretion from politicians.