Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday 26 September 2023

Challenges to the strong golden rule: MMT and bond market paranoia


The idea that responsible fiscal policy involves matching plans for future taxes to projected day to day government spending, often called the golden rule, has a long history. It is often expressed, as Shadow Chancellor Rachel Reeves did recently, as saying governments shouldn’t plan to pay for current spending byborrow. There is a lot to discuss on how you should implement this golden rule (like what matching taxes to spending actually means), but here I want to focus on the principle behind the idea.

Furthermore, I want to look at a strong form of golden rule, which says that following the golden rule is all responsible fiscal policy should do. If you have a fiscal rule that implements the golden rule, you not only don’t need any additional rules, but you shouldn’t have any additional fiscal rules. In particular, as I have persistently argued, you should not have any aggregate rule that restricts public investment. [1] From memory, no UK government has ever implemented this strong form of the golden rule, because even when they followed that rule they also had additional fiscal rules.

In this post I’m going to look at two very different objections to this strong golden rule, coming from MMT on the one hand and on the other coming from what often seems like bond market paranoia. But first we need to add a big caveat, which is that the golden rule should not apply in recessionary periods [2] In recessionary periods short term nominal interest rates are either at or could soon be at their lower bound. At that lower bound monetary policy can no longer provide a predictable stimulus to the economy, and so fiscal policy should take its place. [3]

Outside of recessionary periods short term interest rates can rise and can therefore do the job of stabilising the economy. Fiscal policy therefore no longer needs to step into that role. Here I would argue that something like the strong golden rule should apply. [4] Both MMT and those worried about the bond market would disagree.

Reasonable and unreasonable MMT

MMT has two arguments against the golden rule, which I will call reasonable and unreasonable. The unreasonable argument is that interest rate increases do not reduce aggregate demand and inflation, and therefore fiscal policy has to play the macro stabilisation role at all times. It is an unreasonable claim because it contradicts the large amount of evidence that higher interest rates do reduce aggregate demand and inflation, evidence that you will find in the academic economic literature.

Estimating the impact of higher interest rates on aggregate demand and inflation is quite hard, in part because central banks put interest rates up when inflation rises. This simultaneity problem means eyeballing data just doesn’t count as evidence. For me, some of the most convincing evidence comes from studies that look at unexpected monetary policy changes, such as here for example. Until MMT can provide studies that are of a similar quality that come to a very different conclusion, then arguments that higher rates don’t reduce demand and inflation are just baseless assertions. [5]

The reasonable MMT objection is that even though interest rates can stabilise the economy, it would be better if fiscal policy did so. You could argue, for example, that fiscal policy had a more predictable impact on aggregate demand than interest rate changes. I have discussed the relative merits of fiscal or monetary stabilisation elsewhere, but the key point is that today, in almost all advanced economies, central banks use interest rates to target inflation. Given this, and the reasonable view that this works, the idea that fiscal policy should take this role instead is not a description of how economies actually work, but instead a suggestion of an alternative way they might work..

A standard half-truth that MMTers often state is that the only constraint on fiscal decisions is the demand for real resources and therefore inflation. This would be the case if interest rates were held constant when inflation rises, but they are not. So the constraint on higher government borrowing is not real resources and inflation, because the central bank will raise interest rates which will divert resources from the private to the public sector, and keep inflation under control.

Perhaps the MMT argument should be, for the economy as it actually operates, that the real constraint on fiscal policy is the level of interest rates. So why isn’t this a disincentive enough to prevent governments using borrowing to match higher spending or lower taxes where inflation is either stable or rising? Why do we need a self-imposed financial constraint of the golden rule as well?

Why higher short term interest rates are not a sufficient constraint on fiscal policy

The problem is that the implications for interest rates of breaking the golden rule may not be clear or felt for some time. Imagine, for example, that a year before an election a government permanently announces increased spending in lots of popular ways, and pays for that increase by borrowing, thereby breaking the golden rule. Interest rates may not immediately rise, because demand fluctuates from year to year for countless reasons other than fiscal decisions. Interest rates will be higher than they would otherwise have been, but most people do not follow central bank decisions that closely. The temptation for governments to use borrowing to finance popular spending increases ot tax cuts to gain votes therefore remains.

The golden rule provides a more direct and immediate check on government fiscal plans and decisions. If the government finances higher current spending or less taxes by borrowing, that will tend to increase inflation and therefore lead to higher interest rates. Rather than wait for interest rates to rise, breaking the golden rule gives us advance warning that this could happen.

So by sticking to the golden rule outside of recessionary periods, the government is in effect committing to take decisions on day to day spending and taxes which will not put upward pressure on interest rates. Nice to have, but hardly the most important commitment the government makes. The golden rule certainly does not represent an externally imposed financial constraint on what the government can do. Instead it is just good practice. The interesting question is whether there are exceptional situations other than recessionary periods where that good practice should not be followed. [6]

What about the bond markets

Following the golden rule alone does nothing to ensure that the government debt to GDP is stable or falling, or that the total (current+investment) government deficit hits some target. Any period of high public investment could mean higher debt to GDP, although public sector net worth would not change. Any fiscal rules that targets the level or change in government debt, or the total (rather than current) deficit, are not following the strong golden rule.

I suspect governments have departed from the golden rule mainly because of a feeling that they have to target government debt in some way. In my view this is a consequence of mistakenly looking at just one side of the balance sheet. Governments need to start thinking about their net worth, not their debt. (Arguably a growing failure to invest in public services across Europe at least is a consequence of this mistake.) But those who worry about the bond market (or say they do) would say we need additional targets to placate that market.

Does that market need placating? If government borrowing is rising because it is investing, why would any rational trader worry about this additional borrowing? The situation is just like a firm borrowing to invest, except that unlike a firm the government will never be forced into bankruptcy because it can create its own currency. As a result, bond holders will always get their money back. The chance that a country like the UK that is following the golden rule will choose to default on their debt is zero.

What can happen in rational bond markets is that interest rates on government debt (long rates) can increase, making it more costly to borrow to invest. Whether this happens depends on what bond traders think will happen to future short rates. If they think that higher public investment means that the Bank will have to raise rates in the future, current long rates may rise even if current short rates do not.

Whether long rates do rise following high public investment financed by borrowing depends a lot on the nature of that investment. Investment that enables more green energy will tend to lower future energy prices, putting downward pressure on future inflation [7]. But even if high public investment puts up long term interest rates, this increase is likely to be modest.

What about irrational bond market panics? The first point is that I cannot think of any bond market panic that occurred when a country was following the strong golden rule and borrowing to productively invest. The second point is that in the case of a disorderly bond market the Bank is likely to step in, as they did after the Truss fiscal event.  

This is why the Truss fiscal debacle provides no justification for going beyond the strong golden rule. That fiscal event broke the golden rule, and the predictable result was higher interest rates. More importantly, it greatly increased uncertainty in markets for sterling assets, because it was unclear whether tax cuts would be accompanied by spending cuts, and even if they were, whether such cuts were credible. The Truss event provides a good example of why governments should follow the golden rule, but does not provide any evidence that we need additional targets like falling debt to GDP. [8]

As Toby Nangle writes, "fear of bond market monsters is a bad reason to delay investment in vital infrastructure or the green transition." Imposing fiscal rules, like falling debt to GDP, that go beyond the golden rule because of fears about the bond market are both pointless and risk delaying that vital investment. 

[1] Paying for investment through borrowing not only makes intuitive sense, because it’s what consumers and firms do, but it also makes sense on fairness grounds. The benefits of investment are spread over time, so the taxes to pay for it should be too. If taxes only have to rise to pay the interest on borrowing this means that future as well as current generations pay for the investment. Of course this definition of public investment may apply rather more widely than the national accounts definition.

[2] I define ‘recessionary period’ as either a recession is likely to happen in the near future, a recession is happening or the economy is recovering from a recession. This terminology is deliberately broader than just when output is falling.

[3] In a recessionary period should we worry that the bond market will react negatively to all the extra deficit spending that fiscal stimulus is likely to create. (IMF evidence suggests fiscal stimulus could well reduce the debt to GDP ratio in a recession, but we don’t need to make that argument here.) This bond market paranoia was the public basis for UK austerity that began in 2010. Bond market paranoia in a recession is completely misguided because of Quantitative Easing: the central bank buying government debt to keep long term interest rates low. In the unlikely event that traders stopped buying UK government debt, the central bank would step in to buy government debt. We saw that happen during the pandemic as well as after the Global Financial Crisis.

Indeed we could go further. In a recession any central bank that allowed long term rates to rise because of worries in the bond market would be failing in its duty to stabilise the economy. In addition, a responsible central bank is likely to step in and buy government debt whenever the bond market acts in a disorderly manner, as it did after the Truss fiscal event. Having a central bank in charge of its own currency is our safeguard against bond market panics, whether we are in a recessionary period or not.

[4] One caveat would be that the institutional framework exists to check that public investment projects generate an adequate social return. If that institutional framework didn’t exist, then you might want to set some limits on public investment as a kind of second best. But that does not apply in most advanced economies. It is silly to use aggregate fiscal rules to kill off dozens of good public investment projects just because you are suspicious that the odd lemon might get through.

[5] There is an element of conspiracy thinking involved in this claim. It requires all the central banks that are currently changing interest rates to control inflation to be participating in some kind of mass delusion, where none have noticed that what they are doing has had no impact or is making things worse, or those that have noticed are silenced for some reason. Equally it requires that mainstream academic economists are so indoctrinated by the idea that higher rates reduce inflation that they will not allow contrary evidence to be published.

[6] A war is an obvious example, but some have plausibly argued that climate change (and specifically a green new deal) could be another

[7] To the extent it reduces national vulnerability to volatile oil and gas prices, this reduces uncertainty which will also put downward pressure on long term bond rates. However any investment in domestically produced goods is a claim on resources, so for this reason short term interest rates might be slightly higher if the economy is otherwise strong.

[8] Indeed, Kwateng did say that he would stick to the falling debt to GDP target, and that did nothing to prevent rates rising.

Tuesday 19 September 2023

Democracy on a knife edge in the United States


Asking if US democracy as we know it will survive either seems very depressing or rather melodramatic. However it is actually quite hard to be melodramatic about the consequences of Trump becoming President again. Trump failed last time to turn the United States into a dictatorship of the kind he so admired overseas not because he didn’t want to, but because he was prevented from doing so. He and his supporters have learnt their lessons and will be much more difficult to stop if they get another shot, while those forces that held Trump back in his first term have not been reinforced.

Much of the resistance to Trump during his first term came from the established bureaucracy of government. The solution proposed by Trump supporters is to fire large numbers of them from day one. To put it in their language, they would get rid of the ‘deep state’ that opposed Trump during his first term. With the Department of Justice in his hands, a judicial system, already much more political than in the UK, would lose all independence. He would target his political opponents as he tried to do last time, and the Republican party starting impeachment hearings against President Biden on no basis whatsoever show they would be happy to go along with this. What the Republican party would surely do is ensure the US electoral system became even more biased, making it even harder to elect a Democratic President or Congress again.

The rest of the world would quickly see the effects of a Trump second term. He is unlikely to back Ukraine in the same way that the US is currently doing, forcing Europe to provide much more military support. He plans a 10% blanket tariff on all goods imported to the US. Trump and his party is likely to do everything it can to slow down the transition to green energy, which given the country’s carbon footprint would be seriously bad news for the survival of human civilisation as we know it. More generally, when Trump’s decisions are largely divorced from the normal pros and cons of politics, it is difficult to know what additional harm he could do freed from any executive restraint.

Donald Trump is the clear frontrunner to be the Republican candidate for the 2024 election despite the fact that he is facing trial in two separate cases for trying to overthrow the results of the last election, which he clearly lost. One is for putting pressure, in a recorded phone call, on Georgia’s secretary of state to find 12,000 votes to swing the state in his favour during the election. The second is a more general charge of trying to overthrow that election result by various means, including his role in the 6th January attack on the Capitol.

It seems incredible that someone charged, and perhaps even by then convicted, of trying to overthrow a democratic and fair election could legally become President, but there seems to be nothing in the US Constitution that clearly prevents that. Where there is any doubt, the key point to note is that the final legal decision maker in the US, the Supreme Court, has a Republican majority and is almost certain to vote in Trump’s favour.

If he cannot be legally prevented from becoming the next POTUS, will voters prevent that happening? Republican voters will not, and increasingly the Republican party is now Donald Trump’s party. Although there are quite a few Republican politicians who are unhappy that this has happened, few have dared voice their opposition. The reason is fourfold. First, a majority of Republican voters are supportive of Trump, for reasons discussed below. Second, Republican candidates at most levels of government are chosen in primaries by Republican voters. Third, there is enough of the 0.1% who think Trump will be good for them to ensure Trump supporting candidates will always run for those seats and have the necessary financial backing. As a result, opposing Trump is close to electoral suicide for any Republican politician. Finally, these politicians increasingly worry about their or their families' personal safety. Never underestimate the power of occasional violence from the extreme right.

This is why Trump is likely to be the Republican candidate in 2024. Fortunately there are enough voters (mainly Democrats and Independents, but also a few Republicans) who still believe in democracy to outnumber those voting for Trump, but three things may nevertheless mean that Trump could still become President.

The first is that many voters will not see the election as Trump vs US democracy. Of course with one of the two candidates having tried to overturn the result of the 2020 poll it is not as if Trump’s contempt for democracy is hidden from them. Instead it is because elections are always fought on many issues, and all the signs are that the non-partisan media will treat 2024 as just another election.

Remember the 2016 election where the non-partisan media obsessed about whether Clinton had used her personal email account for official business. This is how ‘balance’ works in the US media: journalists feel they have to be equally critical of both sides, so implicitly the trivial (which email account did Clinton use) is equated with the serious (is Trump suitable to be President?). We see the same thing happening today. The media obsess about Biden’s age, to balance their critical coverage of Trump’s various appearances in court. But worrying that the President is too old is a different class of concern to worrying about whether US democracy will survive.

On the crucial issue of the economy Biden should be way ahead. From the perspective of Europe (or virtually anywhere outside the US) the US has made a far better recovery from the pandemic then nearly every other major economy, and it looks like inflation has returned to target without the need for a major recession. Unemployment remains very low. But this is not how it is seen in the US, where sentiment about the economy is very depressed. There is a great deal of speculation about why this is, and whether it represents a media failure or something real (high interest rates, a short term confusion between the price level and inflation, or the onset of another Covid wave), but the upshot is that the economy is not as yet the strong card it should be for Biden.

The second reason why Trump could beat Biden is because the Electoral College, rather than the popular vote, decides who wins, and the Electoral College is heavily biased towards Republicans.

The third, and perhaps most alarming, is that Trump and the Republican party will dispute the result of any General Election result that Trump loses. Trump, once again, has learnt from his failure to overturn the 2020 election result, and has been trying to ensure that his people are in positions of power to at least sow confusion about the validity of any general election result in key states, something he failed to pressure Republican officials to do last time. The danger is that Trump, backed by the Republican party, can put a sufficiently strong case that he actually won to the Supreme Court, who will given its composition rule in the Republican’s favour.

That someone with such disregard of democracy should once again have another shot at gaining the White House seems incredible, so it is worth exploring why that can happen. There are two different but plausible stories you can tell. In the first, a majority of Republican voters have such great faith in Donald Trump that they are happy to overturn democracy to see him elected. To put the point in another way, they are happy with democracy as long as it only involves true Americans. The second story is that a majority of Republican voters are so misinformed by the media they consume that they actually believe Trump really won in 2020, and that it is Democrats rather than Trump who is a threat to democracy.

Reality probably combines both stories. There is little doubt that many Republicans want to believe the stories they are fed by the right wing media, and as a result allow themselves to live in a fantasy world where, for example, Trump was cheated in 2020 by voter fraud or whatever. On the other hand if the right wing media that provides this fantasy world did not exist, at least some of those Republican voters might be forced to confront reality. The evidence is also clear that exposure to right wing media does increase the Republican vote.

Whatever the causes and extent of the The Paranoid Style in American Politics”, a crucial question is how such a minority can potentially overthrow US democracy. How is it so easy for a would-be dictator to capture one of the two main political parties in the United States, and therefore get close to power? There are of course many answers to that question, but perhaps two of the most important are the lack of control over the influence of money in politics (including through the media), and the widespread use of closed direct primaries in a two party system since the beginning of the last century. [1] If Trump loses, US democracy is safer but far from completely safe. There are plenty of Trump successors around. More importantly the voters to whom Trump appealed, together with a right wing media that feeds them and a voting system that gives them power, are not going to change.

[1] Recent UK history provides a similar illustration of the perils of party membership power within political parties on the right. Liz Truss became Prime Minister not because she was elected in a general election, but because she was chosen by just 80,000 Conservative party members. She was elected on a platform of tax cuts, when that was the last thing the country needed. Her attempt to implement those tax cuts quickly unraveled, and her period of being Prime Minister lasted only 49 days.

Tuesday 12 September 2023

The next time someone says the government cannot borrow to invest, just mention RAAC


Kids not being able to go to their normal school because those schools are crumbling away is as good an example as any of the impact of 13 years of austerity government. It began with Gove scrapping Labour’s Building Schools for the Future programme (a decision he subsequently said was one of the worst he made) when the Conservatives came to power in 2010, and it may well end with thousands of children being forced to relocate to temporary accommodation because Sunak when Chancellor failed to respond to warnings from his own Education department.

It is also an example of the impact bad fiscal rules can have. As I have argued many times, whether to undertake public investment (which can vary from large infrastructure projects to replacing crumbling concrete) should depend on the merits of the investment, and not on some arbitrary aggregate limits. Yet governments have at various times imposed fiscal rules that either included public investment (a target for the total deficit, or a falling debt to GDP target) or in some cases imposed a limit on total public investment itself. [1]

The case of crumbling schools caused by RAAC concrete also clearly shows why arbitrary aggregate limits on public investment make no sense. When the roof of a primary school in Kent collapsed in 2018, ignoring the problem became, in the words of the National Audit Office, a “critical risk to life”, which meant many schools with Raac concrete in them needed replacing fast. That means spending a lot of money quickly. As we now know, and as the Treasury were told, not doing so would mean some school buildings would become unsafe to use. Unlike current spending on day to day services, the need for public investment can vary substantially over time, and sometimes that investment just has to take place.

What did Sunak, or the Treasury, expect to happen when they revised down a RAAC based bid from their education department by a factor of 4? Were they crossing their fingers and hoping that the engineers were being over cautious, and that no more buildings would collapse? Or did they not even get as far as reading what the department had written, and instead just looked at numbers on a spreadsheet? Did no Treasury official raise their hand and say ‘but minister, what will happen when they start closing schools because they are unsafe’?

The term ‘Treasury brain’ is fashionable, but if the politicians in charge are determined to spend less public money then the Treasury can do little to stop them. Furthermore, these politicians are invariably short term in their political outlook, so they will always be tempted to cut investment rather than current spending. Investment by its nature has its benefits in the future, while current spending cuts will be noticed today. This is why it’s important to design fiscal rules that stop politicians doing this. If the Treasury can tell a minister that cuts to public investment will not do anything to help that minister meet their fiscal rules, they are less likely to make those cuts. [2]

The same is true for short term cuts that end up costing more in the longer term. Treasury brains are more than capable of seeing the foolishness of doing this, but if the remit from politicians is to get down borrowing over the next few years by whatever means possible, Treasury civil servants cannot keep options from politicians. Again fiscal rules need to be medium to long term, to avoid this kind of foolishness.

The whole current system, where dangerously crumbling concrete is kept in place because fixing it would require some borrowing, is predicated on a kind of deficit fetishism that treats reducing government borrowing as more important than almost anything else, including teaching children. Politicians are putting reduced borrowing ahead of essential investment. Asked why, they will mutter phrases like ‘fiscal responsibility’, and the media will find a City economist to talk about ‘bond market jitters’. Someone will mention the Truss fiscal event, as if borrowing to stop schools collapsing on children can be equated to cutting the top tax rate. (In reality the reaction to the fiscal event was all about interest rate uncertainty and pension funds taking risks rather than excessive government borrowing.)

Fiscal responsibility does have a real meaning. It makes sense to ensure taxation matches current spending in the long run so debt to GDP levels are sustainable. Fiscal rules are useful to prevent politicians cutting taxes or spending more to win elections and funding these giveaways by borrowing. But refusing to borrow to enable schools to remain open and safe is clearly not in any sense fiscal responsibility. For once household and firm analogies are appropriate. People borrow if necessary to fix serious problems with their homes, and firms would of course borrow to prevent their factories falling apart, so why not the government when it can borrow more easily and more cheaply than any household or firm?

However there is one area where aggregate conditions, rather than the individual merits of any investment, does matter. This is borrowing costs, which should influence when (not if) investment is done. The ideal time to start replacing RAAC concrete was when borrowing costs were almost zero, because short term interest rates were at their lower bound. Yet, as this graph from the IFS shows, this government cut capital spending on education compared to levels under Labour, just at the point when borrowing costs were at their lowest. Cutting investment when borrowing is cheap, and being forced to do the investment when borrowing costs are much higher, is a good example of this government’s economic incompetence.

This is one area where the way the Treasury does things may be lacking. Whether a project is worth doing is typically assessed using a constant 3.5% real discount rate, with some exceptions. There are good arguments for using a discount rate independent of market rates, although whether the rate should be as high as 3.5% is another matter. But deciding that public investment projects are worthwhile to do, and deciding when to do them, are two different choices. The latter will depend on many things, including the state of the economy and the cost of borrowing.

It is obviously cheaper for the government to undertake a worthwhile investment when the cost of borrowing is very low. Yet it is unclear how that basic point influences government spending decisions. Needless to say, a focus on reducing borrowing when the economy is depressed, and interest rates and borrowing costs are likely to be low, is completely the wrong thing to do. But even if that was not the case, it is not clear that Treasury practice encourages investing when it is cheap to borrow.

Closing schools because the government refused to replace crumbling concrete is also a perfect example of what this government has become in another sense. Before the 2020 spending review, Sunak as Chancellor was told by the education department that at least 300 schools needed replacing a year because of crumbling concrete, and they asked for funding to replace 200 a year in the first instance. Instead Sunk decided to halve the school rebuilding programme target from 100 to 50 schools per year. But when presenting the results of this spending review, he described it as producing a “once in a generation investment in infrastructure”. It’s not just that they lie all the time, but when Sunak like Johnson makes grandiose claims it is generally to disguise monumental failure.

Unless something unforeseen happens, we are destined for a year when all we can do is look forward to a change in government. An incoming Labour government may not have the same aversion to the public sector as this current lot, but they will still have fiscal rules. The government will still be working in a media environment where government borrowing is viewed with suspicion, and the distinction between how day to day spending and investment is funded is rarely made. Labour are committed to borrow to invest, but are saddled with Conservative fiscal plans that are unworkable and a falling debt to GDP rule that discourages investment. Rachel Reeves’ priority in government should be to raise taxes to match increases in day to day spending, and to scrap the falling debt to GDP rule so that we can start investing in the public sector after a decade and a half of complete neglect.

[1] That limit, of 3% of GDP, has now become redundant as the share of public investment is planned to fall to almost 2% in five years’ time. (Public investment reached 3% of GDP three times in recent financial years: 2008/9,2009/10 and 2020/21.

[2] It would be nice to say that good fiscal rules that excluded public investment would completely avoid austerity driven cuts to that investment, but unfortunately the experience of the Coalition government suggests that is not true. As I noted many times, the structure of the primary fiscal rule first introduced by George Osborne did exclude public investment, because it had a target for the current balance (the total deficit minus net investment). As a result, there was no need for the Coalition government to cut public investment, yet that is exactly what they did, particularly in 2011 and 2012. That decision alone cost the average household thousands of pounds in lost resources.

It was this cut in public investment that really hit the UK recovery from the Global Financial Crisis recession. Quite why the Coalition government decided to cut public investment so drastically when it did nothing to meet their fiscal objectives is unclear. Did the Treasury just ask departments to cut all spending, and naturally (see above) these departments initially chose investment over current spending? Or did the Chancellor not understand his own fiscal rule?

This is why I hesitate to claim better fiscal rules might have prevented this government cutting back on public investment. When politicians have an ideological belief that everything in the public sector is inefficient and wasteful, they may ignore even the most enlightened fiscal rule.

Equally when fiscal rules become things that are changed every couple of years, as they have been since 2015, then unfortunately it also tempting for politicians that know they are nearing fiscal limits to include public investment in any target, because it is easy to cut. 

Tuesday 5 September 2023

It’s the economy, but is it good?


As Robert Saunders recently reminded us, “the economy” is a relatively recent concept. It emerged, I suspect, shortly after Keynes had effectively created a branch of economics called macroeconomics, and the government started collecting statistics on many aspects of the aggregate economy. As a macroeconomist I obviously think this was all an excellent thing. Saunders doesn’t disagree, but his concern is rather that this has made the economy something that is addressed in largely technocratic terms, divorced from both values and other concerns. To quote:

First, it subordinated a moral and political judgment (what is "good economy?") to a blunter question: how do we make "the" economy bigger? … Second, it turned "the economy" into a "thing", to be weighed against other, different "things": such as "the environment" or "saving lives".”

I want to add a third concern. Most people are not macroeconomists, and don’t read macoeconomists or the Financial Times, so they have little conception about how the economy works, or indeed how to evaluate whether the economy is doing well or badly. What they do know is that the economy matters. It influences their lives, sometimes dramatically. The concern is that the combination of importance and ignorance allows politicians and the media to fool people.

The clearest example of this for me was the 2015 UK general election. Voters generally agreed that pretty well everything was worse in 2015 than in 2010, with one exception: “the economy”. Media pundits agreed that the economy was the Conservative party’s strong card. Yet real wages had been falling every year from 2010 until 2014, and had only begun to grow during 2015. As a result, Labour attempted to raise the ‘cost of living’ as an issue. What could explain this combination of real wage falls with the feeling a majority of voters had that the government was managing the economy well?

Part of the answer is that a crucial group of voters, pensioners, were cushioned from real wage falls. But the main answer has to be that many voters, encouraged by the media, had decided that ‘managing the economy’ was all about reducing the budget deficit. The major aim of the government was to bring down the deficit. Most media bought into the idea that the budget deficit was the major economic problem the UK faced, and as a result Labour gave up on their attempts to balance this against more conventional macroeconomic goals.

It was nonsense of course, for reasons I and others have elaborated on at length, but in political terms it worked, leading the Conservatives to win that 2015 election, leading to Brexit and further economic failure. How was it possible that faced with substantially lower real wages than five years earlier, voters and the non-partisan media nevertheless could be convinced that the budget deficit was more important than living standards?

I think the answer has to go back to the financial crisis, and then the subsequent Eurozone crisis. After the financial crisis most people blamed the banks, but a significant minority (including most Conservative supporters) blamed the government. From 2009 onwards UK voters, and perhaps more importantly journalists, watched regularly on the news a Eurozone crisis that was, in the way it was reported, all about government budget deficits of certain Eurozone countries. It became very easy for the Conservatives and their press to convince much of the media and a majority of voters that financial crises and budget deficits went together. (Remember Cameron and Clegg’s claims that the UK ‘was on the brink’ of disaster before they won the election.)

This was also nonsense. The Eurozone crisis was very much a Eurozone affair, and the problem lay not so much with periphery governments but with the European Central Bank and major Eurozone countries wanting to protect their own banks. But understanding that required the media to go beyond their usual sources (governments and market traders) and access people who were not trying to please voters or clients, and in particular to talk to academic economists. This the media repeatedly failed, and continues to fail, to do.

If this is the clearest example of misleading voters about the economy, it is far from the only one. More recently we have seen ‘the economy’ invoked by Johnson’s government (strongly encouraged by Sunak) in 2020/1 as a reason why we shouldn’t try to save lives using lockdowns before vaccines became readily available. Once again the media didn’t ask those making this claim obvious questions, like whether the economy would benefit from many more people getting sick if lockdowns were not imposed. The reality is that the economy/health trade-off only existed in the very short run, and in the longer run what was good for health was also good for the economy.

This is one of the examples Saunders quotes where “the economy” is thought of as a separate entity (to health), the environment being the other. They are actually quite similar. If there exists an economy/environment trade-off (at least in terms of fossil fuel usage), it is only over the very short term, because of the government investment needed to get green energy production into place. Once that is done green energy improves the economy because it is substantially cheaper (among other reasons). In the longer term the economy will only head downwards if we don’t get rid of fossil fuels.

This suggests to me that the problem is not so much that the economy is seen as a separate thing, but that it suits some political actors to pretend that it is independent of other things like health and the environment. Lockdowns only damage the economy if you imagine that a pandemic will have no impact on the economy, which is obviously nonsense. Getting to net zero is only costly if you ignore the benefits of cheaper and cleaner energy for the economy. Political actors can get away with this because most people don’t understand much about how the economy works, and the media does very little to inform them when doing so would upset some of those actors.

What about the contrast Saunders makes between the ‘good economy’, which is bound to involve moral judgements, and the more technocratic question of how we create a bigger economy? Again it’s not hard to see why certain political actors would resist talking about a ‘good economy’? One obvious aspect of a good economy is how resources are distributed, and those with everything to lose from such a discussion would rather it wasn’t discussed. A good economy would also involve good jobs with good working conditions, an economy where those who lost their jobs were financially secure and where the state made real efforts to help them find new jobs rather than making efforts not to give them money, an economy where firms were not able to pollute the natural environment for the sake of shareholder dividends, an economy that was family friendly (people could take time off to have and look after kids without taking a hit to their career prospects), an economy where public services were not crumbling, and so on. A good economy is likely to involve a lot more state resources and ‘interference’ than the political right would be happy with.

However I don’t think this is the only reason why the media often seems obsessed by more technocratic macroeconomic issues involving growth and the business cycle. Another is that monthly or quarterly data, or large daily movements in financial markets, provide journalists with news, and the number of journalists talking about news far outnumbers those able to tell generally more interesting stories about things that have been true for some time.

Don’t get me wrong. I think dealing with macroeconomic issues in a technocratic way can sometimes be extraordinarily useful. For example, both austerity and Brexit were bad for nearly everyone in the economy irrespective of any but the most trivial moral judgements. It is crucial to be able to make such judgements independently of any party political or ideological perspectives, because that is how you can convince those who are not politically partisan (and even some who are) what are good or bad ideas.

However I hope the last 13 odd years will be seen in the future as a relatively unusual period, where the government made so many obviously and seriously bad decisions in purely technocratic terms. If we move to a more benign period where the government avoids making such obvious technocratic errors, and where ministers are less resistent to state intervention, then the issue of what is a good economy might become more interesting and important than questions involving economic growth. Just don’t expect to see that change reflected much in what the media reports and talks about.