Winner of the New Statesman SPERI Prize in Political Economy 2016

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.

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