On the use, or not, of expertise by government

I will write some thoughts, next week when I have had a chance to collect them, following an excellent PEF book launch two days ago, with great discussion from Ann Pettifor, Aeron Davis and Maya Goodfellow and a packed audience. In the meantime, as spring turns to summer, I wanted to write about something else.

In a recent post I ask why we were governed by incompetents, and I related that to ideology, which in recent times means neoliberalism. But I think it is a little more than working in a neoliberal context, because I say that the Labour government often did try and do evidence based policy. Not always. I mentioned Iraq but there are other examples, but in comparison to Conservative governments they did evidence based policy a lot. The difference is while the Conservatives had neoliberal zeal, Labour were prepared to intervene in the market, particularly to help the poor. A good example was the minimum wage, which was set by a specific body who aimed to keep it at a level that did not cause significant employment loss.

The Coalition government of 2010-5 contained Liberal Democrats who did often check the neoliberal zeal of Conservative ministers. But they often failed to do so, and one example was abolishing the Agricultural Wages Board (AWB) in England. (The rest of the UK kept them.). It was part of their programme to abolish red tape. The argument was that although Thatcher had spared the AWB in her bonfire of wages boards, the minimum wage made it redundant.

I have spent a lot of my life on or near farms. When we moved from London to rural Sussex some 36 years ago I still remember vividly two conversations. One was with a farm worker. I had already noticed the unsocial hours they regularly worked, and I asked him about it. He told me how when his son was born he worked so much that he hardly saw her during the first three months. It was just a bad time of year from the farm's point of view. I guess I remember that conversation so well because we had quite recently had our first child.

What the AWB did and what the minimum wage doesn’t is regulate pay for anti-social of excessive hours. But what about market pressure from labour scarcity? The other conversation I remember was with the owner of the same farm. He was complaining about how hard it was to get additional labour when he needed it. He told me how far he had advertised but it was still difficult. I suggested he try raising his hourly wage. He laughed and said he couldn’t possibly. Those in his local farmers group would stop speaking to him if he did that.

Farming is a classic monopsony, where firms can fix wages well below the market clearing level. The ability of farm workers to find work elsewhere is limited, particularly when employers operate a cartel on wages. The farm I lived on back then was typical: I have watched farm workers working late at night and weekends everywhere I have lived near farms.

Abolishing the AWB allowed farm owners not to increase in nominal terms payments for anti-social or overtime hours on existing contracts, such that they gradually wither away in real terms. It allows farmers not to offer any of these type of payments on new contracts. Some farmers may even have tried to abolish these payments on existing contracts. The governments impact assessment calculated that AWB abolition would lead to a substantial transfer of income from farm workers to farm owners.

I wrote about the abolishing the AWB in 2014. I later had a conversation with a SPAD about their decision. He told me the level of analysis in my post was well above anything he had seen in government when the decision was made. You might think the policy was not surprising from Conservatives, who have a close relationship with the National Farmers Union (a farm owner’s club), but there was no attempt to get even the simplest of evidence, and a very short consultation period for this decision.

This illustrates a neoliberal zeal to abolish regulations, with the inevitable transfer of income from the poor to the rich, without even thinking about making a serious attempt to look at evidence on this issue. In the absence of evidence the LibDem Coalition partners chose not to fight a battle on this issue. Scotland, Wales and Northern Ireland have retained their AWBs. The Labour party opposition have pledged to reintroduce them in England.

Osborne's failure

I've mentioned before the coalition economics website, where the academic economists who analysed the Labour government's economic record for the Oxford Review do the same for the Coalition. My analysis of the Coalition's record on fiscal policy is now up.

It starts by noting three similarities between how Brown and Osborne started their time in office. First, they both made important and progressive institutional changes: Brown established the Monetary Policy Committee and Osborne set up the Office for Budget Responsibility. Second, they both established fiscal rules that improved on past practice. Third, they both started with significant fiscal contractions.

So why will history judge Osborne so much more harshly than Brown? Why did Osborne's policy cost each UK household on average at least £4,000, while Brown's (inherited) contraction had no similar cost in terms of lost resources?

The answer, of course, is that the macro contexts were very different. Brown's fiscal contraction happened when the economy was relatively strong, and interest rates were above 6%. Osborne's austerity happened when the economy was just starting a recovery from a deep recession, and interest rates were at their then Zero Lower Bound (ZLB) of 0.5%. Mainstream macroeconomic theory says that these different contexts make all the difference: when interest rates are at the ZLB, monetary policy cannot counteract the negative impact of fiscal austerity on output.

Why did Osborne ignore this basic piece of macroeconomics? Was his policy based on an alternative macro theory? A remarkable speech he gave at the RSA in April 2009 suggests not. In that speech he said that his macro framework was based on New Keynesian theory, because that theory implied monetary policy should look after macro stabilisation and fiscal policy should focus on debt control. Yet New Keynesian theory also says that monetary policy becomes ineffective at the ZLB, and cutting government spending in that situation reduces output. Incredibly the speech makes no mention of the ZLB problem, even though UK interest rates had just hit 0.5%!  

Could it be that Osborne, or his economic advisers, had simply not done their homework properly? One simple piece of evidence suggests not: his proposals for more austerity after 2015 risks making exactly the same mistake again, with interest rates still at or near their ZLB. A much more plausible explanation for his actions were that the macroeconomic risks were understood, but were put to one side for political and ideological reasons. First the possibility of hitting Labour with a populist concern about the deficit was too great a temptation to resist for a Chancellor for whom political tactics are everything. Second, austerity was a means of implementing an unpopular policy of reducing the size of the state by the back door.

Now you may cynically say that in a contest between economics and politics/ideology, politicians will always choose the latter. However much that is true or false, when that choice costs each household at least £4,000, it would be very strange if that politician survived the judgement of the electorate.