The death of economic policy

One of the great and under-appreciated changes of recent years has been the disappearance of serious economic debate from Westminster politics.

For decades the big political divide was about economics: the causes and cures for the UK’s relative economic decline; the precise mix of state and private sector; what to do about industrial relations; monetarism vs Keynesianism; how to achieve macroeconomic stability; how to redefine social democracy in the 90s; and austerity after 2010.

Today, though, mainline politics is largely innocent of economics. The Tories, Stian Westlake has said, “seem to have stopped talking and thinking about economics.” We see this, for example, in the decline of John Redwood from being a serious Thatcherite to a sub-North Korean driveller about juche. More starkly, it was once inconceivable that any Tory would utter the phrase “fuck business” – let alone become Prime Minister having done so.

It’s not just Tories, though, who have abandoned economic thought. So too have centrists. The TIG (or whatever they called themselves) were silent on economics except for waffle about fiscal responsibility. And Chris Leslie’s Centre Ground pamphlet (pdf) said nothing about how the financial crisis requires us to rethink economics, despite his boast that centrism chooses “an evidence-based rather than ideologically-driven approach to the world.”

I fear that Labour might go the same way, and lose its McDonnell-inspired interest in fundamental change of our economic institutions.

There is a justification for this lack of interest. Raising medium-term economic growth is hard: in fact, growth rates might well be determined more by international factors than local ones. And it’s not worth the effort. You don’t have to subscribe fully to the Easterlin paradox to suspect that economic growth doesn’t translate into great improvements in well-being; the fact that well-being seems to have improved in recent years despite our sclerotic economy is consistent with this.

What’s more, many important issues can be addressed without policies to raise general economic growth – such as food poverty, the housing crisis or climate change.

You might add a further justification for the declining importance of economic policy. It’s that voters don’t care about it. As Stephen Davies says in The Economics and Politics of Brexit, that "the main division in society has switched from being primarily about economics to being about culture and identity” – that there has been a realignment in politics along cultural lines.

These, I suspect, are justifications rather than reason. Voters’ attitudes are not exogenous. They are instead the product of both economics (stagnation tends to breed reaction) and of political forces – the way in which eurofanatics forced what was once a fringe issue to the top of the agenda.

Instead, I suspect there are two reasons for the loss of interest in economic policy.

One is that centrists and the right just don’t have a clue.

From the 70s to 2008, the question for neoliberal economic policy was how to unleash capitalism’s incipient dynamism. Whether it was Thatcher blaming the unions or high inflation or Brown blaming unstable macro policy, politicians thought that the role of government was merely to create the right conditions for growth and that capitalism would then deliver it.

Subsequent events have refuted this view. The 2008 crisis showed that lightly-regulated capitalism was unstable. And weak trend growth since then suggests that governments might have to intervene more in the economy to stimulate growth. Not having answers to these problems, the centre and right have gone quiet.

Secondly, there are fewer interests that are served by economic growth. As Brett Christophers has described, the economy is dominated by rentiers. Their wealth depends less upon revenue growth and more upon maintaining and securing rights to assets, sometimes via cronyism. It’s not just companies for whom this is true. Many retired pensioners with expensive houses are in the same position.

In fact, for many of these, economic growth might actually be a bad thing. Sustained strong growth would raise real interest rates. But this would depress asset prices by raising the discount rate applied to future rents and by increasing the cost of leverage. Fordist capitalism required a large and growing mass market; rentier and financialised capitalism do not.

Perhaps, though, politicians were never really that interested in promoting growth even when they claimed to be.

Sure, they all talked about the UK’s relative economic decline in the 50s, 60s and 70s. But maybe this was less because they wanted to raise living standards and more because they feared the UK’s loss of power and prestige on the global stage. And if they did care about raising living standards it was less out of concern for workers’ well-being and more out of the desire to buy off discontent – to show, in the face of the communist threat, that capitalism could deliver the goods.  

And perhaps Thatcher’s assertion of “managers’ right to manage” was not a means of increasing efficiency but rather a desire to impose traditional hierarchies and put workers back into their subordinate place. As Corey Robin has argued, the one common theme in conservatism is its love of hierarchy.

Traditionally, Marxists have thought that capitalists need economic growth. Which is true of capitalism operating within markets. But it is not true of all types of exploiters: feudal lords did perfectly well for themselves in stagnant economies. Perhaps, then, the loss of interest in economic policy is a symptom of the fact that capitalism today in fact is characterised by powerful elements of feudal exploitation. Rightist and centrist politicians are no longer interested in economics because they no longer need to be.

Comments

[Nigel Clarke]

Economics is not discussed because it is not understood be either the electorate or the politicians.The politicians have no interest in economics because it is irrelevant to their chances of re-election and also this leaves them free to espouse nonsense like trickle down, and laffer curves.

[marku52]

Perhaps it is because within the memory span of the modern voter, no policies tried have actually changed the economic trajectory?

[Rich]

I imagine this is true of elderly Tory voters, but what about the young with marginal jobs and no hopes of buying a house? They may be powerless but they surely care about their future economic and other opportunities.

[Bill Posters]

Where's Blissex?

Southern Tory voters don't care about economics as long as house prices keep going up.

[David Friedman]

"What’s more, many important issues can be addressed without policies to raise general economic growth – such as food poverty, the housing crisis or climate change."

The major policy supported as a way of reducing climate change is replacing fossil fuel with wind or solar. That increases the cost of energy, which one would expect to have a negative effect on general economic growth.

[rsm]

At some level, the public understands that we can print money faster than prices rise and distribute it equally to avoid the Cantillon effect. Real purchasing power increases faster than inflation; taxes aren't necessary. Economists have a whole impressive edifice denying this intuition, but everybody knows they're wrong. Some are starting to say it out loud ...

[Jim]

Seems to me politicians have been pushing economics buttons for decades but without much effect. Small wonder they are looking for new/different buttons to press. The traditional buttons seem not to be connected to anything. We are back to a pre-technology pre innovation society at least for now. In effect ownership of rental assets and coercion assets is what counts.

Right now the fashionable buttons are electric cars, all things green, influencers, social media. We seem to be making a living by tweeting, sending trivial messages and pictures around the world and buying 'stuff' made in China. All good ways of burning off human endeavour.

In return we flog 'services' such as insurance, high finance, legal services, software and technology and 'tech' and intellectual property. All fine and large, but unconvincing. Intellectual property sounds a lot like 'land', something to be rented out, fine until someone does the job differently. Further, being intellectual it only exists in heads and heads are a common enough product, IP can go anywhere, overnight.

We may worry also that electric cars are a dead end. The battery revolution may be a long time coming. Are we really going to find all the metals to make all those fancy motors and generators. Is Mr Biden really going to wean the rednecks off their 5 litre SUV's. On the other hand heating homes is another energy intensive business. To make all homes energy efficient we would have to knock most down and start again - whilst keeping an eye on costs, quality and whatever the next gotcha is. Sure to be done on the cheap.

What is really happening underneath all this. People still need food and housing and medicines etc. People are still messy creatures that screw the place up. We might yet have to think of think of holding down their numbers. Howls of protest, if us then why not them etc etc. To do so overtly or covertly? Perhaps a never ending Covid20, 21, 22 etc might help. At least viral infections like Covid knock off everyone in more or less equal portions. Our salvation may be staring us in the face.

[ltr]

What is so interesting, in contrast, is that President Macron just delivered a profoundly important speech at Davos on inequality with unfettered capitalism and a need to change the concept of capitalism.

Also, President Xi spoke importantly on economics at Davos:

http://www.xinhuanet.com/english/2021-01/25/c_139696610.htm

January 25, 2021

Special Address by Chinese President Xi Jinping at the World Economic Forum Virtual Event of the Davos Agenda

BEIJING -- Let the Torch of Multilateralism Light up Humanity’s Way Forward

[ltr]

Remember that the British media ruined the Labour leadership of Jeremy Corbyn. Corbyn of course always focused on economic policy and that was threatening to the likes of Murdoch media folks or even the BBC and Guardian elite. With the likes of Starmer there will be no actual concern with economic policy.

[ltr]

January 29, 2021

Coronavirus

UK

Cases   ( 3,772,813)
Deaths   ( 104,371)

Deaths per million   ( 1,533)

Germany

Cases   ( 2,207,393)
Deaths   ( 57,052)

Deaths per million   ( 680)

[Jan Wiklund]

You are right, Chris. But there is more in it.

Classical politicians wanted growth, or rather development. They wanted their countries to be competitive, not least for military reasons. And they thought like pre-industrial landlords or subsistence peasants: how do I get as much as possible out of the land. That was also the approach of classical economy, as with Serra, Colbert, Hamilton, List, Carey, Schumpeter and all the post-slump development economists. Even Keynes thought like that, although Samuelson neutered him when he was dead.

Nowadays politicians think like employees: how do I get the money to last. And this restricted way of looking at things is also the neo-classical economist approach. You can see the differences between the approaches at http://othercanon.org/organization/.

Moreover, the latter express themselves in such a hermetical way that politicians can’t get any help from them even if they had any.

[Jan Wiklund]

Addition:

Classical economics (of the kind mentioned above) thought in terms of productive capacity. Different business lines could be of different value depending on the time or space, or on the presence of other business lines, as the rather latecoming development economist Erik Dahmén's "development blocks", see https://link.springer.com/chapter/10.1007%2F978-94-009-1075-1_5.

Contemporary economics is flattened out, one-dimensional. It has no other units than monetary ones. It judges a rent as equally valuable as a productive capacity, if not better. Thus, it has made us all into pensioners. So what could the poor politician do?

[KJ]

Just a reminder that none of this hardship is necessary... this is deliberate government action withdrawing support from its citizenry for no good reason... there are no fiscal constraints on a sovereign currency issuing nation such as the UK... and they know it...

So once again I present for your perusal the Whole of Government Accounts (WGA) for the UK...

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/221560/whole_of_government_accounts_31-03-2011.pdf

Which provides a consolidated view of government... This represents pretty much exactly the MMT view of the government sector...

Some of the quotes from the accounts are too good to be left hidden away in a PDF...
So I’m going to highlight them for your delectation... 😉

Paragraph 2.2 (p7) sets the scene:

HM Treasury identifies the entities to be included in WGA in accordance with the legislation that required WGA to be prepared1. It is required to include entities that “exercise functions of a public nature” or that are “substantially funded from public money”. The Treasury’s decisions are consistent with the classification of entities to the public sector by the ONS. This is because the ONS takes account of these factors when making their classification decision as well as the degree of control that government has over each entity.

This is corroborated by the auditor in paragraph 7.16 (p50)

To be included in the WGA, a body must do the work of the UK government, be accountable to, or be otherwise controlled by government.

Therefore, unsurprisingly, the accounts include the central bank (para 7.75 p76)...

the Treasury has taken steps to make the WGA more transparent and complete. The 2010-11 WGA: … consolidated the financial activities of additional bodies, such as the Bank of England

The bilateral relationship between HM Treasury and the Bank of England is similarly explained clearly. Para 3.80 (pp28) shows that the indemnities between them are irrelevant at the consolidated level.

A number of guarantees and indemnities exist between HM Treasury and the Bank of England. These are not disclosed in Whole of Government Accounts, as both bodies are included in the consolidated financial statements.

The same point is made in Para 3.85 (p 29)

Arrangements between bodies within the WGA boundary, such as guarantees and indemnities between HM Treasury and the Bank of England, are not included, as they eliminate on consolidation in these accounts.

MMT says that QE is an asset swap and effectively eliminates any Gilts purchased... The accounts agree in para 7.50 (p62)...

As at 31 March 2011, there were some £1,059 billion of gilts outstanding but the WGA shows a smaller figure of £746 billion (Figure 10). The WGA is not intended to include as liabilities gilts held as assets by entities in the WGA, such as the Bank of England Asset Purchase Facility Fund as part of Quantitative Easing (paragraphs 7.53 to 7.54).

Para 7.54 (p65)expands on this and delivers the killer conclusion...

Consolidating Quantitative Easing does not significantly reduce the overall liabilities of government but it does reduce the number reported as government borrowing. Once intra-government transactions are eliminated, the scheme represents an exchange of gilts (liabilities of the National Loans Fund) for central bank reserves (liabilities of the Bank of England).

In addition the Consolidated Statement of Financial Position (p94) contains the term "Financed by Taxpayers' Equity"... Which is exactly correct... The net savings of the non-government sector is indeed Taxpayers' Equity...

When you apply the International Financial Reporting Standards to a set of government accounts ... the MMT viewpoint arises quite naturally from the numbers...

[rsm]

"MMT says that QE is an asset swap and effectively eliminates any Gilts purchased..."

Central banks buy a lot of private assets. Doesn't that mean that the privately-created assets are effectively eliminated too, leaving only money in private hands? In other words the private sector creates a debt instrument and monetizes it by selling to the central bank?

If so, doesn't that contradict MMT dogma that the private sector cannot create Net New Financial Assets? The private sector creates a sterling-denominated asset out of thin air, sells it to the Bank of England, and now has sterling instead of the magically-created asset? Isn't that essentially creating a private sector net new financial asset?

[eg]

@rsm

Since loans create deposits I believe that the “privately created asset” also features a simultaneous and equivalent “privately created liability.”

Net private sector assets equal government debt as demonstrated by Wynn Godley’s sectoral balances analysis.