It's not the 90s any more

Sir Keir Starmer wants to party like it’s 1999. That seems to be his motive for seeking the advice of Peter Mandelson. There is, however, a big problem with this. It’s not the 1990s any more. There have been huge socio-economic changes since then, which require very different policy responses.

One of these is that the economy is now stagnating. In the 20 years to May 1997 labour productivity grew by an average of 2.3 per cent. In the 12 years before the pandemic, however, it grew by only 0.2 per cent per year. Back in the 90s, therefore, it was reasonable to believe that the economy would grow well if governments could only provide the right framework such as stable macroeconomic policy. Today, though, we know that whilst policy stability might be necessary, it is not sufficient. Capitalism has lost its dynamism. That requires a different – perhaps more activist – policy response.

A big reason for this stagnation is, of course, the legacy of the financial crisis. Which itself shows another reason to need to break with 1990s thinking. In his 1996 book The Blair Revolution, Mandelson wrote of the need for “firm macroeconomic policies to avoid any repetition of boom and bust”. “By far the most important thing” he wrote “is to get macroeconomic policy right.” But we now know that macro policy is not enough to avoid recessions and their aftermath. The banking crisis taught us that the economy is not naturally stable, thrown into recession only by policy error. Instead, crises arise from private sector decisions which cannot be fully corrected by good policy. Mandelson’s claim that “our understanding of economics has greatly advanced in this century, and in theory enables economic fluctuations to be damped and corrected” now reads as simple-minded hubris.

Our long stagnation requires another change in thinking from the 90s. “New Labour emphasizes macroeconomic stability” wrote Mandelson “because of principled objections to high inflation and the economic and social havoc it wreaks.”

Today, though, we have the opposite problem. Inflation is too low. A rise in it might actually be a good thing as it would allow us to escape the zero(ish) bound on interest rates. Mandelson wrote of the need for a “tight new discipline” in fiscal policy. That might have made sense in an inflation-prone economy where real interest rates were over 4%. But when economies are stagnant and real rates minus 2%? Not so much.

Stagnation also overturns 1990s ideas about inequality. Although Mandelson has disowned his famous remark about being "intensely relaxed about people getting filthy rich as long as they pay their taxes", I’m not sure he appreciates just how wrong it was. A decade and a half of stagnation shows us that inequality is not a minor issue ameliorable by tweaks to the tax system. Instead, it’s plausible that inequality is a big cause of slow growth. It concentrates power within companies into the hands of reckless Stalinists like Fred Goodwin; it incentivizes rent-seeking; it generates perverse incentives; reduces trust, innovation and investment; and so on.

Growth-enhancing policies thus require much more egalitarian actions than we thought in the 90s, therefore.

And the inequality that matters now is very different from that of the 90s. Back then, leftists such as Will Hutton spoke of the 30-30-40 society: “30 per cent disadvantaged and marginalised; 30 per cent insecure; 40 per cent privileged.” Today, though, what matters is the wealth and power of the top 1%, or 0.1%. New Labour was largely oblivious to this: in hindsight, one of Gordon Brown’s great failings was his undue deference to bank bosses.

Because the economics has changed since the 90s, so too has the politics. I mean this in two big ways.

One is that the growing wealth of the mega-rich has increased their power over politics. In the 90s, the main opposition to Labour was founded upon businesses’ fears of higher taxes and bad macroeconomic management. The party could then assuage such concerns easily. Today, though, it faces opposition from eccentric billionaires stoking up culture wars. It’s less obvious what to do about this.

Secondly, our long stagnation has strengthened illiberal populist sentiment – just as Ben Friedman predicted. In the 90s and 00s the Tories lost elections massively by “banging on about Europe”. Things have changed since. In the 90s, voters chose technocrats over cranks. They no longer do so. Which gives Labour a dilemma: how far to accommodate itself to populism, and how far to resist it?

In all these ways, the 90s is utterly irrelevant today. What worked then will not work now. Few centrists, however, seem to grasp this. One of their defining features, indeed, is a complete innocence of economic realities and a vacuum where ideas should be.

Which brings us to a paradox. One of the great achievements of Tony Blair was to realize that social democracy had to reinvent itself for the new times of the 1990s. His epigones, however, don’t appreciate that Labour now needs another reinvention for different times, and don’t give John McDonnell credit enough for grasping this fact. The thing about modernizations, though, is that you have to keep doing them.

Comments

[Prince]

Does economic policy matter less to our politics today than it did in the 90s? I would argue yes, and so would you I think Chris.

Follow that theme a little further and you could argue the reasons Labour lost in 2010 - the first post crisis election - are the same as those that will lose it in 2024 and have little to do with economic policy: in divide and conquer Britain Labour is portrayed to be siding with the feckless and unloved groups of society instead of 'hard working people'.

A New Labour mantra was to 'concede, and move on' whenever new realities struck. Might that explain Sir Keir's current positioning better than other factors?

[rsm]

"The banking crisis taught us that the economy is not naturally stable, thrown into recession only by policy error."

The lesson from 2008 is 1) the Fed tightened too fast, precipitating a mortgage default crisis; and 2) the Fed made a further mistake by not bailing out Lehman's, causing a financial panic that reverberated into the real economy.

[rsm]

"Secondly, our long stagnation has strengthened illiberal populist sentiment – just as Ben Friedman predicted."

So Trump really did have the election stolen from him?

[Jim]

I must admit to a vacuum of ideas. I cannot think of a large scale business to invest in. Sure, a spot of retail or holidays or care homes or windmills, but nothing really very new, just same old - same old. Green looks good and attracts subsidies but mostly the physics and chemistry don't really work. So I might take a bit of money for a while - until reality catches up.

Worse, there are large scale business ideas - but they need large homogenous markets with access to plenty of cash and no barriers to trade. The old competitive advantage idea has gone, nations are all equally capable and compete on price/distance/transport/communication. The internet has been a great leveller, unfortunately the hill we sat on has been levelled.

Which leaves political parties with a problem. For now the Tories can roll the printing presses but may face a problem in say 2023 when despite serious cranking of the engine nothing has happened. The economy has evaporated. The 2024 election looks like one to lose - for anyone.

[Paulc156]

"So Trump really did have the election stolen from him?"...or perhaps it explains how he got elected in the first place and why he got yuuuge numbers to come out for him, (at the polling stations) even despite the widespread mirth and loathing that he inspired in the media and across the globe. Hmm.

[Casapinos]

The problem with this article is in my view the statement that
"the economy is now stagnating"
I assume based on the apparent slow growth in productivity figures but which , in my view is wrong. I do not believe that GDP whether in total or per head is accurately reflecting the giant strides that are being made . Look around, or even look in your hand . The "hedonic adjustments" which are meant to account for the improved functionality of the tools we all use every day , the mobile phone(hand held personal computer ?)our TV, our laptops and the myriad software tools they support have changed the world fundamentally and at diminishing cost for increased functionality. I suspect that when the economic history of the last two or three decades is finally compiled we will find a very rapid productivity growth .

[David]

Do you think that stagnant aggregate productivity is an example of Simpson's paradox?
Many individual sectors have continued to experience productivity gains (most obviously tech but also manufacturing and some professional services).
However, at the same time, there has been a shift in employment towards:
1) Sectors with lower productivity (e.g. retail).
2) Sectors with lower potential for productivity improvements (e.g. care).

[Gary Fuentes]

I do believe that because the economics has changed since the 90s, so too has the politics. When it comes to voting rights, people now are over using their rights that even if the candidate has no experience into leading people but because of popularity, they will choose it over the candidate that has a good record of leading people and making the economy to be in a better position.

[Dennis Smith]

"The banking crisis taught us that the economy is not naturally stable, thrown into recession only by policy error."

Maybe the banking crisis taught us that there is no such thing as ‘the economy’? What kind of thing is it that is thought to be ‘naturally stable’? (Note that it is natural, not cultural: cultural change is assumed to be non-existent or non-effective.)

Maybe the thing is stable because it can be analysed into a system with feedback loops? But what is this system made up of? Maybe sub-systems, such as corporations? And what are the sub-systems made up of? Is there an infinite regress looming ahead?

Maybe we can find a solid base in individual persons or agents? But lots of people – call them post-humanists for want of a better name – have been telling use lately that personhood and agency are bourgeois myths that must be deconstructed. Deconstructed into what?

Maybe at this point the whole idea of rational agency vanishes into the sands, taking the discipline of economics with it?

[ltr]

Follow that theme a little further and you could argue the reasons Labour lost in 2010 - the first post crisis election - are the same as those that will lose it in 2024 and have little to do with economic policy: in divide and conquer Britain Labour is portrayed to be siding with the feckless and unloved groups of society instead of 'hard working people'....

[ Jeremy Corbyn sided completely with 'hard working people' and for that the BBC literally portrayed Corbyn as a Russian communist. Then Corbyn was continually portrayed as anti-Semitic even by a working class detached Labour elite. ]

[ltr]

February 17, 2021

Coronavirus

UK

Cases   ( 4,071,185)
Deaths   ( 118,933)

Deaths per million   ( 1,746)

Germany

Cases   ( 2,362,352)
Deaths   ( 67,074)

Deaths per million   ( 799)

[Dipper]

Coronavirus

UK 170 deaths per 100K
Belgium 190
New Jersey 253
New York 237
Massachusetts 226
Slovenia 187

[Paulc156]

@Dipper. Saw what you did there lol.
Comparing nation states though...UK covid deaths per million 3rd highest behind only Belgium and Slovenia and far worse than disorganised, distracted and dysfunctional USA. Only the impressive rollout of vaccines and strict lockdown has given us a belated get out of jail card. So instead of 'the' worst in the world which we were last month we're now just one of the worst!
https://www.statista.com/statistics/1104709/coronavirus-deaths-worldwide-per-million-inhabitants/

[Dipper]

@ Paulc156 what is wrong with comparing densely populated UK with densely populated states in the USA?

The stats for the states are very interesting in that they are quite choppy. Although there are a lot of northern densely populated states at the top there are also some southern less densely populated states in there too. And the Dakotas.

It is almost as if there is little rhyme or reason behind which states did well and which didn't.

https://www.statista.com/statistics/1109011/coronavirus-covid19-death-rates-us-by-state/

[ltr]

February 16, 2021

COVID-19, experts and the media

On February 4th, the British Medical Journal (BMJ) published an editorial * which suggested that the actions of most government’s in mishandling the COVD-19 pandemic could be described as "social murder." They write:

"The 'social murder' of populations is more than a relic of a bygone age. It is very real today, exposed and magnified by covid-19. It cannot be ignored or spun away. Politicians must be held to account by legal and electoral means, indeed by any national and international constitutional means necessary. State failures that led us to two million deaths are 'actions' and 'inactions' that should shame us all."

The biggest state failure of them all is the UK Chancellor persuading the UK Prime Minister to ignore his expert scientific advisers last autumn.

This damning verdict should come as no surprise, as in most countries most medics have despaired at the failure of politicians to be able to lockdown hard and early. Time and time again leaders want to delay what is inevitable, which just means that more people die, and the lockdowns when they come last longer than if they had been put in place earlier. Equally academic economists with some expertise in pandemics have despaired when governments have used the economy as an excuse for not saving lives, because these economists know there is no trade-off between health and the economy beyond a few weeks.

The interesting thing about this editorial was not that it was written, but that it received virtually no coverage in the mainstream media....

* https://www.bmj.com/content/372/bmj.n314

-- Simon Wren-Lewis

[ltr]

February 18, 2021

Coronavirus

UK

Cases   ( 4,083,242)
Deaths   ( 119,387)

Deaths per million   ( 1,753)

Germany

Cases   ( 2,372,201)
Deaths   ( 67,547)

Deaths per million   ( 805)

[Dipper]

@ltr

The Lancet is basically Socialist Worker for doctors.

Many investigations have failed to establish a clear link between lockdowns and deaths.

There has been a suggestion that lockdowns have made matters worse by making hospitals a primary source of infection so serious strains get preferentially spread. It is suggested the same thing happened with Spanish flu.

Perhaps, given that 40% of covid cases were caught in hospitals, the BMJ should instead ponder the mistakes made by the medical profession in failing to prevent the spread within their establishments.

[rsm]

"perhaps it explains how he got elected in the first place"

This is a great example of how those who agree with Ben Friedman cherry-pick their data. Why did Trump lose in 2020 if the economy was still stagnating? That was the point my sarcastic response, which obviously went over the head of our outraged commenter ...

[Paulc156]

@rsm...Why? duh! Covid is only one obvious possibility dullard. Enough dems were scared by his indifference to post their votes in. Of course a few might have been swayed by his series of attempts to subvert the actual election process. I don't think I've ever read Ben F. Seems like you respond like Pavlovs dog every time Dillow mentions him though. Try to be a little less obsessive and you might be less biased as a result. Just saying...

[rsm]

Ben F's story does not remotely hold together. At times of greatest stagnation, the US has repeatedly elected lefties like FDR, Obama, Biden. Dillow and Friedman are simply pushing a mainstream economic agenda that growth is good for tolerance, but the Reagan growth years were accompanied by great intolerance towards drugs that ruined my life. Of course, Ben F and Dillow just ignore my personal time-series, writing me off, eliminating me entirely from their analysis because I inconveniently bring up glaring
counterexamples to their narrative.