"A vote for Labour is a vote for stability" said Sir Keir Starmer launching Labour's election campaign. This is more than just a soundbite. It opens the door for some sensible policies.
There is a solid economic logic to this desire for stability. Instability and uncertainty depress capital spending: why invest in a risky project in uncertain times if you can wait for the fog to lift? If government can offer stability - and, crucially, have businesses believe in its offer - then this alone can boost economic growth. This is why Gordon Brown famously spoke of "no return to boom and bust."
Which brings us to the problem. There are two sorts of stability, one of which governments can provide and one which they cannot. They can provide policy stability: in principle, Ms Reeves could announce Labour's tax and spending plans for the next five years within a few weeks of taking office and then promise no more Budgets. This would give us fiscal policy stability.
What it would not give us, however, is economic stability. Economies are always hit by shocks* which cause booms and slumps, as Mr Brown discovered in 2008.
The question, then, is: how can policy respond to such shocks and so create economic stability?
In the case of demand shocks, the answer is in principle simple. The Bank of England cuts interest rates and the government borrows more, thereby supporting demand. To her credit, Ms Reeves has an "escape clause" in her fiscal rules to allow current public spending to exceed taxation "if the OBR declared the UK was in an economic crisis."
Demand shocks, however, aren't the only sort. There are also supply shocks - things such as soaring oil prices** which depress both demand and the economy's supply potential. And some shocks are a mix of both supply and demand shocks - such as the pandemic and perhaps the banking crisis.
Policy responses to these have been ad hoc: after the pandemic and the surge in gas prices caused by Russia's invasion of Ukraine the Bank of England let inflation rise above target whilst the government gave one-off handouts to support demand.
But here's the problem. Shocks are unpredictable: Prakash Loungani and colleagues have concluded:
We find that the ability to predict turning points is limited. While forecasts in recession years are revised each month, they do not capture the onset of recessions in a timely way and the extent of output decline during recessions is missed by a wide margin. This holds true for both private sector and official sector forecasts.
During the financial crisis, for example, the Bank of England only cut Bank rate to what it then considered its lower bound in March 2003 - 12 months after output began to fall.
Conventional macro policy, then, can at best only ameliorate recessions after they have begun. The belief that "predict and control" can prevent economic instability is due to irrational overconfidence and the ideology of centrist utopianism, not to actual evidence.
If Sir Keir is serious about offering stability, he therefore needs to offer more than good macro policy.
But what?
One answer is to prevent shocks rather than react to them. Ms Reeves has recognised this. One lesson of 2008, she said in her Mais lecture, is that:
Stability was a necessary, but not a sufficient condition to generate private sector investment. An underregulated financial sector could generate immense wealth but posed profound structural risks too.
This is why greening the economy is so important. Doing so doesn't just (!) help save the planet. It reduces our vulnerability to one source of shocks: gas and electricity price rises.
But we cannot predict where all shocks will come from: will they be pandemics, wars, food price rises due to climate change or - quite likely - from something we've not thought of? Important as it is, prevention is not enough. We need something else.
That something, as Eric Lonergan pointed out during the pandemic, is that we have the means to react quickly and efficiently to shocks. We lacked this in 2008. And whilst help was quick during the 2020 pandemic it was not wholly effective: many self-employed people missed out on assistance whilst millions were lost to fraud.
One possibility here is to have a rule-based policy, to expand activity when GDP drops a certain amount below a pre-announced trend level (and contract it when it rises above it). The expansion, in emergencies, could take the form of tax rebates, zero mortgage rates or simply writing everyone a cheque.
There's a problem with this, though; GDP is only measured with a lag and so any such help will arrive late. One solution to this would be to develop macro markets (pdf), in which there are liquid markets in GDP-linked securities whose prices could be used to guide policy. Another solution would be to accelerate the development of nowcasting (pdf), ways of measuring GDP in real time.
But there's something else policy can do. We could have better automatic stabilizers, which include high enough welfare payments to avoid people suffering huge falls in income in bad times.
These aren't just necessary at the macro level. They are also necessary to ensure something more important than macro stability - individual security.
Even in stable macroeconomic times people suffer job losses. These are the counterpart of productivity growth. This occurs not so much because incumbent firms become more efficient but because of creative destruction, the closure of inefficient plants and firms and opening of better ones (pdf). A more efficient economy thus requires that people move job. But as Ms Reeves asked:
Without a safety net to fall back on, how can we expect an ordinary person to retrain, take a new job or change career?
This safety net must not only be high but must be stable and be genuine help, rather than harassment by a cruel bureaucracy. Which is one reason why some of us favour a citizens basic income.
Serious thinking about economic stability, then, requires a focus on big policy questions: how to go beyond "predict and control" macro policy; how to regulate key industries properly whilst ensuring resilience elsewhere; how to have a welfare state that supports incomes and facilitates necessary job moves.
Of course, you'll object to all this that it is not what Sir Keir has in mind at all. Maybe not. My point is that once we start talking about economic security, some sensible ideas naturally emerge. And this is one reason why leftists should welcome a Labour government, especially one with a big majority - because it would change the agenda away from media-inspired Tory drivel and towards more serious issues.
* I'm following economists' standard terminology here. In truth, some of the things that cause recessions aren't exogenous bolts from the blue but are in fact the product of developments within the system: I'd argue that the banking crisis of 2008 was one such, but that's another story.
** Some people prefer to call rising oil prices a terms of trade shock. Nothing I say hinges on this distinction.
《The Bank of England cuts interest rates and the government borrows more, thereby supporting demand》
Why ignore trillions in currency swaps with the Fed and outright asset purchases by the BoE?
Why continually leave finance out of your analyses, especially since our blogger made all his money in finance?
Posted by: rsm | May 30, 2024 at 07:16 AM
«big policy questions: how to go beyond "predict and control" macro policy; how to regulate key industries properly whilst ensuring resilience elsewhere; how to have a welfare state that supports incomes and facilitates necessary job moves. [...] once we start talking about economic security, some sensible ideas naturally emerge.»
I guess our blogger is arguing that public life in the UK suffers from a scarcity of "sensible ideas".
«leftists should welcome a Labour government, especially one with a big majority - because it would change the agenda away from media-inspired Tory drivel and towards more serious issues.»
So putting better people in charge would mean they would deal with ˚serious issues” thanks to “sensible ideas” to solve “big policy questions”. It is curious that not so long ago our same blogger wrote this:
https://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2023/12/the-class-base-of-bad-government.html
«schoolteacher politics, the notion that bad policy is mere intellectual or moral error that could be avoided if only we had better people in charge»
In my fantastical parallel earth the “big policy questions” that have arisen in public life have been "how to redistribute from worker and tenants a lot of wealth and income upwards with rapidly increasing housing costs”, and "how to ensure City spivs make a lot of money with very risk trading by deregulating them and then backstopping them entirely with state money” and “how to make workers more competitive with lower wages, pensions, and much meaner welfare” and “how to moderate taxes by cutting spending that benefits workers and tenants”.
All these questions have been solved for the past 40 very well, the governments of the past 40 years have achieved much to the delight of their voters.
In my fantasy parallel Earth there is no scarcity of “sensible ideas” as to solve the problems above, and they have been solved.
How fortunate must be the real planet in which you all live where the big problems on which most voters agree are to “go beyond "predict and control" macro policy”, “regulate key industries properly”, “have a welfare state that supports incomes”, even if the people in charge are not good enough to have “sensible ideas” on how to solve them.
Posted by: Blissex | May 31, 2024 at 07:16 PM
What if in my fantastical parallel world, the rich create a lot of money for themselves, use the central bank as a public money backstop when necessary, and impose scarcity on the poor not due to physics but simply as a kind of icing on the cake, pointing to the zero-sum models of mainstream economics as an excuse why they have to be mean (even as they cynically press the money-printing button as much as they want, for themselves)?
What if the poor realized that the zero-sum models of economics are just being used cynically by those in power to justify rising inequality? What if we the people voted in politicians who would implement a non-tax-funded high basic income fully indexed to inflation?
Posted by: rsm | June 01, 2024 at 08:03 PM
«So putting better people in charge would mean they would deal with ˚serious issues” thanks to “sensible ideas” to solve “big policy questions”. It is curious that not so long ago our same blogger wrote this:»
While I keep following this blog as I appreciate the quality of our blogger's posts presenting interesting literature with useful links, I keep making this point because...
I liked rather more his writing when he was talking about economic matters, rather than "metaphysical" matters like cognitive biases and the quality of the people in charge.
There are plenty of strange economic happenings around us, from high inflation here and negative inflation in China, the weird goings on in the USA government debt markets, the evolution of the UK trade balance, the enormous fall starting in 2004-2005 in both electricity consumption and production in the UK and many other "mature" economies, the apocalyptic increase in valuation of USA stocks like Moody's, ...
I am also disappointed by his constant inconsistency :) between his acknowledgments that politics and economic policy is about conflicts of class interests and power for specific constituencies and his talking of "kumbaya" style government for what he seems to think is "the national interest", solving “serious issues” thanks to “sensible ideas” to address “big policy questions” like “go beyond "predict and control" macro policy”, “regulate key industries properly”, “have a welfare state that supports incomes”.
Posted by: Blissex | June 03, 2024 at 10:17 PM