Fed
up with the Conservative Party’s current psychodrama? This could be
a useful distraction.
Aeron
Davis has a new
book out
that is a 40 year history of the UK Treasury (HMT). As I found his
previous book
‘Elites at the End of the Establishment’ fascinating, and as I’m
always interested in anything about the most powerful economic
institution in the UK which also gave me my first job, I was looking
forward to reading this. It does not disappoint.
Like
that previous book it is based on lengthy interviews, in this case
with the key political and civil service people at the top of the
Treasury over this period. As a result, it is very far from a jargon
filled analysis of the details of macroeconomic policy over 40 years.
Its brush is much broader, covering many themes from the growing
influence of finance (financialisation), neoliberal ideas, and an
internationalist viewpoint, but also dealing with the big historical
crises of the period. As the book also roughly covers the years I
have been working as an economist, what follows is not so much a
review as a selected mixture of my own thoughts and those of the
author. I’ll do my best to distinguish between the two.
The
book starts, appropriately, in 1976 after the IMF crisis. I’ve
written
about this before based on Richard Robert’s book,
and I agree with Robert’s interpretation of that crisis as mainly
about fear of devaluation rather than the government no longer being
able to borrow. Aeron is right that HMT used the shock of that crisis
to re-establish its control of government spending, much as it did
later in 2010. However I think the 1970s is more significant because
of three large intellectual failures within HMT.
The
first, which I discuss in that earlier post, was the pervasive view
in the Treasury that it could cheat the Phillips curve using various
forms of prices and incomes policy. The second, again touched on in
that earlier post, was a failure to adjust to a floating exchange
rate regime. It was clear to me while I was working there that while
many junior economists understood how floating rates worked, those at
the most senior levels did not. Both failures were central to
understanding 1976, but were largely corrected by the end of that
decade. [1]
A
third failure that was not corrected was how to deal with the bonanza
of North Sea Oil. It is today standard in the macroeconomics of
resource rich countries that any temporary gain due to the discovery
of a finite resource should be largely invested. That macroeconomics
was not as developed at the time, but the basic choice for the
government of consumption (cutting taxes) or investment was discussed
at reasonably senior levels while I was there. Norway made the right
choice but the UK did not, although how much that was down to
politicians at the time is difficult to tell.
As
Davis points out, this failure wasn’t just about North Sea Oil
revenues, but was repeated with privatisation and council house
sales. During the Thatcher period selling off public capital was
treated as just another form of revenue, which is nonsense because
unlike taxes it is not permanent. Sometimes people question why the
OBR does 50 year forecasts for government borrowing, an innovation
that started under Gordon Brown, and the abuses of the Thatcher
period are one obvious answer.
A
recurrent problem here and throughout any discussion of HMT is to
separate out the views of officials and the politicians they served.
In my own rather limited and out of date experience, those working
in HMT have very varied views, and in a way this is helpful when the
government changes. The arguments against can quickly become the
arguments for when the political tide turns. One of the strengths of
this book and the many interviews on which it is based is to try and
tease out what decisions were political and which were down to
thinking within HMT.
A
good example, which Davis is right to discuss at length, is the
pervasive doctrine within HMT that national firm ownership didn’t
matter. A quote from an interview with John Grieve sums up the issue:
“On
ownership, right from the ’80s, from Big Bang onwards, and indeed
before, there’s been a running worry in government and in
commentary about are we wise to let
foreigners buy everything? … but in fact, there’s been a
longstanding policy, successive governments have decided not to do
anything about it … And, you know, of
course most other countries think this is mad, and that ownership
does matter.”
Aeron correctly links this to internationalist, finance orientated and free
markets attitudes within HMT, but I also suspect there is a hangover
from the period before 1976, when poor UK management, leading to
deteriorating export performance and productivity growth, was a
constant concern.
One of
the points often made about the people working in HMT is how clever
they are. That of course does to necessarily translate into good
policy. I can think of two examples that illustrate this point which
are not covered at length by Aeron Davis: ERM entry in 1990 and Euro
non-entry in 2003. In the first case the good work done outside HMT
on an appropriate exchange rate for the pound was
ignored,
and the debacle of Black Wednesday was a direct result. In contrast
the opposite happened in 2003, and the intellectual
weight
of HMT work helped Brown to convince Blair not to join the Euro.
The end
of the book is dominated by three crises. The first is the Global
Financial Crisis. Aeron effectively shows that no one wanted to hear
warnings about the growing fragility of the UK banking sector, but my
own personal view is that there was one person in particular who was
best placed to react to these warnings, and that was Mervyn King. The
book includes the following quote from an official.
“[King]
managed to spin a narrative over the next few years that the Bank of
England lacked the tools and powers to do anything about it … I
call him the Keyser Soze of the
financial crisis. The greatest trick he ever pulled was persuading
everyone that his responsibility for the financial crisis didn’t
exist … Mervyn, can you point to where
you said that prior to the financial crisis? Why did you cut the
financial stability stuff? You were obsessed with monetary policy,
weren’t you?”
Aeron also deals with how the Labour government failed to hold an inquiry
into how the crisis had been allowed to happen.
The
second crisis is austerity. There are some lovely quotes here,
illustrating that what Aeron Davis calls the ‘posh boys’ regarded
economics as a political means to an end. Here is a quote from his
text.
“Those
who had been part of the New Labour regime, such as Ed Balls, Dan
Corry or Gus O’Donnell, got rather excited when speaking about
economics, even with a noneconomist academic. It was the same with
Alan Budd, Terry Burns and Nigel Lawson when talking about the
Thatcher years. But for those leading the Coalition, economics
was just another consideration in the wider matrix of Westminster
party strategizing and news media lobby management.”
What
Osborne and Cameron were interested in was media management, and they
were experts at it. Unfortunately the advice they were getting proved
no corrective to their macroeconomic ignorance. Here is a quote from
Aeron reflecting on his interview with Rupert Harrison, Osborne’s
economics advisor and now advising Jeremy Hunt.
“When
I asked him directly about the broader inspirations of his economic
thinking, Harrison responded that he had no interest in macroeconomic
thought. His policy views were ‘shaped by more general reading’
and by being ‘a centre-right leaning person’.”
I’m
afraid this was painfully
obvious
from Osborne’s speeches at the time. [2] The origin of the last
twelve years of economic decline can be found in politicians who put
party political interest above the health of the economy.
Unfortunately
that gap in knowledge and concern was not filled by HMT. Senior HMT
officials at the time were more than happy to go along with fiscal
consolidation at the low point of a recession. In this sense
austerity was also another massive intellectual failure for HMT.
However I also think it reflects a key power dynamic within the
department, a battle between those trying to control government
spending and those managing the economy. This tension has been there
since the advent of Keynesian economics, and is the basis for
repeated calls for the two roles to be split into separate
departments.
I have
set out my own views on this, as part of the Kerslake
review,
in a post here.
As Aeron Davis notes, one of the unintended consequences of first
Bank of England independence, and then the creation of the OBR, was
to diminish the weight of macroeconomists within HMT. Nevertheless,
all those running HMT should have had a good understanding of
Keynesian economics. I accept that they could do little to change the
overall policy of Osborne/Cameron, but the cuts in public investment
in 2011 and 2012 that did so much damage to the recovery were not a
core part of that policy, and I think the HMT could at least have
tried to prevent them.
The
third crisis was the Brexit vote in 2016. Aeron Davis argues that the
Leave vote was not only devastating to most Treasury officials (many
were economists, after all) but also that it reflected past failures
in Treasury management. To quote
“For
one, I hold the Treasury (and successive governments) responsible for
ushering in an economy that was so unbalanced and unequal. Years of
trickle-down economics, and years of favouring finance over
manufacturing, large foreign multinationals over home-grown
companies, large asset-holders and rentiers over others, London over
the regions, monetary rather than fiscal activism had had a
cumulative impact. Austerity economics only exacerbated such trends,
with several commentators
linking that to the vote outcome.”
Of
course any vote that close can have many things that help tip the
balance. To the extent he is right, the Brexit vote represents a
fitting ending for the book, as it represents many of the themes the
author examines coming home to roost. In fact it is not the end, as
there is a postscript entitled ‘reckless opportunists gain
control’, which covers Johnson and partygate but not Truss’s
ill-fated reign.
It
should be clear from this short review that this book is not just an
interesting overview of the Treasury over the last 40+ years. It is
also an invaluable record of what some of the key political and
official actors involved in UK economic policy thought they were
doing at the time and how they view that in retrospect. I thoroughly recommend reading it to anyone interested in
the recent economic history of the UK.
[1] I
say largely because the new Conservative government’s advisors did
not foresee that money supply targets would lead to a large
appreciation in sterling a la Dornbusch, which decimated UK
manufacturing.
[2]
Austerity, by which I mean embarking on spending cuts in a liquidity
trap recession, represented ignorance of everything Keynes talked
about in the General Theory, as well as state of the art
macroeconomics. On the positive side a form of fiscal council (the
OBR), something that I had argued
strongly for,
was created after being rejected by Gordon Brown. On the whole it
seems easier for new rather than existing governments to introduce
reforms that take away discretion from politicians.
