Here are some grumbles about the current econ election debate.
1. That the Coalition claim credit for the extraordinary job-creation. This almost certainly had nothing whatsoever to do with Government policy. Except by comparison to some counterfactual Government that would instead have greatly increased regulation. In fact, the most pertinent thing to say about the surprisingly high employment is that it would have been even higher were it not for the Coalition having over-egged ‘austerity’.
2. That this credit can be claimed in the teeth of very weak productivity, which has, of course, arithmetically, been one of the drivers of high employment.
3. That the Opposition parties blame the Coalition for weak productivity, or the ‘cost of living crisis’. Once again, except relative to some counterfactual, transformational government, incumbent governments can’t do much about real earnings per head, except over very long horizons. And even then there is much controversy about how they could go about that.
4. That key elements of the debate about the best fiscal policy going forwards are not being recognised. In particular, that the plan for reducing the deficit over the next few years has to be contingent on the economy evolving so that interest rates can be lifted sufficiently clear of their zero lower bound.
5. That the Opposition feel they have to apologise continuously for their management of the economy. The typical punter forgets several pertinent facts about that guardianship.
-First, it was Labour who took the plunge in making the Bank of England independent, the Tories too wedded to the idea that monetary policy setting should be available for manipulating the business cycle.
-Second, the financial crisis cannot be laid at Labour’s door. It was a global crisis, caused by almost total negligence and misapprehension of the risks accumulating in a fast-innovating financial system. I don’t doubt that that aspect of our history would have played out identically had the Tories instead been in office. Light touch regulation was part of a cross-party political consensus.
-Third, there was not, as is commonly thought, gross mismanagement of public finances. With the benefit of hindsight, we can see that pre-crisis tax revenues from the financial sector, and the trajectory of productivity driving taxes from income, were not sustainable. But those key aspects of current fiscal challenges could not have been so easily foreseen.
6. That the Coalition make capital out of the creation of the new BoE/PRA/FPC architecture as the solution to the financial crisis, which is in turn pinned on Labour having created the FSA out of the Bank of England. This seems to be taken as read, even by Labour. In my view, the shuffling of chairs did not cause the crisis, and the reshuffling will not prevent another one. The real failure was one of substance, and we don’t yet know whether we have addressed that….
6. That there is almost no debate about whether we have an adequate monetary-financial-fiscal framework that will serve us well over the future, and in the even that we have another crisis. I’m not so sure that we do. For example, as I’ve mentioned many times, a good argument can be made for increasing the inflation target to leave more room for interest rate cuts next time. I think more work could be done to institutionalise the use of strongly activist, discretionary fiscal policy in the event that the zero bound limits future monetary responses to the next crisis. The lack of this is what caused the Coalition problems last time. It felt boxed into making promises to be tough that it could not and thankfully did not keep, and then into concealing that it had not kept them: all this the worst kind of expectations management. Third, more work needs to be done to formalise the use of unconventional monetary policies next time. Too much last time was left to the discretion of the internal executive of the BoE. Fourth, there seems to be no taking stock of whether we have the right financial policy framework now.