Dead Men Left

Monday, April 25, 2005

Keynes and Brown: has our Gordon secretly resurrected the post-war consensus?

Larry Elliott, writing today in the Grauniad, makes one good point about cuts in stamp duty, and one slightly questionable point about Gordon Brown's alleged Keynesianism. Since cutting taxes to boost demand in a market that suffers from chronic and repeated bubbles is indisputably quite mad, making sense only in a world where sacred cows like the private housing require perennial sacrifices, I'll concentrate on the second.

In the first two years after 1997, Brown stuck to Kenneth Clarke's exceedingly tough spending plans and at the same time saw tax receipts roll in during the boom of the late 1990s. The public finances, already improving, became very strong. As a result, he was subsequently able to increase spending more rapidly than the economy's trend rate of growth for a number of years.

From a macroeconomic point of view, this was a perfect Keynesian response. Fiscal policy was tightened in the upswing of the economic cycle and that left room for the government to loosen fiscal policy when things turned nasty after the collapse of the dotcom bubble and the terrorist attacks on 9/11. As the private sector retrenched, Brown expanded the public sector - precisely the right response and the reason that, unlike most other industrialised nations, the UK made it through the downturn without a single quarter of recession and with unemployment falling.

There's no need to get too deeply into exigetical arguments about what Keynes really said back in the 1930s, but I find it very hard to square Brown's macroeconomic policy over the last eight years with faithfulness to "Keynes' original doctrine." The fiscal rule was imposed, and rigidly adhered to, in order to pacify the financial markets; Keynes, himself an industrious speculator, compared these same markets to casinos, and the critical sections of his major work, The General Theory of Employment, Interest and Money positively sing with contempt for the whole sordid business. Where, in Brown's fiscal subservience, is the "euthanasia of the rentier" the General Theory demands in its closing paragraphs? Where is its replacement, the "socialisation of investment"? Brown has taken quite the opposite course, tailoring policy to the diktat of the financial markets - rather than using policy to (at the least) restrain those markets.

Of course, what Elliott is really arguing - following a recent paper presented by Jim Tomlinson to the Economic History Association - is not that Brown and friends have paid much attention to the actual Keynes, but that he stands four-square in a "Keynesian" tradition of demand management: curtailing government spending during a boom, letting it increase during the bust, just as governments were supposed to do in the good old days. In Tomlinson's view, the 1970s are then no longer a "great watershed" in British political history; rather, after a brief, unsuccessful deviation from an established path, the traditional methods of economic management were re-established under Major, and successfully extended by Brown.

Though a timely reminder of how much New Labour owes to Old, this gives too much credence to Brown's own myth, peddled for Old Labour audiences, as the Iron Chancellor, successfully grappling with financial markets and so avoiding the sterling crisises every other Labour government has faced. Far from it: Brown has been the recipient of an extraordinarily favourable set of circumstances for the British economy. On the decisive policy decision of the last decade, entry into the ERM, he was dead wrong, but this has not prevented him benefitting enormously from its consequences; his approach to the markets and the major economic institutions was made on his knees; and, for his most recent Budget, so important to delivering a third New Labour victory, he has relied on the same black gloop that held Thatcher aloft: a convenient (but wholly unanticipated) windfall from North Sea Oil.