Golden Rule and New Labour's political economy

Wynne Godley on the Golden Rule - Gordon Brown's grand commitment to only borrowing to fund investment, and keeping government finances in the black over the course of an economic cycle. Godley points out that, given the way national income is distributed between consumer and government expenditure, investment, and net exports, the maintenance of the Golden Rule depends on significant assumptions about how consumers and businesses respond to different incentives:

More fundamentally, the budget balance is equal to the difference between the government's receipts and outlays, but it is also equal, by definition, to the sum of private net saving (personal and corporate combined) plus the balance of payments deficit.

If the private sector decides to save more, the government has no choice but to allow its budget deficit to rise unless it is prepared to sacrifice full employment; the same thing applies if uncorrected trends in foreign trade cause the balance of payments deficit to increase.

A sensible target for the budget balance cannot be set unless it is integrated into a view about what will happen to autonomous trends and propensities in private net saving and foreign trade. Moreover, as those trends and propensities change, it will never be possible to determine viable targets for the deficit that are fixed through time such as, for instance, that it should never exceed some number such as 3 per cent of GDP or that it should on average be zero.

This all seems quite correct. I wonder, though, how far the Golden Rule has acted precisely as a means of leading (and even disciplining) the major private financial institutions that largely determine savings and investment behaviour. The actual "autonomy" of "trends and propensities in private net saving" may be miniscule relative to the influence of, say, consumers' access to credit and financial instruments. Elsewhere, Godley has rightly picked up on the huge change in private saving behaviour that the deregulation of financial markets in the 1980s brought about. There no compelling reasons to suppose that institutional influences on saving and borrowing have become weaker since then.

Maintenance of the Golden Rule, in other words, is not only a problem of economic management, as Godley points out, but of political economy: of the attempt to organise large institutional blocks so they work in a certain direction. Under a relatively free market capitalism, this central organisation can only be performed somewhat indirectly, with the central bank and financial ministries attempting to give a lead. Devices like the Golden Rule matter in so far as they credibly commit the government to acting in a certain way and managing the economy under relatively clear parameters. This, in turn, signals to private financial institutions how they are expected to behave.

It's a sort of bargain between the two parties, and it's why both the Golden Rulen and the independence of the Bank of England have been so critical for New Labour. Both have enabled the government to maintain its relationship with private capital in a certain form - one best suited to the low-saving, low-interest economic environment that has secured successive New Labour governments.