Economic history is littered with innacurate predictions. At least this time, with unemployment, the news is better than expected
The news that unemployment is falling – and faster than most forecasters expected, not least the Bank of England – is extremely good news. It was the memory of the high unemployment between the first and second world wars that drove governments to make the pursuit of high, indeed "full", employment a supreme goal of economic policy for many decades after 1945.
Indeed, it was curiosity that there should be unemployment at all that first interested my mentor at the Financial Times, Sir Samuel Brittan, in the subject of economics. (Sir Samuel has recently celebrated his 80th birthday and is as interested as ever.)
Of course, policymakers could never really achieve full employment. There was bound to be some unemployment, called "frictional", as people changed jobs. But in the 1950s the conduct of economic policy was so successful that rates of 1.5%-2% were considered perfectly normal.
The aim was to maximise economic growth and employment, provided inflation was kept under control and the balance of overseas payments (exports and imports) was manageable.
Well, whole libraries have been filled on the problems that arose after the 1950s, and policymakers faced no shortage of problems with inflation and the balance of payments. But one thing they could take for granted until 2007-08 was a reasonably well-functioning banking system. It was Gladstone who put it succinctly: "Finance is, as it were, the stomach of the country, from which all the other organs take their tone."
The banking crisis, as we know, led to the recent depression, a depression that in my opinion was severely aggravated by mistaken policies. It was therefore interesting to hear Sir Nicholas Macpherson, the urbane permanent secretary to the Treasury, reflect recently on the achievements, or lack of them, of British economic policymakers in general over the years, and of the Treasury in particular.
In his lecture to the Mile End Group on 15 January, Macpherson made no secret of his admiration for Gladstone and the 20th century Labour chancellor Philip Snowden, both of whom are often accused of being more concerned with balancing the budget than balancing the economy.
His lecture – The Treasury View: a Testament of Experience – is well worth reading in full. After running through all the "panaceas" on which policymakers placed their counter-inflationary bets – from incomes policy to monetary targets, shadowing the deutschmark and entering (and exiting) the ERM – they eventually arrived at "inflation targeting".
Like the good public servant he is, Macpherson managed the transition from Gordon Brown and Alistair Darling's Treasury to George Osborne's – an example to those who would "politicise" the civil service. He is in his 30th year at the Treasury, and has counted them all in, and counted them all out. He says: "The Treasury exists to serve the government of the day: to promote and achieve its objectives in the financial and economic field… It needs to understand, interpret and apply the philosophy and agenda of the governing party (or parties)." But experienced officials ought to be able to offer an understanding of what works and what doesn't.
Well, the Treasury has had plenty of experience of that, but nevertheless found itself deficient in resources and experience when the bankers almost brought the entire edifice down.
Macpherson has certainly tried to make up for lost time. And he is frank about one of the great policy mistakes of the 1990s and early 2000s: the belief that price stability would bring overall stability, and the lack of attention to the growth of credit.
"Looking back to the last decade," said Macpherson, "I think senior Treasury officials – myself included – became mesmerised by the length of the upswing." It was not just Brown!
Macpherson enunciated a number of propositions, one of which was that there are limits to what the state can do to regulate demand, another that fiscal policy should support monetary policy. When your correspondent asked him whether he thought fiscal policy was supporting monetary policy at that crucial time in the summer of 2010 when the new chancellor raised VAT sharply and stopped the recovery in its tracks, he said he had feared "an inflection point", at which there would be problems selling government debt.
I disagree. The Debt Management Office was having the time of its life selling debt with an average maturity of 14 years – and not, as in the case of Greece, worrying about where the next investor was coming from. Interestingly, the permanent secretary distances himself from Osborne's (and the Bank's) absurd comparisons of our problems then to those of Athens.
At all events, the latest economic panacea in trouble appears to be Mark Carney's "forward guidance" and associated forecasts that have made the new governor a laughing stock. But for those of us who have always worried about unemployment, it remains good news that it is falling – and, personally, I have not lost faith that higher productivity will follow.
However, output is still 2% below its 2007 peak, and if past trends had continued, GDP would now be 20% higher than it is. Personally, I am less concerned about the disarray of Carney's forward guidance than with his apparent lack of concern about bankers' so-called "remuneration".
Unemployment and employment statisticsEconomic policyEconomic growth (GDP)Economic recoveryEconomicsCivil serviceWilliam Keegantheguardian.com © 2014 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds |
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