After a Decade of Macroeconomics, It’s the Small Things That Need Fixing

This article appeared on UK Telegraph on January 2, 2020.
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It could have been worse. That’s hardly a stellar verdict on the 2010s as a decade of UK economic policy. Yet in a 10‐​year period that saw the mopping up of the financial crisis, a controversial deficit reduction programme, and then the political convulsions of Brexit, it doesn’t take much imagination to envisage economic outcomes much weaker than we’ve seen.

After the financial crisis, a mistaken lurch Left in policymaking seemed feasible. Economic commentator Will Hutton talked confidently of how “an old order is once again giving way to another” and of a “once‐​in‐​a‐​lifetime chance to change British capitalism”. The Left had a clear narrative, portraying the financial crisis as the ultimate manifestation of “deregulation” and supposed “neoliberal” excess.

Mercifully, they fluffed their lines. Sure. Old, failed ideas resurfaced and became renormalised in public debate — from Keynesianism to strong unions, “New Deals” (this time Green) to price controls. Britain briefly flirted with Jeremy Corbyn, and the Conservatives became more attracted to nannying and susceptible to the allure of central planning themselves. But a sea‐​change in policy away from markets hasn’t materialised, yet. Britain has, so far, avoided throwing out the baby with capitalism’s bath water.

After‐​the‐​horse‐​had‐​bolted regulatory reform of the banking system instead quickly gave way to a decade dominated by macroeconomic debates — of monetary versus fiscal policy as the best stabilisation tool, stimulus versus austerity for the public finances, and then, most recently, on the short and long‐​term consequences of Brexit. Plenty of mistakes were made, but Britain’s aggregate outcomes, viewed coolly and objectively, have not been disastrous.

Monetary policy after the crash helped avert a deep depression. Fiscal repair in terms of reducing the day‐​to‐​day structural deficit afterwards is now largely complete, with headline borrowing having fallen from above 10pc of GDP to around 2pc once new spending promises kick in.

What’s more, this has been achieved alongside a remarkable employment performance, no doubt aided by Britain’s flexible labour market. Unemployment, at 3.8pc, is now at its lowest since 1973; the employment rate for 16 to 64‐​year‐​olds, at over 76pc, is at its recorded peak. Austerity didn’t deliver a lost generation of workers as some claimed it would. Nor did it result in the skyrocketing inequality and material deprivation some thought an inevitable consequence.

In fact, though there are no doubt families struggling in insecure work, or others having seen working‐​age benefit cuts, the proportion of children in households facing both low income and material deprivation has fallen since 2010. Income inequality, as measured by the Gini coefficient, is lower now than a decade ago.

Britain’s economy has proven more a hardy weed than the delicate flower of politicians’ minds. George Osborne predicted an immediate recession if we dared to vote to leave the EU in 2016. Uncertainty since that referendum has indeed proven a drag on growth, but as with the major fiscal consolidation we saw through to 2016, the British economy has proven a lot more robust and adaptive than many expected.

We shouldn’t be Panglossian about the 2010s, of course. With alternative policy, better outcomes could have been delivered. Monetary policy “forward guidance” from the Bank of England proved a huge misreading of the potential of the labour market.

The coalition government front‐​loaded tax rises and cuts to investment spending, proving more of a drag on economic activity than if they’d prioritised reform towards a smaller day‐​to‐​day state that did fewer things better. Huge public finance headwinds from an ageing population remain in the future.

But Britain’s policymakers’ main mistake was putting too little focus on what became our biggest self‐​evident structural problem: stubbornly weak productivity growth. Output per worker growth has averaged just 0.3pc a year since 2008, a figure earning the dubious honour of the Royal Statistical Society’s “stat of the decade”. As a result, we are 20pc poorer than we would have been if the pre‐​crash trends of 2pc productivity growth per year had continued.

Now, that counterfactual is no doubt over‐​optimistic given trends in other developed countries. But as time has gone on, attributing this malaise to a hangover from the financial crash or a consequence of deficit reduction has become ever more difficult to justify.

Whatever its causes, the consequences of weak productivity growth – not least weak wage growth and lower tax revenues — deserved a policy reassessment. But so much of the past decade has been spent fighting crises, unexpected political events, or near‐​term fiscal shocks, we’ve neglected discussion of the microeconomic building blocks of longer‐​term prosperity.

As we enter the 2020s, this focus must change. Brexit is forcing a debate about the nuts and bolts of good trade policy. Boris’s victory is seeing a repoliticisation of infrastructure spending and a battle of ideas on regional regeneration and land‐​use planning laws. How we regulate machines, driverless cars and digital platforms will become more important as innovation continues apace.

The economic consequences of efforts to lower carbon emissions and immigration will be heavily dependent on the nuts and bolts of the frameworks government introduces. Britain’s new Bank of England Governor, Andrew Bailey, will presumably play a key role in preparing the financial sector for Brexit and any regulatory deviations Britain makes after leaving the EU too.

Of course, we can never discount the risk of a fresh recession and so the revival of the macro debates. But it’s the quality of microeconomic policy in all these areas that will determine Britain’s long‐​term economic success.

With the public finances now healthier and Brexit delivered, Boris Johnson and his big majority in Parliament have a real opportunity in the early 2020s to tackle the smaller, micro‐​level roadblocks to broad‐​based macroeconomic success.

Ryan Bourne

Ryan Bourne is the R Evan Scharf Chair for the Public Understanding of Economics at the Cato Institute.