Howe to Wake up the Dinosaurs...

Andrew's post raises the issue of Geoffrey Howe's 1981 budget:

364 economists wrote to The Times in protest at Howe and Thatcher's stringent monetary-led policy.

It's worth pointing out how vague and anachronistic the letter was:

"We, who are all present or retired members of the economics staffs of British universities, are convinced that:
a) there is no basis in economic theory or supporting evidence for the Government's belief that by deflating demand they will bring inflation permanently under control and thereby induce an automatic recovery in output and employment;
b) present politics will deepen the depression, erode the
industrial base of our economy and threaten its social and political stability;
c) there are alternative policies; and
d) the time has come to reject monetarist policies and consider urgently which alternative offers the best hope of sustained recovery."

We must put these events into context - the monetary policy espoused by Howe (focusing on the reduction of inflation) was the academic mainstream of US policy in the early 1980, and is also the academic mainstream in the UK today. It's hard to justify point a. now that Labour have made the Bank of England independent, and it's sole responsibility is to hit an inflation target.

The predominant UK thinking at the time was in dear old Keynesiaism, and the monetarist challenge threatended the existing orthodoxy. The dinosaurs weren't happy, and predicted doom and gloom (point b.) without offering a sensible alternative (see point c.) They ignored the fact that the existing methodology had not been working, so that no matter how the economy responded they could claim vindication.

As it turned out, Howe's budget was not an immediate fix, but it did what it intended to do: inflation came under control and this (ultimately) led to a fall in unemployment.

It's worth pointing out that I am neither a Keynesian nor a Monetarist, and am therefore an outsider to this debate. But as a (relatively) economically literate citizen I am glad that Howe woke the dinosaurs by moving away from the 1970s orthodoxy that had created the macroeconomic problems, toward the now ubiquitously endorsed system of inflation-targetting. It wasn't perfect, but it was an improvement.

There have been about 364 reinterpretations of Keynes' economics, and likewise there'll be many interesting sides to the debate about Thatcher's reforms. I am one of those people who've pledged to drop whatever i'm doing and go to the nearest pub for a pint, when she dies.

All I know for sure, is that if a Doctor finds out that you've got cancer and delivers radiotherapy that makes your hair fall out, they shouldn't be blamed for the illness.

See:
364 Economists on Economic Policy (2006), by Geoffrey Wood, Econ Journal Watch
Were 364 Economists All Wrong? - Panel Discussion, Institute of Economic Affairs
How Maggie Beat the Experts, Sunday Times

Comments

[Andrew Mellor]

Cheers Anthony - and thanks for throwing some light on it. But one thing - if Howe's 1981 budget did (ultimately) decrease unemployment, then it was only after a 2.5% increase (and whatever came after your table finishes in 1984). Is that a sign of how slowly it takes economic policy to take effect, and if so, when did that meteoric rise in unemployment stop?

[AJE]

It peaked in the mid-80s, i think, before drastically falling (only to rise again following the ERM debacle in the early 90s).

It is indeed a sign of how economic policies have long and variable lags - the initial problems were due to the Keynesian belief in an ability to fine tune an economy. The purported cure was to establish a stable monetary rule, and whilst (by definition) it won't be a quick fix, currently we have inflation targetting and low unemployment.

I think there's a valid debate as to whether the journey could have been smoother, but we're clearly better off having now arrived.

[Jim]

As a matter of interest, how long was it before unemployment returned to its 1981 levels?

[AJE]

Off the top of my head, not until New Labour, although it's now back to about 5%

[Jim]

Monetarism sure took a while to work its magic, then. If it had had no effect, how would we know?

[AJE]

Inflation wouldn't have budged... Growth and output wouldn't have become positive...

If it had had no effect I doubt we'd have seen cnetral banks everywhere being made independent and following modest inflation-targetting rules.

That said, I'm neither willing not able to defend monetarism! My own views on macroeconomics are quite different.

[Paulo]

AJE
I take it you saw the IEA have published a 76 page document on the 364 letter etc this week.

As far as the unemployment figures go, I recall the government changed the definition numerous times, thus reducing the number, so be careful reading too much into the month to month data

http://www.iea.org.uk/files/upld-release106pdf?.pdf

Nil satis...

[James Hamilton]

I'd be very sincerely interested to know if Howe and his Treasury team actually expected the "cure" to involve business shutdown and unemployment to quite the degree that we actually experienced. I suspect not - and I also suspect that they expected the upturn to be a)sooner and b)stronger than it eventually was.