One of the great unmentionables is that the macroeconomic foundations of Thatcherite monetarism and New Labour neo-liberalism are being comprehensively trashed. The UK national accounts data just published reveals just how massively public investment is boosting demand in the face of very weak spending by the private sector. That’s not what was supposed to drive the economy. Ever since Nigel Lawson’s 1984 Mais lecture enunciated that the role of macro-economic policy was the control of inflation, not the promotion of growth and employment, while the role of micro-economic policy was to lay the foundations for private sector investment and profitability, not the restraint of prices as in the incomes policy era, the use of public policy to manage aggregate demand has gone out of the window. In line with their mentor Friedman’s Quantity Theory of Money, the Thatcherites would be expected to follow this dogma. Rather less so Gordon Brown, yet he embraced the Thatcherite macroeconomic doctrines almost whole. Now he must be eating his words.
In fact he should have been eating them a long while ago. When boasting over the decade up to 2007 that he had ended Tory boom and bust, he neglected to say how the continuing boom was being generated. Its prime source, despite the fiscal easing in 2000, was the massive consumer binge unleashed in the credit and housing markets. The mountainous credit bubble soared to over £1.35 trillions, not much less than Britain’s entire GDP, and the massive boom in house prices, fuelled precisely by the lack of adequate house investment, overshot their real worth by some 30-40%. In addition, massive tax breaks for the City of London further boosted financial speculation and skewed the country’s development away from its industrial productive base. Having eschewed demand management as an instrument of policy, Brown then wholeheartedly embraced it to bring about his long decade of growth. But no doubt he will never admit that his post-classical endogenous growth theory, as he himself laughably called it, was always wrong in the first place.
Neither the Tories nor New Labour have grasped that the central macro-economic problem is not what has obsessed them over the last 3 decades, namely whether there is a long-run trade-off between inflation and unemployment, but rather where is the source of aggregate demand to come from sufficient to sustain steady growth without huge artificial financial stimulation which is long-term unsustainable. Large-scale technological breakthroughs and massive US defence expenditure (currently over $0.6 trillion a year) have partially supplied the drivers in the past, and most recently the financialisation of capitalism via the colossal spread of credit derivatives which were then securitised played part of this role until the 2007-8 crash. The only other obvious remaining source of globally sustainable demand is a redistribution of resources towards those on the lowest incomes, both towards the poor in the rich world and the poorer developing countries as a whole. But that would require both an openly Kenyesian policy and an avowedly socialist goal.