In 1994 Dan Corry wrote an article in Renewal on the shape of Labour's macroeconomic policy (Corry, 1994). After almost twenty years it is striking how relevant much of the article still feels. The original piece was entitled 'Living with capitalism' but today's Labour economic policy appears to have moved beyond simply living with capitalism and is setting out an active agenda of how to change and shape it.
Labour's macroeconomic policy has moved through several distinct stages over the past two decades and the very definition of what exactly constitutes a 'macroeconomic policy' has been contested. In the early 1990s traditional macroeconomic policy (defined as the use of fiscal and monetary policy to impact upon macroeconomic variables such as growth, inflation and unemployment) was downplayed in favour of an agenda of supply-side reforms. In the mid-1990s a brief flirtation occurred with a more rounded approach to 'political economy', as opposed to simple macroeconomics, focused on the concept of a stakeholder economy. But this eventually gave way to a macroeconomic framework of 'constrained discretion' for policy-makers (Bank of England independence and fiscal rules) and a renewed focus on straightforward supply-side reforms. The notion of fundamentally changing the UK's national business model was quietly dropped.
From the late 1990s until the crisis of 2008 macroeconomics seemed oddly absent from British politics, in as much as when it entered political discourse it was usually reduced to seemingly endless lists of achievements (the longest period of consecutive growth since the 1800s, etc.). The crisis of 2008 saw both the return of macroeconomic policy to political debate and the return of active demand-side policies to prevent a slide into depression. In the years since the last general election a new economic agenda has been fleshed out. Labour retains a strong macroeconomic focus but is now going well beyond what are thought of as the traditional levers of macroeconomic policy and into the realm of political economy. This new agenda does not take the shape of the British economy as a given but as something which active government can influence.
Dan Corry wrote his original article at a time when Labour's macroeconomic policy, and indeed its entire approach to questions of political economy, was in flux. Labour had failed to win the general election of 1992, to the great surprise of many, and had committed itself to supporting the European Exchange Rate Mechanism (ERM) which the UK had been forced from in September 1992, just months after that election. By 1994, though, the UK economy was on the road to recovery.
Corry identified four broad schools of macroeconomic thought. 'Supply Siders' essentially thought that no macro could have a major beneficial impact on the economy and the proper role of macro policy was simply to ensure stability in variables such the exchange rate, public spending and interest rates to minimise uncertainty. 'Active Macro' proponents agreed that stability was essential but saw a role for macro policy in achieving this by fine-tuning the business cycle. 'Strong Keynesians' went a step further and argued that active macro policies had significant and lasting impacts on the real economy. This often led to a focus on managing aggregate demand in the economy and a frustration with the seeming over-emphasis sometimes placed on the supply side of the economy. Finally, 'Supportive Keynesians' took a more nuanced view. They thought that active macro policy should be the servant of supply-side policies, but this meant more than simply ensuring stability. In particular, they often emphasised the need for a low exchange rate and low interest rates as preconditions for growth (Corry, 1994).
As Corry noted, by 1987 Labour was still arguing for a broadly Keynesian position, with the manifesto pledging [pounds sterling]3 billion of borrowing for capital investment to drive down unemployment. 'However, by 1992, to many people's horror, the policy had shifted markedly. A macro dimension seemed to have been given up as Labour went overboard on supply-side issues' (Corry, 1994, 52). Signing up to the ERM, which severely limited the room for manoeuvre on both fiscal and monetary policy by pegging sterling to the Deutschemark, was seen by many as a continuation of this supply-side fixation.
Looking back twenty years later, Ed Balls argued that this had been a mistake. Labour in 1993, he stated, had neither an alternative to the 'strait-jacket' of the ERM nor a 'credible approach' to tax and spending. His suggested alternative was to argue for Bank of England independence (a radical idea at this stage) (Balls, 2012).
Ed Balls, from the mid-1990s onwards, became one of the key figures in shaping Labour's approach to macroeconomics. His own background (PPE at Oxford, time at Harvard studying with Lawrence Summers and Robert Reich, and a stint as an economics leader writer at the Financial Times) made him one of the most technically accomplished macroeconomists in British politics. He was in tune with the latest macroeconomic academic thinking and his approach came to dominate Labour's position.
In technical economic terms the overall macroeconomic approach was one of 'constrained discretion'. The use of targets and rules to voluntarily constrain its own room for manoeuvre would buy a Labour government credibility with both markets and voters. This credibility could be put to work by using an active macro policy when needed to support the economy. In terms of Corry's four schools of thoughts this could be seen as 'Active Macro', the proper roles of fiscal and monetary policy being to maintain stability by ironing out fluctuations in the business cycle. Crucially, and in tune with the latest economic thinking, the primary tool of stabilisation policy was seen as monetary policy. This was both easier to change (and hence more responsive) and could be placed outside of direct political control. When in the 1990s the Labour Party pledged to end 'boom and bust' it was monetary policy they were talking about. By placing the ability to change interest rates outside of political control the role of the political cycle in setting them could be minimised. An independent central bank was seen as more likely to raise rates as the economy over-heated, while politicians might fret about making voters' mortgages more costly.
Alongside the traditional debate on macroeconomic policy, the mid-1990s also saw a renewal of interest in what could be termed 'political economy'. As macroeconomics as a discipline became more 'rigorous', more mathematical and more model-based (Skidelsky, 2009), there was a revival of interest in political science departments in what came to be called 'Varieties of Capitalism' (Hall and Soskice, 2001). This debate went beyond the role of macroeconomic levers in stabilising demand and considered the roles of corporate governance, financial systems, industrial relations and firm relationships in explaining economic performance. The Labour manifesto of 1992 had contained a great deal that broadly fit into such an agenda (Thompson, 2006).
In the UK this was popularised by Will Hutton's The State We're In (Hutton, 1995) with its arguments for a more German model of capitalism that took greater account of the different stakeholders in the economy (workers, consumers and management, not just shareholders). Labour flirted with this agenda, most notably in Tony Blair's Singapore speech of 1996. For a while the 'stakeholder economy' was seen as Labour's 'big idea' but the term meant very different things to different actors in the debate. As Andrew Gamble and Gavin Kelly noted in 1996, Labour's practical policy agenda on stakeholder economics was always very limited (Gamble and Kelly, 1996).
Three factors perhaps explain why the dalliance with a stakeholder economy never really moved beyond the rhetorical phase. First, and despite praise from Will Hutton and many others, the German economic model appeared to be in serious trouble by the mid to late 1990s. A costly reunification with East Germany led to a large loss of competiveness and by the early 2000s Germany was regularly described as 'the sick man of Europe'.