To achieve the ambitions that those on the centre-left have, we need to use all the tools at our disposal. One of these is macroeconomic policy, the policies that at an aggregate level try to influence growth, employment, and demand in the economy.
Even if, either as a Marxist or a neo-classical traditionalist, one believes that in the long run it is the supply side of the economy that really matters, macro policy can and must matter in the short run. And since within economics there are many arguments that macro conditions affect the way that the supply side develops, most would agree that macroeconomic policy must matter even in the longer run.
But most thinkers on the left do not really know what they think about macro policy. And even macro economists who are of the left are not really sure what the correct macro policy is - let alone whether there is a 'correct' macro policy in all circumstances.
By and large most on the centre left can be classified as Keynesians. This means firstly that they believe that the economy does not through its own volition always create enough demand to meet its potential supply, thus leading to unemployment and other under use of resources. And secondly, that they believe government action to stabilise an economy and push it nearer to the full use of capacity is desirable and possible to do effectively (1). This indicates that the values and the broad understanding of how economies work will be driving the left in a different direction from those driving the right. But in practical terms, how far can we articulate a progressive macro policy that is different from mainstream or right-wing macro policy?
Furthermore, where those on the left disagree on macro policy, what drives those differences? Are those differences about how the economy works, about what works in tackling economic problems, or about values and what is politically possible and advantageous? And where does and where should Labour stand on all this at present?
The last time macro policy was contentious
Every now and then in the UK, macro policy becomes a huge bone of contention. This is not only because the left has a different perspective to the right, but also because within the left there are massive differences on what the correct policy is, how economies work, and how they link into the real or supply side of the economy.
In terms of the right versus the left, the 1980s and early 1990s saw a battle between the monetarists and the rest (mainly but not exclusively Keynesians). This technically was about issues such as the role of the quantity of money in influencing inflation and output but more fundamentally was about whether government, by purposeful actions, could lead us to better outcomes in term of jobs and growth, or whether the best government could do was to control inflation and then keep out of the way. Not surprisingly, the overwhelming voice of the left was against the hard versions of monetarism. But the battles within the left camp were also vigorous and passionate.
There were particularly marked disputes between those who believed in very active Keynesianism to boost growth even if it did cause inflation; those who wanted import controls to allow demand to grow without sucking in imports; and those who were starting to argue that macro tools should mainly be used to secure stability in the macroeconomic conditions because it encourages private sector investment and other activity. In the mid-1990s, when I last wrote about this topic for Renewal (Corry, 1994), this battle was still raging, even if the Supply Siders were gaining the upper hand within the Labour Party and the more radical Alternative Economic Strategy had faded well into the background.
These different perspectives, as I tried to analyse in that paper, were about a number of issues. First, a difference in the weight to give to different objectives and disagreement as to whether there were trade-offs between some of them. The most important of these was in relation to inflation. Some Labour thinkers were pretty relaxed about inflation; if policies that boosted the economy boosted inflation then so be it--a price, if you like, worth paying. Others worried at length about it, feeling that in the end high inflation restrained growth, hit Labour's natural supporters, and was a vote loser.
Second, there was a difference about what a small open economy like the UK could do on its own and how much it had to adjust to global realities--ranging from the constraint that free and internationally mobile capital markets imposed to the inability to expand domestically, if other countries were not, without just sucking in imports in an unsustainable way.
Third, there was a disagreement as to what the best macro conditions were to allow private sector activity to expand and flourish. One side felt very strongly that low interest rates and a competitive pound were above all the key requirements. Others believed it was stability--fewer booms and busts, to half coin a famous phrase.
Fourth, there was disagreement on deficits and debt. The definition of it in those days, the Public Sector Borrowing Requirement (PSBR), had become a big issue not least because the right-wing monetarists claimed that it was bad not only because of the stifling need to repay the resulting debt but because the PSBR affected the money supply. The left's arguments were more focused on the extent to which fear of high debt should be a constraint on fiscal policy.
A broad consensus--or so it seemed
The coming of Tony Blair and especially Gordon Brown saw an end to such debates in the Labour Party--they pushed on with what I called in 1994 the 'Supportive Keynesian' approach. But it was not just them. In academia and across the word, macroeconomic policy seemed much less divisive. Broadly speaking, for much of the so-called 'NICE' period ('non-inflationary consistently expansionary'), macro debate became muted. Loud debates on macro policy were replaced by important but less fundamental ones on growth theory and the optimal design of stable policy institutions. The new consensus across the spectrum was that macro policy should be used for stability and micro policy was where the action was. So in different ways keeping inflation down became the top priority and doing this was entrusted to independent central banks; nobody argued much anymore that there were trade-offs whereby you could 'buy' higher growth and lower unemployment for a bit more inflation in the medium or long-term. And fiscal fine tuning was no longer much talked about, as longer term fiscal goals were prioritised. In addition, the deficit, apparently so worrisome in 1994, had melted away as a concern by 1997. Much of this consensus of course reflected the benign economic times; the debates over how to respond to really difficult economic conditions were submerged rather than resolved.
The centre left version of this was perhaps best played out in the way President Bill Clinton and his team approached economic policy--so called 'Clintonomics'. Clinton made a virtue of getting the fiscal position under control, not least as it would lead to lower real interest rates, thus boosting private sector investment. Active supply-side policy, for instance in the labour market, was used. But the argument that the deficit had to be kept under control and that monetary policy was not about Keynesian boosts took hold more widely.
This approach seeped into the New Labour approach pretty quickly--not least because there was a search for a fresh narrative after yet another defeat in 1992. Right from the start of New Labour the most common point made was the need to end the debilitating extremes of the business cycle--to end boom and bust (Balls and O'Donnell, 2002).
There were some who doubted this approach in UK academic and other economic circles, but their voices were not that loud and were certainly not much heard by policy-makers, especially as unemployment did fall, inflation kept low, deficits and debt were under control, and growth just kept on going. There was little to get excited about from a left perspective on macroeconomic policy.
Debate such as...