23rd September 2022
Once upon a time I was an Economics A-Level student, and that time was 1987 to 1989.
And I remember one day sitting watching the 1988 Budget given by Nigel Lawson, and it is an indication of how I was not like other A-Level students that this was very exciting.
I even remember writing out “Medium Term Financial Strategy” into my exercise book of quotations – perhaps the dullest book of quotations ever compiled – and sitting with the Times and Financial Times spread out on the living room carpet.
But most of all I remember the triumphalism.
Socialism and the post-war consensus was over: Thatcher and Lawson had re-written the economic rules, and our reward were to be good times that would never ever end.
And all this accorded with the theories taught on the Economics A-Level course.
It was all so easy – and one had to ask why had nobody ever done this before.
*
But.
The 1988 boom ended with bust, as all booms tend to do.
This was not a sound financial strategy – either for the medium term or otherwise.
And Lawson and then Thatcher lost their jobs, and a recession occurred while I was at the university into which my Economics A-level result had helped me.
(Though it was not until around 2008 that I finally dropped my free market views, when it became obvious that – left to themselves – markets tended to disequilibrium – and implosion – rather than to equilibrium.)
*
I also remember Gordon Brown as Chancellor contending that there would be “no more boom and bust”.
This was a similar triumphalism to that of Thatcher and Lawson, but from another political party that believed they had cracked how to manage the economy.
And that triumphalism was also undermined by events.
*
After a while, watching governments and politicians (and pundits) come and go, one can become unimpressed, if not cynical.
The not-a-budget announced today by new Chancellor Kwasi Kwarteng is certainly something that would have fascinated my 1988 Economics A-Level student self.
It is probably even a speech that my 1988 Economics A-Level student self could have given.
The statement is a simple application of some economic theories to the complicated world of real economic activity.
Perhaps it will work.
Perhaps Kwarteng will confound his critics.
Who knows?
Economics is not an exact science – and some would say economics is not a science at all.
Perhaps this engineered boom means that we can have economic good times for ever and ever.
But.
The messy nature of human affairs means that few ambitious plans work – and especially those which are accompanied by triumphalism, the claps and cheers of the easily impressed.
Policy, like law, is hard.
This is because policy, like law, has to deal with human behaviour in complex societies.
And if policy and law were really that simple to get right, our politicians would not keep on making so many mistakes.
“Brace, brace.”
(Which I really should have written down in my exercise book in 1988 instead.)
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I shared a taxi with the late (Sir) Sam Brittan in the run up to the 1979 election. (I was at the FT at the time). His wisdom on how to read a budget has stuck with me ever since.
1. If it is welcome on the day, it will be a disaster.
2. If it is loathed on the day, you will not be forgiven, even if right.
3. Beware the beneficiaries.
I can’t recall it ever letting me down. Howe’s 1981 budget is the best on No. 2. The last needs some evidence. His argument, to me, was that the beneficiaries will think they have won the argument and been offered a sop so will be angry.
That balance of theatre and policy is always important.
I know zip about economics, but I have long been interested, in a shallow and un-examined way admittedly, in this approach:
https://steadystate.org/discover/briefing-papers/
David, your recollection of the 1988 budget is not quite the same as mine.
There was, as you say, plenty of free market rhetoric and the red braces brigade were popping the champagne corks.
Lawson was, though, pursuing his not so secret policy of shadowing the DM – in Mrs Thatcher’s words, bucking the market.
This, conveniently, allowed him to cut interest rates while supposedly maintaining credibility.
Unfortunately for him, it also cooked the UK economic goose as the hangover from the Lawson boom was to collide with German re-unification and much higher German interest rates.
Lawson, of course, had jumped ship well before the proverbial hit the fan, resigning on a matter of principle.
I think we may be advancing to ‘bust’ without passing ‘boom’.
Speak in the future tense for yourself Roger; the Skid Row block party has been building up a head of steam for over ten years :)
The ranks of the destitute and broken have been swelling at an alarming rate for the duration of this most recent period of Conservative administration. As a matter of policy, we no longer have a functioning safety net. As a nation we have elected to turn a collective blind eye to the fact that it is actually private charity stopping millions from starving, not the welfare state we are told we can’t afford.
Many people will die prematurely this winter unless Kwarteng can drive inflation hard enough to make burning banknotes a viable way to stay warm.
I don’t know a lot about economics. But given who will benefit most from Kwasi Kwarteng’s “fiscal event”, it is extremely hard to see how it will do what they think it will. Even for me. It’s got a huge amount of trickling down to do before it even approaches the less well off.
It does not look at all good.
The cynic in me suggests that the cabinet reckon that with the multiple changes in leadership, the Lockdown Party fines and all the rest, that have secretly acknowledge that they simply can’t win the next General Election.
So this, in other words, is an attempt to gift as much as they can to their mates and their financial supporters early, in the hope that by the time the GE comes around, we’ll all have forgotten that the bonus cap for bankers (specifically the ones that fomented the 2008 financial crisis) and these other changes…
If we put party politics to one side for a moment and thought about the most effective way that the treasury could ease the burdens of UK citizens, then the best way to do it would have been to lift the “no tax” threshold from £12,500/year to say £20,000 and, funds permitting, to lift the basic rate threshold from £50,000 to say £60,000. All the top earners would still have been better off – because they would enjoy the same tax benefits as everyone else. But proportionately, such a move would have helped those on the lower incomes the most.
The fact that this government chose to use this moment to 1) take the bonus cap off the financial sector; and 2) cut the 45% tax rate completely… tells you all you need to know.
And even worse, hidden behind the details of the tax cuts came news of further lockdowns on benefits for the most vulnerable in our society.
Sadly, this isn’t a government; it’s a coalition of grifters and shake-down artists.
I remember sitting in a school economics lesson (I’m apparently a year older than you) and putting my hand up and, with a smirk, asking the teacher why we don’t just print money and give it to the poor.
There followed a calm and patient explanation of money supply and inflation.
Only a fool would do that, preferably in Zimbabwe or the Weimar Republic.
And then they made up a new word and Osborne came along …
“why we don’t just print money and give it to the poor.”
Because it’s obviously much more sensible to print (or borrow) money and give it to the rich. After all, they might invite you to their magnificent homes and yachts!
Markets are determined by two opposing forces, neither of which is rational: they are “abject fear” and “blind greed” and so markets tend to swing from one extreme amplitude to the other. “Froth” and “exuberance” followed by the “hangover”. So much for economics being a science. There is no such thing as a really “free market”. The trick for any Chancellor is to try to get the pendulum to near equilibrium with as few volatile swings as possible. Rather like steering a large vessel, an aeroplane or a very fast car, the secret is in small adjustments. Instead, here in the UK we are to be the “in vitro” experiment for “Britannia Unchained” fantasy economics as the Chancellor “goes big or goes home” according to one Tory. The Pound has already tanked. One thing markets can do very well is reflect sentiment.
“Perhaps it will work.
Perhaps Kwarteng will confound his critics.
Who knows?”
Who knows? Anyone with even a basic understanding of how economic theory translates into Real World economic practice.
I honestly believe that this is a Tory government that knows its days are numbered (so at least something of their own making to be thankful for) and is salting the earth for the government to come.
Never was your bracing more necessary than today. This government is taking the biggest gamble on the economy, but in such a way that the richest cannot lose. So, for them and their rich mates, it’s just the excitement of unleashing a fickle and volatile market on us mere underlings – without mandate or fiscal scrutiny.
In Eastern Europe war is raging; Putin the Terrible (who has probably had more than a finger in engineering our instability) now threatens us with nuclear weapons. We are stuck here, having mostly lost our freedom of movement (thanks to these same actors). The rich, of course, can live wherever they choose. We, the lab rats, remain trapped in our cages unable to escape this shocking experiment that is being perpetrated on us.
Pass me the revolver when you’ve finished with it.
As a former A level economics student, though a couple of decades before you, I remember learning about the magic of the invisible hand and the need for government to get out of the way. At University the Faculty’s first priority was to remove the errors of A level!
That markets clear is, as you say, one of the most fundamental fallacies of simple economics. We are now in a contest between the government, seeking to expand economic activity – at a time when unemployment is lower than it ever has been – and the Bank of England seeking to hold down inflation.
Double-digit interest rates are more than likely within the next 12 months.
I am reminded of the works of two authors, which may be relevant.
1. Robert Peston’s “Who Runs Britain?” The bottom line is that governments have vastly less influence over the economy than they think they do.
2. Isaac Asimov’s “Foundation” series. Based on his invention of “psycho-history”, which could predict social events accurately using mathematics. Later experts concluded that societies are far too complex for this to work. Great fiction though.
All I can hope is that regression to the mean happens. Perhaps that’s what Kwarteng is hoping as well. If so, he will take the credit, but should not.
If you enjoyed the Foundation series… nice premise, stumbled along the way in a few places… then you would almost certainly enjoy “In the Country of the Blind”, by Michael Flynn. I thought the premise – that Charles’ Babbage’s “Analytical Engine” was not only completed in secret, but it worked better then expected and could be used to predict the future – to be brilliantly realised.
1988. The first year of GCSEs. On Budget day, 15 March, the UK number 1 single was Kylie Minogue with “I Should Be So Lucky”, followed in later weeks by “Don’t Turn Around”, “Perfect”, “I Owe You Nothing”, and “The Only Way Is Up”. Whee.
Here is his speech: https://www.margaretthatcher.org/document/111449
The introduction of independent taxation for married couples.
Corporation tax held at 35% (“one of the lowest corporation tax rates in the world”), inheritance tax cut from up to 60% to 40%, capital gains rebased to 1982 with full indexation but charged at income tax rates not the special 30% rate (so that was an increase for some but a cut for others), VAT at 15%, basic rate of income tax cut from 27% to 25%, top rate of income tax cut from 60% to 40%.
“Mr Alex Salmond (Banff and Buchan): This is an obscenity. The Chancellor cannot do this. [Interruption.]”
The Lawson boom saw inflation at 8% and interest rates at 15%, but the Conservatives were re-elected in 1992 under Major.
And here we are again.
Policy is really hard to get right, and the end result never is.
However, if well thought out, consulted upon and well written, it can address many areas of its subject albeit not all, because, as you rightly point out, some failure will occur following its first encounter with humanity.
The underlying issue with the economic policy announced today and with the exclusion of all scrutiny, it appears that none of above has been applied and its first encounter with the all-knowing markets (humans too I understand) has been disastrous which doesn’t bode well for the rest of us.
Reagan’s trickle-down policies didn’t end well and Kwarteng’s “just try even harder” attempt will inevitably fail too.
If you always what what you’ve always done and expect a different result… to paraphrase some famous automobile entrepreneur bloke.
If you always do…
Or as the army types say, no battle plan survives first contact with the enemy.
This mini-budget reminds me of the Barber Boom resulting from , excessive stimulus and fiscal loosening that led to a crash, the three day week, the end of the Heath administration and inflation eventually peaking at 24%.
Another fine example of the Conservative Party’s financial rectitude in action.
*resulting from the 1972 budget,
I quite literally never comment but this resonated.
I was 10 years behind you but similarly indoctrinated.
I think there is something, or maybe a lot, to be said for the total domination and proliferation of the neo-liberal/Chicago school of economics as gospel to the academic world for a period of some 50 years.
I’m slightly less convinced of this…
If you think back to the 2008/9 financial crisis, caused in very large part by the significant de-regulation in both the US and UK from about 1997 onward (the major elements of the safety net were removed when Brown became Chancellor), it took roughly a decade to see everything go to pieces.
But when the extent of the sub-prime scandal became apparent, we saw completely different “neo-liberal” economic solutions. The UK ended up with Osborne choosing “austerity”, with the UK hauling itself out of the mire over 6-8 long years. On the other hand, Obama picked up from Dubya – and largely kicked the can down the road, figuring – like Lawson did in the UK back in the 1980s – that he would inflate his way out of trouble.
The US economy picked up speed again more rapidly than the UK, but did so with a much larger parcel of debt attached.
Unfortunately, the days of fiscal responsibility and “balanced budgets” are long behind us and now both the UK and the US have eye-watering levels of national debt. In the US the number stands at just short of $31 trillion… in the UK it’s about £2.4 trillion…
A bigger challenge for the UK is that in March this year national debt had reached 99.6% of GDP… and that was just before we headed in to recession.
Unfortunately, it looks as though Kwarteng has taken a page out of Nigel Lawson’s playbook and his strategy is to inflate his way out of trouble – allowing inflation to continue until such time as the new debt he is creating becomes less significant in terms of GDP. That was particularly painful first time around… and I can’t imagine it will be much different this time.
Sigh.
Well. As someone we know would say. Have you read Naomi Klein’s The Shock Doctrine? Unfortunately Chicago School Economics/Friedmanomics didn’t remain in an ivory tower, but instead wreaked havoc in many countries where it was weaponised. And it is alive & thriving in Brexit Britain.
I also did economics A-level.
Also in Birmingham.
Also 1987-89.
Watching that self same Lawson budget (although I will admit I didn’t open the FT at the time).
My own economics A-level teacher at the time was definitely an anti-Thatcher, anti-Lawson.
Our favourite trick, during a double economics period, was to ask him about the latest pronouncements from Mrs T et al.
He would then rant for the next 40 minutes, before saying: “Christ. I’ve actually got to teach you this.”
I learnt far more from listening to him than from the actual text books.
Thank you, Mr Smith (yes, his actual name).
I not only did Economics A level, but started to do an Economics degree – before I saw the light and switched to Italian Medieval and Renaissance history.
Which was far more interesting.
I also worked for economics advisers and lecturers for a couple of years. I’m still in touch with one. They’d have a lot to say about today’s bilge.
It wouldn’t be flattering.
I’ve got two conspiracy theories (or questions) to air about the current madness. Both are re. the lack of forecasting (at least that they’re admitting to) by the OBR, which per my understanding is supposed to make projections precisely so that politicians and the punters can see the sorts of risks Chancellors might be taking. Not around in the 1980s, of course.
First one is re the sacking of the Treasury Perm Sec Sir Tom Scholar earlier this month. Might Sir T have been the kind of senior chap to request a formal written ‘Ministerial Direction’ that recent convention was to be broken & no OBR forecasting made public, or even released to the relevant HoC Select C’tte?
Second one is whether calling this a ‘Mini budget’ is a deliberate trick of terminology to be able to say something like:
“Ah yes, well. it’s not a Budget, so there was no need for the OBR forecasting that’s associated with Budgets“.
In terms of what the Chancellor has done to taxes / the pound / the economy, this must surely be far more consequential than many actual “Budgets”?
I think you’re right on both counts.
In a related observation (and, yes, I know this is a bit of a soap box of mine), is that what the government have just done is implement a budget in all but name.
By choosing to name it differently, as you note, they are very effectively side-stepping the obligations to use an OBR forecast.
Now, there may be circumstances under which it is necessary and appropriate to make a change in fiscal policy without “going through the whole rigmarole” of a legally defined process. But the OBR was introduced precisely for this purpose – to safeguard the economy, the nation and her citizens from “ministerial meddling”.
One of my “resident concerns” if you like is that politicians divert attention towards policy and away from the mechanics of governance, deliberately, to allow them to pull moves like this.
If it had been the case that the OBR would have buttressed the financial arguments being made this week, you can be absolutely sure that the government would have used them.
Their absence is as informative as an admission of guilt would be.
In the light of this story today I think both my above conspiracy theories are looking pretty good.
Do you ever get the feeling that our world is a livestock farm, and we are the livestock, and the farmer is permanently drunk?
I like the Austrian school of economics even though Austria is within the Eu.
Hayek argued that in times of economic turmoil Central Banks should stay out and do nothing to avoid creating a false market which would saddle people with greater debt in the mid and long term.
Schrumpeter argued any enterprise that could not pay its way should be let go to the wall. If necessary replace it with a new enterprise with a new business model and no debt.
In posting this I have to admit that I never received any economic education at school or university so the views here can no doubt be shredded to pieces and dismissed.
I am also influenced by a fictional character called Jenkins of Loughor who appears briefly in a short story called The Outing which is about a group of retrobates organising an annual booze cruise to the seaside.
In deciding who should get onto the coach we are told simply this:
Jenkins of Loughor? Don’t get him talking about economics. It cost us a plate glass window last year !
Just perhaps Dylan Marlais Thomas was the greatest economist of all time ?
But there again I gave up my seat on the bus many years ago. Perhaps others should do so now ?
Budget in haste, repent at leisure.
I suspect that poisoning the wells has played a part in the timing and content.
Economics looks quite a hard subject if taken seriously. Many stimulae, incentives and constraints have to be matched both with what you have and what you want to be. The Hidden Hand helped a lot with that and without much effort – but no longer. The Hidden Hand worked OK for us when there were few constraints and the costs of transport were large. Not any longer, there is no cop out, hard thinking, difficult choices and consistent action are needed.
To turn this ship’s course looks to be a job of 10 years or so – if you had a plan that was even vaguely logical. There’s a great deal of ruin in a nation – and we have plenty.
Wi’ sic a parcel o’ rogues in a nation, the ruin is not exactly surprising.
(Yes I know, the rogues in this song were the Scottish parliamentarians who took the bribes, but it’s a phrase eminently applicable to others. At the risk of wandering even further off-topic, here’s some background for our less Scottish readers.)
https://www.scotslanguage.com/articles/node/id/450
It was widely anticipated that the budget (since the broad outlines of what it would contain was not a secret) would lead to a sharp fall in the value of the pound against other currencies. It provided an unparalleled opportunity for the shorting of the pound by those with access to the millions needed to make the exercise worthwhile. Not only did this happen but those who engaged in this apparently have no qualms about boasting about the killing they made or of toasting Truss for giving them this opportunity. Of course, the rest of us will pay for last week in the form of higher prices or is that incorrect? And, what recourse, if any, do we have to discourage behaviour like this? Exposure of what is going on may be the only one. This is something that this blog does wonderfully well across a range of subjects. Let’s hope it has a wider impact.
…when will they ever learn…when will they ever learn?