Tories and Supply-Side Reform
It seems the righter-wing end of the Conservative party has had a think about their party’s 2015 electoral prospects, looked at the GDP figures, and gone into a little bit of a panic. Not necessarily a bad thing. What is their plan?
Liam Fox today gifted a stream of “nasty party” quotes to the Guardian sub-editors, allowing them to concoct headlines with the words “slash” and “welfare” carefully arranged to maximize the righteous indignation of their readers. David Davis last week made a speech calling for a government “growth strategy” – and the growth strategy that he and Fox have in mind is no more and no less than “radical” supply-side reform.
Davis and Fox remember that Thatcher won elections, and Thatcher loved supply-side reform. So they revert to this primitive ideal of Thatcherism which says “supply-side reform wins elections”.
But they have forgotten that a good part of Thatcherism was demand-side, with the adoption of monetarist targets for the broad money supply aimed at providing lower, and stable inflation. Cobham’s book on UK monetary policy makes the point that this was more an evolutionary change than a revolution; monetary targets had been used but completely ignored in the 1970s; after the targets were made more explicit in the 1980s, they were still ignored or revised when policymakers found that convenient.
Regardless, the demand-side policies under Thatcher brought down nominal GDP growth from an average annual rate of 16% in the 1970s to 9% in the 1980s. Some volatility remained with inflation and NGDP soaring in the first years of the decade and another (less severe) spike at the end during the “Lawson Boom”. The intervening period saw marked stability in nominal GDP, real GDP and inflation. Lawson’s abortive ERM experiment was another unnecessary screwup, but the subsequent adoption of inflation targeting in 1992 set the stage for 16 years of stable growth.
My point is not to elevate the record of demand management under the Tory governments of the 1980s, a record which is certainly not above criticism. But it was generally a lot better than what came before. Davis’ idea of a “growth policy” is simply to pretend the demand side does not exist, or in his words:
when I talk about a growth policy, be clear that I am not talking about an exercise in Keynesian demand management.
He is similarly dismissive of Japan’s experience with “suppressing interest rates to zero”. Milton Friedman keeps on turning in his grave.
Davis does come out in favour of government-funded infrastructure spending, but purely for its benefits in improving the supply-side and long run growth. This support is conditional; it must only be infrastructure spending on things David Davis thinks are really good. Which apparently means that high speed rail is out, and gigabit broadband is in, because South Korea has gigabit broadband and therefore, um, handwaving here. I’m not sure Davis has fully grasped the Hayekian critique of central planning embraced by Thatcher.
The (short) list of supply-side reforms which Davis deems necessary for growth may well (or may not) be sensible ideas. Jonathan Portes is surely correct to point out that an “easy win” from supply-side reform would be to relax the immigration rules tightened under the Coalition, a subject which the likes of Davis and Fox are curiously silent on. But supply-side reform will not help escape from the demand-deficient slump we are in. UK nominal demand growth has been weaker over the last four years than any other period on record, and there is no obvious recovery imminent.
For these politicians to abandon any consideration of demand policy right now not only contributes to their party’s electoral suicide, but is a repudiation of the Thatcherism they claim to admire. Monetarism’s “second counter-revolution” offers an escape from what might be considered “Keynesian” demand management, but the Tories have little time to embrace it.