The present prosperity, and party politics

There is a useful debate - in the sense that one side's misconceptions are being refuted - taking place between two Times columnists, Matthew Parris and Anatole Kaletsky, about the decline of manufacturing in Britain and whether this is of economic significance. Parris is a former Tory MP whom I once mistakenly thought of as a sceptical liberal, but who is increasingly displaying the more traditional parochial concerns of British Conservatism. He believes the semblance of prosperity is misleading, largely because he has a superstitious (or perhaps puritan) conviction that imports are a cost and exports a benefit. He has very much the worse of the argument. Kaletsky wrote in his column last week:

[T]he almost universal belief that Britain, as a nation, is living far “beyond its means” is simply untrue. Some individuals may be borrowing too much, but this is not true of Britain as a nation. In this sense, at least, the present prosperity is real and sustainable. But there is another, deeper reason for the sense that Britain’s newfound prosperity is some kind of new Labour conjuring trick or bull-market illusion. Britain’s economic success, especially in relation to other European countries, represents the reversal of a hundred-year trend. For anyone born before the mid-1980s, belief in the country’s continuing prosperity means abandoning a century-old assumption about Britain’s inevitable decline.

In his column yesterday, Kaletsky explained his point about the reversal of Britain's relative decline. He identified "three separate tributaries" of economic change that had joined. These were the deregulatory reforms of the Thatcher years; the change in macroeceonomic policy that had been initiated, ironically, by the failure of policy in the ERM crisis; and a shift in relative prices whereby the things that we import (especially mass-produced manufactured goods) have got cheaper while knowledge-intensive goods have risen in price.

Kaletsky's exposition of economic policy and the benefits of an open, trading economy is particularly good. But he doesn't get the political background right. It's that detail that I comment on here, rather than the much grosser fallacies that Matthew Parris advances. Inadvertently - for he is always a fair commentator - he gives too much credit to the Conservatives in the 1990s, and correspondingly not enough to Labour since 1997. There's an understandable reason for this, in that the Treasury's own exposition of Reforming Britain's Economic and Financial Policy, published in 2001, is a hectoring and self-congratulatory document that epitomises New Labour at its most sanctimonious - but it really does have a point in noting the things that Labour has done that ought to have been done earlier.

After sterling's forced departure from the ERM in 1992, the much-derided Norman Lamont introduced a good policy framework at exactly the time the Conservatives' reputation for economic competence had imploded. Instead of seeking exchange-rate stability as the overriding goal of economic policy, it rightly stressed the control of inflation as the single target instead. Lamont's introduction of an inflation target was an important reform, and one that he ought to have received greater credit for. But typically, economic policy was complicated by the incompetence and incoherence of the Prime Minister, John Major. The logic of Lamont's policy was that the other traditional goals of economic policy - on output, employment and the trade balance - would be subordinated to the inflation target. Major immediately undermined this by stressing, a month after the ERM crisis: "A strategy for growth is what we need, a strategy for growth is what we are going to have." The Major government then compounded its reputation for indecision by pursuing direct tax cuts at the same time as making additional spending commitments, and increasing indirect taxes to compensate.

Kaletsky understates the importance of Labour's decision to grant operational independence to the Bank of England in setting interest rates. It wasn't just a "small, though significant, technocratic advance": it was part of a wider strategy to make economic policy less discretionary and more rules-based. It had its counterpart in the introduction of a Code of Fiscal Stability - the so-called Golden Rule, under which the government would borrow only for investment and not for current spending, and the debt rule controlling the debt-to-GDP ratio. In commending the "expansionary demand management" that has capitalised on the reforms of the 1980s, Kaletsky fails to mention that it's a different approach in principle from the discretionary demand management practised by governments of both parties in the 1960s and 1970s. Those governments' attempts to exploit a short-term trade-off between inflation and unemployment resulted in higher inflationary expectations with no lasting effect on output or employment. Policy now is designed to be ''time-consistent" (e.g. resisting inflationary spending programmes in the budget before an election).

I am a confirmed advocate of tactical voting to defeat the Liberal Democrats at the next election. It embarrasses me not at all to observe that the only sensible critique of government economic policy at the moment comes from that party's Treasury team (far the most impressive spokesmen the Lib Dems have), and not from the Conservatives. Whereas the Tories are reprising their internal obsessions with tax-cuts (and focusing, bizarrely, on the ratio of public spending to GDP), the Lib Dems' line of attack is that the Chancellor's fiscal regime lacks the type of independent scrutiny that monetary policy has. It's an important criticism, not least because it recognises what's changed in economic management in the past dozen years. What's changed is much to the good, however disturbing that must be to the more reactionary strains of Right and Left.