In early January, the long-run rate of interest on UK government bonds rose to almost 4.9%. This was far higher than the rate being charged on government borrowing eight years previously. Conservative politicians and their friends in the right-wing media seized on this as evidence of Labour’s incompetence in managing government fiscal policy.
For a few days, there was frenzied speculation that Chancellor Rachel Reeves would have to resign, and views were exchanged about who might replace her. The previous administration had taken a huge amount of flack for spooking the markets as a consequence of Kwasi Kwarteng’s ‘fiscal event’. Now in opposition, the Tories took great delight in Labour discomfiture, while the Mail, Telegraph and Express amplified the attacks.
Within a fortnight, what had initially been portrayed as major and significant revealed itself to be much ado about nothing. Economist Simon Wren-Lewis, In his latest Mainly Macro blog post, drew attention to two important matters: first, interest rates on government bonds had, within a week, more or less returned to where they had been at the start of January. Second, identical ‘blips’ in interest rate had occurred in the USA and other financial centres.
Economic illiteracy writ large
What had happened in the UK was simply part of a global phenomenon. As a result, the pressure on Reeves and the prime minister was greatly reduced. Wren-Lewis was moved to describe the part played by the print media as “uninformed overreaction” and “distorted coverage”. He went on to add, “The most important point here is to ignore a lot of what you read or hear in the media”.
For years, Professor Wren-Lewis has taken issue with the media’s handling of economic matters in the UK. Around the globe, the most widely accepted model for analysing and framing economic policy is the Keynesian model, developed by John Meynard Keynes in the 1930s. This model includes the possibility of ‘deficit finance’ as a viable route out of an economic slump – something unpopular with those of a right-wing mindset because it involves ‘big government’.
Conservatives, by contrast, prefer to see the national economy as akin to a household budget, where the books must always balance. This is the economics of Mrs Beeton, not Keynes. (It also reflects the policies that served the UK so badly during George Osborne’s austerity drive). Wren-Lewis coined the term ‘media macro’ to dismiss this pre-Keynesian thinking, which, in early January, was busy doing the rounds – economic illiteracy writ large.
On 8 January, another respected economist, Professor Jonathan Portes of London University, weighed in with an article in The Guardian. Portes asserted that there was “no need to panic” and that the government’s fiscal strategy was “the right one”. He continued: “higher taxes or spending cuts in the short term would be bad economics and bad politics”.
Criticism of Reeves’ approach
That said, neither professor gives Reeves a free pass. Wren-Lewis, for example, offers two criticisms. First, Reeves has reduced the time frame on the key fiscal rule (that government current spending should be balanced by tax take) from five years to three. Secondly, she has ruled out significant tax increases in future. It would seem that in an effort to conform to the ‘media macro’ narrative, the chancellor has imposed restrictions on herself. As a result, she is offering watered-down Keynes, rather that the full-strength version the economy needs.
Some afterthoughts
A friend of mine is of a Conservative disposition and is highly critical of Labour’s management of the economy. He used to be a senior manager with Yorkshire Water and asserts that the government fails in its fiscal policy because “none of them have been businessmen”.
Three points stem from this:
- The previous Conservative government was stuffed with supposed business leaders, yet they made a total pig’s ear of running the economy.
- Highly paid (one might say overpaid) business leaders run Yorkshire Water and have hardly made a good job of that.
- Ultimately, running a national economy requires a different model from that of running a household budget or a commercial company.
