A New Golden Rule
The proposal for a new ‘golden rule’ for the conduct of macroeconomic policy, published in a new report by the Fabian Society, takes our earlier arguments about the importance of corporate sector surplus to a new level.
Co-authored with Steve Barwick and Dan Corry, the report does two things, one looking forward and one back.
The backward looking point in this: the idea that the UK’s economic problems arose from Labour economic incompetence and profligacy is wholly at odds with the good economic record even up to 2007. At the same time, however, neither the financial crash nor the subsequent recession came out of a clear blue sky. Rather, the economy had started to become seriously imbalanced, certainly from 2004, and the emergent ‘chronic’, ‘persistent’, or (as some now call it), ‘structural’ corporate sector surplus was at the heart of what was going wrong.
The forward looking point is that any new ‘golden rule’ adopted by a government to demonstrate their commitment to economic discipline needs to include not only the public sector deficit but also the corporate sector surplus. Both need to come down, and in some sense, the pace at which the former comes down needs to be conditional on the latter.
Versions of this argument can be found in City AM here and here in The Guardian. The report is also available directly from this website here.
Rather than summarise it yet again, I want here to make a series of observations about why I believe this is so important. There are five points: party political, economic policy, economic ideology, pecking-order in government – and power.
First, the idea that economic competence lies all on one side of the party political divide is nonsense. The return of recession in 2012 had already done much to damage the idea of Tory competence. This examination of the Labour record goes further. Those tempted to dismiss this as the authors’ pro-Labour bias should note that the report also draws attention to the strong economic record the 1992-1997 government too.
Second, it is not enough to focus economic policy on the public sector deficit and how far and fast to reduce it. Note the symmetry here: neither those who would go faster and deeper, nor those who would go slower and less deep, are right. This one dimensional thinking must give way to economic policy making in two or even three dimensions.
Third, this switch from one to many dimensions destroys the cornerstone of free-market ideology, that the private sector is self-correcting and that the only imbalance that policy makers need to concern themselves with are those arising in the public sector.
Fourth, government industrial policy – which is bound to have a central role in changing corporate behaviour and reducing its surplus – is promoted to the first rank. Economic decision-making is no loner just, or even mainly, the province of the Treasury.
Fifth, a persistent corporate sector surplus at the heart of our economic woes means that the finger of blame for those woes must be turned from the poor to the powerful. Arguing that government must turn its attention to corporate Britain is not an easy road, a cop-out from imposing further cuts and tax rises on the poor, but a very hard road indeed.