Why this might be like the 1970s
The 1970s analogy is overused in British economic commentary. But, in some ways, it is starting to make sense.
It’s easy enough to make analogies with the 1970s today. Inflation is running at a multi-decade high, the papers are promising a ‘summer of discontent’ and it’s even possible (sort of) to go and see an ABBA gig in London. But I’ve, until now, been resistant.
The wage-price dynamics still seem radically different to me. More importantly the structural shifts in the nature of the labour market and the scale of globalisation over the course of the 1980s, the 1990s and the 2000s all make reasoning from the experience of the 1970s far from straight forward.
But over the last week or two, I’ve started to think that perhaps the 1970s analogy holds some truth for the current UK outlook.
For me, and this is a great opportunity to plug the book, the defining feature of Britain’s economy in the 1970s was a sense that everything was going wrong at once.
It wasn’t just the oil shock, or the difficult industrial relations. It was a decade which also saw the break down of Bretton Woods and a newly floating pound in just about the worst circumstances imageable. It saw a proto-Thatcherite attempt at structural reform which was soon abandoned. It saw a newly deregulated banking system stoking up a house price boom. It saw some wildly inappropriate macro-policy which swung from far too loose to too tight. It saw a loss of faith in the not only the tools of economic policy but also a reassessment of what the targets of policy were1.
In this sense, the sense of an economy facing multiple simultaneous shocks pushing in different directions, I can start to appreciate why a 1970s analogy makes sense.
Britain in 2022 is still suffering from the economic fallout from the pandemic, still being buffeted by the impact of China’s zero-covid policy on global supply chains, facing the inflationary hit from the war in Ukraine and, at the same, adjusting to the new trading regime following Brexit. All of which comes on the back of a 15 year long productivity slump and real wage stagnation.
Macro-policy usually involves trade-offs, but those trade-offs have become much tougher. Just as they did in the 1970s. And just as in the 1970s it is no longer obvious how macro-policy should respond to the series of external shocks.
I’ve been covering the British economy, in one way or another, since 2004 and commentating on it publicly since 20082. That’s quite a long time. And for all most of all that time since 2008, ‘British macro-policy is too tight’ has been a sound enough starting point for analysis and explanation.
But perhaps that is no longer true?
We are all conditioned by our first crisis. Generals aren’t the only people who refight the last war. It was clear to me in 2007-09 and afterwards that Britain faced a deflationary shock to demand emanating from a financial collapse. The appropriate policy response was fiscal and monetary stimulus to restore demand and, ideally, to make up lost ground. We got a lot of monetary stimulus but not enough fiscal. The lost ground was never recovered.
Again in 2020, whilst the initial hit from the pandemic effected both the demand and supply sides of the economy, the demand side hit dominated. Once again, the response required was fiscal and monetary stimulus. This time we got it. The macro-policy of 2020-21, across the advanced economies, was a huge global success story that risks being forgotten.
But 2022 isn’t 2020. The nature of the shocks has shifted.
Right now, it is not at all clear that British macro-policy, as a whole, should be loosened further.
With consumer confidence in freefall the case for the Bank holding back on further rate rises is obvious. But a bout of dovishness in Threadneedle Street, when other central banks are hiking, risks a weak pound and more imported inflation which would further hit real incomes and depress consumer confidence. A broad-based fiscal loosening meanwhile would no doubt help growth in the short run but risks adding to inflationary pressures.
I tend to think that what is needed is not so much an overall loosening in the macro-policy stance but a recalibration: more (much more) targeted fiscal support to the households (and firms) most exposed to high energy prices coupled with tighter monetary policy – as much to help the value of sterling as anything else.
Of course even this stance is far from ideal: stronger sterling – especially in the context of the new post-Brexit trading regime – would be tough for exporters. Materially higher rates pose a risk to the housing market3.
The trade-offs have become tougher. That’s the real spirit of the 1970s analogy.
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I am leaving aside here the contested nature of the 1970s. Like the 1930s, the other decade that serves as a cautionary tale in Britain’s political economy, it produced both winners and losers. Again for more detail… I can recommend a book.
2008 was a big deal for the economy, obviously. It was also a big deal for economists. For the first three or four years of my professional life, at the tail end of the long boom, being an economist was pretty dull. If people asked what you did and you said ‘economist’ it was seen as probably quite worthy but also fairly boring and involving a lot of dry numbers, kind of the equivalent of ‘accountant’ or ‘actuary’. Then, all of a sudden, people became interested. I guess it really is a counter-cyclical occupation.
And yes, lower real house prices would be a good thing. But getting there via a messy fall following a rate shock would not be pleasant for anyone.