Where is the (British) centre left now on macro policy?

Corry, Dan

To achieve the ambitions that those on the centre-left have, we need to use all the tools at our disposal. One of these is macroeconomic policy, the policies that at an aggregate level try to influence growth, employment, and demand in the economy.

Even if, either as a Marxist or a neo-classical traditionalist, one believes that in the long run it is the supply side of the economy that really matters, macro policy can and must matter in the short run. And since within economics there are many arguments that macro conditions affect the way that the supply side develops, most would agree that macroeconomic policy must matter even in the longer run.

But most thinkers on the left do not really know what they think about macro policy. And even macro economists who are of the left are not really sure what the correct macro policy is - let alone whether there is a 'correct' macro policy in all circumstances.

By and large most on the centre left can be classified as Keynesians. This means firstly that they believe that the economy does not through its own volition always create enough demand to meet its potential supply, thus leading to unemployment and other under use of resources. And secondly, that they believe government action to stabilise an economy and push it nearer to the full use of capacity is desirable and possible to do effectively (1). This indicates that the values and the broad understanding of how economies work will be driving the left in a different direction from those driving the right. But in practical terms, how far can we articulate a progressive macro policy that is different from mainstream or right-wing macro policy?

Furthermore, where those on the left disagree on macro policy, what drives those differences? Are those differences about how the economy works, about what works in tackling economic problems, or about values and what is politically possible and advantageous? And where does and where should Labour stand on all this at present?

The last time macro policy was contentious

Every now and then in the UK, macro policy becomes a huge bone of contention. This is not only because the left has a different perspective to the right, but also because within the left there are massive differences on what the correct policy is, how economies work, and how they link into the real or supply side of the economy.

In terms of the right versus the left, the 1980s and early 1990s saw a battle between the monetarists and the rest (mainly but not exclusively Keynesians). This technically was about issues such as the role of the quantity of money in influencing inflation and output but more fundamentally was about whether government, by purposeful actions, could lead us to better outcomes in term of jobs and growth, or whether the best government could do was to control inflation and then keep out of the way. Not surprisingly, the overwhelming voice of the left was against the hard versions of monetarism. But the battles within the left camp were also vigorous and passionate.

There were particularly marked disputes between those who believed in very active Keynesianism to boost growth even if it did cause inflation; those who wanted import controls to allow demand to grow without sucking in imports; and those who were starting to argue that macro tools should mainly be used to secure stability in the macroeconomic conditions because it encourages private sector investment and other activity. In the mid-1990s, when I last wrote about this topic for Renewal (Corry, 1994), this battle was still raging, even if the Supply Siders were gaining the upper hand within the Labour Party and the more radical Alternative Economic Strategy had faded well into the background.

These different perspectives, as I tried to analyse in that paper, were about a number of issues. First, a difference in the weight to give to different objectives and disagreement as to whether there were trade-offs between some of them. The most important of these was in relation to inflation. Some Labour thinkers were pretty relaxed about inflation; if policies that boosted the economy boosted inflation then so be it--a price, if you like, worth paying. Others worried at length about it, feeling that in the end high inflation restrained growth, hit Labour's natural supporters, and was a vote loser.

Second, there was a difference about what a small open economy like the UK could do on its own and how much it had to adjust to global realities--ranging from the constraint that free and internationally mobile capital markets imposed to the inability to expand domestically, if other countries were not, without just sucking in imports in an unsustainable way.

Third, there was a disagreement as to what the best macro conditions were to allow private sector activity to expand and flourish. One side felt very strongly that low interest rates and a competitive pound were above all the key requirements. Others believed it was stability--fewer booms and busts, to half coin a famous phrase.

Fourth, there was disagreement on deficits and debt. The definition of it in those days, the Public Sector Borrowing Requirement (PSBR), had become a big issue not least because the right-wing monetarists claimed that it was bad not only because of the stifling need to repay the resulting debt but because the PSBR affected the money supply. The left's arguments were more focused on the extent to which fear of high debt should be a constraint on fiscal policy.

A broad consensus--or so it seemed

The coming of Tony Blair and especially Gordon Brown saw an end to such debates in the Labour Party--they pushed on with what I called in 1994 the 'Supportive Keynesian' approach. But it was not just them. In academia and across the word, macroeconomic policy seemed much less divisive. Broadly speaking, for much of the so-called 'NICE' period ('non-inflationary consistently expansionary'), macro debate became muted. Loud debates on macro policy were replaced by important but less fundamental ones on growth theory and the optimal design of stable policy institutions. The new consensus across the spectrum was that macro policy should be used for stability and micro policy was where the action was. So in different ways keeping inflation down became the top priority and doing this was entrusted to independent central banks; nobody argued much anymore that there were trade-offs whereby you could 'buy' higher growth and lower unemployment for a bit more inflation in the medium or long-term. And fiscal fine tuning was no longer much talked about, as longer term fiscal goals were prioritised. In addition, the deficit, apparently so worrisome in 1994, had melted away as a concern by 1997. Much of this consensus of course reflected the benign economic times; the debates over how to respond to really difficult economic conditions were submerged rather than resolved.

The centre left version of this was perhaps best played out in the way President Bill Clinton and his team approached economic policy--so called 'Clintonomics'. Clinton made a virtue of getting the fiscal position under control, not least as it would lead to lower real interest rates, thus boosting private sector investment. Active supply-side policy, for instance in the labour market, was used. But the argument that the deficit had to be kept under control and that monetary policy was not about Keynesian boosts took hold more widely.

This approach seeped into the New Labour approach pretty quickly--not least because there was a search for a fresh narrative after yet another defeat in 1992. Right from the start of New Labour the most common point made was the need to end the debilitating extremes of the business cycle--to end boom and bust (Balls and O'Donnell, 2002).

There were some who doubted this approach in UK academic and other economic circles, but their voices were not that loud and were certainly not much heard by policy-makers, especially as unemployment did fall, inflation kept low, deficits and debt were under control, and growth just kept on going. There was little to get excited about from a left perspective on macroeconomic policy.

Debate such as there was on macro policy in this period tended to be about whether the UK ought to join the single European currency, and what the economic circumstances should be to make it worthwhile--leading to the infamous five conditions for joining that were established in 1997. Some of this debate reflected concerns that the UK exchange rate was very high in the later 1990s and early 2000s, which was taking a toll on British manufacturing especially in the Midlands, and a hope that we could join the euro at a lower exchange rate to overcome this.

Then along came the banking crisis

In 2007 I was asked to give a lecture. It was about how I had found that the economic theory I had studied influenced policy-making within government (Corry, 2008). It was mainly about microeconomics. As I was drafting it, I also added an aside that macro policy was now a bit boring. Yet by the time I gave it in October 2008 I had had to change that part! The whole edifice came crashing down with the onset of the banking crisis in 2007 but really hit home in 2008 with the collapse of Lehman's. Suddenly, rather than purring along gently, the major countries all saw growth collapse, unemployment rise, deficits soar, and real wages cut. Macro economists argued about what should be done to see off the worst of this. How could macro policy best play its role--and what was the role of monetary versus fiscal policy? This was in addition to doing what was possible on the micro side to help, with the charge in the UK led by the newly established National Economic Council (Corry, 2011a). Policy-makers had to act in real time and there was little opportunity to argue about principles and theory when banks were collapsing and firms going under.

There were then issues about what should be done given that policies to support the economy meant that big deficits would inevitably--and were being--racked up. Clearly they had, at some time, to be paid back. How fast to do that, when to announce it, how firm to be on time paths, which policies to enact? What role should monetary policy play? And how could one avoid debates about debts and deficits completely dominating the centre-left's advocacy of growth and full employment?

Finally, there are issues about how we should operate macro policy in the future. After all, if macro policy cannot tell us how to avoid events like the Great Depression of the 1930s and the Great Recession from around 2008, then what is the point of it all? (2)

The debate among economists

The argument about what had gone wrong divided economists. Clearly the proximate cause of the crisis was the banking crash, which focused attention on financial regulation, why it was too light touch, why macro models had no finance sector, why lending had become too easy and risky, and why banks that were 'too big to [let] fail' had been allowed to emerge.

From another perspective attention focused on the fact that the supposedly benign macro situation that had endured for the best part of a decade and a half in the UK had relied too much on private consumption and household borrowing to drive it. Was this something that should have been stopped earlier--and if so how? If it had been, would Britain have enjoyed a more 'virtuous' sort of growth that was export and investment driven? Or is this a false choice? Analysis also suggests that the corporate sector went into deficit quite early in the New Labour years and stayed there, something that in retrospect should have given pause for thought to macro policy thinkers (Kenway, Corry and Barwick, 2012). Here we see a modest return to an old left obsession with sectoral balances, with the old focus on the trade balance being replaced by others.

Finally, a great deal of attention amongst macro economists has been focused on the global imbalances that had started to arise--essentially with the West (and the US) running deficits financed by growing countries like China. This helped generate a too long period of low interest rates which added fuel to the consumer-led boom. What, then, should be the left's response to these debates?

Disagreements within the centre left

The left split on all these issues: the causes; what to do initially; and most of all, how to get out of the recession and to cope with the debt build up.

There were strong polemics against the consumer and credit driven society that the Labour government was said to have encouraged, or at the very least ignored. One strand of thinking said that New Labour had been seduced by the glamour and tax revenues of finance and so had let it do what it wanted in a sort of Faustian pact with catastrophic consequences (Wickham-Jones et al., 2012, 60). Since the 2010 defeat, very few defenders of the previous government have emerged, partly because the actors have kept their counsel and partly because the politics of the day require a degree of separation from that period, even from those still active who were then involved (see Corry, 2011b for such a defence).

Probably the least disagreement was on what to do when the crash struck. Almost nobody on the left argued anything other than that fiscal policy needed to step up to the plate. In technical jargon this certainly meant allowing the automatic stabilisers to act without worrying too much about the short run impact on borrowing. But fiscal policy was loosened in an expansionary and deliberate way on top of this too, to try to make up for the sharp downturn in private spending. Cash spending plans set in the good times of 2007 were adhered to (despite inflation being lower than anticipated so real spending was higher); capital expenditure was accelerated; tax reduced (both directly for households through VAT cuts and for firms through tax delay schemes, for example the Time to Pay scheme for smaller firms: Corry, 2011b; Wren-Lewis, 2013a). In addition nobody argued with the idea that monetary policy--now controlled by the Bank of England not the Treasury--should try to support activity as much as possible. Bigger arguments came after the immediate crisis. How quickly does one need to get the deficit and debt down? What are the parameters on this and what are the constraints?

To try to understand this internal debate, we can break macro thinking on the left into different groups. One starting point is to distinguish between the relative strength of fiscal and monetary policy. Here I take everyone on the left to be essentially Keynesians, since they all see economies as being liable to periods of underemployment of resources and as requiring a strong role for policy in addressing this.

However, carrying out this exercise demonstrates that views often differ between 'normal' times, when Keynesian policy is needed to try to smooth out the ups and downs of the regular business cycle, and 'crisis' times when the economy has been hit by a very big shock, and is in severe recession--periods like the Great Depression of the 1930s or the so-called Great Recession that began in 2007/8. In general, and as we have seen above in the discussion of the earlier macro consensus, there is not that much debate in 'normal' times. The differences emerge when things are looking bad.

The table below sets out the different options for a crisis period and gives some titles that we can then work with. It simplifies drastically the differences between view-points to enable contrasts to be drawn (3).

Table 1: Different views of fiscal and monetary policy
during a crisis

                    FISCAL POLICY
                      Powerful         Less powerful

MONETARY  Powerful  Full           Monetary Keynesians
POLICY              Keynesians

          Less      Fiscal or      Weak, Supply Side or
          powerful  Traditional    Supportive
                    Keynesians     Keynesians

Full Keynesians think that both fiscal and monetary policy are powerful and should be used to the maximum to enable demand to remain at a level that enables all resources to be employed. They are flexible as to which is more important. Commentators such as The Observer's William Keegan and, at a more international level, Paul Krugman might fall into this group. Monetary Keynesians emphasise the use of monetary policy of all types to boost demand, while Fiscal or Traditional Keynesians put a great deal of their focus on fiscal measures. Weak, Supply Side, or Supportive Keynesians believe the key to a decent economy lies on the supply side--they are not convinced that either monetary or fiscal policy can really change things that much as a rule. While they would be in the same camp as the others in arguing for macro activism now (in a deep recession), they want to get back very fast to being tough on macro policy and believe that there must be rapid and strong consolidation once recovery begins. Some of this thinking is reflected in the writings of the 'In the Black Labour' group, who are relatively supportive of market-based supply-side policies (Cooke et al., 2011; Corry, 2011c). However there are other, more anti-market left positions that also play down the role of macro policy. Such distinctions of course become complex, especially in times of crisis. For instance some who are pretty moderate and conventional Keynesians in normal times, such as National Institute for Economic and Social Research Director Jonathan Portes, or the Oxford economist Simon Wren-Lewis, argue currently for radical action, but when the worst is over would want to then return to moderate policies and back to the macro consensus before the crisis in terms of largely market-orientated policies.

If we use this typology, we can then go on to examine some other issues to see whether the differences are about how economies work or about values and politics. The table below summarises them.

Fiscal policy multipliers

Not surprisingly, some of the major arguments concern the effectiveness of fiscal policy. The issue of how well fiscal policy works to boost the economy has been long running. The right has often argued that it cannot really work since it implies future tax rises to pay for the extra borrowing involved (so-called 'Ricardian equivalence'). In 'normal' times, however, most on the left felt fiscal policy could work a bit, with its strength and desirability varying across the cycle, and there was a general consensus that automatic stabilisers should be allowed to work. In the aftermath of the crisis, however, the debate became ferocious. 'Establishment' opinion tended to argue that it was not strong--and so that moving fast on a negative fiscal boost (i.e. cutting spending fast) would not have major costs to growth (4). Indeed, some argued that policies that led to too big a debt/GDP ratio were bad for growth in and of itself. Keynesians tended to disagree with this and received a boost when some of the key work that had been taken to justify that conclusion (Reinhart and Rogoff) turned out to be flawed (see Davies, 2013 for a good summary). In particular, fiscal multipliers turn out to be large when monetary policy is doing everything it can and interest rates have been cut virtually to zero, as in the present situation. This means monetary policy cannot 'make up' for fiscal tightening by loosening more. On this, most shades of left thinking agree, and this is a major unifying force in advocating fiscal action and being wary of 'cutting too deep and too fast' across different shades of Keynesianism at present.

Monetary policy

Similarly, and given other constraints on fiscal policy, some believe that monetary policy is more the way to go. It works fast, is generally less distortionary than fiscal policy (5), and does not involve the crowding out that fiscal policy can cause. Nonetheless, for the moment at least monetary policy has been doing what it can--even if the Bank of England was slow off the mark. In fact, there is not much disagreement on monetary policy since most agree that there is little more that monetary policy can do at this point.

Debates do exist regarding the best use of what is known as 'conventional unconventional monetary policy' (QE), especially as it does not seem to have got business lending going, and so-called 'unconventional unconventional' monetary policy (for example saying that interest rates will stay low for X years or until growth is at X: Bowdler and Radia, 2012).

A bigger debate might examine changing the inflation target of the Bank of England to make it a bit more pro-growth. The new remit for the Bank includes considering growth alongside the inflation target and some advocate more of a move to nominal GDP targets instead of pure inflation ones (Corry and Holtham, 1995). But with exceptions there are not that many left debates on this issue, especially outside the real specialists (6). Indeed, the left seem to get more excited about fiscal policy (which alters the size of the state) than about monetary policy, which tends to act on private sector decision-making.

A last element to note here is the regulation of the banking sector. There is little disagreement on the need for much tougher regulation (including much higher capital ratios) and to get competition into banking if at all possible. There are some differences between those who would go for a full separation of retail and investment banking activity and those who can live with a less radical structural approach as long as there are possibilities of a full separation if the banks do not play ball. Perhaps a bigger difference is how fast all this should come in. The rules aim to prevent 2007/8 happening again--avoiding an unsustainable boom pumped up by too lightly regulated finance. At present it is argued we actually need banks to lend and to be active, so some argue that these measures should be delayed or postponed.

Constraints the markets impose on fiscal policy

This then loops back into the issue of what the constraint on using fiscal policy is. How real is the danger of a downgrading by credit rating agencies and the markets taking fright and how much does this matter? This is a tricky question. As I know from experience, when you are setting policy you know there must be some place where you go too far, but where that is is very hard to tell: the markets themselves do not really know where they are, so no wonder policy-makers cannot tell. If you think the costs (economic and political) of crossing that barrier are very large and potentially catastrophic then you are risk averse. On the other hand, when, as in the UK, you have your own currency, your debt has a long-term maturity, and there is confidence that the government can take action when it needs to (unlike say Greece), then you have more room than some think.

A way of giving oneself space for flexibility and sensible expansionary policy while keeping markets confident that you have not lost your will to get debt down when it is possible, or that you even care about it, is the use of fiscal rules. This was indeed part of the tactic that New Labour tried with its Golden Rule on the annual deficit (borrow only to invest) and its sustainable debt rules (7). However, despite there being a lot of common sense and good economics about them, these turned out to be so flexible and malleable that they lost credibility (Mulheirn, 2013, 9). Some kind of new rule would, it is generally agreed, be helpful, but the search for one that combines credibility with flexibility is not easy. To counter this, several leading progressive macroeconomists argue for a much stronger OBR - a Fiscal Council - that would judge the policies in terms of the sustainability of public finances without the need for a crude rule (Wren-Lewis, 2013b). This seems a very sensible avenue to pursue.

Constraints from the supply side

Expansion of demand is somewhat futile if the economy cannot cope and all it does is lead to inflation. Harder Keynesians tends to see the economy as demand constrained, able to bounce back if demand comes through. Further, they see the potential output of the economy being massively reduced the longer the wrong macro policy is undertaken. Supply Siders in contrast are more worried that productivity and the potential output of the economy have been decimated by the recession and that there is little spare capacity (Corry, Valero and Van Reenen, 2011). Supply Siders then think of macro policy as being about how to create stable conditions so that the supply side can work, private investment and innovation increase, and economic growth be generated.

This also helps explain a slightly different set of emphases on political goals. Full Keynesians tend to think getting demand up, and growth and full employment secured, will help solve many of the equity issues that the left cares about. Supply Siders tend to think that other, underlying issues like the structure of benefits and lack of modernisation of public services are equally if not more important and cannot be ignored.

International Keynesianism

Keynesianism rarely works well when confined only to one country, leading to beggar my neighbour policies with regard to demand and exchange rates. After the crash there was a great deal of activity on the international front, stemming from a belief that only by working together through a coordinated global demand expansion could recovery happen fast (8). However, the steam went out of this, partly as nobody replaced the energy of Gordon Brown and partly as domestic debt burdens began to take top billing. Similar issues were clear at the EU level. The framework for the single currency had enforced fiscal rules that were unhelpful in the circumstances now faced.

All sides of the British left have been pretty quiet about this debate recently. There is surprisingly little discussion of UK policy towards the exchange rate and the balance of payments. Virtually no-one is arguing for us to join the single currency, with a pretty much free-floating approach to the exchange rates reigning unchallenged. This is a major change from older left traditions.

Conclusions and directions

Sometimes the left has great tensions over an issue when the details lying behind it shows the two sides are not that far apart--at least on the substance rather than the positioning. It feels like the differences on the future direction of macroeconomic policy at present reflect differences over the relative weight to give to different factors. Great anger and even abuse is thrown between those who see themselves on the fiscal conservative wing of the Labour Party and those on the more expansionist wing, as well as those on the wider left. This ends up affecting the rhetoric about where we have been, where we are now, and where we need to go.

These are crucial debates but we must not forget that on the underlying issues the centre left is very united: there is a distinctive centre left macro view at present, which is hostile to the extreme right-wing idea that in some way austerity could be expansionary, and also to cutting too deep and too fast. Crucially there is no disagreement that the state has a responsibility to use macro policy to support activity in the economy and that growth is needed. The reality is that apart from some outliers there is not that much difference on the underlying understanding of economics across the centre-left factions--much less than there has been in the past.

There are certainly important differences about the impediments to operating a higher growth policy and exactly how fast an economy needs to reduce the deficit and debt, but the differences on prescriptions for macro policy at present are mainly about other things.

From the Supply Siders' perspective, there is a sometimes shrill desire to wean the left off its tendency to think that leftism equates to your debt/GDP ratio when it is clear that the last Labour government spent a lot but did not always achieve what it might have. Supply Siders, a little like some on the right (although for different reasons), want to use the crisis to undertake reform. More than that, they want to play sensibly to a public opinion that worries about deficits and which they believe has lost confidence in Labour given the popular myth that it lost control of the fiscal aggregates. Being firm here, with a focus on tough fiscal choices, and being less vociferous in pushing for immediate growth and full employment, is the way they think Labour re-establishes credibility.

From the Full Keynesians there is alarm that to bow too much to these factors will lead to a period of low growth, countless lives being destroyed, and Britain moving further away from being a 'good' society. They believe that the constraints and impediments of all sorts are over-played, even more so now that several years of tough austerity do not seem to have produced the growth the right-wing claimed it would. Growth, after all, is the major route to debt reduction in their view and they feel that the public can be persuaded on that point (9). While they probably would sign up to fiscal expansionism through boosting spending power of any kind, they would certainly go for a major boost to infrastructure spending now (Fic and Portes, 2013).

Both are points of view backed up with legitimate arguments, although each also has the feel of an ideological position wrapped up in the language of constraints, economics, and markets. One has the danger of moving us too far away from the goals of the centre-left--growth and full employment--while the other tends to dismiss too lightly any objective constraints to expansionary policies. Whatever the merits, it is however not possible to run both at the same time. How then does Labour pick its way through this difficult terrain, at a time when much of the press is hostile and simply wants to ask it how much it will cut, when and where?

Keeping to the middle ground must be the place to be. The path through must surely put the centre left forward as the advocates of growth and full employment. This both allows and calls for some immediate moves on infrastructure spending either funded by increased borrowing or--copying the Coalition on its rather ill-advised various mortgage schemes--by using the government balance sheet to offer guarantees and take on risk. However, this has to be combined with tough messages on getting the debt down over time, as the Labour leadership has been starting to articulate more recently (Balls, 2013), with the outside constraints to ensure this happens strengthened. Possible measures here include a much tougher OBR as well as the creation of some sort of body to pursue aggressively efficiency and productivity in the public sector. Monetary policy remains in the hands of the Bank, but without sacrifice to sustaining low inflation over the medium-term Labour should make clear it supports Governor Carney if he feels the need to act sensibly to support growth. And it is time Labour got back to thinking about a policy for Europe and beyond which would support its objectives and help the world avoid debilitating and self-defeating austerity (Corry, 2010).

Purists might ask in vain for the exact theory that underlies all this. But such a mixture would continue the pragmatic approach to macro policy that can both work to generate growth and jobs as fast as possible and be electorally sellable. And that would not be a bad outcome.

I am grateful to Gavin Kelly, Ian Mulheirn and Peter Kenway for comments on an earlier draft.

References

Balls, E. (2013) 'Striking the right balance for the British economy', speech, London, 3.6.2013, at http://www.labour.org.uk/striking-the-right-balance-for-the-british-economy.

Balls, E. and O'Donnell, A. (2002) Reforming Britain's Economic and Financial Policy: Towards Greater Economic Stability, London, Palgrave for H.M. Treasury.

Barker, K. (2012) 'Macroeconomic policy: too much autonomy and too little co-ordination', London, Centre Forum.

Bowdler, C. and Radia, A. (2012) 'Unconventional monetary policy: the assessment', Oxford Review of Economic Policy 28 (4): 603-21.

Clift, B. (2012) 'The UK macroeconomic policy debate and the British growth crisis', SPERI Paper, Sheffield, July 2012.

Clift, B. and Tomlinson, J. (2007) 'Credible Keynesianism? New Labour macroeconomic policy and the political economy of coarse tuning', British Journal of Political Science 37 (1): 47-69.

Cooke, G., Lent, A., Painter, A. and Sen, H. (2011) In the Black Labour, London, Policy Network.

Corry, D. (1994) 'Living with capitalism: macroeconomic policy alternatives', Renewal 2 (1): 47-60.

Corry, D. (2008) 'Economics, government, policy and politics: reflections from the front line', Bernard Corry Memorial Lecture, Queen Mary, University of London, at http://www.qmul.ac.uk/media/docs/corrylecture.pdf.

Corry, D. (2010) 'Where are the calls for a European growth strategy?', London, Policy Network.

Corry, D. (2011a) 'Power at the centre: is the National Economic Council a model for a new way of organising things?', Political Quarterly 82 (3): 459-68.

Corry, D. (2011b) 'Labour and the economy, 1997-2010: more than a Faustian pact', in Diamond, P. and Kenny, M. (eds.) Reassessing New Labour: Market, State and Society Under Blair and Brown, Oxford, Wiley-Blackwell.

Corry, D. (2011c) 'In the Black Labour is in danger of taking us to the wrong place', London, Policy Network.

Corry, D. and Holtham, G. (1995) Growth With Stability: Progressive Macroeconomic Policy, London, IPPR.

Corry, D., Valero, A. and Van Reenen, J. (2011) 'UK economic performance since 1997: growth, productivity and jobs', Centre for Economic Performance, LSE, at http://cep.lse.ac.uk/conference_papers/15b_11_2011/CEP_Report_UK_Business_15112011.pdf.

Davies, G. (2013) 'How much of Reinhart/Rogoff has survived?', Financial Times Blog 19.4.2013, at http://blogs.ft.com/gavyndavies/2013/04/19/how-much-of-reinhartrogoff-has-survived/.

Fic, T. and Portes, J. (2013) 'Macroeconomic impacts of infrastructure spending', London, NIESR for the TUC.

Kenway, P., Corry, D. and Barwick, S. (2012) A New Golden Rule: Putting the Corporate Sector Surplus at the Heart of Economic Decision-Making, London, Fabian Society.

Lipsey, R. (2012) 'Twenty-five methodological issues in memory of Mark Blaug', Simon Fraser University, Department of Economics Working Paper, November 2012.

Mulheirn, I. (2013) 'The social market after the crash', Political Quarterly 84 (1): 4-15.

Portes, J. (2013) 'Reflections on the Green Budget', NIESR website 10.2.2013, at http://niesr.ac.uk/blog/reflections-green-budget#.Uau4vPUS33U.

Wickham Jones, M., Toye, R., Clift, B., Feldmann, M., Kelly, J. and Cronin, J. (2012) 'Roundtable: what's left of the left', Renewal 20 (4): 57-77.

Wren-Lewis, S. (2013a) 'Aggregate fiscal policy under the Labour government, 1997-2010', Oxford Review of Economic Policy 29 (1): 25-46.

Wren-Lewis, S. (2013b) 'The case for fiscal councils', London, Policy Network.

Notes

(1.) Apart from some very hard liners, many on the right also think the economy won't always self-correct quickly, but they tend to play down the potential for disequilibrium (arguing for instance that more of unemployment is 'voluntary' than the left would); they worry about it less than the left on 'equity' grounds; and in any case they believe that government action is more likely to exacerbate the problems, at least in the medium or long-term, than it is to solve them.

(2.) One should not overplay the failure of conventional Keynesian thinking here though: a lot of learning just got lost. As Richard Lipsey said: 'there is little that happened to the macro economy during these last years that would be a surprise to Keynesian economists of say 1955, given only the added knowledge of the institutional changes that have occurred since that time, particularly in the financial sector' (Lipsey, 2012).

(3.) A slightly different take on this is given in the excellent diagram produced by the Social Market Foundation: http://www.smf.co.uk/files/4313/6377/3326/20130320_growth_options.pdf.

(4.) Some even argued that cutting spending was expansionary since it would free the private sector to grow.

(5.) This is because it alters 'prices' for everyone. But monetary policy can and has led to house price booms and other asset bubbles while the rate of interest and inflation has implications for the relative well-being of different groups (e.g. pensioners versus workers).

(6.) See Barker 2012 for some sensible ideas. More radically, another former MPC member Adam Posen has argued for the Bank to boost mortgage lending by directly buying securitisations through quantitative easing.

(7.) As Clift and Tomlinson point out, New Labour used rules to 'reconcile both the securing of credibility with international financial actors and substantial fiscal policy space to pursue domestic economic policy of a broadly Keynesian character'. Ed Balls called this 'constrained discretion', which allowed macroeconomic 'coarse tuning' if not the fine tuning of old (Clift and Tomlinson, 2006, 47-8, 53).

(8.) Keynesianism 'had been at its highest between the G-20 summits in November 2008 and March 2009, when Gordon Brown, along with Strauss-Kahn, Obama and others were singing the praises of international co-ordinated fiscal policy to stave off global depression': Clift, 2012.

(9.) As Jonathan Portes puts it: 'A few years of 3 per cent growth--and given the amount of spare capacity in the UK economy, there is no reason that should be infeasible, given good policy both here and in the eurozone--and much of the problem will simply vanish, as tax revenues rise and some spending falls' (Portes, 2013).

Dan Corry is Chief Executive of New Philanthropy Capital. He was an economic advisor to the Labour Party in the 1990s and worked for the Labour governments of 1997-2010 in the DTI, Treasury and Downing Street.

Table 2: Macro policy differences during a crisis

              FULL            TRADITIONAL KEYNESIAN
              KEYNESIANS

Fiscal        [check][check]  [check][check][check]
multipliers
strong?

Monetary      [check][check]  [check]
policy works
fast?

Credibility   [check]         [check]
on fiscal
policy is
genuine
constraint?

Supply side   [check]         [check]
trumps
eerything?

Economy able  [check][check]  [check][check]
to bounce
back?

Importance    [check]         [check]
of stability
as aim of
macro
policy?

Equality      [check][check]  [check][check]
created by
full
employment?

              MONETARY KEYNESIANS    SUPPLY SIDE
                                     KEYNESIANS

Fiscal        [check]                [check]
multipliers
strong?

Monetary      [check][check][check]  -
policy works
fast?

Credibility                          [check][check][check]
on fiscal
policy is
genuine
constraint?

Supply side   [check]                [check][check][check]
trumps
eerything?

Economy able  [check][check]         [check]
to bounce
back?

Importance    [check]                [check][check][check]
of stability
as aim of
macro
policy?

Equality      [check][check]         -
created by
full
employment?