Liberal Democrat economics

In a post at Liberal England yesterday entitled Clegg tells Lib Dems to come out from behind the sofa Jonathan Calder responds to a brief piece in the Independent on Sunday. The Indie reports that Lib Dem ministers have been instructed to be a bit less reticent in speaking about the distinctively Lib Dem successes in government. The party is suffering in the polls in a way that the Tories are not. Some better PR would help.

Calder offers two reasons why the Lib Dems were behind the sofa in the first place. First, the party is not used to being unpopular. “When you are the third party, being ignored is a far more familiar experience”. Second, “we are not really sure what Liberal Democrat economics look like”.

I’m not convinced the second of these reasons put the Lib Dems behind the sofa. But I am certain it is an issue. We really aren’t sure.

It may be that such a beast as Liberal Democrat economics does not exist. In fact, I’m pretty confident that it doesn’t at the moment. The discussions on the social liberal left of the party and the discussions on the straightforwardly economic liberal right of the party occupy different universes in terms of their understanding of the economy. Bringing those into meaningful dialogue would be interesting – possibly incendiary – but I’m not sure how productive it would be.

If we move away from the political, there are some equally fundamental challenges on the economics side. As I have blogged before, the economics underpinning many of the policies adopted by the Coalition is either questionable or not very coherent.

Much of the microeconomic reform being proposed lacks a compelling evidence base. The evidence that deregulation or contracting out of services and the like inevitably improve efficiency and effectiveness and, most importantly, improve the net well-being of the population is by no means unambiguous. But it is an article of the market fundamentalist faith that these are good things. So policy follows.

That is not to argue that contracting out or deregulation, as examples, are never a good idea. It is to argue that treating them as a good idea by assumption is not sensible. Nor can it be justified by anything but the crassest application of the market story.

At the macroeconomic level the core of the Government’s programme – expansionary fiscal consolidation – has pretty much no empirical support. To note this is not to argue that the deficit does not need to be cut, nor that we must fall into the arms of the Compass-sponsored plan B, but to say that you can have fiscal consolidation or you can have expansion but you can’t have both at the same time. It is, in economic terms, an oxymoron. Expansion may come later, but that is also something of an article of faith. Fiscal consolidation is just as likely to set off a vicious spiral of decline, which is in part what is happening in Greece.

The bigger problem is that mainstream macroeconomics itself is in a bit of a jam. As I’ve noted before on a couple of occasions (most recently here), several high profile economists have argued that mainstream macro-theory has been travelling further and further up a cul-de-sac. It needs to reverse and head in a different direction. Our understanding of the economy needs to be rebuilt on different foundations.

The ingredients of that rebuild might include things like a better understanding of incentives (as articulated yesterday so effectively, and remarkably, by Guido Fawkes); a different conceptualisation of expectations and their significance; a greater recognition of distributional issues and heterogeneity among economic actors; a clearer understanding of the complementarity between the public and the private; a recognition that regulation can bring long-term stability to the system and doesn’t just represent a burden of ‘red tape’ to be removed. More ambitiously, it requires the recoupling of economics with concerns for ethics and values. The patient needs to recover from the Ricardian Vice.

But the disciplinary incentives to rebuild thinking in this way are weak. The mechanisms for doing so unclear.

Perhaps a Liberal Democrat economics needs to pick up the challenge. It could draw on some of the more promising heterodox strands of thinking to articulate a fresh understanding of the economy. That would be truly brave. Fresh thinking is desperately needed.

But perhaps the political incentives to rebuild thinking in this way are weak. The mechanisms for doing so unclear.

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