“It’s the economy, stupid.” That was the core message of Bill Clinton’s successful 1992 campaign to unseat President George HW Bush. It was an imprecation to Democrat campaigners to focus on the state of the economy. It was also a claim to voters that the recession in which the United States then found itself was the fault of the president and that Mr Clinton would fix it.
In 2010 David Cameron blamed the Labour government for the record deficit. Right through the 2010s Labour blamed the coalition and Conservative governments for dire growth in incomes and earnings. At every election, parties promise that they will boost growth and prosperity.
But what difference do governments really make? The answer is both much more difference and much less difference than they usually claim.
Let’s start with the obvious moments at which governments really matter. We are going through such a moment right now, as we did back in 2008-09. There are times, during recessions, when the economy should be supported. That was Keynes’ fundamental insight. Fail to provide support when the economy is in recession and not only do you impose additional costs and suffering on the present population, you unnecessarily create long-term costs, too.
To be fair to Alistair Darling back in 2008-09 and to Rishi Sunak this year, recent chancellors have recognised this truth and have responded, broadly speaking, appropriately. In either case, the consequences of a failure to act would have been catastrophic.
Yet poor old chancellors rarely get much thanks for managing a recession. They are more likely to get blamed for it in the first place. True, I don’t think anyone is blaming Mr Sunak, at least yet, for the current extraordinary situation, but Messrs Brown and Darling certainly got plenty of the blame for what happened a decade ago, just as President Bush Sr got the blame for the state of the US economy in 1992. That’s pretty harsh. Nobody has yet found the cure for economic cycles. Recessions have always been with us. Some chancellors, or presidents, are unlucky enough to be in the hot seat when the music stops. Poor fellows.
Well, not so fast with the sympathy. Politicians are perfectly happy to take the credit when things are going well. Gordon Brown’s hubris before 2008 was something to behold, boasting of the end of the boom and bust and the longest period of sustained economic growth in hundreds of years. In truth, he was lucky. And then his luck ran out. Hubris, then nemesis.
In any five-year parliament, it is hard to make a sustainable positive difference to economic performance. You can manage short-run fluctuations, you certainly can make mistakes, but you can’t do much to control global booms and busts. In normal times, there’s not much you can do to boost the economy this year, next year or the year after in a way that will be maintained. That’s where we have excessive expectations of our political masters — and where they positively encourage those excessive expectations.
Yet in the long run what governments do matters enormously. We are still experiencing the effects, for good and evil, of the Thatcherite reforms of the 1980s. Sharp cuts to investment spending immediately after 2010 are costing us now. Changes to tax regimes, planning rules, competition policy, education systems and much more besides have real effects on our living standards over the long term. And while Keynes quipped that in the long run we are all dead, small long-term differences in growth rates make big differences to our standard of living. Incomes growing at 1.5 per cent a year take 47 years to double. If they grow at 2 per cent a year, they double a decade sooner.
While all those long-term policies matter, economic institutions probably matter even more. That’s why granting independence over monetary policy to the Bank of England back in 1997 is perhaps Mr Brown’s most enduring legacy. It’s also why changing our relationship with the European Union and its institutions, including the customs union and single market, will have such a lasting effect on economic growth.
Dive even deeper into the institutional background, though, and you’ll find things that are more important still. They are the basic institutions that underlie our whole political and economic structures: democracy, political stability, respect for private property, the rule of law. As economic historians have documented, such shared institutions are behind the strong relative long-term economic performance of much of what we think of as the developed world. In the UK, the rule of law and respect for private property were among the preconditions for the Industrial Revolution starting here. They have continued to allow the domestic economy to operate in a relatively stable and safe environment. The UK’s reputation in these areas, built up over centuries, also has been fundamental in allowing us to access foreign investment and international markets for government debt.
These basic institutions matter in their own right, of course, but they are also the basis of our material prosperity. There’s a reason that sterling fell in the wake of the Brexit vote and fell again sharply last week as it appeared that our government planned to break international law. The reason is that these events, this pulling back from trusted institutions, relationships and legal norms, will make us poorer. With this government showing less respect for the institutions of state than any in a generation, and with the real risk of further constitutional upheaval emanating from north of the border, we would do well to beware of the risks.
You can, of course, change institutions for the better. But the wise would not take for granted what we have.
This article orginally appeared in The Times and is used here with kind permission.