Kaletsky is over-optimistic

Anatole Kaletsky has this article in the May 2005 edition of Prospect which argues that economics has been of declining political importance – as evidenced by the absence of economic policy as an important topic in the 2005 General Election.

Since the mid-1990s, however, the idea of economics as the dominant factor in British, American or European elections has become untenable, as in country after country economic and electoral performance have diverged.

Kaletsky is right that old-fashioned economic policy debate has not been much in evidence this year, but wrong about just about everything else.

  • Kaletsky is wrong to say that we have conquered boom and bust. This is a common self-deceit at this point in the business cycle: Nigel Lawson said just the same in 1988, towards the peak of the long 80s boom and before the disastrous recession that followed it. All experience tells us that there will be a down turn, whether triggered by a collapse in house prices, or the dollar, or confidence in the Euro, or energy prices, or a financial scandal arising from the failure of split-cap funds or derivative trading …. or something else completely.
  • Kaletsky is wrong that using only monetary policy for demand management to stabilise the economy will lead, in the long run, to a more stable economy than using a combination of the two; indeed, one of the most significant downside risks to the economy in the coming years is the failure of the US to maintain a proper balance between fiscal and monetary policy, resulting in the catastrophic collapse in domestic savings, the unsustainable current account deficit and – eventually – the devaluation of the exchange rate that must follow. Demand management would be more successful, and more stable, if governments used both fiscal and monetary policy to pursue economic growth and price stability.
  • Kaletsky is wrong that the shift of output from manufacturing to services will reduce the risk of an investment-led business cycle. Though we may invest less than we did in machine tools and factories, we invest instead in human capital, software, brands and other intangible assets that underpin the service economy. There is nothing in the theory of the investment cycle to suggest that it only applies if the investment is in physical capital.
  • Kaletsky is wrong to say that the composition of our economic output makes it less volatile as we shift to "platform companies" like Dell and Nike. It is true that the production of primary commodities is more volatile than many other activities – but there hasn’t been a significant part of the economy doing that for many years. Some of the activities we have "kept for ourselves" are amongst the most volatile possible sources of income: marketing and brands can collapse in value overnight (think of Arthur Anderson), whereas a t-shirt factory can always make shirts, even if they have to cut the price a little to stay in the market. R&D, training, and marketing are notoriously volatile – being the first lines in the budget to get cut when times are bad.
  • Kaletsky is wrong to say that there is no longer disagreement about the most important issues ("almost impossible for any serious politician to question the bedrock principles of the capitalist economy: private ownership, competition and the profit motive."). What about the very live debate in the context of the EU Constitution about whether we want an "anglo-saxon" economic model or a "social partners" model?

It is true that the debate is no longer in the same language as the 1970s and 1980s. But most of the key political issues of the day are issues of economic policy: from the make poverty history campaign to global warming, from pensions policy to immigration and asylum seekers, there is a profound debate being played out. In short, Kaletsky inhabits an intellectual era that does not recognise the challenges of globalisation and poverty, the environment and immigration as fundamental issues of our economic well-being.

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