Devotees of This Blog will have noticed that it had nothing to say about the passing of Geoffrey Howe, who some have named Margaret Thatcher’s nemesis, even though he was her staunchest ally from 1979 throughout the 1980s.
This is because I wanted to put forward some information on his actual performance as a cabinet minister and, in particular, as Thatcher’s first Chancellor of the Exchequer, and I was waiting for someone with experience of this role – who wasn’t going to be abjectly sycophantic – to step up.
Here’s Professor Simon Wren-Lewis:
I personally will remember him as Chancellor when Margaret Thatcher came to power. In 1981 I was a young Treasury economist who happened to be in charge of calculating the economic effects of the budget using the Treasury’s macro model. I was too junior to go to most budget meetings involving ministers, but I did go to one. I was there as the technical backup in case the Chancellor asked a difficult question about the model simulations. I was naturally psyched up, but it turned out for no reason. There were no questions about the simulations, or even about any macroeconomic effects. The most technical any interrogation by the Chancellor got was to ask ‘how’s that figure arrived at?’, to which the reply was ‘by summing the numbers above, Chancellor’. As one senior civil servant told me afterwards, arithmetic was not Howe’s strong point.
Why was there so little interest in the macroeconomic effects of that notorious 1981 budget (of letter from 364 economist fame)? It is difficult to understate the culture shock that occurred in the Treasury after Mrs Thatcher’s election. Treasury ministers, including Nigel Lawson (who succeeded Howe as Chancellor and is now an active climate change sceptic), believed that Treasury advice – including anything from its macro model – was outdated Keynesian nonsense and that monetarism was the way forward. When internal Treasury model forecasts predicted their policies would create a recession within a year, they were dismissed with the assertion that the unemployment impact of tight monetary targets would be small and very temporary. (Unemployment doubled and only returned to 1979 levels in a sustained manner by the end of the century. We got classic Dornbusch overshooting, as this 1981 Brookings paper by Willem Buiter and Marcus Miller describes, probably followed by unemployment hysteresis.)
It may be that high unemployment was necessary to bring inflation down. It may even be that a contractionary budget in 1981 was sensible to achieve a better monetary/fiscal mix. What is almost certainly not true is that this was calculated by Howe, Lawson and Thatcher.
Source: mainly macro: Howes that
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