New history of the UK Treasury seems to be a comedy of errors

The Treasury in London: if the latest history of it is to be believed, it seems to have become a lunatic asylum, that has been taken over by the inmates.

How wrong can you be?

I think the expectation of most people in the UK is that the minds dominating the Treasury – the financial engine room of the country – must be the most level, intelligent, and careful in the nation.

But if the picture painted of Bankruptcies, Bubbles and Bailouts, the new history of the Treasury since 1976 by Aeron Davies, on Professor Simon Wren-Lewis’s Mainly Macro site is accurate, it seems more accurately described as a madhouse taken over by the inmates.

Perhaps it would more accurately have been titled Carry On Up The Treasury…

Consider this:

How to deal with the bonanza of North Sea Oil[:] It is today standard in the macroeconomics of resource rich countries that any temporary gain due to the discovery of a finite resource should be largely invested… The basic choice for the government of consumption (cutting taxes) or investment was discussed at reasonably senior levels while I was there. Norway made the right choice but the UK did not, although how much that was down to politicians at the time is difficult to tell.

The money wasn’t invested but was splurged on tax cuts, of course. And did anyone learn from that waste?


This failure wasn’t just about North Sea Oil revenues, but was repeated with privatisation and council house sales. During the Thatcher period selling off public capital was treated as just another form of revenue, which is nonsense because unlike taxes it is not permanent.

It would be easy to say this wastage was due to the influence of politicians, but both Wren-Lewis and Davies seem to say that consensus within the Treasury (where it existed) could also cause huge blunders:

A good example, which Davis is right to discuss at length, is the pervasive doctrine within HMT that national firm ownership didn’t matter. A quote from an interview with John Grieve sums up the issue:

“On ownership, right from the ’80s, from Big Bang onwards, and indeed before, there’s been a running worry in government and in commentary about are we wise to let foreigners buy everything? … but in fact, there’s been a longstanding policy, successive governments have decided not to do anything about it … And, you know, of course most other countries think this is mad, and that ownership does matter.”

Ownership does indeed matter because at the time of writing, the UK’s railways and England’s water and power companies are primarily owned by foreign governments who are milking us for all they are worth. That money goes out of this country to subsidise others’ infrastructure for them.

But political influence is shown to have the upper hand most of the time – with the prominent example being austerity:

What Aeron Davis calls the ‘posh boys’ regarded economics as a political means to an end[:]

“For those leading the Coalition, economics was just another consideration in the wider matrix of Westminster party strategizing and news media lobby management.”

What Osborne and Cameron were interested in was media management, and they were experts at it. Unfortunately the advice they were getting proved no corrective to their macroeconomic ignorance. Here is a quote from Aeron reflecting on his interview with Rupert Harrison, Osborne’s economics advisor and now advising Jeremy Hunt.

“When I asked him directly about the broader inspirations of his economic thinking, Harrison responded that he had no interest in macroeconomic thought. His policy views were ‘shaped by more general reading’ and by being ‘a centre-right leaning person’.”

I’m afraid this was painfully obvious from Osborne’s speeches at the time. Austerity, by which I mean embarking on spending cuts in a liquidity trap recession, represented ignorance of everything Keynes talked about in the General Theory, as well as state of the art macroeconomics. The origin of the last twelve years of economic decline can be found in politicians who put party political interest above the health of the economy.

And then there’s Brexit, about which the author becomes positively festive:

Aeron Davis argues that the Leave vote was not only devastating to most Treasury officials (many were economists, after all) but also that it reflected past failures in Treasury management. To quote

“For one, I hold the Treasury (and successive governments) responsible for ushering in an economy that was so unbalanced and unequal. Years of trickle-down economics, and years of favouring finance over manufacturing, large foreign multinationals over home-grown companies, large asset-holders and rentiers over others, London over the regions, monetary rather than fiscal activism had had a cumulative impact. Austerity economics only exacerbated such trends, with several commentators linking that to the vote outcome.”

Of course any vote that close can have many things that help tip the balance. To the extent he is right, the Brexit vote represents a fitting ending for the book, as it represents many of the themes the author examines coming home to roost.

It isn’t the end of the book, because there’s a postscript which covers Boris Johnson and Partygate (but doesn’t get to Liz Truss’s “ill-fated” (as Wren-Lewis describes it) reign. The title says it all: “Reckless opportunists gain control.”

It’s a great review, and I’ll tell you why: it takes a subject that should be dry as a desert bone and makes me want to read the whole book.

Source: mainly macro: The UK Treasury since 1976

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