The disdain for economic orthodoxy was dripping from Liz Truss’s lips in the first big interview of her campaign to become Conservative party leader. “We have had a consensus of the Treasury, of economists, with the Financial Times, with other outlets, peddling a particular type of economic policy for 20 years. It hasn’t delivered growth,” she said.
This column is not a defence of the FT, but an explanation to the UK’s new prime minister of what economic orthodoxy is and what it is not. Having had a crash course in financial market punishment after the “mini” Budget last Friday, her new government might benefit from taking note.
Despite accusations that economic orthodoxy is driven by a cosy cabal of the Davos-attending global elite, the truth is much more mundane. Economic orthodoxy is not ideological but simply the accumulated knowledge and experience of what tends to work best. It is not the slave of some defunct economist, but a constantly evolving body of thinking and experimenting in the real world. It is always open to challenge.
There is no doubt that the orthodoxy can get things wrong. But it learns from its mistakes. Far from every element of the “Washington consensus” — the economic orthodoxy of the 1990s — survived the Asian financial crisis in the latter part of that decade.
The lesson from 2010 to 2015, now accepted by the IMF, OECD and European Commission, is that there was a little too much focus on deficit reduction and austerity in the post-global financial crisis years. There should have been more leeway in light of rock-bottom interest rates and high unemployment.
More recent evidence suggests there are nevertheless limits on economic stimulus with inflation constraints closer and harder than the orthodoxy imagined. The Biden administration has found that running a “high-pressure economy” was much riskier than the consensus believed.
Compare this flexibility of thinking with recent bouts of economic populism tried in many countries and ask these questions. Was Greece better off under the Syriza government in 2015, which sought a crisis and the country’s near ejection from the euro, or with its strong recovery now? Is Brexit and the erection of trade barriers with the UK’s neighbours helping or harming the nation’s prosperity? Did Donald Trump’s tariffs cow Beijing into submission and make the US a great exporting nation?
Economic populism suffers from all the diseases it falsely attributes to economic orthodoxy. It is rigid in its beliefs, highly ideological and unable to adapt as the facts change. It has an inability to consider trade-offs or unforeseen consequences of policy actions and that is why it performs so badly.
Take the UK’s sorry performance in financial markets over the past week, with a tumbling currency, spiking government borrowing costs, households unable to secure mortgages and the near collapse of UK pension funds. When ministers are itching to smash the orthodoxy, would it not have been sensible for the chancellor, Kwasi Kwarteng, to have considered whether people in financial markets are part of the economic orthodoxy? The fact that they are — because that way money has been shown to be better looked after — should have given him pause for thought before implementing unfunded tax cuts at a time of high inflation which were bound to stoke concerns.
With a twin budget and current account deficit, the UK needs the global economic orthodoxy to keep lending it money. So it is not wise to denigrate its thinking, nor to sack the respected top Treasury civil servant nor to refuse to allow independent assessment of the public finances.
In fact, the past week has shown the only problem with the economic orthodoxy is its name. Call it knowledge and experience instead.