The one-time pin-up boy of the free market talks inflation, the economy and why there’s reason to be optimistic
Source - Daily Telegraph 27/08/22
Prof Patrick Minford has been one of Britain’s leading macroeconomists since the 1970s. For more than 20 years he was a professor at Liverpool University; since 1997 he has been professor of applied economics at the Cardiff Business School. Mrs Thatcher used to brainstorm with him when transforming Britain’s economy in the 1980s. He became a pin-up boy of free-marketeers, and a target for her detractors. He has never sought to be a political figure and keeps a low profile – but suddenly he is above the parapet, having endorsed the economic ideas of Liz Truss, which bear an alarming resemblance to his own.
Looking much younger than his 79 years, Minford, who is thoughtful and articulate, is speaking to me over Zoom from his book-lined study in his home in Cardiff. I ask him about his relationship with our potential future prime minister. “I haven’t got an arrangement with her. I met her when she was at the Department for International Trade and she mentioned that she agreed with a lot of things I’d been trying to say – how we need to get away from tax rises and have proper supply-side reform, and not be bothered with very short-term rules that are quite inappropriate to addressing solvency.”
Solvency – the state of not being broke, as a country – is a prime consideration for Minford, along with promoting growth. “I’m suggesting we take a long-term 10-year look at what the country can afford, and cut our spending plans to fit that,” he says. I suggest that many economists and financiers worry about Truss’s plans to cut taxes without funding them through cuts in spending, regarding it as reckless.
“I don’t see it as a gamble on the future of the economy because it goes along with the long-term solvency rules. We put our growth strategy in place and then cut our cloth according to the revenues that come in. I think that’s fully understood by Liz Truss.”
He thinks Mrs Thatcher would support what Truss promises to do, not least because he considers the debate about whether an out-of-control money supply causes inflation has been settled: it does. “Things have changed since her day, and not least because she changed them. She had to invent monetary policy: the Bank of England then was entirely in favour of an Incomes policy. That’s why she had to have that very tough 1981 Budget [which massively increased taxes to balance the budget], to establish monetary credibility. Now, the independent Bank of England runs a credible monetary policy.”
Although Minford was never a formal adviser to Mrs Thatcher, he was invited to No 10 to discuss policy with her. He first met her in 1977. “‘Keith Joseph had suggested I might be a useful person to have along – I remember going to a meeting with the two of them, Geoffrey Howe and Nigel Lawson. Alan Walters [Thatcher’s chief economic adviser] had been my supervisor, and he asked me for quite a lot of help on economic modelling. After the 1981 Budget I had to help deal with ‘rational expectations’ – convincing the markets that she was dead serious, after so many years of U-turns. We had to convince them she wouldn’t U-turn as well, and start spending money again and let Britain go to hell in a handcart.”
‘The situation in the economy now is pretty critical’
Educated at Winchester, Oxford and the London School of Economics, Minford sees our times as being as pivotal as the early 1980s. A Brexiteer decades before the term was coined, and author of the book After Brexit, What Next?, he feels Britain must capitalise on the freedoms obtained by leaving the EU. “This is a very important moment: we can’t afford to do things wrongly now,” he says. He is confident Truss can do that, despite her having been a Remainer. “An awful lot of water has flowed under the bridge since then. I think she saw the point of it, and once she could see people wanted to do it she could see it was completely in tune with the sort of free-market policies she is keen to introduce.
“She got going on free trade pretty fast and pretty firmly and I was really impressed by that: she now understands what needs to be done.” He praises deals she did as trade secretary and he is clear about her domestic priorities.
“She’s got to get the economic policy right: not just deregulation, but tax. The tax system needs to be favourable to entrepreneurs to fuel growth. It’s pointless using fiscal policy to drive the economy into a hole when monetary policy is trying to revive it.”
He adds: “The big problem has been that the Treasury, which really heavily dominated Rishi Sunak’s thinking, has formulated short-term rules in which borrowing mustn’t happen. That works against fiscal and monetary policy and is misconceived in dealing with solvency, the long-term policy of the Government to make sure its debt ratio is under control.”
A big focus for him is that Truss’s tax-cutting policy is not inflationary, because it’s in tandem with the Bank of England pursuing its monetary policy. “The purpose of fiscal policy is to support the economy, while the Bank does what is necessary on monetary policy. The short-term rules were invented by Gordon Brown to convince people he was a serious chancellor. A Conservative chancellor shouldn’t be going down that misleading route. Solvency doesn’t mean you should be paying off debts tomorrow. It means a long-term strategy in which state spending is consistent with your tax revenues, which is what I advised her to do.”
Truss has said that interest rates will not rise if her tax cuts cause inflation to spiral: but the Bank of England, whose decision that would be, may think differently. “It won’t be up to her,” Minford admits. “I think they will go to somewhere about three per cent,” while insisting that in fact “monetary policy is extremely tight: the money supply has stopped growing. The financial markets are obviously nervous about the level of interest rates. It’s quite clear that monetary policy is biting; so fiscal policy can now fulfil its role of seeing off recession. I don’t think there’s anything wrong with having a supportive, expansionary fiscal policy as a complement to monetary policy.”
He says, bullishly: “We’re not in a bad place in terms of inflation prospects, actually. I wouldn’t be in favour of going to some giant austerity programme, or of not reversing the tax cuts.” However, noting the severe effects of the rising cost of living on the poor, he adds that, “I’m also against not supporting poor people on benefits. But I think the way to deal with pressure on lower-income people is to index their benefits in real time, instead of indexing them, as is usual, after a long time lag. And we also have to roll back the non-indexation of the tax system for taxpayers, which has pushed them into paying much more than they should be.”
He dismisses Rishi Sunak’s criticism of Truss’s policies. “It’s a bit rich to say one shouldn’t spend a few tens of billions now when he’s just spent £500 billion during the pandemic! The situation in the economy now is pretty critical.”
Though he would not advise Truss to cut the size of state spending. ‘‘A lot of the state is very important to growth – not just infrastructure, but also education and health. But state spending has to be controlled. Here it’s around 40 per cent of GDP, but in France it’s getting on for 60 per cent.”
He says that, for example, “the NHS has to be made more efficient. Many of the problems of the NHS stem from the fact that there aren’t enough resources in social care, so people end up in beds in the NHS.” He also deplores the huge NHS bureaucracy. “We tried to make it like a marketplace. That raises transaction costs. You might make it more efficient, but you have to have people to draw up the contracts. The result has been a lot of waste. You need to put a jolly good general in charge of it, who knows how to make it effective.”
Does Truss remind him of Mrs Thatcher? “I think she’s a very hard worker. Mrs Thatcher just worked her socks off, and when something came up that she didn’t feel she was on top of, she got everybody together and banged their heads together. She would shout at them and argue with them in seminars between civil servants and outsiders.
“I experienced two of those seminars. One was about inflation and the other about unemployment, in the early days. She interrogated people until she got to the bottom of it, and then worked hard to ensure that what was agreed got done.”
He was then working in Liverpool, in the era of the Militant Tendency, and saw the real world at close hand.
“Liverpool was very useful to Mrs Thatcher because it exemplified what happens if you have the very opposite of what she was saying. It was an object lesson: if you had a [Derek] Hatton in charge instead of a Thatcher you ended up with chaos. Her mission was to reverse all that.”
He feels one of the keys to Mrs Thatcher’s success was how strategic she was. “She had a three-string strategy over 10 years: the monetarist control of inflation; bringing down unemployment by controlling the unions and reforming the labour market; and creating a Britain fit for entrepreneurs – through tax cuts and deregulation. I think Liz Truss has a lot of those characteristics – hard work, and a strategic grasp of what needs to be done. And I think she realises how difficult it can be to get things done because the existing system puts up so many obstacles. She has good claim to be the nearest thing we’ve got to Mrs Thatcher.”
Did he get anything wrong in the 1980s? “The thing we didn’t predict was how stubborn unemployment would be. We didn’t do too badly in predicting the improvement in the economy. But even after it started to improve there was still a rise in unemployment. We did new work on the supply side in the labour market and realised the incentives in the labour market were all wrong.
“There was huge taxation on the demand side and on the supply side huge support of anyone who wanted to be unemployed for as long as they liked. There were massive demand-side interferences in the labour market – union practices, regulation and all the rest of it – and no incentive for people to get a job. I said we needed to tackle the benefits system, and get people incentivised to work.” Contrary to her widespread reputation, Mrs Thatcher was not callous about this. “She was very conscious that the levels of benefit were very politically sensitive,” Minford recalls.
The system did, however, change. “For years, we were pretty tough on people having to take a job if they could find one. That all went out with the furlough scheme. One of the things that needs looking at is bringing back the conditionality of all these benefits if you aren’t working. You’ve got to get a job if you possibly can, and you can’t be too fussy about what it is. There’s been quite a fall in labour participation since the pandemic. We can’t have people retiring early on the basis of benefits.”
‘We have to get confidence up and not be defeatist’
Although he says: “We can’t know the future until it’s happened,” I seek predictions. “I think inflation will start going down in the early part of next year, as there’s a reversal in commodity prices. It’s all in the lap of the Ukraine war, because gas prices are driving the numbers. Food prices are now coming down, but the thing that’s going berserk is the gas price. That’s totally volatile. The turning point will come if the Ukraine war ends next spring. Then you’ll see a rapid reversal in inflation. So by the middle of next year it should be five per cent, with interest rates peaking at about three.” Despite the cost, he is unequivocal about Western policy. “I think we are right to stand by Ukraine, and that [sanctions] was the way to do it. There wasn’t much alternative.”
However, he is no catastrophist. “If the Government plays its cards right on fiscal policy, and it isn’t brutalist or stupid, we should avoid a recession: the labour market is still very strong, and there’s plenty of spending power among many people because they’ve saved a lot. There’s still a lot of momentum in the economy; and we shall move to a more entrepreneurial culture, where there’s a better prospect of growth and more investment activity. Looking forward, I’m quite optimistic. Growth next year will be low, but it will still be possible.”
I try, and fail, to tempt him to name his ideal chancellor. “She must have somebody who will carry out her programme, and above all will take on the Treasury, who at the moment are against it. There has to be a new permanent secretary and a new approach in the Treasury consistent with what she wants. We need one policy, and not a fight between No 11 and No 10.”
Does he mind the criticism he has attracted over the years for his Thatcherite monetarism? “I’m pretty used to it now. I’d get pretty worried if people started agreeing with me in large numbers – I’d start to fear I was doing something wrong. It’s amazing how the economics profession keeps rolling from one wrong thing to another. They used to love Incomes policies and didn’t worry about borrowing, because the Incomes policy would sort it out. Now they hate borrowing.”
And if Truss departed from this orthodoxy, would he rebuke her? “I certainly would. I was very supportive of Boris and Rishi in former times, but then they really lost the plot and got it so totally wrong. They’ve just thrown everything away we fought for in Brexit. We have to get people’s confidence up and not be defeatist. It’s critical Liz Truss does get this right.”
What does he make of fears of civil unrest if the economy continues downwards? “I don’t think it’s the British way. We’re a pretty stoical bunch really. More likely we’ll get a Labour government, then God help us.”
Lastly, would he work in Downing Street, to try to help ensure the mission is accomplished? “I’m really not in the market for anything administrative. I’m really an academic. And it’s bad enough, almost at the age of 80, having a full-time academic load. But I’m always around to give advice.”
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