>Brad DeLong wrote:
>
>Britain's march to socialism halted in 1976 by IMF! *Snort*.
>
>=====
I replied:
>
>A cocaine habit might explain how it is you would actually believe most of
>what you contribute here.
Brad retorts:
Naughty, naughty.
I take that as an admission that you have no real arguments or
evidence, and I agree: you don't.
=====
Who are you agreeing with here? Yourself? The coke must be working.
Real arguments and evidence are usually in short supply with your cute
forays -- I have in fact referenced three information sources (the two books
are themselves copiously referenced) in order to support my thesis here. I
can get many more, if necessary.
=====
Most of the critics of Jim Callaghan in the mid-1970s changed their
mind during the five years that followed, for two countries did
attempt to "spend their way" out of recession--the U.S. under
President Carter and Federal Reserve Chair Miller, and France under
President Mitterand. Both attempts ended in sharply higher inflation
in 1978-1979 in the U.S. and in 1981-1982 in France, with no visible
acceleration in output or employment growth. I remember going to a
talk once at which 1977-1981 CEA Chair Charles Schultze discussed the
days in 1978-1979 when the inflation rate kept coming in at 2
percentage points higher and real output growth 2 percentage points
lower than their models had predicted.
=====
That sidesteps my earlier point regarding the heavy steer Callaghan and
Healey were given by your predecessors at the U.S. Treasury. Here's a quote
from David Smith, "The Rise and Fall of Monetarism" Pelican Books, 1987,
pp.65,6:
"It was a period of extraordinary overseas influence on British economic
policy. An IMF team arrived in London that autumn to discuss the conditions
attached to the $3.9 billion loan. The team was headed by a former Bank of
England official, Alan Whittome. His deputy was David Finch, an Australian,
and the Fund's managing director, Johannes Witteveen, was also heavily
involved.
"Irritation arose, however, over the role of the United States
Treasury Secretary, Willian Simon, with the support of his Under-Secretary,
Ed Yeo, and the chairman of the Federal Reserve Board, Arthur Burns. They
were keen to pursue a "hands-on" approach to British economic policy. Simon,
who viewed Britain as something approaching a lost cause, made an
unscheduled visit to London in November 1976 to help oversee matters.
"The conditions insisted upon by the IMF and the Americans were set
out in a Letter of Intent despatched by the British government on 15
December 1976. 'An essential element of the government's strategy will be a
continuing and substantial reduction over the next few years in the share of
resources required for the public sector,' it said. 'It is also essential to
reduce the PSBR in order to create monetary conditions which will encourage
investment and support sustained growth and the control of inflation.'
"The specific measures were a reduction in the borrowing requirement
from its 'unacceptably high' level (it turned out to be £8.5 billion in
1976/7, although it had been £10.6 billion in 1975/6) to £8.7 billion in
1977/8 and £8.6 billion in 1978/9. To help achieve these PSBR targets,
public spending cuts of £1.5 billion in 1977/8 and £2 billion in 1978/9 were
to be implemented. This was in addition to the cuts already announced,
including the £1 billion for 1977/8 pushed through the Cabinet by Healey in
the previous July.
"The IMF had, as in 1968, insisted on targets for domestic credit
expansion, a logical move in view of Britain's balance of payments
difficulties. It was to be progressively reduced from £9 billion in 1976/7
to £7.7 billion in 1977/8 and £6 billion in 1978/9.
"Alongside the targets for domestic credit expansion, the Letter of
Intent said that it was expected that the increase in the sterling M3
measure of money would be between 9 and 13 per cent. Sterling M3 -- notes
and coins and all private sector sterling deposits -- was to achieve a
prominence and notoriety that could hardly have been foreseen late in 1976.
The rather vague 'expectation' for sterling M3 growth was soon elevated to
the status of a formal target. Monetarism had arrived in Britain.
"The IMF Letter of Intent of December 1976 has, in the eyes of many,
a lot to answer for. Disgruntled Labour Party supporters felt that the
government was bounced unnecessarily into unpopular and unacceptable
economic measures. The linking of monetary targets to public spending cuts
produced a powerful image in the minds of the British people, and one which
the Conservative government of 1979 found impossible to shake. Monetarism
was not, in the popular view, an uncontroversial tool of economic policy
designed to allow stable growth without accompanying inflation. It was,
rather, a means of justifying austerity."
And by the way: within a year of coming to power, Margaret Thatcher managed
to increase inflation from 10.3% to 22% (the average for 1980 as a whole was
18%). Meanwhile interest rates increased to 17%, and the £/$ rate exceed
2.40. As a result, UK manufacturing was devastated, and unemployment rose to
record levels, inner cities imploded in 1981, and the full armoury of the
national security state was brought to bear upon the miners in 1984/5.
=====
There seems to be every reason to believe--unless there are some key
magical differences between the macroeconomies of Britain on the one
hand and France and the U.S. on the other that have somehow escaped
everyone's notice--that a policy of more stimulus and faster
reflation under Callaghan would have made things worse, not better.
Callaghan was in a box with no good options: but all the comparative
evidence suggests that a stronger resort to vulgar Keynesianism would
have been a very bad policy choice indeed.
And the claim that Jim Callaghan's neck was under the hobnailed boot
of IMF imperialism suggests a basic failure to understand what the
IMF does. The IMF loaned Callaghan a lot of money to use for exchange
rate management and to stretch out what would otherwise have been a
very sharp, short, nasty period of macroeconomic adjustment. In
return the IMF sought assurances that British policies would not
produce large budget deficits and trade deficits that would put
repayment of the IMF loan into question: the IMF is an underfunded
agency, and it needs its money back from one crisis so that it can
lend it out to the next country that finds itself illiquid. The IMF
gave Callaghan additional options (albeit not as attractive options
as I would wish it had given Callaghan). If a government judges that
the IMF is unhelpful, a tool of the oppressors, and a source of
imperialist control, there is a simple answer--don't borrow from it.
Jim Callaghan was a smart guy, a good politician, a committed social
democrat: he judged that IMF money was worth taking, and I have never
seen any plausible argument that he was wrong.
=====
I won't disagree with your character assessment of Callaghan. But, between
the pressures applied on him by the civil service, his pathetic born-again
monetarist son-in-law Peter Jay (who probably wrote Callaghan's 1976
conference speech, having penned sub Economics 101 doggerel for William
Rees-Mogg at the Times) whom he made UK ambassador to Washington, the
undoubted power of the "markets", and the US, he was hopelessly out of his
depth. And, typically, you ignore the wider political context in which these
decisions were made, as if the economic crisis were independent of all the
other events occurring at that time (MI5 and South African BOSS targeting
Wilson as a Soviet spy, Special Branch stitch-ups of Irish "terrorists",
plots by senior army officers (Gen. Walter Walker and Earl Mountbatten,
among others) to take over the reins of power should Benn actually win out,
disinformation about senior politicians leaked to the press by the security
services (e.g., Edward Heath's "involvement" with a boys' orphanage in
Northern Ireland), the integrity of the "independent" Polaris missile
"deterrent", MI5 via Airey Neave parachuting in Margaret Thatcher as Heath's
successor as Tory leader, etc, etc).
Had the IMF provided the loan under its traditional conditions, your
argument would better stand up. However, as even a Sunday Times columnist
like Smith acknowledges, the nature of the conditions attached to the loan,
indeed the manner in which the conditions were set, was highly controversial
owing to their unprecedented nature. But they heralded the beginning of what
subsequently evolved into the "mission creep" you profess deploring, and
which formed such an integral part of the Washington consensus whereby
structural adjustments were imposed willy-nilly in order to suit the "highly
sophiscated" models of "brilliant" economists who, with customary elan,
ignored completely the wider social and political, never mind economic,
consequences of their policies. Unless, as I said earlier, they did not, in
which case they are fundamentally criminal.
Michael K.
