Hamish McRae: Convention says voters like big spending governments...it's wrong

Economic view
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The Independent Online

Don't take any of this too seriously but there are some signs that the tide of economic news, which has for the past couple of months tended to favour the Government, may now shift and be starting to favour the Opposition.

All sorts of attempts have been made to relate government popularity, or unpopularity, to economic outcomes and if would right to be sceptical of these. Some people suppose that house prices are important, the idea being that when prices are rising there is a feel-good factor. I have been looking at a graph that relates opinion polls to the gap between long-term interest rates in Germany and the UK. Why there should be a relationship, I find hard to fathom, especially since the widening of the gap seems to favour the Government, whereas it suggests that world markets are losing faith in UK policy. Other things that are supposed to affect a government's popularity include the sterling/dollar rate, which most people take as a proxy for the pound's strength. A weak currency does not go down well – and not just for people off to Florida for their holidays. The pound has been sliding in recent days, which would be bad news for the Government were it not offset by last week's upgrading of growth in the final quarter. That surely ought to help a bit.

To try to get a better handle, I have been looking at a rather more thorough piece of work that has been done by Simon Ward, the economist at fund managers Henderson. He has built a model that has as positives for the government of the day, increases in average earnings and house price growth, while the negatives are higher retail price inflation, rises in unemployment and increases in interest rates. It goes back a long way, right to the early 1980s in fact, so it has some credibility. He then plotted the results from what is really a "how popular should the government be?" model against the actual popularity as measured by the Guardian/ ICM poll. At least the peaks and troughs fit, as you can see in the graph.

In the past few months, according to the model, Labour ought to have been doing better than it has been, as shown in the enlarged bit of the graph. House prices have turned up, retail price inflation has been low, unemployment seems to have stopped rising and interest rates have remained on the floor. There are still lots of negatives, but not quite as many as there were last spring. The narrowing of the Tory lead was completely predictable; indeed on purely economic grounds it should have narrowed to just 2 per cent. That it didn't has to be attributed to other factors, including the unpopularity of the Labour leader.

But the model predicts that things will soon get worse for the Government; inflation is rising; and house prices, it seems, are falling again. Ward comments: "Labour's catch-up could be about to end. Assuming a further rise in inflation to 4.5 per cent in the spring, and stability of the other explanatory variables, the model predicts a rise in the Conservative lead to 11 points by May. Labour's hope must be that voters blame the Bank of England rather than the Government for the inflation pick-up."

Now, as I say, don't take this too seriously, though it is true that economic data can have a political impact. In the 1970 election, a rogue set of trade figures which suggested a widening of the trade gap, dished the view that the Labour government had the economy under control. As it turned out, the figures were subsequently amended but by then Edward Heath was in No 10.

On the other hand, in 1992, John Major won what is still the largest popular vote of any UK government in the teeth of a recession – though I see by that chart that the economic factors, briefly, seemed to have swung in the government's favour during the spring of 1992. So maybe this does work.

A further issue is raised by the model: that inflation is unpopular. I am not sure that this is fully taken on board by the politicians. Though Gordon Brown's handing over of monetary control to the Bank of England does seem to have been popular, many politicians seem to think that lax economic policy is something voters want – or at least are prepared to put up with as the reverse, tough policies, are worse. If this is right, it is worth noting that the Bank's inflation policy has turned out to be biased towards inflation.

The Bank's Governor has just written a letter to the Chancellor explaining why inflation is overshooting the target range. That is the sixth letter that the Governor has had to write about an overshoot since the regime was founded in 1997. And during that time, how many letters have there been explaining an undershoot of the target? Guess. Well, it is none.

This surely suggests that not only do politicians have a bias towards inflation but our central bank does too. It has a duty in statute to hold inflation at a centre point, currently 2 per cent, "at all times" and that target is supposed to be symmetrical. In other words, the Bank ought to be undershooting as often as it overshoots. And it hasn't. So even a set of constitutional arrangements that are seen as successful are not, under scrutiny, quite as successful as they might appear.

Big question: had the Bank leant a little harder against inflation since 1997; had it been more prepared to increase interest rates and slower in cutting them, might we have experienced a more muted boom? There would, I accept, have been a bubble, but it would, I suggest, have been somewhat smaller and more manageable.

Back to politics. The conventional wisdom is that voters like not just inflation but big spending governments. Have another look at that graph. The period when Labour was really crunching down on public spending, during its first two years of office, its popularity was highest. During the big spending phase, which really took off from 2002 onwards, it became progressively less popular. It was popular enough to win the last election, true, but its share of the vote was low. Finally, during the period of these huge deficits of the past two years, it has been at its most unpopular.

That tells me the conventional wisdom is wrong. Here's more evidence that wise politicians know that voters want restraint. It is a comment by Hillary Clinton, appearing before congressional panels on Thursday to defend the State Department's $52.8bn budget request for 2011. "It breaks my heart that 10 years ago we had a balanced budget, that we were on the way of paying down the debt of the United States of America. I served on the budget committee in the Senate, and I remember as vividly as if it were yesterday when we had a hearing in which Alan Greenspan justified increasing spending and cutting taxes, saying that we didn't really need to pay down the debt – outrageous in my view."

'You had one eye in the mirror, as you watched yourself gavotte'

So now we know. It was David Geffen who was the subject of Carly Simon's "You're so vain". It is fitting, isn't it? Both writer and subject were hugely successful, but in ways that could not be repeated now. The game has changed. Then it was about songs and records; now it is about brand, personal appearances and merchandise.

It is always fascinating to see how people make money in the entertainment industry. The human desire to be entertained is as powerful as ever but it is hard now to make serious money out of writing songs. It is even harder to do so out of recorded music. The big money is in creating a brand, which can happen almost by accident, as with the Harry Potter industry, or by deliberately tweaking public sensibilities=, as in the case of X Factor or even Lady Gaga.

But it is hard. There aren't many J K Rowlings around. Indeed, the most durable brands were created a generation ago. In a world where anything can be downloaded, the premium is on personal appearance. If you are prepared to stomp around the world, as do Madonna and the Stones, you can earn a huge amount from your brand. That was why there was such dreadful pressure on Michael Jackson to perform in person. And it is why Tiger Woods has to get back on to the golf course In a world of infinite background noise, the only way to get a message through is to let people see where it is coming from.

As for merchandise, the example of Harry Potter has become the classic how-to model, built on two pretty old media: books and films. But I wonder how durable the merchandise route to riches will be in the future. For the past 10 years, the world has benefited from cheap stuff made in low-waged economies, and that stuff has been given a veneer of class by attaching product to brand. But it is a bit of a con trick and therefore vulnerable.

The genius writers of today and the vain (or otherwise) entrepreneurs will find new ways to make money. But it is harder to pay for the Lear jet now.