How Peter Jay, in these pages, transformed the economic policy debate

The death was announced at the weekend of Peter Jay at the age of 87. Many will remember him as the BBC’s economics editor, and before that for his colourful period as Britain’s ambassador to Washington in the late 1970s.
For a non-diplomat to be appointed to the UK’s plum ambassadorial position was astonishing, apparently only explained by the fact that Jay’s father-in-law was James Callaghan, then Labour prime minister. Callaghan insisted that the decision was not his but that of David Owen, the foreign secretary, who thought the Jays would charm Washington. They did not, as is well known, charm each other for long.
Jay’s most important and lasting economic contributions have been in danger of being overlooked, however, and they came in the 1970s when he was the economics editor of this newspaper.
• Peter Jay obituary: broadcaster, Times economics editor and ambassador
These days Tim Congdon is perhaps Britain’s most prominent monetarist economist. But, as he recalled later, it was from Jay that his interest in the relationship between money and inflation was first kindled.
“I first became interested in the relationship between monetary growth and inflation while I was working on the economics staff of The Times between 1973 and 1976, where I was strongly influenced by the Economics Editor, Mr Peter Jay,” Congdon wrote in his book Reflections on Monetarism.
“Mr Jay had warned in 1972 and early 1973 that that rapid monetary growth then being recorded would inevitably cause a sharp increase in inflation. He was an articulate and effective critic of the reflationary policies then being pursued by the Conservative Chancellor of the Exchequer, Mr Anthony (later Lord) Barber … I was a little puzzled by his forecasts of doom and disaster. But he was right. In late 1975 inflation exceeded 25 per cent, remarkably similar to the peak rate of monetary growth three years earlier.”
As economics editor Jay, along with a few others such as Sam Brittan of the Financial Times, gave voice to his realisation that the game was up for the postwar Keynesian consensus, as espoused by both major parties and by his own father, Douglas Jay, a Labour politician who served in a number of ministerial roles, including financial secretary to the Treasury and president of the Board of Trade.
The clearest expression of that belief came in columns for this newspaper, and when his father-in-law, then just a few months into the job of prime minister following Harold Wilson’s surprise resignation, asked Jay for help with a tricky speech to the 1976 Labour conference in Blackpool. The government was knee-deep in negotiations for a rescue with the International Monetary Fund, having already been granted a stand-by credit. But the unions wanted action to bring down unemployment.
Callaghan was clear as he read out Jay’s words: “The cosy world we were told would go on for ever, where full employment would be guaranteed by a stroke of the chancellor’s pen, cutting taxes, deficit spending — that cosy world is gone.”
And then, in a passage that has gone down in history, he continued: “We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and that in so far as it ever did exist it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.
“Higher inflation followed by higher unemployment. We have just escaped from the highest rate of inflation this country has known; we have not yet escaped from the consequences: high unemployment. That is the history of the last 20 years.”
With that passage, Jay set the tone for economic policy for the next half-century. The language may have changed — the only black holes back then were in space — but it is the guiding light for Rachel Reeves and has been, with one or two short-lived exceptions, for her predecessors.
Margaret Thatcher, when elected in 1979, initially went down what looked like the full monetarist route. But Jay, when he interviewed her for Channel 4’s A Week in Politics while she was prime minister, found that her knowledge of monetarism was not deep, which was perhaps why the policy did not last. One of monetarism’s tenets, from Milton Friedman, was that there was a “natural rate” of unemployment which could be reduced by supply-side reforms, but that attempts to reduce it simply by boosting the economy would push up inflation. Asked about it by Jay, Thatcher said: “It’s not a doctrine to which I’ve subscribed.”
I did not know him well, encountering him when I was working for a now defunct City paper, Financial Weekly, which fell into the hands of Robert Maxwell, who also enjoyed having “Mr Ambassador” Jay in his employ, if only so he could humiliate him.
In recent years, though, I used to email him, and he was always quick and courteous in replying. He was present and told me about when the famous “two-quarter” definition of recession was dreamt up by Arthur Okun, economic adviser to Lyndon Johnson.
Johnson, who had become president after John F. Kennedy’s assassination in November 1963, was contemplating running in the 1968 election but the economy was not doing well and had suffered a quarterly fall in gross domestic product. Okun came up with a formula in which only two successive quarterly falls counted as a recession, a formula we continue to use in this country, but his political efforts were wasted. After struggling in the New Hampshire primary, Johnson decided not to run.
As BBC economics editor, Jay took his mission to explain to the main news bulletins, introducing viewers to the “output gap”, the amount of spare capacity in the economy. His biggest contribution, though, was when he was writing for these very pages.