An economic and political death match?

The Labour movement column

By Anthony Painter

History never repeats itself; at best it sometimes rhymes. So said Mark Twain and in immediate defiance of this dictum, the quote has been repeated over and over. So one more time is neither here nor there. It is not too extravagant a guess to suppose that this sentiment is applicable to economic history.

And there are two predominant versions of economic history out there in the political market place. One is articulated by George Osborne and the other by Ed Balls. If the latter wins the Labour leadership then it will be an economic and political death match between the two visions. Only one can win and if you win, you win big and if you lose, you’re broke.

The first is George Osborne’s. For him, we are in the 1990s again. He is looking at the economic aftermath of Black Wednesday where fiscal consolidation and (steady) exchange rate depreciation led to a recovery in export growth and private sector investment alongside a growth in consumer spending.

Here is a George Osborne speech from last year in which he articulates his basic approach :

“But what about the argument that cutting spending risks undermining the recovery by reducing demand in the economy?

Not only does this argument ignore the risks of a loss of confidence and higher interest rates, it is also too simplistic.

It ignores the impact of fiscal policy on the exchange rate in an open economy like the UK.

…In other words, what you lose in government spending, you gain in exports.”

There are two drawbacks to this. It relies on the UK seeing growth in its main trading partners. But growth in the eurozone is anaemic and given fiscal and financial insecurity the UK is becoming a safe haven so the pound is rising against the euro – there is little sign of the depreciation that George Osborne expects (though he would never admit this in public.) It may come but for now the strategy looks extremely shaky – and in fact, the Budget Red Book shows that export growth and capital investment would have to be higher in each of the next three years than any time in almost fifty years for his growth expectations to be met.

Even worse, there is no Plan B – drawback number 2. This is Russian roulette economics. He may get lucky and if he’s not then it is people’s jobs, businesses, homes, well-being and public services that are at stake.

In a forthright and robust speech at Bloomberg last Friday, Ed Balls presented us with an alternative economic history. Again, it is worth looking for the rhyme rather than the repetition.

He gave a series of historical examples when classical economic orthodoxy or the ‘Treasury view’ was prioritised over public investment and expenditure – 1925, 1930, 1949, 1967, 1981, and 1990. And then he pointed to the 1945 Labour government which chose to invest the ‘peace dividend’ in the NHS and an expanded welfare state.

The problem with these examples is that the economic worlds of the Gold Standard, the IMF, stagflation, capital controls, and the ERM are different to ours so they are not a clear guide. Moreover, the post-war Labour government didn’t create the NHS and the welfare state by running up a budget deficit. In fact, by 1947 it was running a surplus. It did so by deciding not to return taxation to much lower pre-war levels. In other words, the historical examples provide a warning but unfortunately don’t give us a clear pathway to action in the context of the modern British economy.

This is not just an academic issue. While the UK is currently a safe haven from choppy eurozone waters, it does not mean that it will always be so. Ed Balls is right that markets are concerned with growth. The problem is what happens if a high and continuing deficit came to be seen as an impediment to growth and there are numerous scenarios where it would be such as where confidence in the UK economy collapses so private sector investment dries up. In such a circumstance, the UK could be left with a terrifying deficit to finance and a potential downward spiral. That is not good news at all. So it’s wise to look serious about reducing the deficit – as soon as growth is more established.

So both these historically driven approaches carry significant risks. And that’s the problem. The economic future is so uncertain that any inflexibility of approach could end in disaster. In a weekend review of Ha-Joon Chang’s new book on the limits of capitalism, John Gray wrote:

“After an intellectual failure on this scale, what could economists have to say today that would be of interest to anyone?”

That is what politicians have to contend with. Economists of a more Keynesian hue are the loudest currently though their intellectual opponents hold sway everywhere but in the US. That doesn’t mean that advice given by Keynesian economists will always be right. History certainly provides us with warnings. For every 1930s Britain there is a 1970s Britain and for every 1990s Japan there is a 1990s Canada or 2000s Brazil. The applicability or not of these cases can be argued either way – and has been.

George Osborne has chosen a high risk economic strategy with no obvious back up plan. Should Labour take the opposite risk and turn the next parliament into an economic death match? That could leave Labour relying on economic collapse in order to maintain economic and political credibility. That’s George Osborne’s gambit and Labour should resist – it is a nightmare political scenario for Labour and one to which the public would not extend much patience. It is far better to retain a degree of flexibility and respond to the economic situation as it develops rather than over-relying on history or economic theory.

And then Labour could focus on arguments for creating a new and rebalanced economy. It would take on board the arguments of Ha-Joon Chang and Raghuram Rajan about the link between greater equality, financial stability and growth. It would further develop policies to invest in science, manufacturing, the creative industries and a world-class service economy. It would further take up the developmental challenge of the green economy. Alongside this, it would consider the economic destinies of those who are not able to benefit from new economic opportunities. That is a growth plan. It is social justice. It is about building an exciting and high opportunity future for Britain.

The alternative long-term plan is to carry on as we are and hope to blunder through – an economy balanced precariously on financial services and consumer muscle powered by house equity. After all, as Mark Twain also observed, it is wise to buy land as they are not making it anymore. But that’s no way to run a modern economy.

Anthony Painter blogs at anthonypainter.co.uk