The reality of Gordon Brown’s spending: Black Labour can’t re-write history

December 7, 2011 10:00 am

Did Gordon Brown leave the economy in a mess? This question niggles at me since even sensible people within the Labour Party seem unsure of the answer, when it should be fairly straightforward.

Yesterday, I attended the launch discussion of “Black Labour”, where they argued for ‘fiscal conservatism’ to be brought back in fashion within Labour. Co-author Adam Lent explains it here.

The authors want to ‘throw a grenade’ (to borrow a phrase from another practioner Maurice Glasman) in discussions within Labour – so I’d like to take an opportunity to throw a grenade back.

In theory ‘fiscal conservatism’ makes logical sense – every government has to eventually balance its books and look capable of managing the economy well. It’s the practical application that authors of Black Labour want to avoid.

To be specific, fiscal conservatives believe Gordon Brown should not have run a spending deficit before the crash of 2008. He should have ‘fixed the roof while the sun was shining,’ as the Conservatives like to say. But this theory ignores the reality.

1. Making up for falling investment
From around 2001, British businesses had started hoarding their cash rather than investing it domestically. The UK wasn’t alone in this, even Ben Bernanke said that:

“many advanced economies… face an apparent dearth of domestic investment opportunities”.

Labour ministers worried that the economy was heading for a ‘soft landing’ or maybe worse. Given that the UK’s debt level was at historic lows, a decision was made to invest money in public services to make up for the drop in business investment, and increase the UK’s long-term growth potential (investing in schools).

If Labour hadn’t spent that money, unemployment would have edged up and tax revenues down – so they would have faced a deficit anyway. Had Labour tried to be ‘fiscally responsible’ then, by cutting spending, unemployment would have inched higher anyway.

In fact, Adam Lent himself argued last year that the UK had been in good shape before the crash hit. So what would our fiscally conservative friends have done instead?

2. Brown spending versus the crash
Here’s the other obvious point: even if Gordon Brown hadn’t spent that money from 2002, the impact would have been minimal. Debt as a % of GDP went from 29% to 36% or so, but was still well below western average.

The impact of the crash and credit crunch was unprecedented: unemployment shot up and tax revenues collapsed and debt levels shot up. There is very little any government could have done to prevent that.

Labour should admit mistakes
Nevertheless, it’s clear that Osborne’s narrative (even though Conservatives planned to match Labour spending until 2009) prevailed with the public, thanks to a compliant media. The Lib Dems also developed collective amnesia about their deficit reduction plans (much closer to Labour than Conservative plans) and started castigating Brown after they signed the Coalition agreement.

So, Labour cannot politically escape without a mea culpa. I would say this: Labour did fail to regulate and rein in the banks properly. Labour also failed to create a balanced economy that didn’t rely so heavily on the City. Labour did not spend all its money wisely and made plenty of costly mistakes (IT projects, PFI projects).

The leadership should admit mistakes on these fronts and apologise until the public is sick of hearing it.

But if the authors of Black Labour want the party to admit mistakes on deficit spending, they should at least offer an alternative.

  • http://politicalfretting.com Martin Coxall

    Unless and until Labour make it look like they are serious about the deficit, they’ll struggle to achieve economic legitimacy.

    And being serious ab0ut the deficit means having a serious discussion of how Brown was allowed to get things so catastrophically wrong.

    Crying “but it wasn’t really our fault! Waaaah!” will, rightly, fall on deaf ears.

    • Ianrobo

      you are making a presumption that the deficit made things worse, You are thinking of course the Tories would have done anything different. Which again is false as Osborne committed to our spending plans and lauded Ireland as the model to follow (now on the 4th emergency budgte and 23% VAT).

      Brown’s major mistake was thinking the City was this golden egg, Blair made it, Thatcher did, everyone did, it was the great neo-liberalist dream of fake and funny money.

      Our mistake now is not what any stupid coloured name book says it is but is in fact not realising that the neo-liberalist dream died and why try and resurrect a dead body.

      Instead of listening to the hedge fund managers, their lobbyists and protectors, call out the neo-liberalists,m call their dream dead and rebuild the whole of the banking system to serve the people and not itself.

    • http://www.facebook.com/christhegoth Chris ‘thegoth’ Wilcox

      We would have had to have been psychic to have known about what The Bankers were up to with those bad debts.

      Sadly the Public may at present believe that The Govt should be psychic.

      • Anonymous

        Not at all, but we do not expect Government to remove regulation which have kept bankers on the seemingly  straight and narrow. We do expect Government to see things right in front of them like Housing bubbles, we do expect Government to know when the price of Gold is going to go up, we do expect government to understand the the market

        • http://www.facebook.com/christhegoth Chris ‘thegoth’ Wilcox

          Gordon wanted to regulate, but was not allowed to.  I’m wondering how much else was Blair.

          And remember, a devalued currency has helped our exports with Europe.  As our products are now more affordable to them.

          The Housing bubble alone would not have been a problem if the boom had just petered out.  Remember, The Torys have cut the new Housing Budget by 90%.  That’ll keep prices up, rather than helping The Poor.

          I also feel The Govt did understand the market.  Well, well enough anyway.  It was the Bankers who chose to fill the market with products that, in reality, were utterly worthless.  Oh, and then keep quiet about it.

          My view is that it’s The Bankers that are mostly responsible for the pickle we are in, and that Labour actually did little wrong.  Bar trusting said Bankers, which was a huge mistake.

          • Dave Postles

            ‘My view is that it’s The Bankers that are mostly responsible for the pickle we are in’
            and their auditors.

  • http://twitter.com/UOldfield Ust Oldfield

    Sunny, I have so many problems with this post. For a start, the argument you make is too simplistic. 

    “If Labour hadn’t spent that money, unemployment would have edged up and tax revenues down – so they would have faced a deficit anyway.” Not necessarily. Businesses started hoarding, rather than investing, in 2001 because they anticipated a recession due to the business cycle – being once every 7/8 years. So spending all that money only delayed matters. When a crisis is delayed in the economy it is usually magnified. By that logic, which is also your logic, Labour exacerbated the 2007/8 crash.

    Fiscal conservatism is actually a necessary part of Keynesian economics. Save in the good times, spend in the bad times. What Labour did in the economy through 13 years was far from Keynesian. Why is this necessary? Because it is counter-cyclical, and that is used to even out the economy – make the busts less bad and the booms not so great. 

    If Brown had approached his tenure at the Treasury with the same attitude of the authors of ‘In the black Labour’, then the UK economy would have been in a better position. Household debt would be less. Business debt would be less. Government debt would be less. Why? Because the economy would be more sustainable than it is. The Government should only intervene (and this is contested among Keynesians) when there is a recession to encourage private investment not as a replacement to said investment at any stage of the business cycle. Arguably that’s what happened under Labour and that was unjustifiably wrong.

    • Anonymous

      But then again you might as well Vote Tory….

      • http://twitter.com/UOldfield Ust Oldfield

        I’d rather not. 

        • Anonymous

          We will see at the next election how many vote for each party, being disabled I doubt I would walk two yards to vote for any of them.

          • Redshift

            Postal vote?

          • Anonymous

            You have to have a party to vote for last election I very nearly put my X next to the BNP, and I knew it was time to end my voting days.

    • http://www.facebook.com/christhegoth Chris ‘thegoth’ Wilcox

      I doubt household debt would have been less.  Private Sector wages have not kept up with inflation for years.  Many were forced to borrow just to get by due to this.

      As The Private Sector fleeced its’ workforce more and more.

      • http://twitter.com/UOldfield Ust Oldfield

        Inflation actually averaged 2% for most of Labour’s 13 years due to an import of Chinese deflation, and wages did increase with inflation, sometimes greater than inflation. It’s only recently that wages in real terms have fallen. 

        • http://www.facebook.com/christhegoth Chris ‘thegoth’ Wilcox

          Public Sector Wages sure.  But not Private Sector.  Not according to my mates anyway.

          They haven’t had a pay rise in years.

        • Anonymous

          On the other hand food rises, electric gas water council tax took away a dam sight more then wage increases.

    • Redshift

      Is it really as straight forward as ‘save in the good times’? Surely governments should be looking to invest in new industries to create an advanced economy that delivers high wages and high living standards to the population.

      We should have been creating a Green Investment Bank or state investment bank in 2001. We should have had a proper industrial policy. This is what would have really allowed us to weather the storm of the global economic crisis. Instead, the Nordic countries and Germany* have really looked like the industrious ones (like usual). 

      *I am aware their growth has fallen off but unlike us this can be more or less blamed on the Euro crisis

      • http://twitter.com/UOldfield Ust Oldfield

        As a Keynesian, I’d say that the state should encourage that sort of investment but it should not direct that investment. The state should not pick winners or losers – it’s inefficient. 

        Also, the construction of the economies you mentioned are vastly different from ours. Businesses are part of the community and thus ethical. It’s a good thing, but the British economy is not on a trajectory anywhere close to that. Not now nor for the foreseeable future. That isn’t to say that it should not be a goal to aim for. 

  • http://www.facebook.com/christhegoth Chris ‘thegoth’ Wilcox

    I see Labours borrowing between 2001 and 2008 in this way:

    For years The Torys had under-invested in Schools and Hospitals.  And we had a possible slow-down happening.  And like with any recession you build your way out.  Which is what Labour did, following this 7-8 year boom-bust model we seem to have.  They started building in 2001.

    It’s like a home owner getting a new garage with a new room above it as a new extension.  You borrow, you build, and then you pay off over the next 10 years.  The mistake Labour made was to trust The Banks to trade in a sane way.

    But then The Torys made that mistake as well, as did The Lib Dems.

    If the obvious boom had just petered out slowly would Labours’ borrowing in the 2001-2008 period have been a problem?  I doubt it.  All Labour would have needed to do was trim the bush, Tax The Rich a bit more, and hey presto.  A slight surplus would have been enough to head into the repayment needed ( over the next 10 years ) to cover these much needed Public Sector building projects.

    Obviously it did not peter out slowly.  It blew apart as the insanity of the Bankers was exposed.  But, as I said, no-one saw the utter stupidity of these Bankers coming.  Everyone thought The Bankers could be trusted.

    So was that Labours’ fault?  We’d have to have been psychic to have known.  Much as it is easy to blame the Govt of the time, being realistic there is little Labour could have done.  By the time we knew it was simply too late.

    Since then it’s been a credit crunch.  The Bankers won’t lend.  Once again that is them, not Labour.  So our Private Sector has taken a hammering.

    It’s the fault of the Bankers in 90% of the case.  And we need to keep telling this tale.  The Public wanted good schools and hospitals after all.  And our borrowing was low enough for the time to not be that risky.

    Where-as turning bad debts into ‘great products’ that could then be sold and used as guarantees for loans ( the actions of The Bankers ) was incredibly risky, and blew up in everyones’ face.

    • http://www.facebook.com/profile.php?id=671176264 Anonymous

      The problem is a systemic imbalance in wealth. This is and always has been – for thousands of years -what you get when compound interest on debt combines with private property in land and other commons.

      How can the banks lend if the purchasing power in the economy has virtually all gone to the rich, so that 90% of the population is insolvent, illiquid or both?

      The fact is that the system is terminally fucked.  We will NEVER see a return to banking as before, and it has already been transforming rapidly – in the last three years – to service provision, inflating and financialising commodity and equity market bubbles as it went.We will shortly – between one and three months I think – see a collapse in commodity and equity markets at which point we will be ready for the final transition to a sustainable economy.

      Since 1693 – when the Bank of England commenced the privatisation of public credit -we’ve been hypnotised into thinking that banks are necessary credit intermediaries.They are not, and never have been, and it is simply and straightforwardly possible to create a modern day – decentralised but connected version of the decentralised but disconnected system which maintained before.

      • http://www.facebook.com/christhegoth Chris ‘thegoth’ Wilcox

        I like the idea of Public Sector Banks.

        Much more controllable.  And the odds of them leaking money to Shareholders and overpaid executives is much less likely when in the hands of The Public.

        Something these Torys simply do not understand.  As they all want the old system where the wealth was controlled by the few wealthy types out there.  Rather than The People generally.

        Their days are now numbered thankfully.  So really it is just a matter of how long we have to complain about stupidly high pay and stupidly low tax on said pay and bonuses before The Torys either back down or get voted out again.

        The Private Sector has to start paying more though.  That much is obvious.  Low wages and low pension provision in The Private Sector is a huge problem.  And it is due to skinflint managers trying to hoard what they can.  Greed, pure and simple, leading to exploitation of the desperate.

        When Private Sector wages go up we’ll see a drop in credit demand.  And more people able to support themselves in old age.

        • http://www.facebook.com/profile.php?id=671176264 Anonymous

          I am not suggesting public sector banks.

          I am suggesting  private sector banking service providers allocating credit issued by regional and even local Treasury branches or other bodies.

          The service providers would cover agreed costs – which would include professional salaries somewhere between a plumber and a doctor – with the Central Bank setting parameters and supervising the process as monetary authority. They would then receive as an incentive performance related bonuses.

          The staff costs would be reasonable as would be the dividend to shareholders since no capital buffer is required to cover defaults as in the (failed) conventional banking model.

          I’m completely with you otherwise, particularly re private sector salaries.

          • Colin Finch

            …nice idea. But as we all know, if it’s private it will be corrupted and abused by a greedy few……just like now really eh!

  • Adam Lent

    I think you’re mising the point Sunny. The  In The Black Labour paper says nothing about admitting past mistakes or making apologies.  There are two very closely linked questions at the heart of it: firstly, how can Labour regain credibility and trust on the management of the public finances and the wider economy; and secondly, how can we deliver social justice and equality in a period characterised by inescapable austerity both in the private and public sectors.  These seems to us the most pressing questions anybody in the Party or on the left should now be asking themselves and they are really about the future not the past. 

    • Redshift

      I must say I’ve not read the black labour paper but generally the trade union movement has delivered better pay and living standards where governments have not, through collective bargaining. 

      If the government spending is to be so constrained, perhaps the most obvious answer to a social justice agenda is to back pro-union legislation and better worker’s rights. 

    • http://www.facebook.com/christhegoth Chris ‘thegoth’ Wilcox

      Bring the Bankers Bonus Tax back;  Keep the Banking Levy and the 50% Tax Rate as well;  Get a mansion Tax going;  Do Labours 5 point plan for growth, and divert some cash to making sure Legal Aid happens.

      And reverse any govt decisions to reduce workers rights.

      That will bring Social Justice.  Make the Rich gits The Torys are protecting pay up or bog off elsewhere.

    • http://www.facebook.com/people/Mike-Homfray/510980099 Mike Homfray

      The problem is that your solutions are so indistinguishable from the Tories and would just about finish the party off up here –  that it would actually be better to lose than to win with such a negative, right-wing programme. If the only way of gaining ‘credibility’ is to be more like the Tories, then no thanks . If our ideas are not popular amongst the electorate, that’s something we will have to accept. But its no reason to abandon them altogether which is what you are doing.

      • Arjun

        You would really rather complain about a rightwing government destroying industry, the NHS and communities than a Labour government that compromised a little to agree with the public and get elected?! It is a strange kind of narcissistic sadism to want other people to suffer badly until you get your way.

        “it would actually be better to lose than to win with such a negative,
        right-wing programme. If the only way of gaining ‘credibility’ is to be
        more like the Tories, then no thanks . If our ideas are not popular
        amongst the electorate, that’s something we will have to accept.”

        Margaret Thatcher made a career out of your predecessors in the 1980s saying that.

      • jaime taurosangastre candelas

        Mike,

        it occurs to me, and often, that I’m wrong about whatever seems unclear, but on which I have an opinion.  That’s part of (I think) a healthy attitude to learning from precedent, trend and evolving knowledge.

        Having made that admission, does it ever occur to you that you may be wrong?  I’m not saying that you are, although I do suspect that.  With this argument against what I see as economic reality, and some of your earlier posts advocating a protectionist EU, you do appear to me to be positioning yourself into a camp which would prefer to bang heads into an unyielding granite wall.  It is of course quite possible that you agonise over all of these matters before posting, but you never indicate if that is the case, and your language is firm and definite.

        • http://twitter.com/Newsbot9 Newsbot9

          So basically the Tories are right and it’s not only acceptable but GOOD that a first-world country is facing starving and freezing many of it’s poorer people?

          That it’s *invalid* to present alternatives, such as rent caps?

        • http://www.facebook.com/people/Mike-Homfray/510980099 Mike Homfray

          You just tend to accept things ‘as they are’. I think that’s far too limiting – nothing would have ever changed if people didn’t have the vision and confidence to say that they believed in something other than the status quo

  • Pingback: The response to “In The Black” | hopisen.com

  • http://www.facebook.com/profile.php?id=697126564 Paul Halsall

    If every government has to balance its books *eventually*, how come very few British governments have run surpluses in over 200 years, and there has only ever been a minor pay down of the national debt?

    *Eventually* never has to arrive if things are managed properly and we realise that money is just a notional reality.   You can’t push this idea too far, since  it is possible for a state to overreach, but it is quite possible for a well-run state to always run a deficit precisely because “eventually” never arrives.  

    • Anonymous

      A deficit within reason, after the second world war we still owed America from world war 1 and it was totally controlled sadly this time I suspect this is more to do with wage control

  • http://twitter.com/hopisen Hopi Sen

    Sunny, the answer to your opening question is “Yes, he did.”

    • Colin Finch

      A hopelessly simplistic response that echoes the rhetoric of the current government aided and abetted by the right wing press. You’ve just read the full story ffs.

  • http://www.pickledpolitics.com Sunny H

    Adam  you say: There are two very closely linked questions at the heart of it: firstly, how can Labour regain credibility and trust on the management of the public finances and the wider economy

    But surely you have to explain where he lost that credibility?

    Hopi – I’m glad at least you say that. Perhaps you could now explain what you would have wanted done differently.
    Also, it seems your co-author Adam Lent disagrees with you on this:
    http://liberalconspiracy.org/2010/08/12/is-labour-really-to-blame-for-the-deficit/

  • http://www.facebook.com/LeeJamesBrown01 Lee Brown

    Good piece by Sunny.
    Here is what Nobel prize winning economist paul krugman said earlier this week in the Ney York Times piece called “British Debt History”. http://krugman.blogs.nytimes.com/2011/12/04/british-debt-history/

    I’ve been playing around with the IMF’s historical public debt database,
    which has long-term information on ratios of debt to GDP. And you
    really have to marvel, given that historical record, at the deficit
    panic now so widespread. Here’s debt as a percentage of GDP in Britain,
    back to 1830:That
    uptick at the end — you’ll see it if you squint — is what’s driving the
    Cameron government’s insistence on slashing spending in a liquidity
    trap.It’s also interesting to note — contrary to what you often
    hear — that at the time Keynes was writing, and calling for fiscal
    stimulus, Britain was substantially deeper in debt than Britain or the
    United States are now.

    • Ian

      Lee, the thing is, what is worrying people about debt are the bloody banks.  they have the problem, they need the cash, they have no reserves and what as much back as possible. Keep raising rates via their agents S&P and the rest and force a QE and get their base back.

      If we are like progress and accept that then as a party might as well merge with the tories.

      We should not be here to shore up the banks anymore than we had to.

  • Arjun

    There are some good points in this article, but also some I dont quite agree with.

    I think we did have to spend after 2001 to stimulate the economy and improve public service and community infrastructure left decrepit by the chronic underfunding of the previous government, but we should have limited the rise. that would not have increased unemployment, reduced tax receipts etc as you suggest, ecause we would have been raising spending, but not by as much as we actually did.

  • Anonymous

    Dear god anyone see the program on BBC tonight over the Financial mess, Labour had to have known about this mess in 2004/5 if they did not then my god somebody messed up big time.

    And the money these America CEO made after going bust was mind numbing  one CEO who ended the bank was given $160 million as a pay off.

    People living in tents, while these people moved on to other massive paying jobs.

    And Bush was a donkey what an ass.

    And now they are saying that banking are even more powerful then before the crises.

  • Diarmid Weir

    I guess it’s a political rather than an economic question, because economically what happened pre-2008 is neither here nor there.

    I find it pretty incredible that any ‘left-wing’ thinkers believe it is a relevant question. By accepting the ‘austerity’ trope you’re giving in now and for good. Because the main destruction of real wealth involved is in unemployment and the consequent loss of human capital.

    The real problem is a refusal by the bubble-year gainers to accept that they, and they alone, must accept that their con has been found out and that they cannot go on reaping the absurd share of wealth they have been doing.

    It really is as (economically) simple as that. We have to find the politics to get that message across and see it through.

  • John Reid

    Your right, Mike In the 80’s I didn’t get the NHS operaion I needed, i had little education and Ended Up in cardboard city homeless, i don’t know apbout people who suffered from police brutality, but i’m sure it happened, But as Tony benn said the ’83 election was A moral victory even if it put laobur out of power for 14 years and the tories had the Poll tax and the rise in hate crime is something that we’re still recovering from now,

  • http://www.facebook.com/people/Mike-Homfray/510980099 Mike Homfray

    I don’t think this programme would get Labour elected. 

    No incentive to vote for something already being done by the government

  • Pingback: Labour and ‘parking the deficit’ – counterproductive and a disaster | Liberal Conspiracy

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