What do we do when we’re back in power? How do we show that we’re serious about insulating the economy – and by definition the vulnerable – from the worst effects of recession? The answer, pleasingly for Balls and Miliband, could be found in Keynesianism.
Keynes didn’t just believe that it was necessary to spend heavily during a recession to stimulate an economy. Such thinking is reckless and lop-sided unless there is a counter-mechanism which can operate when the economy is strong. What Nobel Prize winning economist du jour (and New York Times columnist) Paul Krugman calls “Hard Keynesianism” should be applied by Labour. We should advocate stimulus spending now to get the economy off its knees, but we should be prepared to run a surplus when the economy is in good shape, and invest that money (perhaps in a UK investment bank or stablisation fund) to fund future stimulus spending.
This also has the advantage of slotting into the government’s favoured “household” financial metaphor. Rather than running up a credit card when you’re in financial difficulty then struggling to pay it off, why not get a savings account – as many prudent people do – and save for a “rainy day” to come? That way the stimulus does not come at the cost of higher debt and punishing austerity measures, but from money already stashed away by the exchequer for such eventualities.
There are of course several drawbacks to such a plan – not least that Labour would be unable to reverse the impact of Tory cuts that will have crippled public services. If Labour is elected in 2015 (or sooner) there will be a clamour to reinstate all that the Tories have cut. That’s an impossible task, and developing a Keynesian stabilisation fund would make it more difficult still. Money spent on fiscal prudence would mean that money wouldn’t be spent on hospitals and schools. Yet the long term benefit of such a fund would be the end of boom and bust in public spending. There would never again be such an excuse – as there is at the moment – for the Tories to hack away services from underneath people in the name of prudence.
Additionally (or alternatively) the proceeds from selling government shares in banks, or the windfall from 4G licenses could be ploughed into such a fund to get it up and running. Labour used the 3G mobile phone spectrum auctions windfall to pay down debt in the early 2000s. That’s one of the reasons our national debt was much lower pre-crash than what we inherited in 1997.
By adopting “Hard Keynesianism” – or Real Keynesianism – Labour show that we are prepared for the reality of government, and determined to avoid further crippling cuts in the future. We can grow public services again at a steady pace without the risk of having them spirited away again at times of financial crisis. We can focus on growing the economy but keep some money under the Treasury’s mattress for a rainy day. And perhaps we really could regulate (if not eliminate) boom and bust once and for all. Wouldn’t that be an economic promise worth voting for?