ITV has revealed the contents of the infamous note left by Liam Byrne for David Laws. Unfortunately it is not possible to embed the video in this post, but you can watch it here.
Three years ago David Laws reported that his predecessor had written ‘There’s no money left’, but it seems that wasn’t quite what the note said.
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Apologies for a lengthy post, but I have no hesitation in again quoting Professor Simon Wren-Lewis, the Oxford Professor of Economics who has calmly and rationally examined the ‘myth’ that Labour’s fiscal policy created a huge mess in his essential blog http://mainlymacro.blogspot.co.uk/2013/06/fiscal-legacies-and-competence.html
He writes, “The key thing to remember is that this debate is all about degree. I have argued (and repeat below) that UK fiscal policy was not tight enough in the years 2003-7, certainly in hindsight, but even given what we knew at the time. As I said before, some of the best myths are based on half-truths. The issue is how serious this fault was. The myth is that this was a mistake of the highest order, which had serious consequences and which therefore requires an apology.”
He assesses the ‘legacy’ argument and the ‘competency’ argument. On legacy he writes, ‘before the recession hit the debt to GDP ratio was slightly lower than when they took office. Of course debt rose subsequently as a result of the recession’. Did we Liberal Democrats vote against that?
And later, ‘The current balance (which excludes investment spending) was -0.5% of GDP in 2006/7 and 2007/8, which is hardly a large number. Public sector net borrowing, which does include investment, was around 2.5% of GDP, which seems larger, but here zero is not the appropriate reference point. A sustainable deficit is one that leaves debt to GDP constant: to take some round numbers, if the debt to GDP ratio is to be sustained at 40%, and nominal GDP grows by 5%, we need net borrowing of 2% of GDP. So an actual deficit of 2.5% again does not seem that excessive.’
On competency he writes, ‘With hindsight there are additional lessons we can learn, and the one I have stressed is that we should have a declining rather than a constant debt to GDP target. But you cannot label politicians incompetent for not realising this at the time, for much the same reason as you cannot damn them for not foreseeing the financial crisis. By such standards we are nearly all incompetent.’
His is the type of rational analysis that needs to be the basis of economic policy production by this Party.
As an economics graduate albeit of the 1980s, David Laws, knows that for a currency issuing nation such as ours the money literally cannot run out. Policies can lead to unwanted inflation at the extreme. But we were never even close to that. In fact the policy required in 2008 and again after the 2010 election was the creation of more money by the Government through the Bank of England – and that took place (though arguably not enough of it). The hawks that have continually warned of impending inflation, and insisted on tighter monetary policy that even the departing Governor of the Bank of England campaigned for, have been proved wrong, month after month. Disinflation and insufficient aggregate demand is still the real danger to our future and the future of our children – a legacy of an inadequate social fabric.
It is politically attractive to smear Labour’s record in this way, but it is dangerous. Unless of course you wish to argue for a much smaller state, ideologically. Which is what is really going on here.
Labour has reacted by almost apologising if not actually apologising for the way it reacted to this global crisis. That is weak and desperate leadership, selling the country for a handful of votes.
So we have short term politics and barely disguised ideological economic liberalism proposed by the three major Parties. This will have long term consequences for future governments of whatever hue or combination to take the right economic action at the right time to maximize welfare (in its broadest sense), opportunity and liberty.
Bill – on a general point, why don’t you invest the time you put into comments into LDV articles?
Paul,
If you checked, you’d find that he does, regularly.
For regular readers, you can check by typing Bill’s name into the search functions on the right…
As a response to Bill Le Breton’s defence of the Labour economic policy I would refer to people to the acceptance speech that David Miliband would have given had he won the Labour party leadership.
http://www.guardian.co.uk/politics/2011/jun/10/david-miliband-labour-leadership-speech.
Defecit deniers are a dying breed in both Labour and Liberal parties.
Stephen Dionnelly
David M is a right-wing neoliberal cut from the same cloth as the current Government – his opinion is no surprise
I find it sad that we still see this ‘deficit deniers’ phrase bandied about.
What a sad place this party has come to – a poor shadow of the Tories
Stephen, one of my points is that actually economic policy 1995/2010 was consensual. Another is that austerity is not the best way to reduce the deficit, nominally or as a proportion of GDP. That is not to deny the need to reduce the deficit by appropriate action at the appropriate time.
The major problem the economy has faced in recent years and continues to face is insufficient aggregate demand. This is not remedied by simultaneously practicing fiscal austerity AND overly tight monetary policy. The result has been to prolong the economic malaise unnecessarily – utter negligence given the knowledge we have built up from looking at the Great Depression and Japan since the Nineties.
Nor does this make me a Keynesian – whatever that is. There is good evidence that austerity has been similar in both the US and the UK over recent times – see the IMF Fiscal Monitor at http://www.imf.org/external/pubs/ft/fm/2012/02/pdf/fm1202.pdf – yet the USA, because of its much looser monetary policy appears to have been able to off-set the effects of that austerity; something that I have been arguing here since 2009 we should have been doing.
That means grasping the seemingly counter-factual conclusion that lower interest rates are not a sign of loose money, and that they are actually a sign that monetary policy has been too tight, suppressing economic activity.
The other meme that has delayed recovery is the ‘legend’ that has come down to us (unchallenged outside of the economics profession) that it was public works that produced the recovery in the 1930s. The facts suggest that, as in 2008, so in 1929 it was overly tight monetary policy that produced the depression/recession and a failure to loosen monetary policy sufficiently that delayed recovery – even though nominal rates were low. The UK was the first to come off the gold standard – which had been the means of applying tight monetary policy – and the UK was the first to recover. No coincidence.
The tight money hawks on the MPC have been proved wrong month after month. Yet Andrew Sentence is still the go-too commentator on the BBC and the Quad has just re-appointed the arch hawk Martin Weale. Those who advocated increasing rates in 2011 should have been sacked and totally discredited, rather than being venerated and ennobled. Thankfully they were not quite in a majority, but they were one vote away from condemning the UK to an even steeper decline.
There is a strong case that those who were intent on reducing the size of the state for ideological reasons have exploited the situation to justify their ideology. We are seeing great damage done to the social as well as the physical fabric of this country. And that is the true legacy we are creating for our children and their children. Rubbishing that *consensual policy* of the is dangerous. Most of the lessons of those times have been learned.
Paul, as Mark has volunteered, LDV has been kind enough to publish my arguments and commentators here have been ‘helpful’ in challenging those thoughts over the last four years.
Bill le Breton – awesome. Convincing and comprehensive. Struggling to see why our leadership find it so hard to see all this
David Laws, his expenses claim was funny too.
Very sympathetic journalist I have to say. Laws did not resign following a “row”; he resigned in disgrace because he was caught doing something he shouldn’t have.
The trouble with Liam Byrne MP is whatever the occasion, he has something nasty to say. I recall his acceptance speech at the 2004 Birmingham Stetchford byelection, in the course of which he used the words “anti-social behaviour” a total of 13 times (I think I added them up correctly). Politicians who demonise minorities (in this case, young people) to get votes don’t deserve our respect.
David Laws was very very lucky indeed he didn’t end up in the same place as Eric Illsey, Lord Taylor of Warwick, and Jim Devine. Someone defrauding a council of 40k in housing benefit certainly would have been put there.
Did the news say Laws was back in the Cabinet ? Surley that is wrong. Getting an email from David saying the note showed you can’t trust Labour with your money – when he ought to have resigned over his expenses really shows that some in the Lib Dems are no better than those they criticise.