Leading commentators on the political economy must have been flattered to hear many of their principles and policies given lip service by Shadow Chancellor Ed Balls this week in his speech to the Labour party conference. Flattered only to be deceived, sadly, as lip service is all he paid; underneath the rhetorical support for a reformed political economy promoted by the likes of Will Hutton, the Institute for Public Policy Research, Ha-Joon Chang and others, Balls’ prescription for the UK economy amounts to little more than tinkering with the same old policy levers that haven’t worked in the past.
Mr. Balls’ speech was riddled with apparent contrition for Labour’s role in the crisis we face, but the apologies were more for political errors (that undoubtedly cost them electoral support) than for a decade and more of Blairite economic policy (that equally undoubtedly cost the country its prospects for the foreseeable future). There was a mea culpa for failing to regulate banks sufficiently, but still no recognition that the broader economic crisis has its roots not just in a simple regulatory failure but more in multiple failures that go to the core of the peculiar version of capitalism that New Labour remains wedded to.
The reliance on a bankers bonus tax to fund the only real policy presented in the speech (housing and ‘100,000 jobs,’ although for whom and doing what remains unclear) exemplifies Labour’s inability to wean itself off its dependence on the financial services sector. So Dr. Balls, do you want banks to stop rewarding failure, or continue to hand out paying exorbitant bonuses that fed into the near-collapse of the entire capitalist system as it represents much of your revenue stream? This contradiction was at the very heart of Labour’s term in office – a dependence on impermanent revenue to shore up public spending, whether from one-off windfall taxes or volatile financial speculation. There’s a depressing failure of imagination here that means Balls’ only recourse is to call for more of what’s failed in the past.
The centrepiece of Balls’ “5 point-plan for recovery” appears to be the tired old cut in VAT. Never mind that is predecessor as Labour Chancellor tried this to very little effect (according to consumers and the Institute for Fiscal Studies there was a marginal, 1.2% boost to consumption that naturally reversed when VAT rose again). After much fanfare, Labour’s answer to the greatest economic crisis in living memory is to cut the price of (mainly luxury) goods we’ve realised we can do without by a few pence – this is supposedly the great stimulus the nation’s economy needs. I need not labour the point (pun intended) that this rather lame tinkering is once again more of the same, more of what’s failed in the very recent past. I’ve little doubt that temporary supply-side tweaks such as national insurance holidays and reduced VAT on home improvements will help a little, but for how long will the effects last? How will they make the UK better equipped to whether the gathering economic storm?
To give credit where it’s due Mr. Balls does recognise the need for economic growth as we try and turn the corner. Again, to give him credit, he also recognises that expansionary fiscal contraction is unlikely to crowd in record private sector surpluses and drive the investment in jobs that the country needs. The trouble is that what he proposes has little or no chance of sparking said growth, at least not on the equitable, sustainable and green basis that is needed. The diagnosis – that the UK economy isn’t growing or creating jobs at anywhere near the required rate – may well be correct, but the prescription is far from adequate.
Go back to the leading thinkers I mentioned, and the proposals for a fair and sustainable economy that they have made. None of what Balls said makes these proposals any more likely to be implemented. For some time now I and others have called for a change of direction away from George Osborne’s Plan A – not towards Labour’s Plan B, which appears less adequate the more we learn about it – but to a Liberal Democrat Plan C. Ed Randall argued for a new, better-orchestrated round of Quantitative Easing (QE) that expressly supports small businesses not just bank balance sheets. This should form just one part of a Plan C (and I don’t apologise for overusing that phrase) that goes much further, combining short-term boosts to investment by crowding in private-sector surpluses with a radical overhaul of our financial system and more long-term boosts to worker security and our skills base. Such a Plan C realises that cutting the deficit using only direct approaches – reducing spending and raising taxes – won’t be as effective as a Kay-sian oblique approach that puts dynamic and sustainable economic growth at its centre.
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7 Comments
Prateek, I couldn’t agree more.
As you point out, from Balls there “…was a mea culpa for failing to regulate banks sufficiently, but still no recognition that the broader economic crisis has its roots not just in a simple regulatory failure but more in multiple failures that go to the core of the peculiar version of capitalism that New Labour remains wedded to.”
I’m sure that your plan C has some important supporters in high places, who are a little shy of saying so in public. It also has some significant public support – in important places. Adam Posen, of the MPC, has made some very interesting observations about policy defeatism and How to Do More, which your readers might be interested in taking a look at; I think they will be well rewarded for their trouble.
Instead of giving tens of billions to the banks in the vain hope that somehow they’ll lend to business and it’ll trickle down to the rest of us we should use QE to give a £1,000 time limited voucher to every household to get a bit of demand going.
I will personally use my voucher to invest in high-end British manufacturing and retail by purchasing a Bowers & Wilkins Zeppelin Air from John Lewis.
Furthermore I will buy the new Kasabian CD to support the British creative industries and import it onto my iPod (legally thanks to Vince) to listen to on my new speakers.
Then, in order to express my solidarity with those working in the alcoholic beverage industry, I will then acquire as much Bulmers cider as I can with the money left over and hold a small gathering of close friends, which in turn should stimulate the local kebab shop and taxi owners.
I think you are on the right lines Prateek. The main problem with the UK is not lack of consumer demand, since the savings ratio is by no means excessive – unsustainable consumer expenditure was part of how we got into this mess. The main problem is lack of investment, plus a trade deficit. Cutting VAT only helps in the hope that increased demand boosts business confidence – but it is scarcely credible there. There were some encouraging hints at conference that Messrs Clegg, Huhne and Cable understood this, and were looking at ways that both government and private investment could be lifted. Some more flexibility from the treasury would be welcome though…since govt capital spend should not be part of the structural deficit (?).
Mr Balls shows no sign of having got it on the economy, and he’s as much part of Labour’s problem as Miliband.
Pleased to be reading that a prominent figure within the Social Liberal Forum wants to distance himself from Labour’s failed figures, failed policies and failed rhetoric.
A temporary unfunded boost to consumer demand won’t solve our entrenched economic problems; investment in skills and infrastructure however, is an stimulus I could get behind.
Sorry you’re not keen on my idea Matthew but Martin Wolf in the FT seems to think it has some merit –
“Personally, I would favour the “helicopter money”, recommended by that radical economist, Milton Friedman. This would be a quasi-fiscal operation. Central bank money could pass via the government to the public at large.”
http://www.ft.com/cms/s/0/045aab84-e61c-11e0-960c-00144feabdc0.html#axzz1ZQGH29al
In practical terms seems to me that there are two broad sets of issues we must tackle.
First, is the unsustainable debt bubble that has inflated over the last 30 years or so. As long as it remains unresolved we will see wealth sucked out of the real economy for the benefit of financiers and enduring recession for hte rest of us. But the debts are now so large that, like spinning plates on poles, they are wobbling ever more wildly and could fall anytime. Those defending the status quo want to load the debt onto the next generation and/or to seize public assets; we must not allow this to happen. If/when this happens the international and interbank linkages will make a bad situation worse and we need a contingency plan. See, for example, this post from Zero Hedge.
http://www.zerohedge.com/news/muddle-through-has-failed-bcg-says-there-may-be-only-painful-ways-out-crisis
The second is improve the business environment or we are pushing on a string. Any amount of capital will do little good if the environment is toxic to business and something is clearly wrong – but what? Several things I suggest including most obviously, but not exclusively, education. My sense is that another factor, less remarked on but equally important is that we have, like the proverbial frogs boiled too slowly to notice, evolved into what Prof Michael Hudson calls a “tollbooth” economy where rent is extracted at every turn for little or no public benefit and so adding to the real economy’s costs. And cost is the ultimate toxin for business.
For instance, two or three years ago Newcastle Airport did a dirty little deal whereby only one taxi firm can drive up to the terminal. (Others can in theory but must pay a fee they cannot legally recover from their passenger and they certainly can’t stay long enough to pick up a return fare). And guess what! The Airport taxis cost between a quarter and a third more than the regular taxis.
If this sort of thing is widespread – and I think it is – then right there you have a guaranteed fail for any initiative that does not address the problem. On the other hand, if this is tackled cost will fall substantially and industry will boom.
Thanks Ed, I hope you’re right about this sort of thinking having support amongst those implementing policy right now – I’d certainly like to think so! Posen’s speech made fascinating reading!
Matthew – spot on!! Andrew – I hope you’re pleased but not surprised that SLF types can be economically literate 🙂
Bill – helicopter money would undoubtedly provide a short-term boost to current consumption, but my point here is that temporarily lifting the amount spent by consumers on short-lived goods will not alleviate the fundamental problems with our economy at large – that of chronic underinvestment (bot public and private) in long-term projects that improve both our economic output and quality of life. I suppose it depends on your aims – if you’re interested purely in averting an immediate double-dip in terms of GDP, helicopter away and sit back – if you’re more concerned about the Koo-esque Japanese phenomenon of a decade-long depression, start implementing Plan C 🙂
Liberal Eye I accept that debt, public and private, is a real issue haunting the world economy. However my concern is that in attempting to directly de-leverage said debt simultaneously without regard to the wider consequences thereof, individual families, corporations, and countries may act rationally but collectively it’s suicide – Keynes’ maxim of the paradox of thrift applies here methinks. Debt must by definition be owed to someone who holds it, and a serious problem is the imbalance between debtor and creditor nations and their activities – basically until China spends the Western debts it holds we’re likely to stagnate. Furthermore, whilst excessive debt is clearly troublesome (cf Greece), a direct balance-sheet approach to debt/deficit reduction can often exacerbate the problem by undermining the growth with which debts can be serviced.
As for rent-seeking in the economy – as a liberal it upsets me that the individual profit motive jeopardises the whole, but am struggling to come up with ways to prevent the scenario you describe – any thoughts?