Opinion: With Liverpool in my mind

A mistaken diagnosis that leads to mistaken and damaging policies: an invitation to Liberal Democrats to reflect on coalition policy before they meet in Liverpool in September.

The coalition government is committed to urgent fiscal retrenchment. Measures agreed between the coalition partners mean that the coalition has adopted £6 billion of ‘early’/Conservative public sector spending cuts, cuts that Liberal Democrats previously opposed.

The coalition’s emergency budget announced an increase in VAT from 17.5% to 20%, to be introduced at the beginning of 2011. The VAT rise was presented as an essential part of a plan to accelerate the elimination of a record peacetime budget deficit. And, the coalition has committed itself to a radical and comprehensive review of government spending. Major announcements are due in the autumn setting out the conclusions of the Public Expenditure Review; it is a review premised on the identification and implementation of swingeing public spending cuts. The cuts, the British public have been told, will be delivered within the life time of a five-year parliament.

Vince Cable warned, in Bournemouth, at the party’s 2009 annual conference, that the scale of the structural deficit in the UK’s public sector made a combination of tax increases and deep cuts in public spending inevitable. He warned that the Tories would most probably increase VAT substantially and implied that Liberal Democrats would oppose a massive VAT hike and precipitate expenditure cuts, which he feared would threaten the country’s recovery from recession. Vince told his mainly Liberal Democrat audience, at a well attended Bournemouth fringe meeting, that he believed that the party could improve substantially on the most likely Tory prescriptions for tackling the structural deficit.

What persuaded Vince to change his mind? In his parliamentary statements and in several press articles, most notably one written for the Guardian, he has been clear about why he changed his mind.

First of all it was a question of urgency and secondly of scale. On entering government Vince was persuaded that the threat of a sovereign debt crisis in the UK was far greater than he had previously imagined. The Euro debt crisis, most obvious in Greece but likely to spread, meant that there was, to use Vince’s word, a real risk of contagion. And, the state of the UK public sector’s finances was far worse than he had anticipated; the inheritance from Labour wasn’t simply a fiscal mess, it was ‘a great, steaming pile of manure’.

Should we accept Vince’s diagnosis and the coalition government’s joint prescription: unprecedented austerity with an absolute minimum of delay?

There is an alternative diagnosis to that which underpins the coalition austerity rush. It is based on an analysis of our economic and social woes that is increasingly widely accepted by liberal economists and well informed students of public policy. It leads to radically different policy prescriptions from those advanced by the coalition government.

Liberal Democrats, both inside and out of government, need to consider that alternative diagnosis and the prescriptions that flow from it. They need to do so over the summer so that they are well placed to debate the coalition government’s austerity economics in September at the Liberal Democrat conference in Liverpool.

Liberal Democrats generally agree that Britons have been ill-served by 13 years of New Labour government. New Labour formed an unholy alliance with the City. Not the only unholy alliance that it formed. The light touch regulation that Blair and Brown championed was held to have helped work an economic miracle and was a key ingredient in the era of plenty Blair and Brown repeatedly claimed their economic sagacity had ushered in.

What is more B&B’s recipe for prosperity was presented as something that was certain to last. Britain’s new-found prosperity, based to a large degree on the success of London as a financial centre, was part of the great moderation that had banished boom and bust and benefited the whole population. Brown’s hubristic claims about the strength of the British economy, under New Labour, have been exposed more brutally than those of any other modern British politician.

But the faulty reasoning behind New Labour’s faith in a lasting and general prosperity, flowing from the apparent success of the UK’s financial sector, has attracted rather less attention.

Margaret Thatcher and Gordon Brown shared a belief in trickle-down economics; a belief that well informed Liberal Democrats cannot. They both reasoned that when bankers do well we will all do well. Both were mistaken. At a recent conference on ‘inequality and the status of the middle class’, held in Walferdange, Luxembourg, leading international researchers, concerned with the social and economic consequences of social and economic policies in the world’s most developed countries, provided incontrovertible evidence that rich nations had been growing increasingly unequal during what had appeared to many to be a time of unparalleled – and widely shared – prosperity. Amongst their number were Tony Atkinson, the author of numerous works on the economics of inequality, and Paul Krugman.

Krugman, in his keynote address to the conference, explored the relationship between growing economic inequality, in the world’s most developed societies, and the truly exceptional prosperity of a relatively small group of economic actors, most particularly those whose economic rewards were derived from their activities in the financial sector. Krugman has – for reasons linking his economic analysis, liberal politics and critique of neo-conservative economic policy – become one of the most prominent opponents of misguided and, above all else, mis-timed austerity.

Paul Krugman is not alone in questioning the wisdom of pursuing fiscal policies, which he has repeatedly warned will exacerbate economic and social problems and fail to aid recovery from recession. Another US commentator (and former Clinton policy maker), Robert Reich, has also expressed, in language that non-economists will easily understand, the dilemmas that now confront public policy makers who want to arrange an intelligent marriage between fiscal responsibility, fairness and economic recovery.

Public policy makers who hope and believe that economic recovery – in austerity obsessed countries such as the UK – will be driven by international demand (will be export-led) are represented by Reich as naive, ill informed and, in many cases, wholly disinterested in questions of fairness. I think Reich is right to make his stinging criticisms of members of the economic establishments, in Europe and the US, who appear incapable of seeing the wood for the trees.

The similarities, in Reich’s discussion of contemporary economic frailties and public anger about them, between the present and the past, our own times and the 1920s and ’30s, ought to be deeply disturbing for Liberal Democrats as they look ahead to their conference in Liverpool and to their opportunity to hold government ministers to account for coalition policies.

* Ed Randall, a Liberal Democrat councillor in the London Borough of Greenwich from 1982 to 1998, edited the Dictionary of Liberal Thought jointly with Duncan Brack. Ed lectures on Politics and Risk at Goldsmiths University of London and is the author of Food, Risk and Politics, published by Manchester University Press in 2009.

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26 Comments

  • Andrew Suffield 15th Jul '10 - 3:57pm

    I’m… honestly not sure what your point is.

  • You fail to mention that Paul Krugman showed himself (12.10.08) to be an enthusiastic supporter of Gordon Brown’s actions:

    “Has Gordon Brown, the British prime minister, saved the world financial system? O.K., the question is premature — we still don’t know the exact shape of the planned financial rescues in Europe or for that matter the United States, let alone whether they’ll really work. What we do know, however, is that Mr. Brown and Alistair Darling, the chancellor of the Exchequer (equivalent to our Treasury secretary), have defined the character of the worldwide rescue effort, with other wealthy nations playing catch-up.
    The Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. And this combination of clarity and decisiveness hasn’t been matched by any other Western government, least of all our own.”

  • paul barker 15th Jul '10 - 5:45pm

    Ed, write a shorter version I will read it, cut by 2/3rds say.
    cuse pissoff troll. We wont take lectures from War-criminals & Torturers.

  • Barry George 15th Jul '10 - 5:59pm

    No desire to enter a debate with ‘cuse’ but I think your comment Paul is testing this sites comments policy to it’s limits…

  • Simon Titley 15th Jul '10 - 7:12pm

    Ed Randall has written an intelligent and thought-provoking critique of economic orthodoxy – and what does he get for his pains? Stupidity and abuse from trolls.

    Andrew Suffield’s comment seems intended merely as a cheap put down. But if he’s genuinely not intelligent enough to understand Ed’s piece, why comment at all?

    Fred Pitt entirely misses the point. Paul Krugman’s endorsement of Gordon Brown, which he quotes, specifically refers to the financial bailout. It cannot possibly be interpreted as an endorsement of Gordon Brown’s policies in general.

    Paul Barker seems to suffer from both the attention span of a goldfish and Tourette’s syndrome.

    If LDV is to be of any value, it should be a place for intelligent debate. If trolls keep piling into every debate, sensible people will give it up. Time for some tougher moderation.

  • Barry George 15th Jul '10 - 7:39pm

    Yes an interesting, informative and thought provoking article. Thank you Ed

  • Barry George 15th Jul '10 - 8:48pm

    @Tony

    Well there seems to be a huge split between those of us that believe that the action’s of the coalition have largely been ideological and those that believe it was inevitable.
    I have clearly stated my belief in the former previously on this site.. This article is a step in the right direction. It asks questions rather than being designed as moral boosting propaganda. It is not the usual denial orientated article nor is it a myriad of Ad Hominems designed to deflect attention onto the opposition.

    No article is ever going to be without fault but being a Lib Dem voter, I am pleased to see that finally some vital questions are starting to be asked.

  • If, as Ed Randall tells us, Paul Krugman is “one of the most prominent opponents of misguided and, above all else, mis-timed austerity”, then he would surely be in agreement with Gordon Brown, who thinks that the recovery isn’t strong enough to withstand the deep cuts proposed by the coalition (cuts which are bigger than the IMF deems necessary), without lapsing into a double-dip recession.

    As to the suggestion that the finances were in a worse state than the government expected, well they would say that, wouldn’t they? The facts suggest otherwise. UK public sector borrowing stands at £156bn for the last year, less than the £167bn which Darling predicted in the March Budget, and considerably less than his forecast of £178bn last December.

    I admit that I’m a Labour Party supporter, but I’m sorry if some people think that makes me a ‘troll’. I express my views openly and honestly without wishing to make any trouble, and I just hope to engage in sensible discussion.

  • Barry George 15th Jul '10 - 10:27pm

    @ Fred

    I don’t like the use of the word ‘troll’, it’s used as a pejorative to avoid real debate. It’s an Ad hominem and as such it doesn’t reflect well on the party if we are debating from such a fallacious and elitist position.

    If someone is defined as a troll then they you don’t need to answer their questions, you can simply dismiss them with that single word. In short, it’s a nice neat get out clause for members to deny dissent.

    This site has moderators and a comment policy, which if effectively enforced, removes the need for anyone to be calling anyone a troll. But I am sure it will continue as per usual.

  • Barry George 15th Jul '10 - 10:52pm

    @ Tony

    Fair point .. didn’t mean to imply that all members are like that… just a few…. and by members I mean regular LDV posters…

  • Terry (BA Econ) 15th Jul '10 - 11:48pm

    Ed – absolutely right. The ‘small-staters’ who have taken over our party in recent years (and now allied us with the Tories) seem hell bent on using the necessarily incurred debt from the banking crisis as an excuse to pursue their ideology, risking grave consequences for us all from a sharp contraction in the role of the state. They need to be taken a down a peg or two, as they were at last year’s Conference.

  • Andrea Gill 16th Jul '10 - 8:39am

    @Barry you do realise most LDV comments posters aren’t Lib Dems? 😉

  • Andrew Suffield 16th Jul '10 - 9:35am

    I admit that I’m a Labour Party supporter, but I’m sorry if some people think that makes me a ‘troll’.

    I don’t like the use of the word ‘troll’, it’s used as a pejorative to avoid real debate.

    The trolls are the one or two guys who make a great many posts under a variety of pseudonyms, invariably posting the same hatemongering rant into every vaguely related comment thread, even after it’s been rebutted several times in older ones. You can’t have a real debate with a troll, because they don’t have an actual argument to make and nothing you say will ever affect them; attempting to engage with them is just encouraging them. There’s not much you can do except warn people off.

    It’s perfectly possible to support Labour without trolling. It’s just that the couple of trolls here are pushing Labour’s line, which tends to lower people’s opinion of other Labour supporters.

    As to the suggestion that the finances were in a worse state than the government expected, well they would say that, wouldn’t they? The facts suggest otherwise. UK public sector borrowing stands at £156bn for the last year, less than the £167bn which Darling predicted in the March Budget, and considerably less than his forecast of £178bn last December.

    That doesn’t really tell us anything – the absolute level of the deficit is only peripherally interesting. What matters is how much lenders are willing to give, compared to the deficit. (Warning: made up numbers for example purposes follow) If they were willing to lend £180bn last year then £178bn would not be a problem; if they were only willing to lend £150bn this year then £156bn would be a serious problem, even though it’s less than £178bn.

    Of course, in practice any major nation can borrow as much as they need, but if they go beyond what the lending market is comfortable with then they have to pay punitive interest rates on it – and risk the sort of thing that happened to Greece. Which is actually significant: the situation in Greece has made lenders a lot less comfortable about high government deficits and has reduced the level of borrowing they will accept.

    Now, has the government and their advisers correctly determined the level of borrowing that will be tolerated? I have no idea, that requires a great deal of inside information on the markets. Probably only people in the big finance industry can tell for sure right now, and they never say anything that isn’t to their personal advantage. Lacking any reliable information, I’m willing to give them the benefit of the doubt on this for a year or two. We’re not going to have another election this year, so I don’t need to rush to judge them, and can comfortably do so later with the benefit of hindsight. Figuring out what happened from history is much easier than predicting what the markets will do.

  • Terry Gilbert 16th Jul '10 - 12:35pm

    But Andrew, would you accept that it seems a trifle strange to embark on costly reorganisations of state enterprises like education and the health services, if, as our Ministers claim, they are wholly convinced that swingeing cuts are necessary to forestall economic doom?

  • Barry George 16th Jul '10 - 1:12pm

    Andrea

    you do realise most LDV comments posters aren’t Lib Dems?

    Now if you had said ‘some’ or even ‘many’ then we may have found a point of agreement. But you went and said most didn’t you…

    I tend to agree with Andrew when he says the trolls are the one or two guys .

    I believe that ‘many’ of the comments on this site are not from Lib Dems but the vast majority of such posters identify themselves as such.

    I do wonder though if your view of the comment posters on this site is influenced somewhat by your view of the thoroughly stupid voters who voted Lib Dem at the last election. 😉

    @ Andrew Suffield

    The trolls are the one or two guys who make a great many posts under a variety of pseudonyms

    I agree, I just disagree with calling them ‘trolls’ .

    The sites comment policy say’s •We will continue to moderate comments where the same person is commenting under different names in order to generate a false picture of the level of support for their views

    and I agree with that. So if people are doing as you state then the moderators will remove their comments. There is no need to name call… Just ignore them and if it is the same person then their comments will be removed…

    In general I think the level of genuine dissent on this site is underestimated and that articles such as this are starting to recognise that.

  • I also have been concerned with the volte face on so many strongly held LibDem policies. I have asked my local candidate why we have heard so little from the Party spokesmen on why that have changed their minds and now support what was so recently unsupportable. His response was that the “LibDems have only 13 parliamentary members and as such cannot expect to get their way in all matters”. I find this to be pragmantism without integrity.It seems to me that so little has been gained with so much lost. I had previously supported the LibeDems foe som 40 years and had given my support voluntarily over the past year. I had been considering joining the party – a major step for me. However, the past nine weeks has disabused me of those activitites. I have withdrawn from volunteering and will now definately NOT be joining the party.
    As things stand, I fear that the untrammelled Tory Policy Rampage will seriously affect the progress of the country to haul ourselves out of the current financial situation (this is a paraphrasing of Vince Cables` speach just prior to the election which has now been cast into the dustbin of `old LibDem policies` ). Too Much, Too Deep & Too Poorly Thought Through.

  • Terry Gilbert 16th Jul '10 - 10:14pm

    Barry – it’s a shame you won’t be joining, as the left of the party has already begun to fight back in an organised way – see Richard Grayson’s Compass pamphlet and socialliberal.net. The Lib Dems are a) pivotal to British politics, and b) relatively democratic. Pay your £10 minimum sub, and have a vote. It’s a lot cheaper than joining the Labour party, and a lot more influential than joining the Greens.

  • Andrew Suffield 17th Jul '10 - 7:11am

    But Andrew, would you accept that it seems a trifle strange to embark on costly reorganisations of state enterprises like education and the health services, if, as our Ministers claim, they are wholly convinced that swingeing cuts are necessary to forestall economic doom?

    Sort of. I don’t find it particularly strange or surprising that a new government would pursue a range of pet projects that are at odds with some of their broader policies. It’s a little sad that this sort of thing happens, but it’s also a “politics as usual” thing. Happens in business too – every new CEO starts spending money on “reorganisation”. I don’t particularly like it but I also don’t expect it to ever stop happening.

    Overall, while that may have a modest impact on the economy, I’m inclined to think that it won’t matter much. The amounts of spending are relatively small, and making “drastic” cuts isn’t just about the numbers: spending a lot of time talking about cuts also changes how the market feels about the government, and increases the amount of borrowing they can get away with in the short term. To some extent it’s possible to cut with one hand and spend with the other and still come out ahead, so long as you keep everybody’s attention on the cuts. That’s why they cut a lot of incidental millions that were never going to impact the bottom line – the impression of cuts is at least as important as the reality right now.

  • Andrew Suffield 17th Jul '10 - 8:28pm

    I’m inclined to agree that Osborne is going too fast.

    Whether we should cut with the speed Osborne is proposing is another matter entirely.

    Subtle distinction here. As I noted earlier, he has reason to talk up the cuts a lot. What has actually happened so far hasn’t been all that objectionable, and I’d like to see more about how the posturing translates into reality.

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