Our Politicians Are Not Up To It
The revelation that Growth in a Time of Debt, the influential 2010 paper by leading economists Reinhart and Rogoff, was vitiated by basic errors has removed one of the last credible underpinnings of the contention that austerity – and reducing the deficit at all costs – is the proper response to recession.
But it is not just miscreant economists who have egg on their face; it is our political leaders too. The translation of the Reinhart/Rogoff findings into a simple ‘rule’ that a debt to GDP ratio exceeding a tipping point of precisely 90% produces a precipitate slump in economic growth has been the intellectual foundation of policies advocated and implemented by politicians across the western world. The two economists have frequently been cited as champions of austerity by Paul Ryan, the Republican vice-presidential candidate, by Olli Rehn, the European Commission’s economic chief, and by George Osborne, among many others.
How did these luminaries come to accept and implement such a literally counter-productive policy? The answer is that there are very few politicians who are competent to make their own judgments on major economic issues. What most of them do is cast around for arguments that support their own political prejudices – and that is all the easier if those arguments are offered from within the comfortable confines of current orthodoxy.
Reinhart and Rogoff were endorsed and applied (mistakes and all) because it is what political leaders wanted – on political grounds – to hear, and because it accorded with the ‘free-market’ doctrines that have dominated western economies for nearly four decades. A George Osborne, for example, found that the supposed ‘90% rule’ gave him all the scope he needed to justify and target the true aims of his policy – smaller government and ‘rolling back the state’.
The dependence of political leaders on advice – especially on economics – is not new; but it matters more than ever today as the dangers of such dependence become clearer. While the austerity message is increasingly contested on grounds of historical experience, Keynesian economics, and the need to establish the direction of causality in respect of any postulated correlation, the thinking of most people is still corralled by those powerful forces which seized control of the global economy decades ago.
There can be little surprise that advice from these quarters is extremely congenial to right-wing politicians. For most of them, economics is a simple business. They see no distinction between running a country’s economy and their own experience of running a business. Even when they think about the wider economy, their decades-long experience of monetarism leads them to believe that the essence of a successful macro-economic policy is a backward-looking insistence on stability and getting government out of the way. They are simply unfamiliar with the kind of thinking that has allowed other economies to grow and prosper.
It is less easy to explain why politicians from the left of centre have been equally unwilling or unable to think for themselves. But the sad truth is that most simply assume, like Tony Blair, that economics is a difficult and technical business that can safely be left to the bankers, and is therefore no longer their responsibility. They tell themselves that the economic process is probably immutable anyway, and that the real business of politics is in any case about other issues. They place more value on the plaudits of the powerful than on the reproaches of the dispossessed.
Even a Gordon Brown – who was widely thought for a time to be a master of economic policy – can now be seen to have been merely a prisoner of his orthodox advisers. He, at least, seems to have had the intellectual capacity to re-think his position to some extent since he left office.
The dead hand of long-established orthodoxy continues to weigh down on the current Labour leadership. Even Eds Miliband and Balls, who clearly have some understanding of what is needed, find themselves constrained by the fear that anything too overt by way of new thinking will open them up to damaging attack. They have to move cautiously; and that inhibits them from developing and advancing a fully comprehensive and coherent alternative policy.
The result is that our political establishment offers no one able and willing to break new ground, to consider, let alone advocate or act on, neglected issues that are nevertheless of great importance. Where, for example, is the debate about the need to improve competitiveness if we are to grow without running into the constraints of inflation and trade deficits? What about rejecting destructive austerity in favour of replacing – as the Japanese are doing – the banks’ monopoly over credit created for non-productive purposes with credit created by the central bank and directed – not into banks’ balance sheets – but in accordance with an agreed industrial strategy into productive investment? What about restoring macro-economic strategy as the responsibility of an accountable democratic government rather than leaving it as the preserve of an ‘independent’ central bank? And, above all, what about making full employment, on economic as well as social grounds, the central goal of policy?
Bryan Gould
24 April 2013
An Economic Policy for Labour
It was significant that, in the seven issues that Tony Blair – in his article last week in the New Statesman – advised Ed Miliband to focus on, there was no mention of the state of the economy.
It is true that Tony never had much interest in or knowledge of economic policy – a deficiency that might have been an exacerbating factor in his precarious relationship with Gordon Brown. But it is nevertheless surprising that, in identifying the big issues that warrant attention, the parlous state of the economy slipped under the radar.
Tony Blair is not, of course, alone among leading politicians in disavowing any interest in economic affairs. Most are content to accept advice from supposed experts, which usually means (and was certainly true in the case of Gordon Brown) that they have no option but to go along with whatever may be the prevailing orthodoxy.
Yet the issue of how an economy should be run and in whose interests is surely the central issue in democratic politics. The ability to think for oneself and to judge the merits of conflicting views should surely be a minimum requirement of anyone who seeks to run the country.
We see today where the orthodoxy of the past thirty years has got us. It is one of the welcome changes that Eds Miliband and Balls have brought about that there is now a disposition in the Labour party to challenge that orthodoxy. There is certainly an appetite for such a change by virtue of a growing if belated realisation in the general public that the old nostrums have failed.
What is needed now is more courage, not less – a focus on positive change (which these days means no more than a moderate Keynesianism) and a conscious effort to move the debate’s centre of gravity; the Blair advice to fight shy of any genuine clash of ideas is surely misplaced – not only representing a missed electoral opportunity but a betrayal of the interests that Labour should be fighting for.
Labour should be ready to take on the tired and discredited proponents of austerity, monetarism and the “free” market with some bold new (or, in most cases, revived) thinking. What about, for example, abandoning the backward-looking and static view of the economy taken by monetarism (and the irrational reliance on austerity to recover from recession) in favour of a recognition of the great power of a competitive market economy to grow – like the US at the outbreak of World War II, the Japanese in the 1960s and 1970s, and the Chinese today? The new Governor of the Bank of England is signalling that he is already looking at this approach.
What about addressing that issue of competitiveness, or lack of it, that has held us back and constantly threatened inflation and trade deficits when we have tried to grow, by making improved competitiveness the central determinant of policy – as Singapore does?
Why not tackle that issue by ensuring that – as Keynes warned – a shortage of money (for which read credit) does not hold us back, but that the credit that is created is put to productive purposes by being channelled, with the aid of an industrial strategy agreed with government, business and banks, into strengthening our neglected manufacturing base?
What about using specific and focused measures to control inflation through restraining bank credit creation for non-productive purposes, so that the real and positive purpose of macro-economic policy – the productive use of all our resources, and the achievement of full employment in particular – become the main focus?
And why not restore such macro-economic goals to their proper place in a democratic society – as the prime responsibility of elected and accountable governments, rather than being sub-contracted to unaccountable and self-serving bankers? And when government uses its power to “print money”, shouldn’t we ensure that those resources help industry through productive investment rather than sitting unused while they boost the balance sheets of the banks?
And should we not nail forever the canard that we have to choose between social justice on the one hand and economic efficiency on the other? We have seen just how economically efficient is an economy that is run in the interests of a privileged few. There is nothing economically efficient about placing huge purchasing power in fewer and fewer hands, about allowing the wealthiest to treat the meeting of their tax obligations as a minor voluntary donation, about keeping large numbers out of work so that they are claimants rather producers, about leaving manufacturing flat on its back, about using vast amounts of money from both the taxpayer and the central bank to boost the banks’ balance sheets while both demand and investment remain depressed.
A real debate about economic policy would produce great benefits – not just for the party brave enough to initiate it, but for the country as well.
Bryan Gould
15 April 2013
Tony Blair Gives the Game Away
Tony Blair’s advice to Ed Miliband this week is unlikely to influence the direction taken by the current leadership of the Labour Party, but it does have the merit of providing a telling insight into how New Labour wasted an unparalleled opportunity.
It is of course appropriate that the advice comes in the week of Margaret Thatcher’s death, since it may be regarded as Blair’s most recent act of homage to the departed former Prime Minister. It was always the (usually unspoken) guiding principle of the Blair government that the Thatcher legacy was too well-entrenched, and too valuable, to be challenged – and it is clear from this latest effusion that this remains the cardinal principle of Blair’s politics.
He seems not to remember that Margaret Thatcher was thrown out in 1990 by her own party or to notice that her death has revived bitter memories of the division and damage she created. For him, it seems, the whole of the Thatcherite agenda lives on.
Both then and now, however, Tony Blair commits a fundamental error in his analysis of how political opinions are formed. What he fails to recognise is that most of our fellow-citizens do not think about politics or economics in any systematic way. It is only a small minority, whatever their position on the spectrum of political views, that has developed a fully coherent set of beliefs and principles.
The majority are perfectly capable of holding in their minds quite contradictory notions and allegiances and of nodding in agreement to any one of the propositions offered from any part of the political spectrum. What matters, what determines the way they will think on any particular issue and the way they will vote, is which of those contradictory values is closest to the surface, or in other words has the greatest salience for them, at any particular time.
As we confront the various issues and challenges that are the stuff of politics – the necessary compromising of conflicting interests and the proper allocation of scarce resources, power and freedom – we will find that each of those issues and challenges can be defined and described according to competing narratives. The battle for political support and the disposition of political power will depend on which of these narratives is the most persuasive.
The challenge, therefore, and particularly for a party of the left that will usually stand for change and therefore progress, is to produce a narrative or narratives that explain difficult and complex issues most persuasively and relate them most accurately to the values that voters hold and that we espouse.
Most people in Britain will affirm, if asked, their continued belief in the values of fairness, compassion, tolerance, concern for others. But those values have become submerged under the tidal wave of free-market propaganda; if we are to rescue them, we need to find effective ways of bringing them back to life, and back to salience, by showing their relevance and value to the solution of current problems.
We do not meet this challenge by accepting Tony Blair’s advice. His response to the apparent Thatcherite hegemony, now and when he was in government, is and was to move the whole of Labour’s agenda rightwards. The values of our opponents were affirmed; the principles and policies that the voters knew were those that Labour had always stood for were abandoned.
But the voters had not moved rightwards en masse. They had, it is true, become disillusioned with some elements in Labour’s programme – elements that needed updating and re-thinking – and they had been persuaded by an effective competing narrative to support some elements in the programme of our opponents.
But for the large number of voters, of almost every political allegiance or none, who continue to embrace the values of community and compassion, the wholesale move rightwards was confusing and uncomfortable; it left Labour voters with a sense of abandonment, undecided voters with the perception that there was no real alternative to Tory extremism, and voters who would not ordinarily vote anything but Tory quite unpersuaded that New Labour was a convincing alternative.
Moreover, in politics, unforeseen events happen and circumstances change; the issue as to who has the most persuasive narrative to explain those changes is therefore constantly redefined. The Global Financial Crisis was not, as Blair argues, an event that left opinion unmoved; the voters, it may be safely asserted, were desperately keen to escape the wreckage and to find a way forward.
Their partial and now reducing adherence, in the aftermath of the crisis, to neo-liberal orthodoxy was in many ways a reflex action; a dash back to mother’s apron strings in times of danger. It will take time – years – to bring them to a realisation that the crisis was the result of market failure; but the fact that this will take time and effort is no reason to concede the whole of that issue to the Tories and to make no attempt to increase understanding of what went wrong so that we can avoid such crises in future.
The only people who might think that this is a correct response are those who believe that the Tories are right and that the whole issue was the fault of supposedly “big” government; even precious few Tories now truly believe this – but Tony Blair apparently does.
Tony Blair’s advice is, in other words, not only defeatist in electoral terms, but also a betrayal of the interests of most people. If he genuinely believes that George Osborne has got it right, then he should be honest enough to come out and say so. Otherwise, he should surely accept that his duty as an experienced political figure is to help towards learning and applying the necessary lessons.
It is significant that, in Blair’s list of seven priority issues for Ed Miliband, there is no mention of the fundamental issue of how the economy should be managed so that we escape from recession and rebuild our shattered productive sector. It is true that Tony Blair never showed much interest in economic policy and seems to have overlooked its importance; yet that is precisely where Labour should focus its efforts, both in its own – and more importantly, the country’s – interests. To take up that central challenge is not only a duty but an opportunity – to reject the canard that we have to choose between social justice on the one hand and economic efficiency on the other.
We should now argue that there is nothing economically efficient about keeping large numbers out of work, about leaving manufacturing flat on its back, about using vast amounts of money from both the taxpayer and the central bank to boost the banks’ balance sheets while both demand and investment remain depressed.
This is now our opportunity to take the argument forward on our terms. We don’t have to choose; the solution to our economic problems does not lie in piling burdens on the most vulnerable. The path to economic efficiency lies instead in creating a more inclusive and equal society in which everyone – as contributor and beneficiary – is able to share. We can develop a narrative that convincingly explains the failures and – in accordance with the values that we share with so many of our fellow-citizens – takes us forward in both social and economic terms.
Bryan Gould
12 April 2013
Thatcher Followed Rather Than Led
Love her or hate her, most commentators have agreed that Margaret Thatcher was a towering figure – for good or ill – who helped to shape Britain and the world. It is, perhaps, not surprising that, on the occasion of her death, and in line with the modern tendency to lionise and exaggerate the importance of individuals, many features of today’s world are attributed to what is called Thatcherism.
The reality, however, is that Thatcherism was destined to become the dominant ideology of the past four decades, with or without Thatcher herself; indeed, if we fail to recognise the true nature of that ideology, and the forces that brought it about, we will be less able to identify and remedy its failures.
This is not to say that the triumph of “free-market” economics and of an aggressive emphasis on the individual as opposed to community owed nothing to the personality of Margaret Thatcher. It is doubtful whether that triumph would have been as rapid and complete, or would have had such a long half-life, without her. But the ideology which prevailed was essentially the product of many other actors and factors.
The first of these was the perceptible sense that the post-war consensus, celebrated for example by Tony Crosland in The Future of Socialism and focused on full employment, public services and community, had run its course, and that it no longer offered a reliable guide to economic success. When Jim Callaghan told the 1976 Labour Party conference that “you can’t spend your way out of recession”, he was announcing the death-knell of what had been regarded as one of the essential characteristics of post-war policy.
We can now see, or should, that the problem that Callaghan was trying to describe was not the supposed failure of Keynesian economics, but a refusal to understand that – if we wanted to match the economic achievements of other countries, defeated in war, who had set about with gusto the task of rebuilding their economic strength, and even more of yet other countries that were rapidly industrialising – we needed to stop assuming that we were entitled to economic success and to think of ourselves as an economy that also needed to change rapidly if we were to keep up.
Our problem was, in other words, one we refused to recognise – that in the face of others becoming hugely more competitive, we were locked into comparative decline, epitomised by our focus on defending the value of sterling rather than recognising our loss of competitiveness; indeed, the whole subject of competitiveness and exchange rates was at that time taboo, as I learnt at first hand when I attempted to table parliamentary questions on the subject.
That loss of competitiveness meant that we could not grow without other problems, like the constant threat of inflation and a perennial balance of trade deficit, holding centre stage. This led many to conclude that some of the central aspects of what had been bipartisan policy were at fault and – as obstacles to a better performance – would have to be abandoned. So, public ownership, government responsibility for securing full employment, a welfare state that guaranteed basic services, were tacitly targeted as necessary sacrifices.
By the time Thatcher won the 1979 election, there was no shortage of pundits to tell us what needed to be done. Political philosophers like Hayek and Nozick, with their emphasis on small government, became newly popular. Milton Friedman and the Chicago school advanced the merits of monetarism – a painless and foolproof way, it was thought, of dealing with inflation that also had the advantage of getting government out of the picture and handing economic policy over to bankers.
These doctrines came together in the minds of ideologues like Keith Joseph and Nicholas Ridley, who had already prepared a “free-market” agenda for an incoming Conservative government, and were enthusiastically supported by proselytisers like the then editor of the Times, William Rees-Mogg. Significantly, even Denis Healey, from 1976 onwards, had accepted the Treasury’s advice that monetarism was the way of the future.
Developments in the real world pointed in the same direction. The rapid increase in the volume of world trade, and the accumulation of large volumes of investment capital in private hands, coupled with the alluring prospect of the profits to be made from taking advantage of low labour costs in undeveloped countries, produced an irresistible pressure for the removal of exchange controls. When the pound “floated free”, as the Daily Express had it, the advent of a single global economy became inevitable and the power of international investors, as the masters of that global economy, grew exponentially at the expense of elected national governments. It seemed virtually impossible for democratic governments of whatever persuasion to defy the precepts that governed the “free” and unregulated market.
It is safe to say that Margaret Thatcher essentially responded to, rather than created, these powerful trends. Indeed, before she became leader, there is little evidence that she possessed little more by way of ideology than the set of everyday Tory values she had inherited from her father.
She must have been amazed, having negotiated a period as a less than impressive Leader of the Opposition, and an initial year or two as one of the most unpopular Prime Ministers in history, to find that the battleground on which she was required to fight had been virtually vacated by her opponents, who had on the whole retreated to their own ideological fastnesses while they waited – as it turned out, in vain – for the political pendulum to swing.
She found that the shift in opinion that had taken place over the previous decade meant that there was now little obstacle to the implementation of the agenda offered by her lieutenants; and, emboldened by her success in recapturing the Falklands, she began to flex her muscles – and to enjoy it.
In the event, contrary to some of the more fulsome tributes paid to her, she muffed the opportunity provided by the absence of effective opposition and by North Sea oil coming on stream, and – in thrall to monetarism – ensured that any benefits from the oil were immediately offset by the decline of manufacturing that monetarist theory asserted was inevitable. Far from “saving” Britain, she was responsible for a huge missed opportunity and, by treating manufacturing as expendable, compounded our competitiveness problem.
It must have been, nevertheless, a thrilling experience for her to discover that – contrary to so many expectations as to the difficulties that would be faced by a woman leader – she was able to wrong foot and discomfort both colleagues and opponents by simply insisting, with increasing stridency and certainty, on getting her own way. It was in this respect that Margaret Thatcher made her contribution to Thatcherism; she did not invent it, or even necessarily foresee it, but when it became apparent, she liked what she saw and, by serving as its instrument, discovered her destiny.
Those powerful forces that were unleashed by the triumph of the “free” market – a triumph in a battle that is constantly fought between the powerful and the ordinary people, but in which the powerful have for the time being prevailed – were extraordinarily lucky that the person who headed the government at the critical time and to whom it fell to bring about the change that they saw as necessary may not have been a great political thinker, still less a ground-breaking economist, but had the force of personality to drive that change through. It was a change defined and willed by others but delivered by Margaret Thatcher.
With her passing, nothing much changes. Those same powerful forces are still in charge, perhaps fighting a rearguard action in the aftermath of the global financial crisis, but using their power to entrench their advantage. So let us be clear; to elevate Thatcher to the stature of a one-woman revolution is to miss the point and to divert attention from the real forces ranged against us – still very much in evidence – and the battles that still have to be fought.
Bryan Gould
11 April 2013
This article was published in the London Progressive Journal on 12 April.
George Osborne’s Non-Event
George Osborne’s budget was driven by an obvious political imperative but was, in economic terms, largely a non-event. The major interest, such as it was, lay in the minor adjustments offered to long-suffering consumers in the forlorn hope that they would be cheered up by cheaper beer and marginal concessions on income tax, and might not therefore notice that their jobs, services and living standards are still under constant threat.
In terms of the wider economy, the Chancellor’s stance was “steady as he goes”; after nearly three years of his stewardship and in the sixth year of recession, nothing much, it seems, needed to change.
There was no recognition that austerity as a response to recession had not only been invalidated by experience, both in the UK and in Europe, but had also, as a consequence, been rejected – following a review of their earlier recommendations – by the IMF. The Chancellor was apparently unconcerned that output still lagged behind its pre-recession peak, and that the government borrowing, whose reduction he had identified as one of his primary goals, had continued – reflecting the depressed level of economic activity – to grow as a percentage of GDP.
So little account was taken of the most obvious and pressing problems facing the economy that one must wonder whether the Chancellor’s focus is political and social, rather than economic. It may well be that his unstated agenda is to take advantage of the recession to unleash forces and drive through measures that will change the balance of advantage between rich and poor, private business and the public sector, for a generation.
The Chancellor may well be, in other words, an (perhaps – if one is being generous) unwitting heir to a long and dishonourable tradition, epitomised by Andrew Mellon, the multimillionaire US Treasury Secretary, who called upon employers in the depths of the Great Depression to “liquidate labour”.
Austerity, and the withdrawal of government, represent, after all, increased space for private enterprise (though the Chancellor seems not to have noticed that manufacturing is so enfeebled that it is unable to take advantage of any supposed opportunities); and even the resulting failure to get the economy moving has a silver lining, in that it guarantees that unemployment remains an actual and potential restraint on wage growth.
What was needed from the Chancellor in his Budget speech was so far removed from what was in his mind that there seems scarcely any point in rehearsing it. But the Budget speech would have made a positive difference if it had signalled the abandonment of austerity and its replacement by a strategy to recruit government, banking and industry in a joint effort to raise the level of demand, to provide finance for productive investment, to coordinate an industrial strategy focusing on those areas of manufacturing that represent the best possibilities for growth, and to frame a macro-economic policy with competitiveness rather than inflation control at its heart.
Bryan Gould
31 March 2013
This article was written for Palgrave Macmillan’s newsletter.