Labour Should Challenge Macro-economic Policy

Stewart Wood in this week’s Guardian is right to argue that the paradoxical popular support for George Osborne’s manifestly failing policies for recovery should not mean that Labour must abandon its social democratic approach to solving the nation’s problems.

The drive for “responsible capitalism” is of course an important aspect of such an approach, and is an area in which Labour should expect to carry greater credibility than its right-wing opponents. But focusing on that issue concedes far too much to an orthodoxy which has served us so poorly.

Why does Labour, in addition to looking for greater responsibility from our business leaders, not espouse as well “productive capitalism” or “efficient capitalism” – in other words, a market economy that actually works? We are now into a fourth decade of Labour failure to mount any effective critique of monetarist orthodoxy, with the result that the whole area of macro-economic policy has been effectively conceded to our opponents. Yet, if ever there was an open goal, this is it.

The monetarist approach to economic policy asserts that the only goal of policy should be the control of inflation – something that can safely be left to bankers armed with the single instrument of interest rates – and that otherwise the market, if left to its own devices, will deliver optimum results. Government should just let business get on with it.

How well has this doctrine prepared us to face the challenges of a new world economic order in which China and India, Korea and Brazil, are making the running? The answer is that it has served us appallingly. We have continued our inexorable decline in the world pecking order – whether it be in our share of world trade, in the output of our manufacturing industry, or in comparative living standards. We do not recognise this only because we have become enured to long-term failure.

And that failure has culminated, of course, in the global financial crisis and a threatened double-dip recession which have left this country flat on its back and apparently facing up to a decade of austerity, no growth and further decline.

What response has Labour made to these startling failures? Nothing – other than deservedly attracting a share of the blame. Far from pointing out the nakedness of “free-market” monetarism, Labour has joined in the acclamation for the emperor’s finery, pinning its hopes when in government on the exploits of the City of London, and only narrowly avoiding the euro trap in which the ECB applies a ruthless monetarism even more extreme than the domestic variety.

It beggars belief that – now in opposition – Labour still finds itself unable to develop its own economic policy. Far from developing a coherent critique of more than three decades of right-wing economic failure, Labour is still urged by many, even in its own ranks, to ape the Tories – to be ‘realistic’, to put forward its own alternative austerity programme, and to accept that there is nothing for it but to accept the monetarist framework.

But for Labour to do so is to accept defeat. If the political argument is only about the degree of austerity, it is an argument Labour cannot win. The Tories will always be seen as more credible exponents of such policies.

Nor can Labour expect to be taken seriously if – while not challenging the imperatives of monetarist policy – it simply proclaims its readiness to take on more debt so as to spend our way out of recession.

Yet the intellectual straitjacket embraced by Labour is easily discarded. One of the prime weaknesses of the monetarist approach has been that, by identifying inflation as the over-riding – indeed, only – focus of policy, and by adopting monetary measures to combat it, we have made inevitable a literally counter-productive upward pressure on our exchange rate – and this at a time when our competitiveness in world markets was already under extreme pressure from the rise of new economic (and particularly manufacturing) super-powers.

We tried to escape the consequences of this loss of competitiveness by pinning our hopes on the international asset and credit bubble created by the City – and when that bubble burst, we discovered that we had a much-weakened real economy to fall back on.

It is competitiveness, not inflation, that is our central economic problem. Until we deal with it, any attempt to expand our economy will run up against a balance of trade brick wall. There will then be no alternative but austerity which, through a lower tax take from a lower level of economic activity, will simply make our debt problems worse.

We have suffered for decades from a blind spot about the exchange rate. Yet it is the key to improving competitiveness. We have reluctantly agreed in the past to devalue only as the remedy for a loss of competitiveness that can no longer be ignored – yet the exchange rate is the most effective, quick-acting, and comprehensive means of establishing an improved competitiveness for the future that would make short-term sacrifices fair to all, while establishing a base from which we can quickly build a strong British manufacturing economy that enables us to break free from recessionary shackles and to find a route out of the austerity cul-de-sac.

Isn’t that preferable to the stark lack of choice we now face? Why can Labour not find the courage for some new thinking?

Bryan Gould

10 January 2012