• 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

  • I Told You So

    Jonathan Freedland, in last week’s Guardian, congratulates the UK Shadow Chancellor, Ed Balls, on being able to claim the rare privilege in politics of saying “I told you so”. Balls had warned in 2010 that austerity would not pull the UK out of recession – a prediction now in the course of being amply confirmed.

    It is certainly true that, for most politicians, claiming to have been proved right is rarely possible – and, even if it is occasionally justified, it is not usually a claim calculated to endear the claimant to his audience. So, Ed Balls is fortunate to have someone else make the claim for him.

    The claim is usually, of course, only of interest if it can be made by or on behalf of a frontline practising politician – someone who either does or might one day exercise the power of government, and whose fitness to do so would perhaps accordingly be enhanced.

    The claim is even more difficult to make – and of considerably less interest – if made by someone who has long since departed the scene. So why – 18 years after I decided to leave British politics – should I think it worthwhile to make that claim in my own name now?

    The answer is that I left British politics in 1994 because I despaired of being able to persuade my colleagues in the Labour party that they were pursuing the wrong course on a wide range of issues. And, since it is precisely those issues which have dominated news headlines over recent times, there is now the chance of assessing who was right and who was wrong.

    What were those issues? First, the dominant role assumed by the City in British economic policy, something enthusiastically endorsed and encouraged by successive governments.

    In 1986, I led for the Opposition when the Financial Services Bill was debated in Standing Committee, and warned repeatedly that self-regulation, “light-handed” regulation, or no regulation at all, would allow unregulated financial markets to subject us all to unacceptable risks – risks that eventually materialised with a vengeance with the Global Financial Crisis.

    From even further back, I had argued consistently that macro-economic policy was being formulated in the interests of the financial economy, rather than the “real” or productive economy, and that this was creating a serious structural imbalance which would eventually come back to bite us. That view was dismissed in the euphoria engendered by the sight of large fortunes being made in the City. Like Winston Churchill, I would rather have seen “Industry more content, and Finance less proud.”

    Then, there was the euro. My argument that the euro, imposing as it did a single and inappropriate monetary policy on a wide range of diverse economies, could not possibly work, had been preceded by my opposition to the euro’s predecessors – the European Monetary System and the Exchange Rate Mechanism, both of which had failed. I was constantly dismissed as “anti-European”, despite my contention that it was the concept of Europe itself that was being put at risk. I was eventually stripped of responsibility for policy-making on this issue.

    And what about the current controversy over News International? I recall being invited to lunch by Rupert Murdoch in 1988. In retrospect, it is a reasonable assumption that he was interested in how malleable I might be (I was then the Shadow Trade and Industry Secretary) in responding to his ambitions. I remember little of the lunch but I am quite certain that I offered a less pliable prospect than some of my successors clearly have done since – and I remained throughout extremely concerned at and hostile to the dangers posed by the concentration of media ownership.

    And austerity? I salute Ed Balls for his foresight in warning that austerity by itself takes us further into recession, and that we need a strategy for growth. But we are saddled with the current sterile orthodoxy because we accepted in the 1980s that the “free” (or unregulated) market must prevail, so that – even in a recession – government must step aside to allow the market to re-establish equilibrium. I have spent most of my political life arguing that markets are irreplaceably valuable but not infallible.

    And, as long ago as 1981, I published – with two colleagues, John Mills and Shaun Stewart – Monetarism Or Prosperity? We argued that macro-economic strategy should be about much more than simply controlling inflation and that we needed a strategy for growth, focusing on full employment, competitiveness and putting the interests of the productive sector first.

    There are many other (and not just economic) issues on which I would claim that events have supported the views I took – the invasion of Iraq, for example, where I was clear long before the invasion that any such action would be disastrous. My purpose, however, is not to claim any special far-sightedness, since there have been many others who have expressed similar views on each and all of these issues.

    What I would claim, however, is that I was one of the very few in mainstream, frontline politics to have taken these views and to have swum against the prevailing tide. On all of these issues, in other words, we had choices – and we have suffered greatly from making the wrong ones.

    Bryan Gould

    1 June 2012

  • A Shadow of a Shadow Chancellor

    Ed Miliband’s choice of Alan Johnson as his Shadow Chancellor is, for all the obvious reasons, likely to define the opening period of his leadership. It has been welcomed in some quarters as evidence that he is very much his own man and is determined to maintain control of economic policy himself. Not for him, it is said, the establishment of a rival centre of power at the Treasury.
    But there is clearly a downside as well. It was clearly identified by Alan Johnson himself, in a way that drew attention not only to his lack of any knowledge of economics, but also must surely have raised questions about his political acumen. Ministers must have salivated at his admission that he would need to consult “a primer on economics”.
    The appointment raises further issues. The challenge for incoming ministers (and shadow ministers) is always to equip themselves with enough knowledge about their brief to allow them to make a proper assessment of the advice that is proffered by their expert advisers. Too often, ministers come into office armed only with a few simple slogans and find that within a short time they have been persuaded that they are not a satisfactory basis for policy. From then on, they are lost and become the prisoners of their advisers.
    This danger is particularly acute when it comes to the Treasury. Economic policy is not something that can be mastered by “reading up” for a week or two. For one thing, who decides what should be on the reading list? There is no
    widely accepted orthodoxy that need only be understood to be safely adopted, and even if there were, the recent history of such orthodoxy does not engender great confidence. An incoming Treasury minister (or shadow minister) will be entirely at the mercy of official advice unless he or she has enough expertise to be able to evaluate that advice.
    The appointment of Alan Johnson and the sidelining of those Shadow Cabinet members who have some real expertise in economic policy suggest strongly either that he is to be a mere cipher and Labour’s economic policy will be made elsewhere (and possibly by Ed Miliband himself), or that Labour is content to have its economic policy decided by officials. If that is the case, Ed Miliband’s Labour party will have failed to remedy one of New Labour’s central weaknesses. It was New Labour’s failure to question free-market orthodoxy that helped to usher in the recession and that ultimately did for them electorally.
    On surely the most important issue of the day, it is essential that Labour is able to mount an effective assault on the coalition government’s constant assertion that “there is no alternative” to deep and damaging cuts in public spending and to offer a coherent and persuasive alternative view. It will not be enough to rail against the damaging impact of the cuts; that impact will be obvious to everyone, but will be trumped as an argument by the contention that the deficit makes the cuts inevitable.
    What Ed Miliband’s Labour needs to do is not only attack the unfairness, harshness and ideological bias of the cuts. They must also argue that they are the wrong response in economic policy terms to the crisis – that giving priority to the government’s finances and to getting their deficit down in the short-term rather than restoring the health of the economy as a whole in the longer-term is to ensure that the recession is longer and deeper – and the deficit more persistent – than they need be.
    There is of course a perfectly legitimate economic policy argument to this effect. It is supported by a great deal of expert opinion around the world and by the lessons that should be drawn from what we know about what caused the recession.But already, the evidence is that the argument is being conceded. Nothing is more depressing about our economic plight than the success the Tories have had in establishing in the public mind that it was “Labour’s recession” and that they have been left to clear up the mess by imposing unavoidable cuts.
    To fail to engage the coalition government effectively on this issue is to concede a huge amount of political territory for no good reason. Sadly, the appointment of someone who, whatever his other strengths may be, has to be guided towards whatever current orthodoxy demands suggests that Labour will – at best – bide its time in responding to the central political issue it confronts.
    Bryan Gould
    9 October 2010

  • Shifting Foundations

    As the global financial crisis unfolds, each country responds by seeking to protect its own institutions and economies. New Zealand is no exception. The steps we have taken have been sensible and – so far – effective in shoring up our economy as well as we can against the immediate prospects of worldwide recession and financial meltdown.

    Soon, however, we and others must lift our eyes to more distant horizons – not just further into the future, but across a wider spectrum. The responses that must now be made cannot be merely national in scale, but must take an international dimension as well.

    And it is when we look to that international landscape that we get a real sense of the change that has taken place. The world has truly shifted on its foundations. The agenda moving forward and the ideas now being discussed are now hugely different from anything that was thought worth considering even a few months ago.

    Three years ago, I wrote a book called The Democracy Sham: How Globalisation Devalues Your Vote. In it, I developed the thesis that the global economy had dangerously sidelined democratically elected governments who found themselves no longer able to withstand the pressures placed upon them by international capital. The result was that unregulated markets were in effect out of control, with no restraining influence exercised by those we elected to protect us from the abuses and excesses perpetrated by a greedy and powerful minority.

    I canvassed a number of solutions to these pressing problems. Some were national in scale, involving changes in national economic policy – a widening of the goals of that policy, a willingness to regulate the “free” market, a proper role for government as opposed to bankers, and a greater concern for social justice.

    Other proposals, however, addressed the international scene. New Zealand has more than most to gain from a better regulated international financial structure. We would benefit greatly from less volatile exchange rates, from some diminution in the huge daily flows of “hot money” around the globe, and from a more prudent policy on the part of those who have driven the credit creation on which the global economy has perilously – and fatally – depended.

    Many of these ideas were no doubt dismissed as irrelevant, possibly eccentric, even dangerous and misguided. What is now intensely interesting is the extent to which this kind of thinking has now – in a remarkably short time – entered the mainstream.

    A striking indicator of how the picture has changed can be found in the debate on the world economy that has just taken place in the United Nations. Some of the world’s leading economists – like Joseph Stiglitz and Prabhat Patnaik – have presented papers in which they look to a new agenda going forward and are prepared to consider proposals that only a short time ago would have been regarded as anathema by most commentators.

    They have, first of all, re-stated the fundamental dilemma identified by John Maynard Keynes, the twentieth century’s greatest economist. Keynes drew a distinction between investment and speculation. Investment took place, he said, in the real economy and produced new productive capacity. Speculation, on the other hand, was a phenomenon of the financial economy, took place on a short timescale and for short-term purposes, and was often undertaken irresponsibly. The only way, he said, that speculation could be reined in was by regulating financial markets, and this was essentially a task for national governments.

    Stiglitz and Patnaik go on to call for action, not just to deal with the immediate crisis, but to make deeper reforms. They want a reform of bodies like the the IMF and the Basel Committee on Banking Regulation, and “a new Bretton Woods” – a UN-brokered international agreement which would regulate the international movement of capital and the volatility of exchange rates. They want a new international financing facility. They make these calls in the interests of a better balanced world economy, and not least to help the Third World which has lost out as a result of both the creation of the credit bubble (in which they had no share) and now its subsequent bursting. The economists are in effect reminding our political leaders of their responsibilities, and telling them that they can no longer leave these important matters to unregulated markets.

    In placing these issues back on the agenda, these economists (who are backed up by an increasing number of leading thinkers around the world) are putting our own New Zealand leaders on notice that they, too, must respond with an increased understanding of what is now expected of them. There is a real opportunity for New Zealand to throw its weight behind, perhaps even to help lead, a drive for a new international agreement that would redress the balance of power in favour of democratic governments and against irresponsible markets and thereby protect us all against further instalments of the kind of damage we are now suffering.

    Bryan Gould

    5 November 2008