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Labour’s Economic Credibility

January 16, 2012
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The past few weeks have focused intensely on the economic credibility of the Labour party. This has now come to a climax with Ed Balls’ apparent u-turn on the coalition’s programme of cuts. I have to admit to the use of some choice language whilst watching Balls’ speech to the Fabian society on Saturday, though many commentators on the left were quick to portray this as a complete political disaster, offering a vindication for the Tories’ economic strategy. Criticism – of course – is a good thing, particularly for a Labour party who have failed to articulate what it is they’re actually for, following their 2010 election defeat – however, I would argue that enacting the clichéd response of the left bringing itself down from within solves little.

Balls’ latest statements have been taken by many on the right to represent a capitulation to the austerity agenda and an admission of Labour’s past fiscal irresponsibility. It is – partly – though it appears to be slightly more complex than this. Balls appears to have changed his rhetoric little over the past few months, but the party spin seems be advocating a more responsible attitude to the cuts in order to neuter the accusations of deficit denial which have plagued the opposition since the general election. Has Balls gone too far in his convergence with coalition policy? In short: yes, he has.

Balls and Miliband now find themselves buried under contradictions, as they continue to push their too far, too fast opposition to the cuts almost unthinkingly, whilst simultaneously failing to proclaim which cuts they support and which they would oppose. This awkward predicament has come about primarily as a response to the party’s complete inability to articulate a credible alternative economic strategy to austerity, if you can say they ever really tried in the first place.

As many have pointed out, there are also many problems inherent with the absence of a functioning opposition, which is essential for the functioning of our democracy. I can’t say that I envy those Labour activists who will have to wrestle with this issue on the doorsteps of Britain over the next several years.

How do you solve a problem like Ed Miliband?

This economic incoherence, combined with a lack of any serious or feasible policy ideas, has led many to question Miliband’s leadership. Whilst it is not unusual for an incoming party leader to experience a rough first year in office (even Thatcher and Cameron had to contend with this), it appears that 18 months in, we are now approaching crunch time for Ed.

The rhetoric emerging from the shadow cabinet by the likes of Liam Byrne appears primarily concerned with winning over votes on populist issues such as welfare and immigration. But by attempting to outflank the coalition from the right in this way, all that appears to have occurred is an increase in alienation for traditional Labour supporters, whilst the party has simultaneously failed to convince voters who – if primarily concerned with these tabloid-fodder issues – would never vote Labour on principle.

It remains to be seen whether the coalition’s dominance of public debate, a hostile media and Labour’s own incompetence in policy making will see the end of Miliband, though it’s entirely possible he will survive until the next general election. As David Wearing writes:

The story Labour’s feral right wing are now telling us is that, 18 months after giving the party a massive kicking at the ballot box, the public should have forgotten that Labour presided over the worst financial crash in living memory, and be carrying the red team on their shoulders back to Downing Street. Such is the deep thinking of the Blairite faction. In reality, it is merely predictable that Labour should have ownership of the economic situation at the moment, and that the coalition will come increasingly to own the situation themselves as the last government recedes into history and we approach 2015.

David Wearing – Comment on Guardian.co.uk

As Wearing also notes, Labour recovered in the opinion polls within months of the election defeat, aside from a few blips, they remain in the lead this week. If Labour’s plan is to neuter criticism of their handling of the economy, getting it out of the way early on rather than risking an explosion of blame in the run up to the next general election, it might not be a bad strategy. Don’t forget that a lot can happen in three years.

The coalition’s economic credibility

The pressure on Miliband, Balls and the rest of the shadow cabinet has partly obscured the problems the coalition is facing in their own handling of the financial crisis, which Labour has consistently failed to capitalise on.

Many right-wing economists make the point that a Labour government would have had to initially increase the deficit in order to stimulate growth, which is no doubt correct. Inside this surreal parallel universe (in which Gordon ‘calamity’ Brown hadn’t casually strolled from one huge PR disaster to another and inexplicably managed to cling to power) the Tory opposition would have surely pointed out that their manifesto plans to reduce spending further and faster would have prevented any ballooning of the deficit, reassuring investors on the security of the UK’s finances.

However, there is one important fact missing here, which is interesting to look at with the benefit of hindsight. The coalition is now borrowing more than ever. In return for this they have only relatively meagre growth to point to, with Ernst & Young presently estimating just 0.2% in total for 2012. Which begs an obvious question, if the deficit was going to increase whoever came to power, wouldn’t the extra cash have been better spent creating jobs, rather than being used to fund the increase in the welfare bill, as it is at present. (Of course you have to assume here that Labour could have stimulated growth using their proposed measures, which requires something of a leap of faith.)

How to fix it?

I’m certainly no economist and I’m not going to pretend I have all the answers, other than to suggest that growth and job creation should be key to all efforts. However, there are some relatively uncontroversial observations which I can make.

Firstly, it’s worth pointing out this research by Morgan Stanley, which provides a breakdown of the UK’s debt and that of other G10 countries. Their paper demonstrates that whilst the UK’s overall debt bubble dwarfs all other nations, public sector debt remains relatively small, particularly when compared to our financial sector. In this context, Labour’s embrace of fiscal austerity is a very risky manoeuvre. Steve Keen highlights the mistaken focus on public debt in his Debtwatch blog.

As well as aggregate UK private debt exceeding America’s, the UK also has a higher debt to GDP ratio for every sector. However as usual, government debt, about which politicians and neoclassical economists obsess, is the smallest component of total debt, and has only started to grow after the crisis began. To emphasise one point on which I emphatically agree with MMT economists, public debt is not the problem, and attempting to reduce public debt now is the wrong policy—from my perspective, because it would add public sector deleveraging to private sector deleveraging, thus exacerbating the underlying problem of deleveraging.

Steve Keen: Debt Britannia

Whilst it was interesting to see the ratings agencies join the criticism of austerity, blaming it for causing further damage to the economies who had implemented it, I don’t think we should place too much focus on the ratings agencies. I’m not denying that the agencies are important and influential, but what I wish to draw attention to is that this state of affairs could have been avoided. The hegemony of neoliberalism and globalisation has led to us handing over substantial power to S&P, Fitch and Moody’s with little accountability and the threat of their predictions becoming a self-fulfilling prophecy.

Let’s also be careful not to forget, these were the same organisations who issued triple-A ratings to Goldman Sachs and Lehman Brothers and continued to do so even whilst the shit was hitting the fan in 2008. Those from across the political spectrum who promised tough action following the crash have yet to make any attempt to tackle the structural problems which caused the unregulated free market to tip the global north into deep recession in the first place and are now failing to put in place any safeguards to prevent a second crash in future. In Cameron’s case,  he actively avoids any hint of regulation for the City of London.

What for 2015?

Labour has serious problems at present, with a lack of substantive policy and a substantial haemorrhage of voters, five million between 1997 and 2010. Not only have Labour failed to win over floating voters with their recent shifts to the populist right, they have also alienated the left-wing faithful whom they would usually have been able to count on to win marginal seats.

The good news for Miliband however, is that we can observe a similar decline in support for the Conservative party during the same period:

As John Ross points out here the decline of the Tories is a long-term phenomena, brought into sharp relief by the fact that they have failed to win a comfortable majority in a general election in 25 years, failed to win an election at all in 20 years, and failed to triumph even in 2010, when any competent opposition would have won decisively. The chance that five years of economic misery will reverse this trend seems remote. Labour could probably therefore win a workable majority in 2015 with no more than 40% of the vote. But this will not be straightforward.

David Wearing – Comment on Guardian.co.uk

With little separating the two main parties, cynicism and apathy on the part of voters is perhaps natural. There are some parallels here with the US, where the substantial convergence of policy between the Republican party and Obama’s Democrats is so great that the GOP are forced to elevate the far-right Christian ‘family values’ candidates in order to appear moderately credible to the party faithful in November.

Ed Miliband now needs to decide whether he will continue to cling to Blairism in his times of need like a tabloid-friendly security blanket, or instead to revive some of his father’s political theory, perhaps taking British political debate in a brand new direction, winning back the supporters they have lost since 1997 and providing the electorate with an effective opposition to the power of government in Whitehall.

[Article photo by plashingvole on Flickr. Creative Commons Licenced.]

One Response to Labour’s Economic Credibility

  1. […] the pace of cuts in the face of ever-shrinking demand and rising unemployment. Whilst I was deeply unimpressed with Labour’s rather vague acceptance of “some” cuts, their sound-bite of […]

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