Thursday 20 June 2013

Dear Prudence

As a good proportion of readers are political anoraks, I am sure most of you will of heard of In the Black Labour, the discussion document put out at the end of 2011. It made the - controversial for some - argument that as the British state is caught between the rock of the deficit and the hard place of public sector debt, it would be foolish for the next Labour government to promise a spending spree. "Responsibility" and "fiscal conservatism" should be the watchwords as Labour re-presents itself as the thoughtful and prudent custodian of the nation's finances.

As you can imagine, for some this was continuity Blairism branching out into economic policy; a recipe for grey, managerial politics. And, of course, an apologia for austerity post-2015 - assuming Labour are returned to office. True, In the Black Labour can be read as all those things. But it and the temporarily on-trend zero-based budgeting quickly disappeared from public view for a while. But following the leader's speech on social security, and Ed Balls's coy preview of Labour's spending plans, guess what? In the Black is back.

The new piece, 'Moving Labour 'into the Black' claims to offer a "socially just, fiscally responsible, pro-growth, pro-social agenda", but does it? First things first, what does it say? In summary it stands for,
* Stronger, more transparent fiscal rules, open to scrutiny on both formation and evaluation.
* Being honest about the scale of spending cuts or tax increases needed to return to fiscal balance over a reasonable period; it’s
better for the public to understand the context of unpleasant political decisions.
* Reducing departmental budgets over time in order to create space for industrial and infrastructure policy.
* Over time, switching resources from current to capital spend and dropping the temporary VAT-cut policy.
* Supporting growth in wages through living wage, skills and vocational education, accepting that these steps will be partial, complex
and no panacea.
* Confronting reservoirs of power and wealth where they swell too much.
* Promoting flourishing and creative local market economies and the innovative state.
Technocracy, austerity-lite, small-statism. At least on first view. The biggies, of course, are the reductions in public spending and reconfiguring the state/economy relationship. Here follows a clutch of incoherent thoughts.

There are cuts and there are cuts. Cuts by slashing support for those who need it, like Osbourne has done, is somewhat different to public spending reductions via an interventionist strategy that grows the economy, increases tax revenues, and shrinks the pool of social security recipients. That the latter is the preferred go-to strategy of self-identified centre-lefties these days shows how far economic debates have shifted since Blair and Brown were at the helm. But I do also think ITB are too willing to embrace cuts as a means of balancing the books. The problem they have, of course, remains the same as the much-lauded Darling strategy of halving the deficit over the life time of this Parliament. More emphasis on jobs and growth, yes, but simultaneous cuts to the public purse. On one level it makes more sense than the demented economics of the Tories. By reinvigorating the economy you make it less vulnerable to the fall out of cuts. But fall out there will be, and that would still present a downward pressure on economic performance. And when competition for jobs is tough, Britain *can't* afford to cut.

To be fair, the ITB team aren't daft, hence their emphasis on taking everything very slowly. Grow now, cut later is the message. However, they're too locked into a technocratic mindset for my liking, their approach is redolent of treating public spending as a technical rather than a political problem. This comes to light in the section they devote to confronting monopolies of wealth and power. They discuss how the state should be an agent of empowerment rather than of redistribution (why not?), and that big enterprises and institutions lock out innovation. If you're able to cut them back, the suggestion goes, entrepreneurialism in business and the public sector will win out and provide better outcomes for all. But what is telling is they view 'taking on' powerful interests solely within the discredited frame of market fundamentalism. Sure, they have a point - monopoly, especially with little or no democratic accountability - can act as a dead hand that traps the invisible hand in a deathly grip. But they do not consider the enormous sums lost through tax dodging, which ranks possibly as the most grotesque of consequences of "reservoirs of power and wealth". Surely it should be the first duty of an incoming Labour government to ensure this yawning gap in the state's finances is properly addressed? Clamping right down on tax dodging, be it legal or illegal, won't redress the balance of incomings and outgoings by itself, but if you want to be honest and straight with the electorate about budgetary problems, you have to be prepared to go after those who are shirking their responsibilities to the rest of society first.

While we're talking about honesty, Labour needs to level with the electorate about the character of the deficit and debt. For example, it is still not widely known that about a fifth of the state's debt is ... owned by the state. The Bank of England have been printing cash, sorry, operating 'quantitative easing' to buy up government bonds. Any interest earned on those bonds (gilts) end up getting handed back to the Treasury, but where does the money paid back go? Due to the operational institutional separation between the two I am sure there are ever so important reasons for including this in the overall debt figure, and counting the payments government makes to meet the debt as part of the deficit. But none of this is secret, though I suspect it suits the Tories not to mention it. After all, the debt suddenly looks much less terrifying sans the £200-odd billion the state owes itself via the Bank.

I was, however, glad to see ITB identify Whitehall, i.e. the institutional apparatus of the state, as a concentrated monopoly that needs breaking up, decentralising and dispersing. For all the government's lip service to localism Britain is still one of the world's most centralised states. The idea of giving more power to local authorities and, crucially for rebalancing the economy, moving chunks of the apparatus out of London is entirely welcome. If you're a government department fancying a move to Stoke-on-Trent, drop me a line and I'll forward you the council's inward investment team telephone number.

The second problem is they have very little to say on how a Labour government would encourage "good behaviour" among business - i.e. more employers that pay a living wage, take on bags of apprentices, invests in communities, and does a million and one other nice things. This isn't a position unique to ITB either. The Labour leadership have nothing to say, beyond suggesting living wages for public sector workers will shame business into accepting them. Hmmm, in the same way much higher trade union densities in the former have bounced the latter into signing recognition agreements? It's one thing to have a "pro-social agenda", but another to implement it. I think it was Eoin Clarke, on a post I cannot find anywhere, who suggested that corporation tax and business rates be whacked right up and then lowered for individual firms who tick the boxes on training, wages, trade unionism, worker management, etc. As fiscal conservatives I imagine ITB are suspicious of regulation and the like, so why not try the carrot rather than the stick to achieve "socially just" outcomes?

The final point I want to make comes back to money and prudence. "Saving money" and "being careful" is not cost neutral. Carrying on with Tory spending plans over 2015-16 means keeping the hated bedroom tax, the real terms cuts in social security and the NHS, and so on. Their downward pressures on local economies are well known (though seldom heeded), but not so much the non-quantifiable costs such as worsening physical and mental health, homelessness, crime, alienation. Any "transparent fiscal rules" cannot stand alone. They must be embedded within a wider understanding of what constitutes social value - a society that runs like clockwork is nothing to celebrate if its an unceasing grind to live in. And this isn't utopianism, the TUC has done some work on this. But again, this does require political will and the capacity to think outside the envelope of austerity-lite. Unfortunately, while there is some good stuff in ITB it just does not go far enough.


Anthony Painter said...

Very interesting piece. I think the 'technocratic' charge is an unfair one (an easy label for anyone in the party who is not seen as on the left?) given that a central argument of the piece is that power in the state - especially Whitehall- needs to be shattered and dispersed. This creates more space for the type of democratic politics, services and citizen engagement to which you refer.

Thank you for engaging with the argument though.

Metatone said...

Good post. Personally I view ITB with much more suspicion, for lots of reasons. However, for today I'd highlight two issues:

1) Yorkshire Ranter does some good questioning of underlying assumptions about company profits and investment here:

I posted a comment with links to Krugman also thinking about the issue.

This is a basic problem with ITB and Hopi Sen's lot, there's a lot of assumptions about why things are the way they are but not a lot of evidence. Leaping to the solution without understanding the problem seems destined to end in tears.

2) Fatalism is attractive and certainly there are many problems, but I find the fact that no-one can even identify a path to a better future using current economic thinking pretty telling. As a child of Thatcher's North, I can totally accept a narrative that says "well we trashed our industries and it takes time to get that back" or "until we build the green energy capacity we can't grow sustainably" - but it seems to me that ITB simply accept the Tory position of "managed decline."

This is getting rambling, but let me try to be pithier: They say "we can't afford it" (being schools, NHS, etc.) and I say "so what could we do to afford it?" And there's largely silence. There's generic muttering about "international competition" but there's no meaningful plan there - neither for indigenous energy production nor for general import substitution. It's bromides (and turtles) all the way down it seems.

Ralph Musgrave said...


The debt and deficit are total, complete, 100%, complete and absolute non-problems. Advocates of Modern Monetary Theory, of which I am one, are agreed on that. I.e. the only constraint on spending is inflation. Keynes said as much.

For my take on the above point, see:
But if you want the same message from other MMT bloggers, see e.g.: