Don Paskini asks what Labour’s economic policy should be. Given that the party isn’t going to be in power until at least 2015, I’m not sure it needs detailed proposals at this stage. Instead, it needs some general principles. Here are some:
1. Distinguish between two ideas: “cuts in government spending will weaken the economy, relative to what would otherwise be the case” vs. “Cuts will plunge the economy into recession.” The first is very plausible - Duncan is entirely right to cite Kalecki - but the second is less so: it’s possible that the economy’s baseline growth would have been sufficiently high that it can withstand tighter fiscal policy.
It would, to paraphrase Alan Budd, be mad to stake one’s reputation upon an economic forecast.
2. It is an accounting fact that reducing government borrowing requires that the private sector’s financial surplus falls. This in turn requires that the banking system be fixed, so people can borrow more easily. David Miliband was therefore right to stress the need for reforming the financial system - but he should have been more explicit that this must be a centrepiece of cutting the deficit.
3. The binding constraint on government borrowing is not the markets but inflation: the deficit can, in theory, be monetized. This doesn’t mean it should be fully monetized, as inflation might then bite. But it does mean we shouldn’t kowtow to the capricious gods of the market.
4. For now, neither the markets nor inflation require immediate cuts in the deficit. The government therefore has time to think about a sensible reduction plan, and to canvass ideas from people who are not mentally ill. This is all the more true because, as Don says, some “cuts” can turn out to be counter-productive. To the question: “what would you do about the deficit?”, Labour should answer: “We’ll think about it properly, which would be an improvement.”
5. The idea that top-down government can identify efficiency savings has already been discredited. Osborne’s first round of cuts - which should have been the low-hanging fruit of pure efficiency gains - included cuts of genuine services, such as university places. You can only achieve significant true efficiency gains by empowering workers, because it is only the boots on the ground who know where money is truly wasted. Such empowerment has the added virtue that it is the only way to avoid spending cuts becoming class war within the public sector.
6. There’s more room for tax rises than generally realized. As Martin Wolf points out, land tax has much to be said for it.
7. Macroeconomic policy on its own cannot achieve full employment (though it can prevent it!). Perhaps even - to cite Kalecki again - sustained full employment is impossible under capitalism. We shouldn’t, then, invest too much in macro policy.
Note for pedantic right-wingers; by cuts, I mean less government spending than would otherwise have been the case.
1. Distinguish between two ideas: “cuts in government spending will weaken the economy, relative to what would otherwise be the case” vs. “Cuts will plunge the economy into recession.” The first is very plausible - Duncan is entirely right to cite Kalecki - but the second is less so: it’s possible that the economy’s baseline growth would have been sufficiently high that it can withstand tighter fiscal policy.
It would, to paraphrase Alan Budd, be mad to stake one’s reputation upon an economic forecast.
2. It is an accounting fact that reducing government borrowing requires that the private sector’s financial surplus falls. This in turn requires that the banking system be fixed, so people can borrow more easily. David Miliband was therefore right to stress the need for reforming the financial system - but he should have been more explicit that this must be a centrepiece of cutting the deficit.
3. The binding constraint on government borrowing is not the markets but inflation: the deficit can, in theory, be monetized. This doesn’t mean it should be fully monetized, as inflation might then bite. But it does mean we shouldn’t kowtow to the capricious gods of the market.
4. For now, neither the markets nor inflation require immediate cuts in the deficit. The government therefore has time to think about a sensible reduction plan, and to canvass ideas from people who are not mentally ill. This is all the more true because, as Don says, some “cuts” can turn out to be counter-productive. To the question: “what would you do about the deficit?”, Labour should answer: “We’ll think about it properly, which would be an improvement.”
5. The idea that top-down government can identify efficiency savings has already been discredited. Osborne’s first round of cuts - which should have been the low-hanging fruit of pure efficiency gains - included cuts of genuine services, such as university places. You can only achieve significant true efficiency gains by empowering workers, because it is only the boots on the ground who know where money is truly wasted. Such empowerment has the added virtue that it is the only way to avoid spending cuts becoming class war within the public sector.
6. There’s more room for tax rises than generally realized. As Martin Wolf points out, land tax has much to be said for it.
7. Macroeconomic policy on its own cannot achieve full employment (though it can prevent it!). Perhaps even - to cite Kalecki again - sustained full employment is impossible under capitalism. We shouldn’t, then, invest too much in macro policy.
Note for pedantic right-wingers; by cuts, I mean less government spending than would otherwise have been the case.
So lets get this straight - 'cuts' means less spending that has been planned for the future, but not not less than what is being spent now?
Incidentally I did plan to spend 10% more on wine, women and song next year, but now I'm going to only increase my spending by 5%. I hope this savage round of cuts will get the approval of the pedantic right wingers.
Posted by: Jim | July 31, 2010 at 12:59 PM
"This in turn requires that the banking system be fixed, so people can borrow more easily."
Who do you think has been finding it too difficult to borrow? Small businesses perhaps? What data would tell us whether barriers to credit have been too high?
Posted by: Luis Enrique | August 01, 2010 at 09:48 PM
Most large public companies have resourced ample funds through rights issues during the past two years or so. By so doing their borrowing needs are either eliminated or hugely moderated.
It's a different matter for small businesses but surely banks need to evaluate the risks of default even more strictly in the current climate. A failing business will mostly look for monetary sustenance until lack of profitability overwhelms. In present circumstances lenders need sensibly to be wary by ensuring their wanted returns take reasonable account of potential risks.
As to banks generally, I'd like to see their business models embedded in "prudence" (now there is a much abused word - more brownish than black or white). Good banking is the bedrock of our society, or should be.
I do like the clarity of your explanation of the economic "politics" in 1) above. I've been struggling with that for some time.
Posted by: Cliff Tolputt | August 02, 2010 at 01:06 PM
We need to get away from the perception that it's just Labour who b*gg*r*d it up. What they did was to transfer some of the appalling 1980s/90s growth in personal debt, to the public sector. Both major parties have made our economy debt-dependent and house-price-oriented (see my post today) and like a cat, I can't see a way back down out of the tree without falling out of it. I'd love to be able to prove that the bankers and politicians knew exactly what they were doing over the past 30 years, but even if they did the evidence will have been shredded, I expect.
Posted by: Sackerson | August 03, 2010 at 04:18 PM