Labour's fiscal debate

The debate about what Labour's fiscal policy should be seems to be hotting up. In this, a large part of me sides with Hopi's fiscal conservatism.

You might object that such conservatism - insofar as it is directed at reducing the deficit - is dishonest. Basic national accounts arithmetic tells us that government borrowing will fall if and only if private sector net lending falls. This means that the only genuine deficit reduction policies are those which stimulate private sector investment and/or reduce their savings. Whilst some of Hopi's proposals (an industrial bank?) might do this, it's not clear that, taken together, they would all greatly do so.

But there's a place for dishonesty in politics. If the next election campaign is anything like its predecessors, every footling Labour policy proposal will be met with the question: "where will the money come from?" Whilst Keynesians have an intelligent answer to this, fiscal conservatives have a simple one, understandable by even the densest journalist. When you're faced with a mad dog, you don't reason with it, but throw it a bone.

However, fiscal conservatism doesn't just have low campaigning merits. There's another case for it, even if we leave aside the arguable possibility that intelligent cuts in government consumption might promote long-run growth. I'm thinking here of its impact upon tax morale.If people believe tax-payers' money is being wasted, they'll be loath to pay tax and so anti-statist ideology will grow. If, however, they see a state that's careful about spending, hostility to higher taxes will diminish, at least a little. In this sense, short-term fiscal conservatism might create social norms more supportive of social democracy.Perhaps, then, Hopi is more right that he realizes when he says:

Holding down spending in the public sector...[is] the only way to build an economy that could support a superb public sector in many years to come.

On the other hand, I have three quibbles with him.

First, I'm not sure whether more years of a squeeze on public sector pay are feasible. The problem here isn't just a "pay peanuts, get monkeys" one, but of gift exchange. Squeezing pay risks eroding the goodwill that has caused public sector workers to do thousands of hours of unpaid work, thus eroding the efficiency of public services.

Secondly, if I read him aright, Hopi wants a shift from public consumption to public investment. Over time, this would tend to increase macroeconomic volatility pretty much arithmetically, by shrinking the size of an automatic stabilizer. Yes, fluctuations in public investment can in theory stabilize growth - but only if governments see recessions coming and so raise investment accordingly, and governments don't have this foresight and aren't going to get it.

Thirdly, and most importantly, unless there's an economic miracle, Labour will enter the next election with mass unemployment. Shifting spending from low- to high-multiplier areas will be nothing like sufficient to tackle this. The challenge for fiscal conservatives, then, is how to combine fiscal austerity with job creation?      

Comments

[Luis Enrique]

the notion of "fiscal realist" could be divided in to two parts

A: somebody who is realistic about the (expected) long-run position of public finances

B: somebody who has realistic views about what fiscal policy (i.e. cutting public spending during a recession means) for A

Osbourne might be A but he's out to lunch on B. Some left wingers are vice versa.

[how to create jobs whilst looking after A and B - helicopter money!]

[Luis Enrique]

sorry, confusing typo, should be "... a recession) means for A. " above

[Rob]

"The challenge for fiscal conservatives, then, is how to combine fiscal austerity with job creation?"

Cameron always used to say that he's a "fiscal conservative and monetary activist". I suppose we'll see how activist he and Osborne really are once their man starts as BoE governor.

[Andy Cooke]

"Basic national accounts arithmetic tells us that government borrowing will fall if and only if private sector net lending falls. This means that the only genuine deficit reduction policies are those which stimulate private sector investment and/or reduce their savings."

Why is it that way around, rather than: "Private sector net lending will fall if and only if government borrowing falls?

[aragon]

I thought you were persuaded of the 'not for turning' (Anthony Painters term aka MMT) Chris.

There is no debate Ed Balls is shadow chancellor and will be followed lemming like, off the fiscal cliff. Ed Milliband is just a passenger, who likes to appease all factions. Though cowards flinch (paulinlancs) is right.

If in power I would implement 'not for turning' polices.

'not for turning' has a credible argument and tragectory that could be explained to the public.

I could even make a pitch for radical policies that even a Austrian (school of economics) or fiscal conservative would accept as vaild, before they have a heart attack at the implications.

Fiscal conservatives are small minded bean counters, forget jam tomorrow. We have already waited thirty years and the bankers still have all the jam. And the economy is disfunctional and circling the drain.

Rob: monetary actavism means helping finance further loot society and the real economy.

The Labour party have said that they won't listen to me on economics. But they know which stone I am hiding under when reality of the two Ed's failure dawns in 2017, or maybe not!

[chris]

@ Andy - I suspect the causality runs from private to gove financial balances for two reasons:
1. There are exogenous factors raising the private sector's net saving, such as the long-standing dearth of investment opportunities, the recession depressing capex further, and the desire to deleverage/accumulate savings.
2. A key mechanism through which govt borrowing is alleged to raise private net saving is that it raises interest rates. But we know this mechanism is not operating now.
@ All - yes, fiscal conservatism can be combined with monetary activism. But if so, the conservatives (in both parties!) should change the inflation target to encourage such activism. That said, there are limits to how helpful this would be, insofar as monetary policy loses traction at the zero bound.

[Ralph Musgrave]

That paper “In the Black Labour” reeks of something that Bill Mitchell (Australian economics Prof.) keeps harping on about (and quite rightly): it’s the sheer economic illiteracy of the political left worldwide. The political left is incapable of doing anything more than ape the neo-liberal and daft economic policies of the political right.

Bill has made this point a hundred times. This is just the latest instance of his making it:

http://bilbo.economicoutlook.net/blog/?p=22762

Secondly, I’m baffled by the first two sentences in the 2nd paragraph of Chris’s above post. Any chance of expanding on what is meant there?

[Ralph Musgrave]

Sorry: I meant 2nd and 3rd sentences.

[Andrew]

Wow - Another Andy makes exactly the point I was just going to type!

Chris - how can you possibly blame things like the private sector's net saving on "exogenous factors"? The idea of a debt-bubble collapse being exogenous is hilarious.

Conversely, if you go ahead and do that, how can you not also blame the public sector's net borrowing on those same "exogenous factors"?

In other words your answer does nothing to break the symmetry and establish whether the "prime mover" is the private or public sector.

A similar silliness arises when Labour types point out that public deficits were small in the run up to the crash - it was all the private sectors fault for massive debt expansion. As if the government income making the books look good wasn't flowing precisely from that same private sector debt expansion!

[Andrew]

Keynes' ideas about the paradox of thrift and demand deficits are incredibly superficial analyses. His fundamental incompetence to the task is made clear with his half-serious model of burying newly printed money down abandoned mine shafts as a stimulative measure.

He "reasoned" that a new industry would spring up to recover the money (it would) and this would result in a sustained increase in wealth (it wouldn't, it would obviously just destroy resources in an enterprise of net negative value to society.) As far as I can see, he didn't even attempt to address this criticism and was labouring under the illusion that economic movement equalled wealth production.

Similarly today, it matters not whether the public or private sector "moves". What matters is whether either sector *does anything of lasting value*.

Just because wealth buidling economies have high activity, doesn't entail that increasing activity builds wealth.

[Keith]

This is why economics was called the dismal Science in the nineteenth Century. Orthodox politics and economics has only reactionary debates and arguments!

The real debate should off course be about Democratic control of Capital and Finance. It is the abandonment of any attempt to control finance and the cowboy wild west resulting which produced the Financial crisis. Keynes is perfectly aware of this and it is the centre of his argument. Fiscal deficits are merely a response to the crash; regulating Finance is the long term method to stabilise Demand. Political "debate" in and outside the Labour party is carried on while ignoring the role of unregulated finance and capital movements in producing boom and bust.

What Andrew is saying is unclear to me but he has not read any Keynes it would seem to me. Both public and private sector may be inefficient and unable to contribute to wealth creation but that merely means one needs well designed public and private sector institutions. It has no direct connection to the issue of the Fiscal balance.

As for the idea that it is ok to lie to the voters about economics or other issues I am not so sure. Unless you educate the public by debate about real issues and choices I cannot see how you can achieve social progress. That is what the aim should be not to make the leader of the Labour Party look boringly conventional so he can avoid the Tory attack dogs. The Hopi New Labour trick has been tried and it just makes politics more right wing. If there is no alternative to neoliberal economics there is no point to the Labour Party or movement.

[the link]

thanks for sharing