Internalizing constraints

Fans of that great 1970s TV series Colditz will remember an episode in which an inmate tries to feign madness in order to get repatriated to Britain, only to actually go mad. I was reminded of this by Ed Miliband's speech at the weekend.

It contains sins of comission and omission.

The sin of commission is the economically illiterate statement "You and I know we won’t have the money" and the very dubious "commitment to balancing the books in the next government".

I say this is dubious because it poses so many questions: why should it be fiscal policy more than monetary policy that tightens? What makes you so sure that we need extra tightening rather than just the operation of automatic stabilizers? Why should fiscal policy be time-dependent rather than state-dependent? What if growth slows markedly in the next parliament?

The sins of omission are that there are so many issues Miliband ducked, such as whether secular stagnation is a threat and if so what to do about it, and how he proposes to significantly reduce unemployment whilst tightening fiscal policy? And aside from a tokenistic promise to put workers onto remuneration committees, there was little interest in pursuing greater worker control or challenging managerialism. Yes, he's promising some income redistribution - but not, perhaps, very much.

There are, of course, good reasons why Miliband made these commissions and omissions. Leftist governments must work within tight constraints. These include the power of the rich which precludes a serious redistribution of wealth and power and the economic illiteracy of the media and voters who have swallowed half-witted guff about balancing the nation's books.

And this is where I was reminded of that Colditz episode. What worries me about Miliband is that he is not merely feigning madness in order to win votes but that he might have internalized the constraints upon him, and so he actually sincerely believes in tighter fiscal policy come what may and in only very gentle redistribution. As Nietzsche put it:

He who fights with monsters should be careful lest he thereby become a monster. And if thou gaze long into an abyss, the abyss will also gaze into thee. (Epigram 146)

My concern here isn't merely for Miliband's internal mental state - though I fear that he has internalized managerialist ideology. The problem is that when Labour leaders do internalize the contraints upon them they can end up missing the chances to make radical reforms on those rare occasions when the constraints fade. For example, in the late 90s Labour's massive majority and disarray of the Tories gave it a chance to pursue a genuine stakeholder (pdf) economy, which it fluffed. And in 2008-09 Brown missed the chance to place banks under democratic control.

The history of the Labour party, especially since the 1950s, has largely been one of disappointment to the left. The reasons for this aren't just structural, but also psychological.

Comments

[Ralph Musgrave]

You won't believe this, but Miliband has an MSc in economics. He's better qualified than Cameron, so ought to be able to say something more intelligent than Cameron on economics.

[Peter K.]

I'd say the same for Obama and Hollande.

Merkel and Germany have been doing better in someways with work-sharing programs during the downturn and their export-oriented economy. Although the overall tightness of their demand management (monetary, fiscal, trade) policy is hurting them in the EU in that a slumping periphery can't purchase as many exports as a growing periphery.

[shorebreeze]

After all this time Labour still thinks it has to apologize for the antics of their national executive and activists in the 1970s and 1980s, to present the image of a "credible" government. At least a sizable element of the Democrats in the US have gotten over that particular hangup, some even to the point of acknowledging the left has some important things to say about public policy, finance and economics. I'm beginning to wonder whether Labour will ever get there.

[aragon]

"the economic illiteracy of the media and voters who have swallowed half-witted guff about balancing the nation's books."

The two Ed's are true believers (not radicals). Been a half wit (regardless of the expensive education) appears to be an advantage in politics, as Osbourne and Cameron demonstrate. Just look at the IPPR report on winning the global race (total hogswash) which is predicated on continuing cuts.

The Labour party are a closed system who select people in their own image, hence all the Red Princes and Princesses, and spend most of their time aping the Tories (group think), with whom they share a worldview .

Apparently the principal opposition the proposal initiated by me, to progressively re-nationalise the railways as franchises expire comes from Ed Balls as Anti-Business! They did a deal rather than loose the vote in the policy forum.

I am, of course, excommunicated for heresy, when it comes to economic policy.

[Keith]

Assuming the voters are dim and talking in platitudes is undemocratic but is assumed to be clever.

It is the obligation of party leaders to educate the public in ideas. Soundbiteism deprives us all of any proper debate and there for choice at the ballot box.

[Jonathan Stiles]

The man that you referred to in Colditz, was, I believe, Flight Lieutenant Eric Foster. He did feign madness as you suggest and when repatriated had then to prove to the British Authorities that he wasn't in fact insane. Having known Eric Foster for some fifty years or so, I can assure you that he wasn't mad.

[Economic Illiterate]

Hi,

I am one of those who has swallowed half-witted guff about balancing the nation's books.

Can somebody please explain this to me how balancing the nation's books is guff? Genuine question, I am sure there is a very good answer.

Are you saying that the government can borrow or print money indefinitely without ever having to consider the consequences?

If so have you told all those poor developing nations out there? I am sure they would love to hear the news as they appear to be a bit short on spending power.

[aragon]

This might Business Insider article might help explain some of the issues.

""Now, you might ask, "What's the matter with a negative private sector balance?". We had that during the Clinton boom, and we had low inflation, decent growth and very low unemployment. The Goldilocks economy, as it was known. The great moderation."

http://www.businessinsider.com/how-bill-clintons-balanced-budget-destroyed-the-economy-2012-9

Hint: It ends in tears ...

"The bottom line is that the signature achievement of the Clinton years (the surplus) turns out to have been a deep negative."

Poor developing nations like China?
I think they know ...

[aragon]

Of course any similarities to the current UK economic policy of any party is left as an exercise for half-wits.

[Economic Illiterate]

Thanks Aragon, I will read that when I get a spare moment.

I was actually thinking more Nicaragua than China, I read a stat today that by 2015 the middle class of Asia Pacific will overtake Europe and North America combined so I don't really think of them as developing even if by some definition they are.

[Simon Reynolds]

@Economic Illiterate

I've tried to understand this too. I'm no economist (that may be obvious in what follows).

What balance are you talking about?

I don't know of course but I suspect that some people who argue for “balancing the nation's books” assume it is self-evidently a good thing for an economy. I also suspect they don't even think about sectoral balances.

Neil Wilson's helpful posts (each quarter for the UK) should at the very least make anyone question what “balancing the nation's books” means:

http://www.3spoken.co.uk/2014/06/uk-sectoral-balances-and-private-debt.html

If the UK government sector balanced its books, while the rest of the world is in surplus (which it is right now as UK imports are higher than exports), then the domestic private sector balance would be negative. Would that be good for the economy? Great link from Aragon above to an argument why it might not be.

Re: “borrow or print money indefinitely without ever having to consider the consequences?”

You don't have to agree with MMTers to at least think that that is not the only option: Why not “borrow or print money while considering the consequences.”

Another common (“half-wit”?) statement with the same tenor as the above – often made by those of the Osborne, Clegg, Alexander tendency – is: “Are you seriously suggesting borrowing more money...?” To which the answer is: “Yes”.

Read almost any of Simon Wren-Lewis's blog posts:

http://mainlymacro.blogspot.co.uk/

Or Brad de Long, who shows with some basic maths how – if interest rates are less than GDP growth (plus some factor) – then: “expansionary fiscal policy right now [March 2102] would be self-financing”...“No future tax increases are needed to amortize the extra debt, because economic growth does it on its own.”

I think that that means that borrowing now leads to lower debt later because of higher GDP growth.

http://delong.typepad.com/sdj/2012/03/delong-and-summers-fiscal-policy-in-a-depressed-economy-conference-draft.html

[Economic Illiterate]

Thanks Simon.

Am I correct in saying that your argument hinges on the assumption that the UK economy will continue to grow in the long term?

Is that a safe assumption?

[aragon]

The half-wits are the people in power who should or do know better, but find the household model of the economy electorally convenient, and pursue it to a greater or lesser extent when in power.

Brown and Osborne have given at least £400Bn to the banks and the rich and housing market as a stimulus while wages are eroded and the poor suffer benefits reductions.

The paradox of thrift, if everyone in the economy (National or World including the mercantilists) reduces spending, the aggregate demand collapses, repeat and you spiral downwards.

Increases in spending through borrowing and while interest rates are below inflation you are been paid to borrow money. But as interest rates rise (due to misallocation of resources) you encounter debt deflation, which triggers and exacerbates, the paradox of thrift (above) and you enter the downward spiral like Japan's lost decade.

Sweeping statement: Developing Countries are run by a kleptomaniac elite, supported by aid, on almost feudal lines, a model favoured by Mr Tony Blair?

[Simon Reynolds]

@Economic Illiterate

I have no idea if GDP growth will continue as per its historical trend.

The following link shows that GDP growth has been pretty steady post-war. The largest discrepancy from the long term trend (a compound 2.6% GDP growth pa) appears to be the period since the 2007 / 2008 financial crisis.

http://www.ons.gov.uk/ons/rel/elmr/explaining-economic-statistics/long-term-profile-of-gdp-in-the-uk/sty-long-term-profile-of-gdp.html

What is most worrying is that during this time Cameron, Osborne, Clegg and Alexander have been peddling the following lines:

o there is no more money
o we have to reduce the public deficit to zero, then aim for a surplus
o we are clearing up the mess Labour left us with
o the public sector debt is like a credit card debt that needs paying off
o the national economy is like that of a household

showing that economic policy makers either don't have a clue about macroeconomics, or more likely are making purely political statements with the aim of getting re-elected (that is, putting re-election ahead of what is best for the economy of the UK).

Either view is pretty depressing. And, as Chris's post here highlights, Miliband and Labour are parroting the same rubbish.

Aragon above puts it very well: “The half-wits are the people in power who should or do know better, but find the household model of the economy electorally convenient, and pursue it to a greater or lesser extent when in power.”

By the way, Duncan Weldon had a good post last year on how a public deficit is the norm, and is consistent with a falling public debt.

http://touchstoneblog.org.uk/2013/06/the-uks-government-debt-since-ww2/

[Economic Illiterate]

I am going to absorb all this information which I am grateful for but if you are in fact expecting indefinite GDP growth on the basis that that's what has happened for the last 65 years then please count me in with the half-wits.

[aragon]

It worked in the past:

Roosevelt's new deal, Marshal Plan, Keynesian economics.

https://en.wikipedia.org/wiki/Post%E2%80%93World_War_II_economic_expansion

"Golden Age of Capitalism, was a period of economic prosperity in the mid-20th century which occurred, following the end of World War II in 1945, and lasted until the early 1970s."

But then Thatcher, Regan, Monetarism/Neoliberalism happened.

And the rest is history.