Duncan’s Economic Blog

Growth Plans

Posted in Uncategorized by duncanseconomicblog on July 22, 2010

I have a niggling worry about much of Labour’s current talk on the deficit. Whilst all the leadership contenders, and the Party at large, seem to agree that the coalition is cutting the deficit too fast and thereby risking the recovery, there is little agree (currently) on what Labour would propose instead. Debate is polarised between those who believe we should stick to the fiscal plans of the last government and a pledge to “halve the deficit in four years” and those who think any timetable risks constraining fiscal policy in an uncertain world.

There is of course a political element to this debate – many, see for example Hopi, argue that without a credible plan Labour will not be taken seriously by the electorate. As I’ve said before, I’m not in favour of a strict timetable – I’d prefer a more flexible plan to cut the deficit centered on growth, a greater share of taxation and more gradual cuts, as the private sector strengthens.

But my real worry is this – what if we are all actually right on the economy and Labour win in 2015. What sort of economy would Labour inherit? I’ve made my rough predictions of what the coalition’s plans will achieve by 2015, after 5 years of tepid growth unemployment will still be high – around the 8-10% mark, the economy will have suffered from a five year investment drought damaging its long run growth potential and crucially the deficit will still be in the region of 3-5% of GDP and debt levels would still be rising.

Would a Labour Party that has committed itself to tackling the deficit be forced to look at the situation afresh? Clearly there would be case for more government action, especially after the failure of the coalition’s cuts to either solve the problem of the deficit or to get the economy moving again. Surely it would be better to maintain a flexible position of “we’ll cut the deficit as the economy grows” than to have adopted a slogan of “halving the deficit in four years” and then be forced to drop that?

I’d like to suggest that Labour moves the economic debate of the deficit, clearly appears very hard in the short term but as the cuts bite and unemployment remains high it will become easier.

To get this started I’d like to hear the leadership contenders outlining their strategies for growth, their ideas to get investment flowing in the economy again and their notions of how to create jobs. I’d be much happier if Labour spent the next five years articulating their growth plans and vision of the economy then if we spent the next five years haggling over which departments should face the axe.

12 Responses

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  1. Will M said, on July 22, 2010 at 2:26 pm

    I think there are two problems that Labour face on this front.

    The first is working out what Labour want to do.

    The second is working out how to communicate it. One of Labour’s key problems in the run-up to the GE this year (and one where I think Brown was right, if badly expressed, in his position) is how to communicate simply to the electorate why the economy needs deficit spending. It is highly counter-intuitive for most voters, and (worryingly) many people who ought to know better.

    I wonder, given electoral considerations, whether the first problem is actually the more important.

    • duncanseconomicblog said, on July 22, 2010 at 2:32 pm

      Notice how the Tories economic attack on Labour from late 2008 onwards has focused almost entirely on the deficit/debt – you gave us the largest deficit ever, you’ve ran out of money, you’ve doubled the nation debt? With only the odd passing mention of “the deepest recession” since the 1930s.

      Why was this?

      I think it’s because Labour did very well at shielding people from the recession – unemployment at half the level of the 1990s recession, repossessions half the level of the 90s, company insolvencies at a third of the rate, etc.

      If the coalition policies play out as I expect – unemployment higher, repossessions higher, insolvencies higher – then this will be the economic attack of the opposition. The deficit is a complex issue, and not that’s really featured as such in UK politics before, it’s an abstract issue – we need to get onto real issues – like jobs.

      I actually don’t think the communications of this, by say mid 2011, will be that difficult.

      • Agog said, on July 22, 2010 at 3:45 pm

        People understand that sensible investment pays for itself over time. Everyone understands that money spent on home improvements can more than pay for itself. We all know that educating our kids well is likely to give them a better future. And most people will agree that if everyone’s kids are educated well, then society as a whole will be better off, surely.

        And anyone with a mortgage can see that a 10 year fixed-rate loan at less than 3.5% is good value (current yield on 10yr gilts).

        But it will be important to focus all the time on shifting the emphasis onto productive investment, and using the tax system to penalise (relatively) less productive uses of money. Principally the FIRE economy. I don’t care if there are votes in that or not. It needs to be done.

  2. donpaskini said, on July 22, 2010 at 3:02 pm

    One problem is that Labour is split on economic policy.

    Three strands:

    1. The Hopi/McFadden/Blairite one, which seeks to boost investment while halving the deficit by holding down spending on public services, public sector pensions and welfare benefits, an approach which is arguably inspired by the Chinese Communist Party.

    2. Gordon Brown/Ed Balls one of reducing spending more slowly, in line with existing priorities, aiming to stabilise the debt at c. 90% of GDP rather than 70%.

    3. The left, who want to cut defence spending and a bit of corporate welfare, maintain or expand other areas of public spending, and raise income tax, corporation tax, capital gains tax, council tax, and introduce a graduate tax and a mansion tax, while creating jobs through a Green New Deal.

    There are probably some areas of overlap or consensus, but I think we need to have a proper discussion about this, rather than just electing a leader and letting them decide policy on their own.

    • duncanseconomicblog said, on July 22, 2010 at 3:17 pm

      Don,

      I agree there’s a debate to be had here, which is why I’d like the contenders to start actually having it.

      I actually think all three strands you identify want to increase investment, there’s just a debate about how to do it, there’s also an agreement that the Tories are cutting too fast and broad agreement we need a more active industrial policy.

      I’d put myself with the left on this one. More stimulus now, but better targeted stimulus – not just attempts to boost consumption (VAT cuts and cash-for-clunkers) but more infrastructure investment, in the medium term more of the share of deficit reduction to come from progressive taxation and, yes, cuts in defence spending.

      I’d add to that – a proper reform of the financial system, so that savings are channeled into productive investment rather than property or financial speculation and a proper industrial policy based on creating high tech, high wage export sector jobs.

      • donpaskini said, on July 22, 2010 at 3:49 pm

        One interesting piece of policy work would be to have a go at answering the question of what set of policies would be needed to create full employment.

        It intuitively makes sense that the way to get ourselves out of this economic mess is about making sure that everyone who can work does so (whereas arguing for deficit spending is non intuitive). The Coalition can explain why their policies of mass unemployment are the best way to reduce the deficit, and we’ll say that we think the best way to reduce the deficit is to make sure that everyone has a job and does their bit, and here is our plan about how to do so.

        • duncanseconomicblog said, on July 22, 2010 at 3:57 pm

          To quote Keynes:

          ‘Look after unemployment and the budget will look after itself.’

          • Jim Baird said, on July 22, 2010 at 4:19 pm

            Duncan –

            Precisely! What none of these people seem to understand is that the deficit is mainly endogenous – the private sector wants to build net savings, and the only place that can come from is government deficit (or trade surplus, but that probably isn’t in the cards for the UK any time soon) The deficit will grow until those savings desires are satisified, and all austerity will do is cause firthur contraction in the economy as people furthur titghten their belts in search of less-available savings.

            Jim Baird
            moslereconomics.com

          • duncanseconomicblog said, on July 22, 2010 at 6:07 pm

            Don,

            This is really worth a read:

            http://www.huffingtonpost.com/james-k-galbraith/statement-on-evanss-stimu_b_654510.html

            Letter from Galbraith, Skidelsky and Davidson:

            On the contrary: If unemployment can be cured, the deficits we presently face will necessarily shrink This is the universal experience of rapid economic growth: tax revenues rise, public welfare spending falls, and the budget moves toward balance. There is indeed no other experience in modern peacetime American history, most recently in the late 1990s when the budget went into surplus as full employment was reached.

  3. paulinlancs said, on July 22, 2010 at 9:38 pm

    I agree completely that Labour needs to work out what it’s policy is between the three strands (though I’d probably add a fourth) and that a good way forward would be to work out what is needed for full employment. Indeed I was saying the same today in response to Hopi’s ‘we must be credible with our cuts package’ mantra today at Labour Uncut. This doesn’t make us look credible, in my view; it simply makes us look weak. Instead of being seen as deficit doves, we’ll be seen as would-be deficit hawks who are no good at the job.

    Sadly, the Labour leader candidates simply do not appear to want to /or be capable of engaging with the more radical options being increasingly put forward by Skidelski, Davidson, Galbraith, Mitchell, Mosler etc., and assess whether that can be sold as a radical new politicial economy that distinguishes Labour from both the Tories AND Tory-lite New Labour. I’ve asked them all the same question, covering the stuff above, in an email and none have answered. I did manage to get a response from David Miliband when I posted the same Q as part of the corwdsourced Q&A at Labour Uncut, but frankly his answer suggested he didn’t really understand the issues properly.

    I’ve just had an approach from Prof Bill Mitchell, a Galbraith/Davidson/Skideski ally about coming over the Uk in September to try to talk some MMT/post-Keynesian sense into some of the candidates (about which I’ll blog at my place) as well as doing a workshop or two, but I’m not sure the doors will be opened by the candidates’ minders. I’ll keep trying

  4. James Doran said, on July 23, 2010 at 1:34 am

    Now, I get the whole growth argument. But here’s what worries me – the ability for the UK economy to grow is being hit by the coalition cuts, but even without cuts there would be the problem of increasing private investment. From what I understand, it is quite difficult to decouple economic growth from increased use of finite (that is to say, non-renewable) resources.

    So, perhaps a problem that a Labour government reaching office in 2015 or sooner would encounter is the difficulty of increasing levels of private investment when costs associated with economic activity are increasing?

  5. […] better off going over to Duncan’s Economic Blog, especially has he has promised us (me?) his sceptical thoughts on MMT over there, and to blogs […]


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