Labour’s Economic Policy Debate – Kalecki, Clinton, Dalton and David Miliband
Don Paskini has rightly asked for the five contenders to set out their economic policy proposals.
He has also identified what he sees as the four current strands of opinion in the Party:
1. The Blairite one set out by Pat McFadden. Continuing the economic policies set out by Alastair Darling and prioritising increased investment to increase economic growth while halving the deficit by cutting spending on public services, public sector pensions and welfare benefits by around £60 billion.
2. The Gordon Brown/Ed Balls strategy of maintaining higher levels of public spending on current priorities and reducing the deficit more slowly, aiming to stabilise levels of debt at c. 90% of GDP rather than 70%.
3. The leftie approach of massive cuts to targeted areas of spending such as defence and prisons, maintaining or expanding other areas of public spending, and raising income tax, corporation tax, capital gains tax, council tax, introducing new taxes such as a graduate tax and a mansion tax, while creating jobs through a Green New Deal.
4. Reject orthodox economics and the idea that the deficit is a problem entirely, and argue for an alternative based on an entirely new kind of political economy such as Modern Monetary Theory.
What is striking is that none of the five contenders are going for the first approach.
I think he’s correctly identified where Ed Balls fits into the spectrum and Dianne Abbott seems broadly to be arguing for the third approach (not to be confused with the Third Way). I haven’t seen much in the way from Andy Burnham and I’m not exactly sure where to place him in terms of economic policy (I saw the higher tax stuff, and would welcome pointers to anything more detailed).
Ed Miliband has made a few interesting speeches (this one in particular) and made some appealing noises in terms of the living wage, banking reform and the general balance between states and markets but he hasn’t yet fully fleshed out an alternative political economy (yet) to what came before. Currently I’d place him somewhere in between the second and third approaches as outlined by Don.
Speaking as someone broadly on the soft left of the Party (I’d have voted for Gould in 1992), this might sound unusual but…the most interesting and detailed economic policy development so far, has come from David Miliband.
But before discussing this, its worth pointing out why the Blairite argument described by Don and articulated by Pat McFadden is wrong. Now, focusing on increasing investment is certainly the right thing to do, the fall in investment has driven the current recession and it is the biggest threat to our long run growth. Ken Livingstone’s 17 page, detailed economic policy document provides a very clear statement to this effect.
The question becomes, how should we increase investment? My problem with the Blairite model, as argued by Pat McFadden, is that it is, in some regards, little different from the New Economic Model, proposed by George Osborne.
Both essentially can be boiled down to a programme of increasing private investment, increasing exports and cutting the deficit. The only two major differences are that McFadden would cut the deficit a bit slower and that whilst Osborne aims to increase private investment by cutting corporation tax and keeping interest rates low, McFadden argues that we should increase it by more government support (in the form of loans, targeted tax breaks and an active regional policy).
Both are wrong. As the best argument why they are wrong was made by Michal Kalecki in 1943. (All emphasis from me).
In current discussions of these problems there emerges time and again the conception of counteracting the slump by stimulating private investment. This may be done by lowering the rate of interest, by the reduction of income tax, [George Osborne’s way] or by subsidizing private investment directly in this or another form [Pat McFadden’s way]. That such a scheme should be attractive to business is not surprising. The entrepreneur remains the medium through which the intervention is conducted. If he does not feel confidence in the political situation, he will not be bribed into investment. And the intervention does not involve the government either in ‘playing with’ (public) investment or ‘wasting money’ on subsidizing consumption.
It may be shown, however, that the stimulation of private investment does not provide an adequate method for preventing mass unemployment. There are two alternatives to be considered here. (i) The rate of interest or income tax (or both) is reduced sharply in the slump and increased in the boom. In this case, both the period and the amplitude of the business cycle will be reduced, but employment not only in the slump but even in the boom may be far from full, i.e. the average unemployment may be considerable, although its fluctuations will be less marked. (ii) The rate of interest or income tax is reduced in a slump but not increased in the subsequent boom. In this case the boom will last longer, but it must end in a new slump: one reduction in the rate of interest or income tax does not, of course, eliminate the forces which cause cyclical fluctuations in a capitalist economy. In the new slump it will be necessary to reduce the rate of interest or income tax again and so on. Thus in the not too remote future, the rate of interest would have to be negative and income tax would have to be replaced by an income subsidy. The same would arise if it were attempted to maintain full employment by stimulating private investment: the rate of interest and income tax would have to be reduced continuously.
In addition to this fundamental weakness of combating unemployment by stimulating private investment, there is a practical difficulty. The reaction of the entrepreneurs to the measures described is uncertain. If the downswing is sharp, they may take a very pessimistic view of the future, and the reduction of the rate of interest or income tax may then for a long time have little or no effect upon investment, and thus upon the level of output and employment.
Thankfully this policy option, of relying on stimulating private investment though either tax or interest rate cuts or subsidy of one form or another is not being outlined by any leadership contender.
David Miliband, easily caricatured as the ‘Blairite’ contender, is different in two important regards.
First, in his recent FT article he put the creation of jobs, rather than halving the deficit, at the centre of his policy. He also made the case for increased public sector investment.
Instead, it should focus on the jobs deficit: the 2.5m people looking for work. Sweden made halving unemployment its priority during its 1990s fiscal consolidation. But Britain is repeating Japan’s response to its crisis: pulling stimulus too early, raising value added tax and relying too heavily on monetary policy – leading to unemployment and stagnation.
…deploy the public sector to invigorate local economies by maximising the multiplier effect of public services. Cutting Building Schools for the Future is not just bad for education, it will hit construction jobs.
Now, he still wants to halve the deficit, but he is making a case that the creation of jobs is the key purpose of economic policy and that public sector investment has a role to play. If this was David’s entire policy proposition, it would be tempting to describe as Clinton-esque circa 1992 – a focus on jobs and productivity as a means to cutting the deficit.
And people might ask, what is wrong with that?
Clinton, after all, not only won two elections, he also had a strong record on job creation (unemployment down from 6.9% to 4.0% and 22 million jobs created) and moved the budget to surplus.
However Clinton had two advantages the next Labour Prime Minister is unlikely to have – a very benign global economy for much of his term and the good fortune to rule in the decade after the fall of the Wall but before the fall of the Towers, when the peace dividend came into effect (defence spending was cut from near 30% of Federal expenditure in 1992 to closer to 20% by 2000).
What has moved David beyond a simple Clintonian agenda, was first mentioned in his Kier Hardie lecture last month (and, of course, ignored by a media more interested in a perceived attack on Gordon Brown).
In the last twenty years Labour has gone from the prawn cocktail offensive under John Smith to a love in with financial markets to an election campaign in which not a single business would support our tax policy. Our lack of distinction between the proceeds of financial capital, which was often concerned with its short term multiplication not its long term investment, and manufacturing capital, which was embedded in the real economy, led to a real lack in private sector growth throughout the country. A lack of innovation and initiative, a lack of partnerships and prosperity. We did not sufficiently recapitalise the regions. We did not intensify the redistribution of power. We saved the City of London but we did not reform it. (My emphasis)
A leadership contender talking about the distinction between financial and manufacturing capital and the need for financial reform, not just to prevent the next crisis but to help the economy grow, seizes my attention. It’s something I’ve banged on about for the past 18 months (for example here).
If David had left it at this, I’d have been tempted to dismiss this as an interesting aside but one with no real agenda behind it. Last week’s Durham speech from David though, fleshed this out in considerably more details – notably this section (my emphasis):
Before the crash, too much money was sucked into an inflated property market or dodgy financial products – or was siphoned off for bloated fees and bonuses. The short term, speculative gains offered by the City of London deprived areas like this of the capital they needed to grow.
We do need to reform the banks to prevent another financial crisis. But we also need to take this opportunity to reform the banking system to help rebuild and rebalance our economy in the years ahead.
We need to get money flowing to the people, the companies and the workers with the best ideas and the best strategies to seize the opportunities of the modern economy.
Over many decades, our European neighbours have had a much better record on productive investment. This has created a weight around the ankles of the British economy.
To crack this problem, the government’s Banking Commission needs to address the question of how the British banking sector should be reformed to ensure it serves its proper role in allocating capital to drive growth and jobs – not just seek the quickest, speculative gain.
One option I think it should consider is the case for establishing a British Investment Bank to facilitate investment for vital infrastructure, to support good small businesses and to accelerate our transition to a low carbon economy.
As an example, a bank along these lines – owned by the public but controlled by an independent, commercially-orientated board tasked with delivering long term returns – would be ideally placed to provide loans to companies like Sheffield Forgemasters.
So, here we have David Miliband – the ‘Blairite’ candidate – giving the most detailed proposals for financial reform and coupling it with rhetoric which places the “jobs deficit” over the “fiscal deficit”. And talking about the need for a publicly owned bank (!).
In some ways, he’s moved beyond Clinton in 1992 and more towards Dalton in 1944 (and yes, I’ve used this quote before):
‘Blame for unemployment lies more with finance than with industry. Mass unemployment is never the fault of the worker; often it is not the fault of the employers. All widespread trade depressions in modern times have financial causes; successive inflation and deflation, obstinate adherence to the gold standard, reckless speculation, and over investment in particular industries …
Finance must be the servant, and the intelligent servant, of the community and productive industry; not their stupid master.’ (Labour Party 1944)
I’m not sure how I’m going to vote yet. But I must say, and much to my surprise, the agenda catching my attention at the moment is his. I’d welcome similarly detailed proposal from the other four.