Winner of the New Statesman SPERI Prize in Political Economy 2016

Sunday, 14 June 2015

Labour’s growing macroeconomic illiteracy

I’ve devoted many blogs to criticising George Osborne’s macroeconomics, so for the sake of variety this post turns to a senior member of the current Labour party. Chuka Umunna is Labour’s spokesman on business, innovation and skills, and in this article for The Independent he discusses what Labour did wrong on the economy. Here is just one paragraph.
“In 2007, before the crisis hit, the UK government was running a deficit. By historical standards, it was small and uncontroversial – it averaged 1.3 per cent from 1997 to 2007, compared with 3.2 per cent beforehand under 18 years of Tory rule. And yet to be running a deficit in 2007, after 15 years of economic growth, was still a mistake. My party’s failure to acknowledge that mistake compromised our ability to rebuild trust in 2010 and in 2015. If a government can’t run a surplus in the 15th year of an economic expansion, when can it run one?”
The first two sentences say that Labour was actually more fiscally conservative than the Conservatives, and that the deficit in 2007 was small. No problem with that, although to imply that the small deficit in 2007 was uncontroversial is not right: many suggested at the time that it should have been smaller, with good reason. The next sentence and the last say that it would have been even better to have run a surplus, because the economy had been growing for 15 years. To which a macroeconomist can only respond - what?

Of course economies normally grow, in real and nominal terms. That means that if you want to keep the ratio of government debt to GDP stable (Labour’s target for this ratio was effectively 40%), you need to run budget deficits, not surpluses. A surplus, or even a balanced budget, will gradually reduce the debt to GDP ratio, because debt will not be growing but GDP will be.

What Umunna is saying here is much the same as George Osborne’s proposed rule: in normal times when the economy is growing run surpluses. But Osborne is saying that in the context of the current debt to GDP ratio of 80% of GDP. Umunna is implying that policy still made sense back in 2007 when the debt to GDP ratio was below 40%, the output gap was thought to be small and no one was expecting a global financial crisis. I cannot remember anyone before 2008 suggesting Labour's debt limit should fall over time. Yet Umunna says the mistake was so serious it helped lose Labour two elections.

I would love to know who the economists are that gave Umunna the advice that led to this article. Certainly not any of the 79 that signed this letter, or advice from the Economist or FT. You would think that the advice would have to be pretty convincing, given how this line plays into the Conservative narrative about how Labour profligacy was the cause of 2010 austerity, and that therefore it is Labour rather than Osborne and Cameron who are responsible for the slowest UK recovery from recession since almost forever.

If you think I’m being too hard, perhaps over-interpreting a couple of sentences, here is another extract:
“reducing the deficit is a progressive endeavour – we seek to balance the books because it is the right thing to do. We will not stand by while the state spends more paying interest every year to City speculators and investors holding government debt, than we do on people’s housing, skills or transport. It will be far too late to leave this to the 2020 general election campaign.”
Would he give the same advice to UK businesses: refrain from borrowing and focus on paying back your debt? Somehow I think not. The Conservatives have a kind of excuse for deficit fetishism - it is a useful device for shrinking the state. That excuse should not apply to senior Labour figures.


26 comments:

  1. This revised Labour "narrative" seems to be a response to the idea that Labour will win more votes if it owns up to past "profligacy", so although the economics is questionable, as a political tactic it is understandable. However, it is a bit of a rubbish tactic because it implies Labour will have to impose voter-unfriendly tax rises if it wants to achieve its social goals.

    Surely it would be better to get some sort of expert endorsement of past and future Labour fiscal strategy, possibly with more delegation to non-political technocrats along the lines you have suggested already.

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  2. Blairism, the idea of holding to the visible hand narratives of Big Business and Murdoch's Sun, is reappearing in parts of the the Labour Party as though the 2008 banking crisis did not happen.

    I would have thought Liam Byrne's asinine letter that the government had 'run out of money', left in the Treasury in 2010 and waved by Cameron during the 2015 election, should have done for Blairism on the economic front as much as the Iraq war did for it on foreign affairs.

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  3. Philip Gould's mantra in the 1990s was "concede and move on", and it seems clear that many in the Labour party now want to "concede and move on" over the issue of Labour's pre-2008 spending. But this is extremely dangerous. If they concede large parts of a narrative that portrays them as having been fiscally profligate the last time they were in office, they will never win the trust of voters for whom perceived 'economic competence' is the paramount consideration.

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  4. Give up, Professor Wren-Lewis - your macroeconomics doesn't fit Labour, it doesn't fit the Tories and it doesn't fit common sense.

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    Replies
    1. Anon, could you expand on your point? Do you believe the government has to "pay off" its debt?

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    2. You provide some compelling evidence for that assertion.

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    3. For it to make any sense and for accuracy, you might want to rephrase your desperate comment to something like:
      'Labour and Conservative views/policies don't fit macroeconomics'.
      As for the final part, who's "common sense" doesn't it fit? Yours?

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    4. Something is terribly wrong. Everyone talks like Schäuble. Have they no self-respect? No-one fits macroeconomics any more except some other macroeconomists or possibly Tsipras and Varoufakis - they are our last hope.

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    5. Random14 June 2015 at 13:08
      Simon14 June 2015 at 13:29

      Helicopter Money is common sense?

      Delete
    6. Anon, the govt spends first, this generates tax and then borrows back the savings.
      When people say things like "money dilutes" they are looking in the right direction - stop thinking about money and start thinking about real resources.
      I disagree with "Helicopter Money" as it is undemocratic.

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    7. http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx
      I suggest you see the Bank of England if you are worried "printing money" will lead to inflation via the "money multiplier."

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    8. http://www.3spoken.co.uk/2011/01/how-governments-super-platinum-credit.html?m=1

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    9. Anon is correct in one sense, Tory/Labour economic policies and 'common sense' are now heavily indebted to mediamacro, which offers a seemingly intuitive understanding of the problem. Any objections from economists are met by a set of standard objections.

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    10. Quantum theory and General relativity don't fit common sense either. Hell, quantum theory barely fits uncommon sense.

      We should probably ditch those, I'm sure the man on the street can come up with something better.

      Plate tectonics? Give me a break, great lumps of rock getting up and walking around! Pah! I say. And whilst we are on the subject - let's get rid of this silly 'round earth' theory, if the earth were a ball then people would fall off the bottom. And it looks flat from where I'm sitting. Never believed in Australia anyway.

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    11. "Quantum theory and General relativity don't fit common sense either. "

      Thomas Sargent said economic theory is "organised common sense".

      Yeah right. Talk about wanting it both ways - both common sense and only understandable by our betters.

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    12. Anonymous: I think that clearly science and even economics is not common sense. So, there is not wanting it both way; Thomas Sargent is wrong.

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    13. Anonymous, at 07:08, if ever a person needed to read Plato's analogy of the cave, it's you, and then take sometime for serious reflection. Perhaps should you ever need a heart transplant you would be happy for the good old 'man of common sense' to advice on your diagnosis and to undertake the operation, rather than a cardiologist and heart surgeon. Also, I feel certain that when the Nationwide mortgage loan group are working out what rate to set their fix-interest rate products at they, do not undertake a straw poll of people passing up and down the street for data/advice, but rather a number of financial experts; or as you mistakenly call them 'our betters'.
      ShaunT

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    14. chris e15 June 2015 at 01:58

      When did mediamacro ever bother to mention helicopter money? For once, mediamacro appears to be innocent.

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    15. Any attempt to equate economics with science is a long, long way from the mark.
      Try comparing it with voodoo.
      That seems more appropriate.

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  5. The 'we spent a bit too much money on things you like' line is not to bad a place to work from. You can then say 'we will be a bit more careful next time, but still spend on nice things'.
    That is a lot better than 'we were utterly negligent in government, then we gave all your money to the incredibly rich incompetents who screwed it all up'.

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  7. I doubt it was economists, if anyone, who advised Ummunu on the content of the article in question. I have read, though, his office staff are supplied gratis by PWC, who I understand have as their clients many prominent in the financial sector.

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    Replies
    1. Indeed: http://www.newstatesman.com/politics/2015/02/labours-biggest-non-union-donation-pwc-firm-accused-promoting-tax-avoidance

      "As both Labour and PwC point out, the secondees are impartial."

      Actually in the context of potential accusations of interfering with tax policy. But really?

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  8. Personally, my reading of this little snippet:

    reducing the deficit is a progressive endeavour – we seek to balance the books because it is the right thing to do. We will not stand by while the state spends more paying interest every year to City speculators and investors holding government debt, than we do on people’s housing, skills or transport

    Is that it's a thorougly calculated attempt to appeal to both Labour party members and the mediamacro crowd, it's similar to a line I've heard put by Liz Kendall. It's essentially an attempt to frame a tight fiscal policy in a way that might also appeal to Labour party members.

    It is of course, terrible economics, but it's not as if that matters these days...

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    Replies
    1. One answer to false comparisons like that would be to say that spending, say, an extra million on housing would only incur debt interest of tens of thousands of pounds - so that would redress the balance.

      Delete

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