My recent post on this was in one way generous to some Labour party figures. It assumed that they knew that George Osborne’s ‘going for surplus’ was a bad policy, but felt they had to follow it to regain credibility in handling the nation’s finances.
However there is an alternative and more straightforward explanation for Labour politicians proposing to follow Osborne’s policy, and that is that they do not know it is a bad policy. Some evidence for the second explanation is provided by this recent speech by Tristram Hunt. He is not trying to resurrect Blairism, as he agrees with Miliband that tackling inequality has to be at the core of Labour’s mission. But on fiscal policy it is hopeless. Here is one particular excerpt:
“the economy is growing and the deficit stands at around five per cent. Even John Maynard Keynes would be arguing for retrenchment in this context.”
The idea that because the economy is growing we should be having fiscal retrenchment makes the schoolboy error of confusing levels and rates of change, and this is certainly not an error that Keynes would have made. In the 1920s and 1930s, when UK unemployment was never below 6% and often much higher, UK growth was often positive and sometimes strong - was that a good time for fiscal retrenchment? Tristram Hunt was originally a lecturer in modern British history, so maybe is unaware of this letter from Keynes to Roosevelt after the disastrous US return to austerity following strong growth in 1937.
Putting Keynesian issues to one side, Tristram Hunt repeats the idea that fiscal retrenchment is sensible because of the amount that the government pays in debt interest. Paying debt interest may be costly because of the distortions created by the taxes needed to pay it (or the missed opportunities for public spending), but taxes also have to rise (or spending to fall) to reduce debt. As I discussed here, a recent paper from the IMF makes it clear that this is not a good argument for austerity.
All of which raises an intriguing question. Where is this nonsense economics coming from? Tristram Hunt makes many of the same mistakes as Chuka Umunna made in a speech I also criticised – is that coincidence? I cannot believe that any academic economist, whatever their views on fiscal rules, would make errors as obvious as these. Are they simply parroting stuff that comes from the Conservative Party, which is repeated in much of the press? Does it come from some City economist? If anyone knows, please tell me (confidentially by email if necessary).