Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday 17 July 2015

Labour and the deficit: a Tristram Hunt follow-up

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).


  1. I wouldn't worry about it.

    Hunt along with Umunna have backed Kendall for leader. Unless there is a major upset, she is going to come fourth. That means that their influence will be much diminished.

    Of course, if you are lucky, Corbyn will be elected leader, he is 4/1 at time of writing whilst Kendall is 12/1

    His anti-austerity programme ticks all your boxes, and so we should be able to have a real world test of your proposition that Labour can win by making the economic arguments that work in academic forums. He is your only hope.

    As for where the message is coming from, that should be obvious: polling and focus groups. Do you think Harriet Harman wants to cut social security as the Tories are doing, or that Labour would be doing anything like this if it had won? Or do you think that polling tells Harman that social security is a major problem for Labour's electoral prospects?

    Pesky old democracy, giving us results Philosopher Kings don't like. Yet again.

    1. Polling and focus groups are telling them that because they're reflecting what they're told by the media. No one tells them anything else. I mean: when times are hard, the government has to cut back it's spending and borrowing, just like everyone, doesn't it?

    2. Because you want to replay your usual record yet again, you are being far too unkind to Tristram Hunt. You assume he knows what he is saying (quoted above) is nonsense, but he is only doing so because it plays well with focus groups. I think it is fairly clear from his speech that he believes what he is saying.

    3. Hugo: you seem to think that the job of a politician is just to repeat whatever the polls say the public thinks, and that to do anything else is by definition undemocratic. You sound extremely anti-intellectual and also your point seems to be premised on the idea that it is impossible to shape public opinion, which is clearly wrong.

      Large swathes of the public (not just Simon Wren-Lewis and his Philosopher King buddies) hate austerity, and their views should be represented in the political debate. In this sense, if Jeremy Corbyn wins the Labour leadership it will be a victory for democracy as well.

    4. I think the job of a politician in a democracy is to win and thereby make a difference through the exercise of power.

      Most voters know the square root of nothing about economics. They'll form a view as to who is right and wrong from the performance of the economy at the relevant time. Hence why Labour lost in 2010, and the Tories won in 2015. Now, I know full well that that is a terrible guide, but for most of us it is perfectly rational not to spend further effort in forming a view.

      The daily background of the Greek bankruptcy makes far more impact on the general public's views on austerity than anything all the economists in Oxford will ever say.

      S W-L is a throwback to the romanticism of the early 80s. I am not a romantic at all. I think you can only shift politics your way by winning power, as Osborne is demonstrating. What you need to say in order to win, and what you can then do once you have are also two entirely different things, as Osborne is also demonstrating.

      Blaming the media, as S W-L always does, is like blaming the weather for the ground being wet.

      Wouldn't it be great if reality were completely different?

      Well, yeah. But that isn't very helpful.

      Vote Kendall.

    5. I accept that voters have little knowledge of economics. But it doesn't follow that we have to therefore embrace the Tory narrative. Greece is now a shining example of what a disaster austerity is -- they implemented huge amounts of it and their country is on the brink of collapse. Hey look, I just made an anti-austerity argument and no Oxford economists were involved!

      "I think you can only shift politics your way by winning power" What is your evidence for this? It implies that all political opposition is pointless. It's not obvious to me that this is correct.

      I don't get your attitude on the media either. We shouldn't criticise it as an institution because it is hard to change? Maybe no-one should be talking about climate change either, as solving that is also a near-insurmountable challenge.

      Your attitude strikes me as a kind of lazy fatalism presented as hard-headed realism. I'm glad not everyone thinks the way you do or political movements would not exist.

    6. ""I think you can only shift politics your way by winning power" What is your evidence for this."

      The history of the United Kingdom, 1979-2015.

      How did the consensus move during Thatcher's government? How did it move under Blair? How has it moved under Cameron?

      The media isn't an 'institution' in the way you suppose.

      Lots of unrealistic political movements exist: realism is no barrier to existence. Success is another matter.

    7. Have you considered that the media isn't an 'institution' in the way that YOU suppose? Reading over his comment, it looks like Sam's got your number, and has argues the point with a logical, coherent interpretation of what you clearly seem to be saying...whereas your reply appears to be written as a baseless, self-evident truth, with no actual addressing of the points raised.

    8. What about under Major? Under Brown? Or for an example abroad, George W Bush in his second term? Actually in the US right now things are so polarised it can hardly be said that there's a political consensus at all on many issues. Do you not think you are cherry-picking here to a degree?

      Your comment on the media completely ignores what I said. Again, are you saying we should ignore all problems that are hard to solve?

      I don't know what your last point is getting at either. I know some political movements do not succeed.

      What about my first para above? Greece is now a gift to anyone wanting to tell an anti-austerity narrative.

      It's not clear whether your objection is a) Torry economic narrative is too strong to be challenged, which is doubtful or b) the status quo is always too strong to be challenged because those in power set the agenda, which renders all political opposition pointless according to you, or c) anyone challenging the status quo is a "philosopher king" preaching to the masses from his ivory tower and should be condemned as undemocratic, which is anti-intellectual nonsense

    9. Ok, let us test this claim.

      I think mass media is delivered by a large and diffuse number of people operating through many different mediums. We have many newspapers, several television channels, radio stations and now the internet where a thousand flowers bloom.

      An institution, by sharp contrast, has an organisational structure. The BBC, the Church of England, FIFA and the ECB are all institutions. Because of their institutional structures, those at the top of them can exercise (some) control over them. We can then meaningfully criticise those who exercise this control.

      The media is no more an institution than, say, music is, If we were to moan that it would be better if the music played nowadays had more of a melody to it that would be pointless. There are no institutional structures controlling this.

      As Sam has 'got my number', perhaps you could explain why you think the media is an institution in any meaningful sense(without adopting an idiosyncratic definition of what an institution is)?

    10. Sam

      "What about under Major? Under Brown?"

      Both of them suffered from the same problem. For Major it was the ERM crisis. For Brown it was the 2007/8 crash. Once these happened, they lost all credibilit, fairly or not.. But, I don't think the opposition moved things their way under even either of them (both of whom were useless, although the former was initially popular).

      "Again, are you saying we should ignore all problems that are hard to solve?"

      Well, if you or anyone else had any solution to the media 'problem' I might be able to take you more seriously. What are you suggesting? More state regulation? We could, I suppose, insist Murdoch divest some of his holdings, but he hardly has a monopoly or anything remotely approaching it. Compulsory lessons in the General Theory look a bit impractical to me. Moaning about the weather should not be confused with having a 'solution' for it.

      "Greece is now a gift to anyone wanting to tell an anti-austerity narrative."

      I don't think so. This cuts both ways. Perfectly possible to tell a 'look where profligacy gets you' story. Indeed, that story is much more readily understandable than a 'look where tightening fiscal policy gets you at the zero level bound' story.

      As to my objection, it is that there is a difference, indeed a chasm, between what is necessary to win, and what economic policy should look like in practice. As a second order matter I claim that you can only shift politics in one direction or anther by being in power. Ed Milibdan taught us that (although we knew it already).

      As for Philosopher Kings, that is a reference to Plato. Those, for example, who favour an increased role for central banks usually rely on the anti-democratic arguments of Plato (even if they don't realise it).

    11. Hi Hugo. The zero lower bound is not the story to tell. We can say "Osborne tells us we need to cut more to secure the recovery. Greece spent the last five years cutting its economy by a quarter. The country is now in ruins." Again I did not have to invoke Oxford economists or the zero lower bound or link to a Paul Krugman blog post.

      "there is a difference, indeed a chasm, between what is necessary to win, and what economic policy should look like in practice."

      You are simply confusing the message with how it is sold. You are not saying "we need a better narrative to support a better policy", in fact you do not seem to have even considered this question. You just assume the task is impossible, I guess. On what basis I don't know.

      On the media, you seem uncomfortable suggesting any ways to improve it, but of course many ideas exist. Reducing Murdoch's power would be a start. Or is that an impossibly utopian suggestion?

      I wonder why you engage in these discussions so often given that you seem to have no faith in the ability of anyone except those in power to influence anything. Do you regard all of your own comments as just more complaining about the weather?

    12. "You just assume the task is impossible, I guess. On what basis I don't know."

      i don't think I do. the history of the UK since 1979 has been of governments, not oppositions, taking politics in their direction. Thatcher and privatisation. Blair and the minimum wage. Many more examples can be given, from both social and economic policy.

      What you are kicking against is that the same thing has happened with austerity under Cameron. this is nothing to do with the underlying merits.

      On Murdoch, as I said I think you could go for more state regulation and get Murdoch to divest. i don't think that would make a scrap of difference (indeed S W-L spends his time mainly moaning about the BBC). What else are you suggesting?

      Why do I engage? To correct the errors of others.

    13. In your view, what is the purpose of political opposition?

    14. To oppose to the best of your ability, and win power if you can.

      Look at every change there has been in government in my lifetime

      Heath: lost because of an economic crisis
      Callaghan: lost because of an economic crisis
      Major: lost because of an economic crisis
      Brown: lost because of an economic crisis

      The idea that oppositions can win by re-doubling their efforts to persuade people that they were right all along is naive fantasy.

      I thought (and think) Miliband was utterly useless (Balls was not) but I don't think that putting all the blame on his incompetence (or railing against the media environment) is all that productive. It is hard for oppositions to win in reasonably good times. To do so they have to adopt comfortable, optimistic positions.

    15. Where do you get this idea about "comfortable, optimistic positions" (what does that even mean)? Your point about the effect of economic crises is that a large part of what determines the result is out of the opposition's hands. That doesn't seem to suggest any particular electoral strategy, except maybe that the opposition should try to engineer an economic crisis.

      The fact is that there is no recipe for winning an election. Five years is a long time -- over that period the country will be in much better shape if the opposition is real as opposed to a phantom. That's what Corbyn offers.

    16. Corbyn offers the end of Labour as an electorally viable party.

      Stuff like the above from S W-L is daft. By the time we come to 2020 we won't be fighting over the economic policy adopted in 2015, let alone over mistakes made in 2010/11. We'll probably be off the zlb, and the economic circumstances quite different from now.

      In that context, positioning Labour now as the party of 'fiscal rectitude' makes perfect sense. Labour aren't in power, and won't be for five years at least.

    17. But he isn't giving them economic policy advice or electoral advice, he is complaining about economic illiteracy! Our whole conversation is really tangential to SWL's post.

      Your points here do not cohere well. The economy will change over five years, so labour should copy the Tories now. Eh? In general your political analysis seems to be a mix of "Labour can do nothing" and "Labour should do nothing". It is still not clear to me why this is your view. Personally I don't see "if you can't beat em, join em" as a viable opposition strategy. I might even describe it as daft

    18. You're wasting your time Sam. Arguing with someone who persistently fails to grasp the most basic point of SWL's posts ( the economic illiteracy and deceit propagated by Osborne and 'media macro'), which for SH comes a distant second to politics and perceptions and as such should go unchallenged since people may not believe or understand it anyway. ie. Let the deception persist and the electorate be completely mislead, because pointing out the deception is a waste of time.
      You can't discuss/argue with someone who so often fails to engage with actual points you raise, veers off on obtuse tangents, and most ironically writes with an air of possessing a superior knowledge and hidden insight which the rest of us mere mortals just don't get, even when we're lucky enough to be enlightened by him. Remember, he's never mistaken, never admits being wrong, and in his own words engages "to correct the errors of others" (Surely this is a joke SH?!). The reality of course is very different, with his writing and attitude exuding some of the classic characteristics of someone who unfortunately has an (intellectual) inferiority complex, and a clear case of the 'dunning-Kruger effect'...hence the frequent and thinly veiled attacks and put downs of our host.

  2. Thank you for pointing out to both, a mostly interesting & good speech by a middle-age politician, and a letter by a master of your craft.
    Only the speech general tone can draw my attention, since I'm an outsider to UK Labour Party politics. And on this token, it seems to me that your point, however correct, is of less importance as against where the speaker is really addressing to.
    However, I might say that Lord Keynes was caring for the risks of aborting economic recovery from a crisis far worse than 2008's, when for starters this latter received much close attention, albeit has lacked enough of a fiscal push.

  3. Have you noticed that contra-austerity actions all involve government as the vehicle for disbursement? Greece is an ongoing example of contra-austerity policies followed over many years.

    I cannot speak to the logic behind specific British politicians but the logic of contra-austerity policy is universal. The logic is the proposition that more money in the hands of spenders will increase economic activity and increase employment. The problem with this is in the detail.

    Detail 1. The new money coming into the economy all comes through government largess which favors some groups or individuals over others.

    Detail 2. Year-after-year increases become a steady-state condition. The powerful players in the economy learn to adjust year-after-year to match the changing monetary conditions, thus capturing all the projected benefits of contra-austerity policy. The result is that the rich get richer and the poor get poorer.

    Greece has followed contra-austerity policy for many years, as has China and Japan (among many others). Greece seems to have made the mistake of borrowing externally to fund the contra-austerity policies. This difference seems to have led to a loss of national financial control. The example of Greece should be providing lessons in policies-to-avoid for all the nations of the world

  4. Henry Ford
    “If I had asked people what they wanted, they would have said faster horses.”

    For as long as no one in labour believes there's an alternative to austerity, they are going to have a hard time convincing the electorate to vote for them.

    1. Right, and so pushing the metaphor, what Labour should offer is faster horses. What it should deliver in office is the automobile.

    2. When the conservatives offer more of the same (horses) and the Labour Party offer the same (less reliable horses) the conservatives offer security and win.

      If labour explained that we could go much faster in the automobile of expansionary fiscal policy they would run home to victory.

      Forgive me if you think the electorate as to stupid to have explained to them what a car is!

    3. Ah, but the point about the Ford quote was that they didn't know what a car was. If there had been a vote on the matter, they would have voted for faster horses. The point of the quote is that people ARE stupid.

      Promise people stuff they don't understand and you'll lose.

    4. Is the more important illustration that people can come to understand something (and buy millions of them) that they did not initially think was the solution to their problem. All each needs(ed) robe hugely appealing and succeed I is(was) the right salesperson.

      Sadly that salesperson does not yet seem to have revealed himself...

    5. Simon, the public not knowing about the benefit of automobiles is why economists need to get out of their ivory towers and inform public opinion. You're going to find it hard to convince those who work in education to follow the line, let the ignorant lead the way, because we do not want to upset them by pointing out the errors in their thinking. Mind you taking the anti-ignorance stance did cost Socrates his life.

  5. One of the outstanding features of Labours 5 years in opposition was their reluctance and meekness towards the Tory narrative...avoiding talking about the economy (other than a few murmurs of dissent towards a tsunami of deceit, misinformation and Tory re-writing of history) was a central feature of Labour's time in opposition.
    In the 12 months leading up the election, how often did they quote figures and the findings of numerous studies which estimated the enormous losses to GDP and lives blighted thanks to austerity policies? They certainly did not attempt to raise awareness of the fact that Osborne in fact eased up massively on his austerity agenda during 2012 - not at the time or in the months/years after.
    Their strategy in opposition was as poor and misguided as the 'economic nonsense' that some labour figures (you mentioned) are currently spouting. Where it comes from is anyone's guess, but given the lack of even basic economic knowledge in the majority of the electorate, its certainly couldn't originate from 'polling or focus groups' - unless as Simon Garrett (above comment) insightfully points out, these people are reflecting and regurgitating what they hear and read in the media.

  6. Is Labour following this narrative because it is targeting only the same small part of the electorate (the “swing” voters) that the Tories are?

  7. My guess is that Tristram Hunt believes what he said, but omitted a clause that he thought was not important for his main audience, but is important to SWL and some readers here.

    Suppose he had said that “the economy is growing, the unemployment rate is below both its long run average and estimates of the NAIRU, and the deficit stands at around five per cent. Even John Maynard Keynes would be arguing for retrenchment in this context.”...?

    No schoolboy error, and an entirely defensible position.

    1. You are right that is better, although you have to add that estimates of the output gap differ widely at present. But it is still wrong, because it makes no reference to the fact that interest rates are still very near their lower bound. Once again, that is not a mistake that Keynes would make.

    2. «interest rates are still very near their lower bound»

      The argument that deficit spending is affordable is not quite the same as that deficit spending is necessary or even just desirable. Just pointing this out...

  8. Really? Wouldn't Keynes have said that it was appropriate in these circumstances to first start to move the fiscal deficit back to a sustainable level (not an Osborne-type surplus, I agree), and only after that to begin to move interest rates up?

    If you are just saying that Keynes wouldn't have worried about the debt interest right now, then I agree...


    1. I think that this was what US 1937 was all about.

  9. SW-L asks "All of which raises an intriguing question. Where is this nonsense economics coming from?... Are they [Tristram Hunt and Chuka Ummuna] simply parroting stuff that comes from the Conservative Party, which is repeated in much of the press? Does it come from some City economist?"

    Chuka Ummuna tweets (yesterday): "Great to catch up with Prof @MazzucatoM this week to talk about centre left macro policy and political economy". Surprising to me.

    1. I think a lot of the problem here is that Labour MPs are just not exposed to basic macro.

  10. When deficit scolds go on moralizing about debt, I'd like them to explain the immediate consequence. We still have relatively high unemployment and sluggish growth. Is inflation or high interest rates a threat? Not in the US.

    The Fed always talks about the dual mandate. But infation is below target year after and they might raise rates September? We just made a deal with Iran. We have this fracking insanity. Petrol will be dirt cheap for the medium future.

    The Fed should adjust its mandate based on condition like any rational institution. Its singular mandate short term should employment and growth.

    Dunno about UK politics . In the US we have loonies running Congress, so fiscal stimulus is hopeless. Ball's in your court Chairwoman Yellen.

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  12. I also like the "even Keynes" from a Labour figure, as if Keynes had been some extreme left-wing campaigner.

    He was anything but and, while commendable in his willingness to challenge classical economics, on balance was probably rather conservative.
    He sure wanted to save capitalism, not weaken it.

  13. Can anyone explain what the schoolboy error is? I too was always under the impression that Keynes would argue for aiming to rebalance the books once a return to growth had been established.

    1. The reason for delaying austerity is to wait until you are sure monetary policy can offset its impact. So wait until interest rates are 2% and rising.

    2. Thank you. I think I'm starting to understand. Interest rates are currently being kept low in order to stimulate demand. Being close to zero they cannot be lowered any further. Fiscal means of stimulating demand will be required until interest rates may be raised to a level such that they may then, if needs be, be lowered again. Is that right? Sorry to bother you with questions but I find your blog immensely instructive.

    3. «Interest rates are currently being kept low in order to stimulate demand.»

      That's very questionable: credit is being expanded and they are being kept low primarily to avoid widespread bankruptcies among financial corporates and speculators, and to enable the same financial corporates and speculators to rebuild bonuses and capital with capital gains, and profits between the very low "factory" rates the central bank/government gives *only to them*, and the much higher rates they charge their "wholesale" and "retail" customers.

      The inflationary effect of expanding credit at very low "factory" interest rates as a gift to the sponsors of the "factory" is being "offset" by modest to harsh fiscal policy. As Osborne and Cameron quite openly stated:

      «A credible fiscal plan allows you to have a looser monetary policy than would otherwise be the case. My approach is to be fiscally conservative but monetarily active.»

      «It is hard to overstate the fundamental importance of low interest rates for an economy as indebted as ours… …and the unthinkable damage that a sharp rise in interest rates would do. When you’ve got a mountain of private sector debt, built up during the boom… …low interest rates mean indebted businesses and families don’t have to spend every spare pound just paying their interest bills. In this way, low interest rates mean more money to spare to invest for the future.
      A sharp rise in interest rates – as has happened in other countries which lost the world’s confidence – would put all this at risk… …with more businesses going bust and more families losing their homes.

  14. Given Labour fecklessness last election, the argument is completely and utterly lost. Best to move on.

    "The interviewees, all of whom were in work and were aged 30-65, believed that Labour had left the economy in a mess and that the Tories had gone some way towards putting it right. Even those who believed the 2008 economic crash was not the fault of the Labour government blamed Labour for spending and borrowing too much. One focus group agreed unanimously they would not vote Labour again until the party had been returned to government and had shown it could run the economy responsibly."

    1. The 'best to move on' attitude seemed to be Labour's strategy before 2015. As I argue in an earlier post, if the profligacy narrative (which is false) is not challenged it will be used by other parties again and again.

  15. I don't know of any city economists who are in favour of the budget surplus law. Also, right-leaning think tanks like the Adam Smith Institute and Institute of Economic Affairs think it's a daft idea.

    My hunch is that Chuka has been getting this stuff from the Institute of Directors -- one of the only cheerleaders for this policy. (see: )

    Chuka is familiar with the IoD's work -- he was star guest at a Young IoD event last year, and has referenced their research in the past. He's also spoken of how his father was a card-carrying IoD member.

    By the way, I'm not suggesting anything improper here -- as shadow business secretary, you'd be expected to speak to (and appear at events) hosted by various business groups, including the IoD. For the record, the CBI also said it is in favour of the new budget rules, although the BCC is against.

    My guess is Chuka is trying to reflect what Big Business wants, as part of a drive to shed Labour's anti-business cred -- good macro policy be damned.

  16. Hi
    Following the Tristram Hunt assault, Frank Field wrote a letter to The Times saying virtually the same thing - that Labour overspent. Sadly, i did not keep my copy so cannot relate exactly what he was saying - something about Labour spending 45%. I know i have not given precise information but does this make sense to you at all?


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