Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday, 15 July 2015

Labour and the deficit

A constant refrain from those who help make Labour party policy goes like this. I know what you economists say makes sense, but we tried that policy at the last election, and failed horribly. We have to listen to what the people are telling us.

So, for example, we cannot oppose George Osborne’s deficit plans, because we tried that at the last election and lost. We cannot talk about the problem of rent seeking by the 1%, because we tried that and it was seen by voters as anti-aspiration. We cannot argue for a higher minimum wage because that will be seen as anti-market and anti-business - oh wait.

I would draw exactly the opposite conclusion from the election result. On the deficit Labour tried to avoid discussion, and let the Conservatives spin the idea that austerity was the last Labour government’s fault. By failing to challenge both this nonsense [1], and the austerity policy enacted in 2010 and 2011, and the austerity policy proposed after 2015, in terms of perception it adopted the Conservative policy on the deficit. [2] That was why it lost heavily.

Some will say that come the next election the government will be running a budget surplus anyway, so why oppose the process of getting there? The answer to that is aptly illustrated by Labour’s decision not to oppose Budget plans to limit child tax credits to the first two children, or plans to reduce the benefit cap. Both are terrible policies, and it is incredulous that Labour is not opposing them. But once you concede the need for austerity, it becomes much more difficult to oppose the measures that come with it.  

Another argument is that Labour has to accept Osborne’s surplus target, because nothing else will stop Labour being accused of being fiscally spendthrift. (See Hopi Sen for example - HT Simon Cox@s1moncox) This just sounds politically naive. George Osborne (as Chancellor or PM) will not suddenly drop the spendthrift argument just because Labour adopts his plans. Instead the argument will change to focus on credibility. He will say: Labour now admits that it was spendthrift in government, and in opposition it has changed its mind so often, you just cannot believe what they say – so any future Labour government will be as spendthrift as the last.

Others will respond to the above by saying how can you argue Labour lost because it was not left wing enough! But challenging austerity is not ‘left wing’, it is just good macroeconomics. The idea that opposing austerity, or advocating less inequality, is akin to what Labour did between 1979 and 1983 is absurd.

If there are examples to draw from, it is to see how your opponents succeeded where you failed. The Conservatives did not regain power in 2010 by moving their policies to the left. They did it by changing their image. Until a couple of years before 2010 they had promised to match Labour on spending. But when circumstances changed, they seized their chance to change policy and focus on the deficit. It was a smart move not because of the economics, but because of how it could be spun.

In 2015, the SNP saw that times had changed compared to 2010. The idea that we might become like Greece was no longer credible, and voter attitudes on the deficit were much more divided. So they campaigned against austerity, and partly as a result wiped Labour out. (Their actual policy proposals were not very different from Labour, but unfortunately few voters look at the numbers: it is perception that matters.)

The lesson is that when the external environment changes, you try to exploit this change in a way that enhances the principles you stand for and gains you votes. As the deficit falls, putting this at the centre of policy will seem less and less relevant. In contrast, the costs of austerity and rising poverty that are the result of ‘going for surplus’ will become more and more evident. Osborne, by going for an unnecessarily rapid reduction in debt by means of increasing poverty, has thrown a potential lifeline to Labour. Unfortunately, Labour appear to be swimming away from it.

[1] Chuka Umunna writes: “Some economists reject this [supporting going for surplus] approach as it would, in their view, necessarily entail simply capitulating at the feet of George Osborne. In their view all we need to do is – in ever more strident and louder terms – shout back at the electorate that it was not profligacy on the part of the last Labour government that caused the crash, but a banking crisis. And, in respect of borrowing, far from acknowledging that we understand the need to reduce national debt, we need to enthusiastically go about making complex arguments for different types of borrowing. Do this and the public will see the light.”

I guess I am one of those economists. I would respond that Labour in 2015 made no attempt to seriously debate this issue, let alone shout about it. The only people challenging the myth that Osborne and much of the media were telling were ‘some economists’. I do not think it is ‘complex’ to argue that you should borrow to investment when interest rates are low, and I think this argument can be effective - which is why Cameron called the people making it dangerous voices.

[2] The SNP saw that Labour were endorsing the importance of deficit reduction, and exploited this by arguing against austerity.


  1. I think there is an even more fundamental disagreement: you are arguing political parties should lead public opinion, while the labour leaders you criticize think they should follow public opinion.

    This difference causes the different reaction to a loss: if you just want to follow public opinion you need to embrace the winners, if you think you can change public opinion, you need to speak your message louder.

    I think it's inevitable that moving towards the winner is viewed as the path of least resistance: changing people minds is hard. I am not even sure I view it as always morally superior. Obviously if people are feed false information, educating them is good. But very often that's not the easiest way to convince people. Marketing in general doesn't really work by rationally engaging with the public, it's usually much easier to appeal to the less rational part of the human psyche.

    For example, I think austerity in the UK is less clearly terrible than in other countries since QE did soften its effects at least in part. I find it much easier to condemn how austerity was achieved. Reducing the 50% tax rate, cutting benefits for the poorest are bad ways to achieve a lower deficit. I find that much more objectionable than the austerity itself.

    1. I think the leader/follower idea is a little too simple. Why did a large section of public opinion think that Labour caused the crash? Because they had been led to believe that, and the argument was not challenged. If one side leads, and the other follows, it is pretty obvious what happens.

  2. "The idea that opposing austerity, or advocating less inequality,..."

    The problem I think is the conflation of the two. People understand the need for less inequality. They don't understand the need for running budget deficits. I for one support less inequality - I think it's important for the fabric of a nation. But deficits? I'd rather do without them. Conflation of the two weakens the attack against inequality - and sometimes, I think that's what SWL secretly wants.

    1. I have no idea what you mean by that last sentence. As for conflagration, I think that describes current policy - Osborne used the need to achieve surplus as a rationale for cutting tax credits.

    2. "Osborne used the need to achieve surplus as a rationale for cutting tax credits."

      OK fine, and you're helping him by not making the distinction and treating it as one thing. Balanced budget, less inequality, tastes great.

      "I have no idea what you mean by that last sentence." I think you care more about macroeconomic theory - austerity is bad - than inequality to such an extent that I'm beginning to question how much you really care about inequality.

    3. Prof. Wren-Lewis,

      Do you know the difference between conflagration and conflation?

    4. Anonymous15 July 2015 at 05:20

      I've no idea what is motivating you to make such pointless remarks about what I 'really care about' based on such ridiculous evidence.

    5. Oh dear we appear to be descending into petty squabbles, the refuge of those with no desire to change our corrupt monetary, privately owned, world banking scam.
      If you do not acknowledge the fraudulent nature of every bank loan, or understand how we are all victims of the banks, take a look at: Bank Loan Fraud - What Really Happens.
      After reading the article, then pause to consider this: Signed Promissory Notes pledging to repay bank loans, are legal tender, however using the Fractional reserve banking system, our PN is used as security by the bank to fund a further ten identical loans. Having done so and received an additional ten PNS from the borrowers we have acted as security for, the bank sells our PN for cash (securitisation) and pockets it.
      Until we ban usury and private banks, we will always be in debt to the banksters.

  3. Spot on. I'm have been a frustrated Labour member for five years. The message chimes well with my CLP but does not crack through to the leadership.

  4. Labour should oppose the narrative that says one side is against the deficit and for austerity and the other side is for deficits and for spending, when this isn’t an accurate representation of economists like the author are saying, it’s mixing up cause and effect. Economists aren’t arguing for massive deficits that will give us growth, they’re arguing for growth that will eliminate deficits. Labour should be for a surplus and against austerity, and say the Tories have only given us austerity and irresponsible borrowing.

    They should say that austerity is what’s stopping us paying off the deficit. It isn’t a hard argument to make: Osborne promised austerity would eliminate the deficit in one parliament and he was wrong by £90bn. Austerity failed massively even on its own terms. Osborne borrowed more in five years than New Labour did in 13. New Labour managed four surpluses out of 13, compared to two out of 18 for Thatcher/Major (despite their selling off the family silver and the North Sea oil boom). The numbers show that the Tories are the reckless borrowers, not Labour.

    If the government had followed the advice of the majority of economists and spent money the economy would have grown itself out of the deficit (I think the figure the author came up with was that austerity had knocked 14% of the economy, so there would now be no deficit if it wasn’t for austerity). This is what it should be arguing for. The only hope it will is if Jeremy Corbyn becomes leader.

  5. I think Labours approach shows us most of what is wrong with politics and the left wing today.

    You seek power not for its own sake, but to implement the policies you believe will reach the goals that you have, whatever they might be. You are also humble enough to respect Democracy, so that if what you want is not what the People want you go about persuading them that you are right, not try to hoodwink them in to voting for you. Even though the policies you want are not the ones the people want.

    Why is this important? Because your mandate, and what you will actually be able to implement once in Power is fundamentally influenced by what you stated to gain Power.

    In other wortds, we dont need a leftwing that does not argue for left wing policies. We need a confident left wing that will argue that their goals, and their plans to reach those goals are right and thus argue vigorously for leftwing policies.

    That means opposing the non sensical economics of the right wing these days. If you loose, you loose, and then you try to be a better sales man the next time around.

    1. "People want you go about persuading them that you are right, not try to hoodwink them in to voting for you."

      If you think that this is the strategy of the modern left you are crazy. The Labour Party are failing because their leaders are spineless and stupid, not because they are slippery. Hoodwinking turkeys in to voting for Christmas is the raison d'ĂȘtre of the Conservative party.

  6. "In 2015...the idea we might become like Greece was no longer credible."

    Was it EVER credible? No, it was scurrilous scaremongering that probably cost output and investment. The pension funds of swathes of UK corporates are desperate to sell volatile equities and match their liabilities with income generating gilts, which also have a more stable capital value. At current yields gilts don't generate much income so this huge pent-up demand for gilts is sitting on the sidelines. The situation could not be more unlike Greece, and this was also true in 2009/10.

    1. I agree, but I'm talking about public perception here. In 2010, I think it was very difficult to persuade those with no economics of that argument. But 2015 is very different.

    2. It just shows how toothless Labour were at the time. It wasn't a hard argument to make. We didn't cause the crisis, if anything right wing principles / ideology did ( efficient market hypothesis etc.); we are not nor can be Greece etc.

      It's amazing how in the UK what was essentially a private sector crisis ended up with the public sector and the poor being the villains. I blame Labour for allowing this perception to take hold. Staggering ineptitude. If they couldn't take control of a simple narrative what were they calable of taking hold of? That's what frustrates me. This wasn't a hard match to win yet they allowed an economically illiterate political charlatan to score a hat trick in the cup final before half time.

    3. We didn't cause the crisis, it was the Tories? You're kidding, right?

    4. No, I didn't say that at all. I was saying that the light touch financial services regulation and Basel regulations aslowing banks to decide on their own capital requirements for certain classes of loan were influenced by the dominant academic thinking, which was undoubtedly very much of the laissez-faire variety. The Efficient Market Hypothesis was very much at the centre of global regulators' thoughts. Come on - please don't say I said things I didn't say, that's just juvenile. But if you disagree that extreme "market knows best" principles were at the root of the GFC then I'd be happy to continue. Centuries of financial crises have shown that the market gets carried away and very often extremely so. This isn't e en a left wing theory, it's empirical fact.

      In case there was ambiguity there should have been quote marks in the "we didn't cause..." bit, to isolate the argument but I thought that was clear enough

    5. I'm using 'Tories' as shorthand for 'right wing principles / ideology'. It would have been rather hard for Labour to argue that light touch regulation was the product of this ideology when they were responsible for it.

  7. As ever I think you underestimate the persuasive power of the 'economy as household' analogy. Its fallacy is obvious to you, but to understand it requires an engagement with some quite complex economic concepts that is simply beyond most people's level of interest in the subject.

    Ed Balls used to advance the argument. Cameron would say 'Labour thinks that the solution to debt is more debt' and everyone just knew that only a deranged leftie could believe such obvious nonsense. How can spending more on my credit card pay off my credit card bill?

    This argument is very hard to win, and especially hard for Labour to win when tax and spend is part of the brand. It's impossible to win if the leader is perceived to be an unreconstructed leftie like Miliband or - God forbid - Corbyn.

    Having said all that I don't think they have a choice. When Labour is supporting a state-mandated limit on the number of children you can have if you're poor, you've got to wonder what the party is for. But to make any headway they have to start by electing a leader who has a fighting chance of getting a hearing on the subject.

    1. Before 2010, I studied what is called deficit bias, which is the tendency for deficits on average to be too large. If analogies about household deficits were ALWAYS so persuasive, its difficult to see how deficit bias could have happened. I think these analogies were powerful in 2010, but that was in part because of the circumstances, including the fact that households were at the time having to cut their deficits. In other times, like now, I'm not sure how powerful they will be. They can also be countered by other simple analogies, like investing when it is cheap.

    2. JD;
      "I think you underestimate the persuasive power of the 'economy as household' analogy. Its fallacy is obvious to you, but to understand it requires an engagement with some quite complex economic concepts that is simply beyond most people's level of interest in the subject."

      Not necessarily. Holing this awful analogy below the waterline is not difficult; two sentences can do it.

      "In a modern, developed, complex, interconnected economy, any persons income comes mostly from other peoples' economic activities. We cannot ignore what effects they have on us."

    3. Most of the time the question is simply irrelevant. When the financial crisis (and the huge increase in debt that resulted from the bank bailout) is fresh in the memory, debt to GDP is 90% and the deficit is £100bn a year, it isn't.

    4. "In a modern, developed, complex, interconnected economy, any persons income comes mostly from other peoples' economic activities. We cannot ignore what effects they have on us"

      I'm sorry but I think you're making my point for me.

    5. You don't have a very high opinion of everyone else, do you? :)

    6. I don't regard a lack of interest in macroeconomics as a character flaw. This is fortunate because in my experience it applies to at least 95% of people, including almost all of my friends and 100% of the people I am married to. I have reached this conclusion from observation, and from my own failed attempts to persuade people.

      Perhaps I'm just not very persuasive. :)

    7. Simon (or others), is this narrative right? I think I get the sectoral balances thing but I wonder do I get stocks and flows mixed up etc.

      Someone's income = someone else's expenditure. Ditto surplus vs deficit, loan versus borrowing etc. In aggregate all debits = all credits.

      4 discrete sectors in economy.

      Corporates (C)
      Households (H)
      State (G)
      Net foreign sector (F)

      C seems to be stubbornly in surplus. Profits are not being reinvested. I'd say this is likely to be for structural / secular / institutional reasons, so not likely to change.
      F is stubbornly in deficit. Certainly it's hard to see trade flows getting much better esp. if £ appreciates. I suspect net investment flows aren't likely to improve much either.
      G is clearly intended to be moving towards surplus (at least in that direction)

      Obviously these all interact with each other and none causes a movement in the other directly, but with C (surplus) and F (deficit) seemingly hard to shift, surely a move from C towards surplus MUST shift H towards (further) deficit.

      Therefore the move to surplus is misguided and further indebts households which appears to be the main foundation of this recovery anyway. The "we all must live within our means" slogan is hypocrisy and economically illiterate ( if we did there'd be no growth).

      Now, in this context I think that the household analogy breaks down completely. A single household has a different lifecycle to the state. A single household does not affect economic activity. If all households save, fewer makers sell things. But, the state can refinance itself in perpetuity, can influence economic activity and can be the necessary counterweight to movements in the financial balance in other sectors.

    8. Sorry, I meant a move from G towards surplus must shift H further into deficit if C and F are fixed(ish)

    9. The question here is not whether the household analogy is or isn't a good analogy. We all agree that it's terrible. But attempts to explain it face major barriers of basic comprehension. It's like trying to win an argument against English creationists by explaining Darwin in French. The problem is that they're not interested in learning French.

    10. I disagree that it is such a difficult concept to sell. I have had no problem selling the concept to my friends and Family, and I had no problem Learning the concept in High School in the US 20 years ago.

      I does become problematic to learn when almost all of the media decides to present the household analogy as fact. In my opinion thats the problem, on economic issues most of the media world have become incredibly right wing, I do not know why, and I don´t know what we can do about it. But at least S W-L media macro series was a decent attempt. The Guardian or The Independent should have run that as an educational series.

    11. Well clearly you're more persuasive than me! Or perhaps you have a more receptive audience: the concept is of course much easier to sell to left-leaning people. We are all much more receptive to concepts that reinforce our prejudices. But Labour has to sell it to floating voters, which is where the challenge lies.

      I don't disagree on the media problem.

  8. Just a thought, but perhaps Labour's problem is one which I suspect is echoed in many industrialised countries: the electorate is always far more ready to indulge the right than the left and tends to believe that the right has more credbility than the left. This may be due to the impression that the right is always peceived as being more 'realistic', even when its policies are sheer fantasy. Here in Finland, the governing right's economic ideas are utter nonsense (welcome to the land of the confidence fairy and 1930s economics) but they only need to engage in the rhetoric of 'hard decisions' and they seem to win instant credibility. If the left counters by saying 'let's ditch austerity' they are instantly viewed as being Marxist utopians. If they say 'let's do austerity', they are accused of pinching the right's ideas and lacking credibility. It's not easy to see a way out of this, when so much of the general public has a default way of thinking.

    1. Could this situation arise because the right is so much better at spin?

    2. Yes, I think that is a big part of it.

      I am a big fan Simon. I am also a member of the Labour party. I am currently a little depressed by how uninspired I feel about the leadership candidates. (I am much happier about the deputy-leader contest; big fan of Tom Watson and Stella Creasey.)

      Anyway, I would immediately put my support behind any candidate who decided to appoint you as their economic advisor. (I have no idea if you'd be remotely interested but...)

      I don't see it happening. Whilst I, for the most part, agree with your analysis above, I think you're being slightly unfair. I sense that the Labour leadership and strategists felt very trapped by the media narrative. The manifesto, whilst not perfect, wasn't too bad economically - it was vaguely Keynesian. But they tried to keep that quite quiet and hope to squeak through. And to be fair - the polls did suggest it was working.

      I have no doubt that the argument needs to be won about how we actually got here and how to solve the current problems, but I think it unfair to underestimate how hard it is for Labour to even get a hearing in the current media environment. Even from the BBC! (Left wing bias, my arse..)

      However, that doesn't change the fact that Labour desperately needs to stand up and be counted. It is probably an existential crisis for the party and only marginally less significant for the country.

      For me, the key turning point in this parliament will be in about 18-24 months time. Osborne is continuing his insanity (to borrow Martin Wolf's terminology) and that will have effects.

      Will Labour be ready with an argument and a message?

      I am living in hope here - I just wish it was more than just hope.

    3. alienfromzog15 July 2015 at 05:34

      I am currently a little depressed by how uninspired I feel about the leadership candidates.

      How depressed are you about SWL?

    4. alienfromzog15 July 2015 at 05:34

      I do not estimate the problem of the media - see all that I have written about mediamacro. However I still think Labour was wrong to try and avoid the subject. It was an understandable mistake, but a mistake nevertheless.

      Anonymous15 July 2015 at 06:11

      So now I'm getting trolls like Paul Krugman. I must be doing something right.

    5. Simon,
      Yeah, that's fair.
      Moreover, I think we are agreed about how vital it is that Labour doesn't repeat the mistake. The comments of the leadership candidates thus far have not given me much confidence.


    6. Mainly Macro15 July 2015 at 06:26

      The trolls have something to troll about.

    7. Simon, you do underestimate the problem of the media and talk as though it would go away if the case was only made more firmly.

      The problem as I see it is the ageing population and what that means in terms of political views- ie more conservative.

  9. Simon,

    While I'm sympathetic to your argument, I think an important thing to keep in mind is the difference in our vox pop democracy between being in government and Opposition. In Opposition one gets tiny 'grabs' on the news. Often one will say to an opposition MP "Why aren't you arguing X" and they'll say "We do nothing but" but don't get reported. I think things are much more difficult in opposition.

    What's even more dispiriting is that this kind of timidity is also shown in government when the party in government has the chance to set the agenda and the terms on which debate is had - including for instance by appointing review committees of credible people to report on any matters the government chooses. I discussed this in this newspaper column on Australia's ALP here

  10. More politics. Where's the macroeconomics?

  11. Happy France, where everybody is in favour of a deficit!

  12. "Happy France, where everybody is in favour of a deficit!"

    And Italy. And Greece. There at least we have governments who know macroeconomics.

    Why is Osborne closing his eyes to the evidence?

    1. Sorry, I know I should ignore this stupid comment but I can't help myself...

      In return for the modest achievement of reducing the deficit in half (something he himself decried and nowhere near his stated aim), Osborne has seriously damaged the fundamentals of the economy that are necessary for long term success. Look at investment levels or productivity or how reduction in youth opportunities has life-long effects on economic output, just for starters.

      Greece is running a (primary) surplus by the way... how's that working out for them?


  13. John Lanchester at the LRB blog, 'Election Diary: Episode One', 30 March 2015, put it well when he said that, "Cameron has been party leader for ten years. He spent the first half-decade ‘detoxifying’ the Tory ‘brand’ and has spent the next half-decade retoxifying it."

    I wrote on this blog just after the election that everything the right-wing had to throw at the last election was hurled, and it gave them 36.9% of the electorate. Compare this to 1992, which was the last time press and politicians all Murdoch-Rothermered, and the percentage of the electorate they garnered in 2015 was way down.

  14. One week on from the budget where Osborne raised the minimum wage and unemployment is already rising.

  15. "it is incredulous that Labour is not opposing them"

    Is that macroeconomic newspeak? It leaves me incredulous,

  16. I recall one attempt by a Labour spokesperson (a woman) to explain in homely terms, on TV two or three years ago, why it might make sense to borrow more when servicing current debt was already proving a struggle. A scenario was drawn in which an individual on a low income - I think under-employed rather than unemployed - is offered a new job with much better pay but has to overcome an obstacle that would otherwise prevent him/her taking it ie. the work is at such a distance it is not feasible to walk there and back daily, nor is public transport available. What to do? The answer was: borrow even more to invest in a bicycle, then pay off that debt and bring the rest under control over time using the increased income secured by the investment. It didn't really work unfortunately and as far as I can tell no further attempt to pursue the argument for borrowing to invest in that sort of vein has ever been made by Labour.

  17. JD is basically right - the real challenge is to combat the total misuse of the household budget story. Until we escape from that trap, austerity rules. But the challenge is difficult.
    For example, the German finance minister actually believes the household budget analogy is true for the economy as a whole. He is the most popular occupant of that post for many years. And most people believe that the German economy is successful. This may be very alarming, but it’s worth looking more at the German perception of reality and confronting it with what goes on in the anglosphere.
    What alternative stories might work ? It’s worth exploring why people accept that households can borrow huge amounts and go into massive debt to buy property - indeed not just accept it, but encourage it as a virtue. Or that firms borrow to invest. But the government that we are supposed to control cannot.
    It’s also worth exploring whether it’s possible to explain to the public the story behind the financial balances of the economy - households, companies, government and foreigners - why not everyone can cut their debt at the same time, what happens if they try, and how we can over time get the economy on to a more balanced path.
    But there’s something other than the message - the messenger.
    When Simon says : “But challenging austerity is not ‘left wing’, it is just good macroeconomics” he is quite right. But no-one will understand that.
    Because people want their leaders to have at least some semblance of strength and competence. These qualities may be in short supply, but any leader who looks incapable or confused will simply not be trusted when it comes to talking about money and budgets. Especially other people’s money. So if you believe the maxed-out credit card story of the national economy, then challenging austerity may or may not be left-wing, it just looks weak, spendthrift and out of control. After the financial collapse, many voters feel that they are like that ; but they don’t want their leaders to be.
    It is quite striking how the SNP managed to present an anti-austerity line to voters in Scotland - highly conservative when it comes to money - and gain votes. And how Labour presented an austerity-lite policy and wondered why people preferred the real thing. As the IFS pointed out, maybe not in their most rigorous work but it was published, there wasn’t all that much difference in the fiscal plans of the two. But the public narrative was very different, and so was the credibility of the leadership.

    1. why people accept that households can borrow huge amounts and go into massive debt to buy property - indeed not just accept it, but encourage it as a virtue. Or that firms borrow to invest. But the government that we are supposed to control cannot.

      «It’s also worth exploring whether it’s possible to explain to the public»

      Someone wise said that if you have to explain you have already lost. Voters are not wise philosopher-kings.

      «And how Labour presented an austerity-lite policy and wondered why people preferred the real thing.»

      In another comments just argued that the "real thing" was not "austerity", but austerity for workers (employed or not) and lots of favours for rentiers.

      My guess is that many voters chose was not austerity, it was the favours for rentiers, and were satisfied that the austerity for the others was indeed going to pay for the favours they were going to receive.

      The Tory proposal was not austerity for everybody, it was big favours for rentiers *paid for* by austerity for workers. Many voters, particularly in marginal seats in the South East, even if they work think of themselves primarily as rentiers. Remember Tony Blair's "Sierra man".

      In terms of votes Labour did fairly well, and the Conservatives did not do well, but their seats (and those of the other 3 minor parties) were not proportional to that because of FPTP, and they did not have the "big government favours to rentiers" olicies that would allow them to take the "yellow" tory vote in many seats in which they came second.

      Tony Blair was the master of the "big government favours to rentiers" story, which he called the "aspiration" story, and won over a lot of "yellow" tories.

  18. «the costs of austerity and rising poverty that are the result of ‘going for surplus’ will become more and more evident.»

    The argument of our blogger is a bit more political than economic: because in the UK "austerity and rising poverty" are not universal: it is austerity and rising poverty for the working and non-working poor, versus a big boost to the fortunes of incumbent/insiders who are rentiers and more in general property owners.

    Cameron and Osborne are very honest, very clear that their policies are meant to redistribute from workers (currently employed or unemployed) to rentiers:

    «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.»

    So it is a policy of "austerity", but only for some and not for others, that is a redistributive policy.

    So as a macroeconomist our blogger should point out not that austerity is a stupid idea, but that the current government's policy, whether it is in some sense "austerity", benefits (most) rentiers and damages (almost all) workers, and that a differerent policy would probably benefit (most) workers a lot more at the cost of less tax-free effort-free capital gains and lower rents for (almost all) property owners.

    I certainly would prefer the policies advocated by our blogger (not a property owner) but I don't think it is fair to describe them as universally better than those of the tories: they are better for most, but worse for many. It is a choice between two different distributional impact, not better policy or bad policy.

    Unfortunately for me and perhaps most britons a lot of voters in marginal seats in the South East love the distributional impact of the government's policies, and that's part of why the Tories got this (paper thin) majority in a FPTP electoral system.

    PS the distributional impact is also obviously geographical, consider for example the rise in the minimum wage, clearly designed to incentivize some employers to relocate from the North to the South, or to locate jobs in the South to start with, thus helping to push up demand for property in the South.

    1. «the policies advocated by our blogger (not a property owner) but I don't think it is fair to describe them as universally better than those of the tories: they are better for most, but worse for many.»

      Or to describe the government's policy as "austerity": it gives the false impression that it means "contractionary" times for everybody, where it instead it is rather "expansionary" for property owners.

  19. Fighting on the errors in government fiscal policy in 2010/11 failed in 2015.

    The idea that redoubling of effort will make this a vote winner in 2020 is a lovely idea. Not very likely in my view, but I am sure your view on this will not be tested.

    No doubt its rejection will confirm your prejudices.

    1. The point is that they DIDN'T *fight* "on the errors in government fiscal policy in 2010/11". A few murmurs about it, but by and large they avoided the subject thus allowing the Conservatives to spin their own version of events...aided and abetted by 'media macro' for good measure.

    2. I think that is a re-writing of history. Miliband and Balls were quite clear. That the argument didn't work (and you think it should) is not evidence that it was not made.

      Most people don't have the time to devote to thinking about these questions. They judge who is right by the general performance of the economy at the time. that may be frustrating, but that is democracy.

    3. Not sure what reality you inhabit but 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.

  20. Excellent post, as usual. But s/incredulous/incredible/.

  21. I have a pet peeve about politics and macroeconomics. You often hear right wingers spouting absurd stuff like the Laffer curve or Ayn Rand nonsense . But you never hear about prvivate debt overhang due to housing bubble , lack of demand at the zlb, inflation being below target, etc. Stuff you read blogs like this daily.

    You never hear pols even try to explain basic macro. Just morality tales. Morality is fine but if your car breaks down it in a blizzard it won't tell you how to fix it to save your family.

  22. The left is typically poorly funded but represent the majority. They need to pick their spots and their message has to be on the money.

    The left also has the bad habit of trying to be rational. (Simon, I think this includes you. Far, far too rational for politics.) Politics is war. The other side will do ANYTHING to get elected.

    You've got 15 seconds and 10 words to win an election. My best effort -- Conservative means taking your hard earned retirement and giving it to the rich.

  23. Simon, thank you for the insights in your blog - much appreciated.

    I agree that too much attention has been heaped on the budget deficit in recent years and that Labour has done a lousy job in tackling the Conservative rhetoric.

    The part that intrigued me is describing limiting tax credits to two children and reducing the benefit cap as 'terrible policies'. Can anyone please elaborate?

    On child credits in particular, do people think many low-income families will not respond to the change and have three or more children regardless, thereby pushing child poverty higher (at least in their households)?

    As someone who is a higher rate tax payer but still is hesitant to have a second child due to stretched finances, I find myself agreeing with the government on this policy. Uncharted territory!


    1. The evidence I have seen is that there may be a small incentive effect. Whether that is worth impoverishing children is another matter. But consider someone who has 3 children because they have a well paid job. They then lose that job, and have to accept a low paid job. They cannot unmake the decision to have a third child.

    2. The argument against the benefit cap is that it is completely arbitrary and makes no account of people's actual needs. I don't disagree that people shouldn't need to claim these kind of amounts in benefits but that's down to the shortage of social housing, and the housing market being screwed in general, rather than some kind of failing on the part of those receiving the benefits.

    3. I can envisage a way around that issue: amend the policy such that any family that goes from not claiming any child tax credits to low income would be eligible for tax credits for all their children, regardless of how many they have. That would discourage low income households from having many children, without penalising families that tried to be socially responsible before job loss struck.

      That said, there will always be people who have more kids than they can afford and it just doesn't sit well with me that those children would suffer poverty.

      The best solution would be to change mindsets through education and engender aspirations such that we no longer need to discuss cutoffs. Sadly, that's a tough ask.

      Thanks for the reply and keep up the good work.


  24. S W-L: " ... it is incredulous that Labour is not opposing them."
    I am incredulous. You are incredible. They are batshit crazy.

  25. "We cannot argue for a higher minimum wage because that will be seen as anti-market and anti-business - oh wait."

    Simon, can you really not see the difference between Labour arguing for something and how it would be received and Osborne arguing for it?

  26. Labour

    Entirely agree with this article, but even more baffling is that Labour are still making the same mistake, taking the same approach now under corbyn, at least if mcdonnells statement are anything to go by. And they must be, I assume. He still thinks Labour can't challenge the tory spin which the voters believe. Hard to see this approach will succeed where it failed before, and for all the same reasons this blog gives.

  27. I'd be keen to see Labour make the point that it was Tory free-market deregulation which caused the banking crisis. Ronald Reagan's decomposition of Glass-Steagall and Margaret Thatchers deregulations allowed the collapse of CDOs to undermine retail banking. The banking crisis caused most of the problems we now have. Gordon Brown had little choice but to rescue the banks (although arguably some some have been allowed to fail) or he would have been seen as irresponsible. Both Obama and Osbourne have stimulated their economies, by QE and infrastructure spending etc. but the difference is the USA did not say it was adopting austerity, and use that banner to afflict the afflicted. Labour can be trusted with the economy, always could. It's the Torys who want to maintain conditions for another crash.


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