Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday, 5 August 2015

A way forward for the centre left on deficits

When it comes to fiscal policy the politics of the right at the moment [1] could be reasonably described as deficit fetishism. The policy of the centre left in Europe could also with some justification be described as growing appeasement towards deficit fetishism. Given its success for the right in Europe, it seems unlikely that this side of the political spectrum will change its policy any time soon. [2] Things appear a little more malleable on the centre left. In the UK, in particular, we will shortly have new leaders of both Labour and the Liberal Democrats. In addition, the Scottish Nationalists have adopted the rhetoric of anti-austerity, even though their fiscal numbers were not far from the other opposition parties during the elections.

Attempts to get the centre left to avoid deficit fetishism need to fight on two separate fronts. First, politicians and/or their advisers need to be taught some macroeconomics. Academics too often assume that politicians either know more than they actually do, or have behind them a network of researchers some of whom do know some macroeconomics, or who have access to macro expertise. (I used to believe that.) The reality seems to be very different: through lack of resources or lack of interest, the knowledge of left of centre politicians and their advisers often does not extend beyond mediamacro.

The second front involves the politics of persuasion: how can politicians successfully persuade voters that deficit fetishism, far from representing responsible government, in fact represents a simplistic approach that can do (and has done) serious harm? I think for academics this is a far more difficult task for two reasons. First our skills are not those of an advertising agency, and we are trained to follow the scientific method rather than act as a lawyer arguing their case (although, if you believe Paul Romer, the scientific method is not universally adopted among macroeconomists). Second, the experience of the last five years on the centre left is that deficit fetishism helps win elections.

It my last post I tried to argue why the success of deficit fetishism was peculiar to a particular time: the period after the recession when households were also cutting back on their borrowing, and where the Eurozone crisis appeared to validate the case for austerity. In other times households try to borrow to invest in a house, and firms try to borrow to invest in good projects. As a result, once the debt to GDP ratio has begun to fall, and yet interest rates remain low, the power of alternative narratives like ‘it makes sense to borrow to invest in the future when borrowing is cheap’ will increase.

Yet responding to deficit fetishism by implying the deficit does not matter, or that we can print money instead, or even that we can grow our way out of the problem, is unlikely to convince many. [3] It just seems too easy, and contradicts people’s personal experience. The trick is to appear responsible on the deficit, but at the same time suggesting that responsibility is not equivalent to fetishism, and other things matter too. I think this provides a powerful motivation at this time for a policy that is designed to obtain balance on the current balance (taxes less non-investment spending) rather than eliminating the total deficit. This is far from ideal from a macroeconomic point of view, as I discuss here, but as a political strategy in the current context it has considerable appeal. In the UK it allows you to attack the ‘excessive and obsessive austerity’ of Osborne, who is ‘failing to invest in the future’, while following a policy that it is difficult to label irresponsible. [4]

Of course this policy was close to that adopted by Labour, the Liberal Democrats and the SNP at the last election, so many will just say it has already failed. I think this is nonsense for three reasons. First, the policy I’m advocating is a combination of targeting a zero current balance, and at the same time arguing aggressively against excessive austerity. Labour deliberately avoided being dubbed anti-austerity during the election. (The Liberal Democrats were handicapped by arguing for austerity for the previous 5 years as part of the coalition.) The only party to adopt an anti-austerity line was the SNP, and it did them no harm at all. Second, the reason Labour wanted to avoid pushing the policy at the election was that they felt they had tried this a few years before and failed, but as I argued in the previous post deficit fetishism only shrives in a particular context, and that context is passing. Third, what sank Labour on fiscal policy was that people swallowed the Conservative line that it was Labour’s profligacy that caused the need for austerity, essentially because this line went unchallenged for five years.

This last point is worth expanding on. Too many in the Labour party think that because many people now believe this idea, the best thing to do is pretend it is true and apologise for past minor misdemeanours (knowing full well it will be interpreted by everyone else as validating the Conservative line). This is almost guaranteed to lose them the next election. It will just confirm that the last Labour government was fiscally profligate, and the Conservatives will quote Labour’s apology for all it is worth. To believe that this will not matter by 2020 is foolish - it is the same mistake that was made in the run up to 2015. It is no accident that political commentators on the right are arguing that this is what Labour has to do. So the first task for Labour after the leadership election is to start to contest this view. They should follow the advice that Alastair Campbell is said to have given after 2010, and set-up an ‘expert commission’ to examine the validity of the Conservatives claim, and then follow through on the inevitable findings. [5]

I can understand why it may seem easier right now to avoid all this, adopt deficit fetishism and ‘move on’. But to do this accepts the framing of economic competency as being equivalent to deficit fetishism, and therefore forfeits a key political battleground to the right. In addition, once you accept severe deficit reduction targets, it becomes much more difficult to argue against the measures designed to achieve them, as on every occasion you have to specify where else the money would come from. (In the UK, that partly accounts for the disaster we saw on the welfare bill. In Europe it leads to the travesty of what was recently done to Greece, where Greece was only allowed to stay in the Eurozone at the cost of adopting harmful additional austerity.) As we have seen in the UK and elsewhere in Europe, there is a large amount of popular support for an anti-austerity line, and if the centre left vacates that ground the vacuum will be filled by others. Arguing against deficit fetishism (or in more populist terms ‘obsessive austerity’) while pursuing fiscal responsibility through a balanced current budget can become a winning strategy for the centre-left in Europe over the next few years.

[1] It is easy to forget that there is nothing that makes this the inevitable policy of the right. George W. Bush took the reduction in the US deficit under Clinton as a cue to cut taxes and raise the deficit.

[2] This sentence is just for those who like to ask why I tend to write more posts giving advice to the centre-left rather than to the right on this issue.

[3] I have argued for ‘QE for the people’, but always as a more effective tool for the Bank of England to stabilise the economy and not as a more general way for governments to finance investment. (Even if this becomes ‘democratic’ along the lines suggested here, the initiative must always come from the Bank.) As for growing your way out of debt, this is much closer to the policies that I and many others have argued for, but it may unfortunately be the case that at the low point of a recession this line is not strong enough to counter deficit fetishism.

[4] It was also the main fiscal mandate of the last coalition government, of course. This could be supplemented by targets for the ratio of government investment as a share of GDP. As long as these are not excessive, an additional debt or deficit target seems unnecessary.

[5] The question should not be ‘did Labour spend too much before the recession’, because that is not the line that did the damage. The question should be more like ‘did the Labour government’s pre-2008 fiscal policy or the global financial crisis cause the 2009 recession and the subsequent rise in the UK deficit?’  


  1. I entirely agree with the suggestions in the post. The key issue is to push back, by use of an 'expert commission', on the 'responsibility for the deficit' lie. It would also help if Labour started to use the word Keynes in their vocabulary - no one else does. His ideas still work.

    1. I agree about Keynes, and particularly that Keynesian ideas are mainstream.

    2. The expert panel is actually the best idea I've heard on this issue.

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  3. > Simon Wren-Lewis

    Maybe, your judgement that the general public's view about the deficit is based on simplistic economics is wrong and in fact the general public don't like deficit spending for a political reason, ie, because their view is that government spending and access to an arbitrary amount of resources without taxation lacks democratic accountability to themselves the public.

    1. Sounds like an awfully sophisticated public to me.

    2. Dinero, the public aren't stupid enough to believe such a stupid thing.

  4. Another way forward would be to use deliberative democracy mechanisms more to try to develop some understanding of what 'the people' think AFTER they've had a bit of time to think. I wrote up some ideas on this here.

  5. Has the Conservative Party argued that Labour spending "caused" the financial crisis? It is a bit of a straw man, but I've seen a lot of Labour people complain about it. Ed even refuted it in the TV debates, though I didn't hear Cameron or Osborne make the point.

    What I heard instead was that Labour didn't "fix the roof while the sun is shining". This metaphor is wonderfully clear. If someone doesn't fix the roof, then you don't blame them for the bad weather (or recession) you instead blame them for not being prepared (in this context, running a structural deficit in 2007).

    Less abstractly, the Conservatives claimed that Labour "spent too much and borrowed too much". But they did not claim that this "caused" the crisis.

    So when you write:

    "[5] The question should not be ‘did Labour spend too much before the recession’, because that is not the line that did the damage. The question should be more like ‘did the Labour government’s pre-2008 fiscal policy or the global financial crisis cause the 2009 recession and the subsequent rise in the UK deficit?’ "

    I think you get it precisely backwards.

    1. The key result from opinion polls is that more people blame Labour than the coalition government for the austerity the coalition government enacted. That can only be because they think the post recession deficit was all about Labour overspending, when in reality the contribution of any Labour overspending was minimal. The fix the roof metaphor presumes the roof needed fixing.

    2. Nick Clegg said that Ed M should apologise for crashing the UK economy in one of the TV debates (I think that was his terminology). That sounds pretty close to blaming the Labour party for 'the mess the country was left in'. I, of course, don't buy 'the mess' meme.

      Further Cameron clearly blamed Labour for the financial state of affairs when he took over - he read out the note saying there was no money left' - the implication was that Labour had spent it all.

    3. @ Dave: yes, I remember Clegg saying that as well. But Simon stated it was a "Conservative claim", which I don't recall (of course, the Lib Dems were a bit more credible than the Tories about wanting tougher banking regulation prior to 2008, so perhaps he meant that)..

      My point was that the broad thrust of the Tory campaign was *not* to blame Labour for the crash itself but instead to claim that we were ill prepared for any sort of recession. The use of the Byrne note is consistent with this. Now you might disagree with this (as Simon does) but it's important to be clear what you are disagreeing with.

    4. Well - if the Tories' implication was that Labour's gross mismanagement of the economy meant that we were particularly ill prepared for the financial crisis then I regard that as equally disingenuous.

      Put that alongside their banging on about deficits and the need to fix the roof whilst the sun is shining. Then look at the deficits and surpluses they were responsible for when in government and you just end up with a deeply dishonest party that knows how to play the political game.

  6. Just to show the difficulty of the task, this poll risks bringing polling, or at least the poll commisioners, into further disrepute.

    "We must live within our means, so cutting the deficit is the top priority" is a prime example of a leading question.

    1. Furthermore, it could be used to justify running a balanced budget in a recession, something even Osborne does not support. So what is that meant to imply - that Labour should have a policy of balancing the budget?

      Cruddas says "We can seek to change the views of the public, but it’s best not to ignore them." I agree absolutely - what Labour did before 2015 was try and ignore them, when it should have been arguing its case.

  7. The most extraordinary and despair-inducing thing is that it was evidently commissioned by the Labour Party itself! And Corbyn is supposed to be the hopeless one!

    1. Of course asking a poor question could have been quite deliberate.

    2. Yes, that thought did occur - thus the despair. In which case it isn't just about meeting the electorate half-way in their error - which makes some political sense - but actually not realising it is an error at all, even embracing the whole idea. I really feel a vote for Corbyn coming on, whatever his leadership skills.

  8. And, as suggested elsewhere, even the headline is false. As being anti-deficit is not the same as pro-austerity.

  9. I believe Ed Balls in the Telegraph was blaming Labour's anti-business approach for costing them the last election - and his seat.

    1. 'Labour's anti-business approach'. Yes, it was called that by Labour's opponents, but of course Labour were not campaigning as the 'anti-business' party. If you had asked all the commentators who used that phrase before the election what was the most anti-business measure of the following:
      a) freezing energy prices
      b) a large increase in the minimum wage
      they would have all replied (b). In reality I suspect being anti-business is code for anything that those earning large salaries object to.

  10. Your also have people like Frank Field who, in media terms, is a Very Serious Person, using loaded terms like "deficit denier".

  11. A decent article in the Guardian by SW-L or a similarly well qualified economist taking to mick out of the "household deficits can be compared to government deficits" idea would help. I say Guardian because The Times and Telegraph probably wouldn't publish it.

    1. krugman says it succinctly but he's the wrong source - in an economy, your spending is my income and vice versa. If everyone tightens their belt you get you get a recession. The government should loosen its belt when everyone else's is tight.

      I think a politician or political party would be a better source.

      You also will get the follow on argument that 'you can't spend your way out of a recession.' My answer is that's exactly what you do - those spending are called customers.

  12. I look at this as a meta macro political problem. A google search would be interesting. How many politicians have uttered the phrases zero lower bound, low aggregate demand, balance sheet recession, or 2 percent inflation target. These concepts are easily comprehensible to a layman like me. A well crafted speech could tie these and other concepts together adding empirical evidence to demonstrate austerity is counter productive and cruel. And no math needed.

    But they think explaining macro will bore people or worse they are ignorant. Or both, sometimes ignorance is willful.

    Macro can be counter intuitive and pols hate that. And so, like Hollywood, they go to easy morality tales, like we need to straighten up and fly right.

    I don't think voters will follow technocrat Keynesians. Too boring. But they might follow a counter morality tale. Like FDR's 4 freedoms or the Great Society or education programs, scientific research, etc. In a way stimulus propsals must be poetic and inspiring. Keynes PLUS Hollywood.

  13. «The question should be more like ‘did the Labour government’s pre-2008 fiscal policy or the global financial crisis cause the 2009 recession and the subsequent rise in the UK deficit?’ »

    That question is a leading and misleading question, in excellent oxonian style, because the answer is neither: it was clearly the New Labour's government fault, but not because of their fiscal policy, which was sound as you describe, but of their extraordinarily pro-cyclical and loose credit policy, which ensured that the global financial crisis would cause trouble in the UK too, and a lot of trouble.

    Those countries that did not engage for 15 years in pumping up debt and asset prices did not have as large a correction as the one that happened in the UK.

    In the UK the "commanding heights" of the financial system were bankrupted not by the non-existent looseness of the fiscal policy of the New Labour government, but by the New Labour policy of allowing/pushing them to ever higher leverage ratios to supply the credit to keep house prices going up. As to that the conservative government is doing exactly the same.

    But pushing up debt to boost house prices is not something for which either New Labour or the Conservative can be usefully criticized at the political level, because it is a very popular policy of "aspiration" to tax-free effort-free capital gain income, and that's why both engaged and continue to engage in it.

    Thus all the irrelevant and stupid discussions about deficit fetishism...

  14. «Thus all the irrelevant and stupid discussions about deficit fetishism...»

    As to that my personal impression is that "austerity" and "deficit fetishism" were fairly irrelevant to the outcome of the election, and what mattered were:

    * The effects of FPTP especially in Scotland. Labour lost in terms of seats, and did reasonably well in terms of votes. Conversely the Conservatives.

    * Many swing voters cared a lot not about the "austerity" rhetoric, but voted for the party that seems more likely to deliver on the "aspiration" to low interest making either debt cheap in itself, or making it cheap so house price would be boosted further up. Many voters are either heavily indebted (for example with those second mortgages) or are rentiers with significant property ownership (for example middle aged and older women voters in the South).

    If "austerity" and/or "deficit fetishism" mattered to voters it was I think only inasmuch they mattered to keeping interest rates low and property prices up. Perhaps secondarily inasmuch rentier voters perceived that "austerity" and/or "deficit fetishism" would result in higher unemployment and lower wages, which to rentiers is a good thing.

    In general for the past 30 years swing voters have chosen the party promising the biggest tax-free effort-free capital gains.

    PS I think that these were the winning arguments for the conservatives, my usual quotes from G Osborne and D Cameron:

    «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.»

  15. This makes a lot of sense. But ‘borrowing to invest’ will only work in the current climate of public opinion if (a) there is a convincing story about what the money will be spent on, (b) people believe that the quality of spending will be better than in the past and (c) the people telling the story are at least credible if not trustworthy.

  16. Another interesting aspect of all this is the short-attention span of the electorate.
    Up until 2008, the Conservatives were backing Labour's spending plans.
    They did an astounding 180 when the crash hit.

    Oh and I'm very thankful that at the moment of true crisis Brown/Darling were at the helm. It's difficult to know if he meant it but we really would have been in a lot of trouble had the then shadow chancellor been in charge in 2008-9 - according to what he said he would do if he was in charge.

    Anyways, my point is this. If Osborne crashes the economy again (flatlining growth or worse in 12-18months time) and the Tories tear themselves apart over Europe. Then there will be space for Labour to stake out a very different position.

    I think the intellectual ground-work needs to be done now though.


  17. I think you're outlining in very clear terms what Jonathan Freedland discussed in the Guardian a few weeks ago, about the need for Labour to find the right metaphors
    Keep up the good work!

  18. "Anti-austerity" is now a phrase which makes "most people" roll their eyes.

    I wonder if it's time the left stopped using the term "austerity" and started considering using terminology that sounds more "grown up"?

    Here are some suggested sophisticated euphemisms!

    STECZIRB - Short Term Expansionary "Close to Zero" Interest Rate Borrowing.

    PEMPTIP - Post Extraordinary Monetary Policy Targeted Inflationary Policy

    SIRIRB - Sub-Inflation-Rate Interest Rate Borrowing


    STR0NGERS - Short Term Restricted Zero / Negligible Growth Economy Revival Spending

  19. "Yet responding to deficit fetishism by implying the deficit does not matter unlikely to convince many. It just seems too easy, and contradicts people’s personal experience."

    I think, or rather I fear, that this is a mistake, at least in the long run. Until their there is a quite fundamental shift in the perception of government taxing and spending, there will always be a strong bias towards deficit fetishism in public discourse, and so in public policy, and this will invariably strengthen precisely at those times when it is likely to be most damaging.

    Fortunately there are plenty of ordinary experiences that can be evoked as countervailing metaphors to the household analogy that stands at the center of the deficit fetishist narrative, such as: the analogy of government taxing and spending with the brake and accelerator in an automobile; the analogy of government money (as distinct from bank money) as a systems of "points" for "keeping score" in the economy (whereby the scorekeeper is obviously never in danger of "running out of points"); and many more.

    Such metaphors may seem overly simplistic to economists, but they are, I think, no more so than that of the government-household analogy. Plus they have the advantage of pointing to the truth, instead of to a monstrous mistake.

  20. I think maybe the public are not as wrong as you think - you assume that anti-austerity policies would be pro-growth and thus increase tax revenues in both short and medium term (and thereby reduce the deficit in the short term and reduce government borrowing in the long term). However, those politicians currently espousing anti-austerity policies are not Keynesian in the sense of providing short-term support to the economy to increase growth. They are just against wage restraint in the public sector and against reduction to both in-and out-of-work benefits because they think those are morally appropriate stances.
    The increase in government spending under New Labour was funded by increased tax revenue from high earners in the boom-time City and tax revenues still come largely from top-rate tax payers. There is some reason to believe that the overall level of government spending bequeathed to the Coalition in 2010 (which was in excess of revenues even in 2007) in fact reflected a far higher structural deficit than appeared to be the case because of the unsustainable financial services boom.
    Now, for understandable reasons, the left wishes to bash the financial services sector and be generally unfriendly to businesses that pay very high wages to part of their workforce. So the part of the left espousing anti-austerity policies also espouses policies that will reduce the gross income of most of the companies and employees that paid the most tax in 2008.
    So the choice of the British public was and remains a choice between the mildly austere Tories (in a growing economy with relatively low unemployment) or the anti-austerity left (who are not pro the growth of anything other than the public sector).
    The public wants growth and thinks that the Tories are more likely to deliver it. They don't think the Tories will impose so much austerity that it crashes the economy and they don't think the left will use increased borrowing in a way that will grow the economy, Neither Corbyn nor Osborne are following a modern macro playbook - our choice is not between Keynes and Hayek but between Marx and Hayek.

  21. As a matter of rhetoric, one should try to choose the battleground where the case is strongest. Doing infrastructure maintenance converts one form of debt to another, because the maintenance must be done eventually, and is thus not really "spending." By emphasizing this the left could attempt to shift the terms of debate. Imagine a politician explaining this as follows:

    "Let's suppose you're unemployed. Of course you have to look for a new job, but you still have plenty of time on your hands. What about finally painting the basement, as you have long intended but kept postponing? You'd have to buy paint, rollers, and brushes, and those expenses would inevitably end up on your credit card. Would that be irresponsible? Anyone with a smidgen of common sense would say `Of course not!' But the Conservatives foolishly refuse to take advantage of the present opportunity to discharge our obligations to the future when it would be least expensive. Spending on infrastructure would do wonders for the economy, and it would make sense on its own terms even if there was no stimulus."

    The Keynesian tradition emphasizes that when the multiplier is greater than one, it makes sense to pay people to dig holes and fill them up again. Perhaps this is OK in an academic context, but allowing the issue to be framed this way in a political debate is disastrous.

  22. I heard the phrase 'put out the fire and worry about the water damage later.' The fire was the Great Recession. The water damage is debt. It makes clear that deficit fetishism was and is the wrong focus.

    Austerity has shut off the water when we have a fire to put out. What could be worse?

    i think you need something that simple and clear to get the message through to the public.

  23. «The fire was the Great Recession. The water damage is debt.»


    * The fire was the enormous growth of debt in the leverage-boom years of 1980s-2000s.
    * The water damage was the great recession.

    The problem is how to deal with the water damage.

    Most governments, and in particular the UK one, want instead to restart the fire, and want to use fiscal austerity as a way to pretend that putting the house on fire again can be made safe.

    As I argued above, discussions about fiscal austerity is mediamacro, which SimonWL seems to engage in quite willingly; voters don't really switch their vote on austerity, either for or against, they switch their vote to the party promising low interest rates and higher property prices, especially higher property prices.

    Swing voters want another round of houses on fire!

    1. The topic is public debt. You write of private debt. You aren't making sense.

      I purposefully don't read your comments as they are far too long for a comment thread.

  24. Just signed up to the blog- good to get back to reading macroeconomics as my Oxford PPE studies ended in 1981 (and I remain a Keynsian). The area I think could be added in the blog is the aspect of press and television seemingly buying in totally to the one- eyed view of deficit reduction. This is contrary to the macroeconomics that I was taught. Especially irritating in the case of the BBC given their charter - more understandable in newspapers such as the Times/ Telegraph etc with clear political leanings.

  25. SNP presented themselves as anti austerity and it did them no harm at all?

    Yeah, it seems you convienently forget that they were pretty much carrying over a guaranteed vote from the referendum. It also gives no credence to the fact that the SNP could afford to be anti austerity (during the referendum campaign AND the UK election) because they had no hope of ever controlling the Treasury levers and have never had an economic record because Scotland doesn't have economic powers.


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