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).
