The twin crises?

The unemployment figures were terrible today. I didn't feel that surprised though, perhaps because, like a lot of people, the current not-quite-recession is affecting my own personal life, and as a result of various changes, I and those close to me are cutting back on expenditure, trimming our cloth to suit our means and all the other things you do when you discover that all of a sudden you're sixpence a year under your annual outgoings, not sixpence a year over.

So, if you want someone to blame for the demand crisis in Britain's economy, I'm over here, wondering if there's really any difference between Sainsbury's Basics Salmon and the expensive kind. It's a middle class nightmare.

Naturally, Labour is trumpeting our "Plan for Jobs and Growth" as our response to this broad swathe of misery. Politically this is both right and appropriate, and it would be economically beneficial.

Yet, the worse the crisis in the Euro zone gets, the worse the unemployment figures are, the more I worry such a plan falls between two stools, as a political proposition.

Now, obviously a temporary reduction in VAT, an increase in effective spend on home improvements and more support for young workers, would help generate demand and mitigate the worst of the employment shock. It would also have an impact on Government borrowing, but on the day economists forecast that the Government would have to borrow more than Labour, the case for multipliers is at the very least, respectable.

Further, it's pretty clear that the Labour plan is a modest one. It does not comprise of major cuts in business taxes for small business, for example, or a massive increase in infrastructure spend, or a "Tax-refund" to drive demand. I cannot help but look at what is happening in the Euro zone and think that though beneficial, our current plans would seem small beer indeed if things went wrong in Italy, France and Spain. If Italy went under, what price lower VAT on home repairs? 

So, while I am very critical of the left, and of the agit-prop tantrum-politics that constitutes what might call the "id" of the Occupy movement, if not its core ideology, there is a grain of truth in the idea that "mainstream" politics is not providing a particularly coherent response to the crisis, and so laughable incoherence becomes an equally attractive option. If the best the right can offer is an attack on red tape, and the best we offer is a short term VAT cut, maybe facepainting your way to a solution seems just as sensible a response as any other.

Instead, mainstream left politicians argue for a cautious, small increase in demand against the backdrop of potential catastrophe, while the idealists busy themselves with constructing a fantasy world where libertarians can lie down with communists, because they all feel upset with the way things are going. The most interesting thing about the Occupy movement, as far as I can tell, is that it is not, in any meaningful way, left wing. It is protest as therapy, not solution, and glories in a refusal to offer an alternative.

If the "left" however loosely defined, was really confident in a belief that we need a huge demand side push, the argument should surely be for a much bigger bang now. But we don't, or won't, or can't make that case.

I wonder, idly, if the reason we moderates offer such limited (though positive solutions) and the idealists offer no solutions at all, is because we know that the traditional tools of the left will not prove efficacious in dealing with the medium term challenge.

Of course, there's always the magic pony of the Tobin tax to pay for any dreams we might have, or the convenience of an extra levy on the Bankers, but such free, painless money aside, there's little appetite for significantly higher marginal tax rates, little hunger to control of the commanding heights of the economy, or for a significant increase in the medium term PSBR (It's PSNCR now, isn't it? Such a mouthful).

Going further left, is anyone serious arguing that the way to deliver jobs and growth in today's economy is to bump higher rate tax up to say sixty per cent, jack up corporation tax, increase inheritance and capital gains tax significantly, control currency flows, or impose price controls?

Not really, because it's hard to see how such a traditional "Left" strategy would actually work, economically or politically. Tony Benn campaigns on, but his Alternative Economic strategy has stayed resolutely, firmly dead, no matter what anyone says about the death of the Neo-Liberal consensus.

(You do occasionally hear of demands to nationalise the banks, but little serious thought about it, because the only Banks we can afford to nationalise are the ones that are dying or dead already.)

So the left finds itself bound. The moderate left is aware that it's fiscal tools to tackle the immediate crisis are horribly limited. The idealist left is uncomfortably aware they don't actually have a plan to offer, other than disbelief at the way things are now. As a result, the right tells the electorate that pain is the only way forward, and they at least sound sure of their prescription.

In truth, we face two crises. the first is the current crisis of demand. This cries out for action now. The second, no less significant, crisis, is a crisis of repayment. In the end, what is borrowed must be repaid, or more accurately, be within capability of being repaid.

My own, personal, view is that the first crisis requires economic boldness, but the second requires a strong commitment to fiscal caution. Our Government offers only caution now, in the hope of a little fiscal laxity to bribe the electorate with later. 

Instead, a clarity from the left in favour of fiscal caution and a commitment to surplus, might give us the political space to take action to meet our current, short term crisis. By stating clearly and absolutely how we will carefully restore fiscal balance in the medium term, we might create the space to act boldly now.

Paradoxically, is the only way to enable a left economic response to our current crisis of demand to embrace a fiscally conservative and cautious long term outlook to address the long term crisis of debt?

However, there is a more depressing coda: This is an argument for government today. It would be essential if we had won the last election. It is economically still essential now.

Yet politically, it might be entirely wrong for the Labour party. We are, obviously, not in power. The worst government of my adult life time is, and they seem resolutely committed to only dealing with the second part of our twin crises. I do not think this will work well.* 

As a result, by 2015 we might well find ourselves in a situation where growth is sluggish, unemployment is still high, and there is little or no appetite in the bond markets for extending British national debt further to drive demand. In other words, we could yet be Italy, or more likely "lost decade" era Japan.  

In that scenario, our current plans for Jobs and Growth will be a mere distant memory, but the pain we have suffered will have been deep and sustained. We will still be faced by high, stubborn national debt and few voters or businesses will hunger to increase that debt further, even if it were possible.

In such a scenario, the only way to address the most pressing concerns will be to arrange our spending and tax incomes to achieve growth while both reducing deficits and meeting our social objectives. That will not be easy, or comfortable for the left. But it might very well be right. In such a situation, a Labour government will have to be fiscally cautious and careful, even if it seeks to pursue bold social policy objectives.

So perhaps the correct political response for the left is to show that it understands that whatever the economic situation,  a future Labour government will make a commitment to a tough regime of fiscal caution, and that our focus will not be around spending money we don't have, but on paying for what we want to achieve?

The idealistic left could then argue that this would require significantly higher taxation, taxes on wealth, property and capital in order to fund vital social goods. The moderate left could argue that some or all of this would be counter productive, or electorally disastrous.

But either way, it will be set against a backdrop of stern fiscal rectitude.


* It might work a little, enough to give us a little growth and a slow fall in unemployment, because the hunger to do better is a marvelous thing, and even a bad government can't prevent people from doing something brilliant. They can just limit how many people are able to, and how well they do it. Nor can they stop people in Brazil wanting to buy cars, or pipes, or Barbour jackets..

9 Responses to “The twin crises?”

  1. Matthew

    It's tempting for a "splurge now, austerity later argument", partly because it might not be wrong. But maybe it's tempting because it's the easy way out, like starting a diet 'tomorrow'.
    The Japanese analogy doesn't hold. For a start there's no govt bond market with a greater appetite for increasing borrowing than the Japanese bond market. But Japan does show you can't divorce govt borrowing from private sector balances, so you need to think about where the govt surplus is going to end up and what kind of economy it will be part of. 

  2. aragon

    Some of us, out here, in the cold, have a cunning plan to offer.
    It would certainly frighten the horses!
    And is not based on neoclassical economics or neo-liberalism .
    Hunger, we could eat a horse (not the reason the horses are frightened).
    Of course the current leadership is still attached to the conventional wisdom.
    Fiscal caution is for wimps… (see comments at Stumbling and Mumbling)
    When we say radical, we mean it.
    Thinking outside the box: we are not even aware of the box.

  3. Brian Hughes

    Thanks for drawing my attention to the PSNCR, another acronym for me to forget but thank heavens for Google, at least I won't have to fret all day about what it might mean.
    You seem to be as gloomy as I am about Labour's options and yesterday I bought basic butter.  Any idea if it's any different to the other sort?  My wife seems convinced it will poison us or, worse, make us talk common.
    I think a good case could be made for a "temporary" emergency hike in income tax rates especially the 40 and 50p ones.  I'd really like to see the 3p that Mr Brown took off standard rate put back, it must have cost the treasury a fortune but won Labour no votes because no one really notices it.  But none of this is likely to appeal to our glorious leaders on account of what happened in 1992.
    How long will it take until Labour's collective memory of that election defeat and the Tories' success in conflating proposals for higher taxes on the top 10% with higher taxes for all?  And never mind that it was such a good election to lose…

  4. donpaskini

    I really like Matthew Taylor's bond for hope idea – £2bn programme to create 250,000 jobs for young people, financed by companies with large capital reserves/asset rich individuals each buying 5 yr govt bonds –
    What is particularly good about this is that it is a call to action, so gives people a chance to do something about youth unemployment, rather than just being powerless spectators.

    • Brian Hughes

      It's a nice idea and the sums involved provide a timely reminder of the extent of the problem.
      The issues of youth unemployment and an absence of low skilled work are ones that no developed economy seems to have much clue about how to solve*.  All "efficiency savings" tend to make the problem worse.  For example it's no doubt more efficient to have our streets cleaned by those dinky little scrubbing vacuum machines but the poor souls who might otherwise be sweeping them are probably languishing, bored out of their minds, on benefits.
      * a US partial "solution" seems to be to imprison a vast percentage of their unskilled and/or young people.  This is of course hugely expensive and helps make their penal system their second biggest "industry".  Ironically, in a land that abhors any hint of socialism, this is nearly all paid for out of the proverbial public purse.  Stephen Fry (amongst others) reckons they've reinvented slavery.

    • Matthew

      I don't want to be overly critical of MT's plan as I think this kind of thinking is needed, but it doesn't create 250,000 jobs, it creates 250,000 jobs for one year by borrowing over 5 years. And those jobs are putting unskilled and probably demotivated people in old people's homes and schools. So the potential for it to all go badly wrong seems quite high to me. 

  5. Andreas Paterson

    Quick point on this little snippet (although I take great pride in not being a "serious" person)..
    "Going further left, is anyone serious arguing that the way to deliver jobs and growth in today's economy is to bump higher rate tax up to say sixty per cent, jack up corporation tax, increase inheritance and capital gains tax significantly, control currency flows, or impose price controls?"
    Would say that this is matching up the wrong answers to the wrong questions:
    – Higher income/inheritance/corporation taxes present alternative ways to cut the deficit with a lower impact on the demand side
    – Higher capital gains does the same but with the additional benefit that it could be changed to limit Soouthern Cross style financial engineering
    – Limiting currency flows would be a way of reducing exposure to cross bornder financial crises and also quite a handy way of reducing tax avoidance, but would have some pretty dangerous consequences.
    The policies you mention above would be little help in creating jobs, but would work pretty well with the whole dealing with fiscal problems thing. 


Leave a Reply