In my last post I said that the lack of a convincing economic vision was at the heart of the British Labour Party’s difficulties, and a problem for the left generally. It is worth unpacking that a bit and sketching the direction that any new thinking should take.
The central political problem for the left is the disaffection of so many working class and lower middle class voters, particularly ethnically native people. They are becoming increasingly voting for right wing populist parties and causes. This was a dominant factor in the vote for Brexit in Britain, and the rise of Donald Trump in the US and Marine Le Pen in France, to name just a few examples. These voters had been part of a left wing coalition, but leftist parties moved up market to attract liberal middle class voters, especially those employed by the public sector, and also pitched for ethnic minorities.
Meanwhile problems for the traditional working classes go beyond political neglect. They are overwhelming the losers from the advances in technology and globalisation which have destroyed the relatively stable and well-paid jobs on which they used to depend. Whole swathes of Britain are stuck in a post-industrial doldrums, especially in smaller towns in England and Wales. The left needs to win back these voters if it is to challenge the populists and the centre right. They have little clue as to how to do this, and distract themselves with other issues. Labour indulges in internecine strife. The Lib Dems are concentrating on rebuilding their core vote – i.e. focusing on the middle class vote.
But the cluelessness of the left in Britain struck me most forcibly from a comment made by the Green MP Caroline Lucas. She blamed the Brexit vote on austerity – government cutbacks since 2010 following the financial crisis. And yet the bulk of the disaffected voters were never very dependent on government jobs and handouts, and are often quite supportive of austerity policies, as they felt they hit the undeserving – immigrants and layabouts – rather then themselves. Indeed, they benefited probably more than most from government generosity on raising tax allowances. It’s not austerity, it is the lack of decent jobs that is the problem. And government handouts are not the answer because these foster dependency and undermine people’s sense of self-worth.
The left starts with a cultural problem. They are by and large liberal, inclusive and cosmopolitan in outlook. This helps in coalition building generally, and especially in outreach to ethnic minorities, but it creates immediate distrust from native working classes. In order to overcome this the left needs to offer hard benefits – and that involves two things. Good quality jobs and decent public services. The left loves good public services too, of course – they provide lots of employment opportunities for their core supporters – though they are less certain how to pay for them as an aging population pushes up demand. But on jobs they have almost nothing to say.
Such talk as there is concerns macroeconomics. The left favours stimulating demand through generous fiscal policy to create jobs in the economy as a whole. Jeremy Corbyn, the Labour leader, talks of investing in infrastructure. This may be a good idea in itself, but by and large these policies create the wrong jobs in the wrong places. New housing, for example, needs to be built in the prosperous south east, where the shortage is greatest, and firms often have to import the workers from abroad because local ones lack the skills. Some infrastructure projects should help the economies of the more run-down regions, it is true, but these need to be part of a more coherent strategy of regeneration. Meanwhile the centre-right has cottoned on the ideas of infrastructure and regional redevelopment as well.
What to do? The first thing is accept that the problems of the disaffected working classes are more than a little local difficulty with conventional economic policy. It is an aspect of a broader crisis brought about by globalisation and technology change, and a blind spot in conventional economic thinking, with its emphasis on aggregated statistics like GDP, and one dimensional concepts of efficiency and productivity. It needs fresh thinking of a type that will be heavily criticised by the conventional public policy establishment. As fellow blogger David Boyle has pointed out, this is not necessarily a problem with economists, but with public servants tied to the old conventional wisdom.
The problem is that conventional policies are tied to highly centralised political structures and tend to concentrate the benefits of economic growth at the centres of power, while hollowing out the rest. While promising efficiency, it is in fact wasteful because it leaves so much human capital under-used. So political decentralisation is a large part of the solution. This is very hard for Britons to grasp, since we have been centralising since William the Conqueror in 1066. But countries with a more distributed history of political power, like Germany, Scandinavia and Switzerland, perform much better while having very similar cultural conditions.
But if political decentralisation is part of the answer, it is incomplete. The USA is politically highly decentralised and yet suffers similar problems of alienation. There localised political units have not been able to challenge the power of big corporate interests, who collect large monopoly profits and suck them out of the local economies in the name of economic efficiency. Wider national and international political structures need to keep these corporations in check, and yet too often they are captured by them. This is an unresolved battle in the European Union, incidentally, and the best reason to be sceptical of the EU project – though the EU also does much to counter global corporate power.
Meanwhile we need to stack the economic odds in favour of local entrepreneurship and innovation, and celebrate localised, human and integrated services that tailor service solutions to individuals. Much more public money needs to be channelled into rebuilding skills in de-industrialised regions – something Britain is woefully bad at by international standards (consider this interesting article in the Economist).
Some on the left are starting to get this. American Democrats are waking up to the evils of large corporate oligopolies. British Lib Dems are sympathetic to the decentralisation agenda. A number of Labour city leaders also grasp it. But it is complex and difficult area. It needs both grand visions to change mindsets and capture the imagination, and small, practical steps that will achieve the goals in an evolutionary way that convinces sceptics.
I will try to use this blog to help develop the new economic thinking in my very small way.
The major problem Labour seems to have is its continued dependence on trade union support and finance (although these are, of course, at the historical root of why Labour (the “Labour Representation Committee”) came into existence in the first place and led people who had been Liberals like Keir Hardie to abandon the party and help to form the new one). This is despite the fact that the trade union bosses (whose membership is now overwhelmingly concentrated in the (shrinking and continuously crisis-hit) public sector) seem hell-bent on electing Labour leaders who sing the song THEY want to hear but who are, frankly, anathema to the wider public (and to the aspirational white working classes in particular): Ed Millband and now Corbyn, In the same way as the Tories (despite May’s soundings) are, in my view, now irrevocably and totally lost to the Hayekian ideals of totally untrammelled free market forces (for which Brexit will be a huge boost and which was ALWAYS the goal of the primary Brexit financial backers (who were more than willing to employ the xenophobic/anti-immigrant feelings of the same white working class as above and who are totally disillusioned with Labour after the disasters of Blair and Brown and the “who knows what?” stance of Milliband), I really cannot imagine these backers of Labour having much interest at all in the ideas you outline but, rather, the calls for “an end to cuts” will just go on and on (and will continue to be ignored). The ONLY way forward to me seems a willingness to form some kind of progressive alliance in which ‘centrist’ Labour backers, Lib Dems, Greens and others (SNP + Plaid) join forces to work towards developing the new kind of approach/politics you outline and for which VOTING REFORM is key factor as well. The alternative is going to be twenty years (at least) of Tory (or, possibly, Tory/Kipper) rule in which ANY form of regulation outside of ‘market forces’ will be dismantled to a degree which no Western country has experienced since before the First World War.
I think you are right that the trade unions will be against any progressive economic reform. They tend to hate decentralisation. They want to roll the clock back to the 1970s. The are progressive elements in the Labour party though – especially city leaders, who are the only Labourites with any serious political power these days. It will be interesting to watch them. And any alliance has to be based on electoral reform, I agree. There is no prospect of that with Labour at present, even though electoral reform is the only way to sustain a purist leftwing party.
Incidentally I don’t think you are right about the kippers. If they survive they will turn themselves into a working class populist party, combining conservative social and cultural values with supporting a big state presence (a bit like the east European populists and the French FN). There are a lot of Labour votes for the taking along that route. I suspect that the Tories will be a bit more centrist that you suggest too – which will make them very hard to beat.
Funny that, I’ve always thoughts economic was one of the left’s greatest strengths.
The economic doctrines of the right have always failed: classical economics led to the Great Depression, Monetarism failed as soon as it was put into practice, and was quietly replaced with Neoliberalism, which took longer to fail, but is visibly failing all over the world.
The left has Keynes, whose ideas were enormously successful: the post-war settlement created the modern middle-class and a shared prosperity on a scale never before achieved in history.
The more radical left has Abba Lerner, whose ideas are ready for prime-time.
Politicians need to be less timid, because it’s not economics that the right are good at, it’s propaganda and framing. What the western world really needs is to return to a policy of full employment – an idea even the right used to support 60 years ago.
Certainly the right is out of ideas on economics too – but they are less ambitious, treating inequality as a law of nature and/or some kind of justice.
Yes, the right take the view that the economy is like a force of nature, beyond our control, and something we are subservient to.
But the reality of course is that it’s nothing of the sort. The economy is a purely human construct that we have a great deal of control over, and we have a duty to make it work in the interests of all.
Ah-Ah! Someone who has heard of Abba Lerner. Very Good! Then there’s the Polish economist Michael Kalecki too.
I’d recommend them both to our host Matthew. Keynes was quite right in his understanding but his prose is a guaranteed cure for insomnia! I’d recommend reading either of these two before tackling Keynes.
In the modern times we have a group of economists called the MMT group who are basically right, although I have a bit of a problem with their JG ideas.
Stephanie Kelton does very good job of explaining it all.
https://www.youtube.com/watch?v=d57M6ATPZIE
@ Matthew,
“It’s not austerity, it is the lack of decent jobs that is the problem.”
Oh dear! Where to begin?
Austerity causes a lack of decent jobs. That’s what it is meant to do. It’s nothing to do with reducing the deficit. That’s just a cover story! The pound is just an IOU of government. If the government spends by issuing IOUs then it has to be in deficit and have an accumulated debt. That’s quite normal.
Cutting spending and increasing taxes (ie austerity) slows down the economy increasing the rate of business failures and the rate of unemployment.
Increasing spending and reducing taxes (ie applying a stimulus) does the opposite but at the risk of introducing some inflation into the system.
Does austerity reduce the deficit? It could go either way. If people are scared economically they’ll possibly save more which means that the government needs to borrow those savings, spend them, and so the deficit could well increase.
The big step needed to understand the National economy is to stop thinking that the government is like a household. Unless that household has a huge printing press in the basement, its nothing like that at all! Households are currency USERS. Governments (like in the UK, the USA, Australia but not in the eurozone) are currency ISSUERS.
Thanks Peter. Suffice to say that I suspect we have quite a different outlook on economic management. I also suspect that you are better read and better qualified than me on economics too, but I will stand my ground for now! My starting point is scepticism over macroeconomics. What do I mean by a lack of decent jobs. Consider the boom years of the naughties when loose fiscal policy (evidence: high current account deficit combined with high real exchange rate) created a growing economy. What did that do for the small towns in the north and west that were so much part of the Brexit backlash. Very little. The decent jobs were wiped out by technology change and globalisation. That is the critical economic problem, and it has very little to do with how the levers of fiscal and monetary policy are pulled in the capital.
And please don’t think that an Economics BSC thinks that running the economy is like running a household budget.
I’m sure most politicians and even some economists would agree that the National economy can’t be compared to a household budget, if pushed. But then they often go on to argue that the budget should be balanced, or as close to it as possible, which is in itself indicative of household budget thinking. Its not just a question of scale. There is a fundamental difference.
Vince Cable is on record as warning about the high levels of private debt prior to GFC. He correctly understood that the build up of private debt was the cause of it. I’m sure he knows that if the UK as whole is in debt to the rest of the world because it runs a trade deficit that someone in the UK has to fund that deficit by borrowing. That borrowing is a mixture of private and public.
So it must logically follow that if private borrowing is too high that either public borrowing is too low or the trade deficit is too high, or, again a mixture of both.
So Vince has now got a problem! He can’t complete his explanation for political reasons. He can’t say that the public deficit is too low. That would never do. And, he can’t say anything about the trade deficit. Worrying about that is so 1960’s!
I think there are plenty of reasons to want budges to be balanced, or not too unbalanced, without resorting to household budget thinking. The world is littered with governments who were too lax about this and then struggled to finance themselves (Brazil is a good current example). And my macroeconomics lecturer (UCL’s Wendy Carlin) taught me that excess govt demand (not necessarily a deficit of course) would lead in the short term to appreciating exchange rate and trade deficit, and then medium to longer term difficulties as that contradictory situation was forced into resolution. I think that is precisely Britain in the naughties (as did she in 2008). Incidentally I concur with you in regarding trade/current account deficit to be a critical issue. As Martin Wolf has pointed out, it was a much better predictor of Eurozone trouble than budget deficits. And the only country which seems to be able to ignore budget discipline is Japan, whose economy is famously based on a strong trade surplus.
To me the high current account deficit is a fundamental sign of weakness in the UK economy, and ultimately limit the government’s room for manoeuvre in fiscal policy. If I have understood you correctly we disagree about the direction of causality. I am rather old-fashioned in thinking that the current account deficit is largely the result of excess budget demand (deficit even at the top of the cycle), whereas you seem to think it is the other way about. No doubt it is a mixture – but I think the rise of the Sterling from 1997 served to do a great deal of long term damage to the UK economy, while give the short term impression of success.
I also accept there is a perfectly legitimate case for replacing private sector debt with public sector debt. But I still have an old-fashioned suspicion of free lunches.
Why does Wendy Carlin think that excess Govt demand will lead to an appreciating exchange rate and trade deficit? Most people in the UK seem to like a high exchange rate and are worried about the pound’s recent fall. So is Wendy Carlin saying that the way to get it back up again is to increase Govt spending even more? I wouldn’t be against that providing inflation was under control but I certainly wouldn’t argue that the exchange rate would increase as a consequence.
Looking at the bigger picture, on a world scale, we have countries like Germany, Switzerland, Denmark, Singapore, and China who are determined to and do run large trade surpluses. For Germany, it seems to be a matter of national pride that this should be the case. But when I ask my German friends and colleagues why they should want to consistently swap more goods and services, with the rest of the world, for fewer goods and services they look at me rather quizzically – but don’t have any real answer. They often say that it creates jobs! So Germans just like building cars for others to drive?
But if they want to do that then maybe we should just let them. The alternative is to engage in trade wars. This, in the past has led to real wars and we don’t want all that again. So, we and the Americans let them buy up treasury bonds, we let them sell us as many BMWs as they like, and we let our currencies rise as result which makes our industry less competitive.
It would be OK if we recognised that is what we were doing and that the trade deficit inevitably translated into a government deficit. Anyone can see it must by looking at the very simple equations for the national accounts but we don’t! We fret about the public deficit and needlessly depress our own economy in a futile attempt to make the books balance by cutting spending and raising taxes like VAT.
We should only do that if the economy is overheating and inflationary tendencies need to be quelled.
I should say that I have not spoken to or read Wendy Carlin recently, so it would be wrong of me to say anything about what she thinks now. My comments are based on her lectures and conversations with her (she was my tutor) when I was studying in 2005-2008. The basis of her claim that loose fiscal policy leads to an appreciating real exchange rate was the Mundell-Fleming hypothesis. Fiscal policy creates demand for currency and so its price rises by the laws of supply and demand in the case of a floating currency. It is part of a rather neat symmetry for small open economies – a fixed exchange rate renders monetary policy redundant while enhancing fiscal policy; a floating exchange rate renders fiscal policy redundant (cancelled out by exchange rate movements) while enhancing monetary policy. A high real exchange rate may mean enhanced buying power in the short term, but it is not sustainable medium term if there is a current account deficit – sooner or later you become a credit risk. In my view sterling’s recent fall is a good thing and it needs to stay down for the longer term health of the economy. However, if so many countries are determined to run a surplus, it becomes easier to sustain a deficit – but there will come a point when the financial system cracks under the strain. This is behind the Euro crisis. And it is a central plot theme to Lionel Shriver’s novel the Mandibles that I reviewed last week. The tension resolves by the surplus countries have their excess financial assets destroyed while the deficit countries go through some type of default. All which causes severe disruption.
The mathematician in me warns you not to describe the relationship between the government, private sector and foreign deficits/surpluses as an equation. It is an identity, or truism, which has no information content. It tells you nothing about causality. It’s a bit like saying that if you increase your speed you will cover distance more quickly. You are using the identity to hide a theory about the wider implications of the fiscal deficit. It’s a bit like monetarists using the “equation” linking inflation, growth, money supply and velocity to say that money supply was critical to managing the economy. That turned out to be a theory that velocity was constant, which turned out to be nonsense.
I perhaps should come clean and say I’m a Physicist/Engineer. I know economists like to have their identities but they are still equations. An equation means one thing equals another. It doesn’t have to contain any causal information in a mathematical sense.
So if we say that:
Govt Defit = Private Savings + Trade Deficit
its still an equation whether or not the Govt Deficit is the cause of Trade Deficit or vice versa. There is some information there. We know that if we want to reduce the Govt Deficit that it might also be a good idea to try to reduce the Trade Deficit too.
My problem with economists is, without any real world evidence, that they believe things like:
“a floating exchange rate renders fiscal policy redundant (cancelled out by exchange rate movements) while enhancing monetary policy”.
We’ve had over 30 years where successive government have relied almost exclusively on monetary policy and the state of the our economies is evidence that things aren’t at all well. Exchange rate movements clearly don’t work in the way that is assumed.
There is no possibility of the UK, US, Australian government ever being a credit risk in their own currency. They can always issue as many pounds or dollars or whatever currency they using as are needed to cover their liabilities.
They can be an inflation risk though. There’s a risk that the currency won’t be worth as much. But that’s not what the credit agencies are measuring, if they are measuring anything at all. If it was just about inflation then the UK would have a better credit rating now that it had in the past when inflation was significantly higher.
Economists need to be more scientific in their approach. They shouldn’t just say that the eurozone should work according to our models and therefore it must work. If austerity produces poor results then even more austerity can’t be expected to produce better results. But that’s what we’ve seen happen there. Theories should fit the observable facts. Except it strikes me that it’s the other way around for the Economics profession.
Good discussion Peter. As a scientist and engineer you will at least take more rigorous approach than some with identities. I have read some howlers, most egregiously from David Graeber in the Guardian. You can use that particular identity as an equation more successfully than many, but there are logic traps all over the place, and I would far rather frame the argument without direct recourse to it, making the assumptions more explicit.
And yes, unequivocal evidence in macroeconomics is impossible to find for about any assertion. That includes the Mundell-Fleming hypothesis and the overly neat model of fixed and floating exchange rates in the idealised small, open economy. (Though I think it conforms to the observable facts of the British economy in the naughties extremely well). I would say the same for your assertions, though, such as “We’ve had over 30 years where successive government have relied almost exclusively on monetary policy….” I would not like to say how factually correct that is, and in any case that is a period of some very remarkable economic achievements, such as the biggest reduction in global poverty in the history of mankind, to say nothing of unprecedented standards of living in most places. (Coincidence perhaps, I know, but…). Also “There is no possibility of the UK, US or Australian govt ever being a credit risk…” Apart from the fact that I regard currency risk as a form of credit risk (in that it makes little difference to an investor) I can remember when the UK government last called in the IMF, and I think something similar could easily happen post Brexit, if we have a private investment drought, trade deficit and budget deficit all at once. If there is one thing that I have learnt over the years it is that the unthinkable happens all too often – and thinking things are unthinkable can be positively dangerous.
The purpose of economic models like Mundell-Fleming and the broader “IS-LM” model is not to provide predictive power, but to draw attention to possible economic strengths and weaknesses so that economic policy making is less risky. Many economists do this very well; others get too attached to their theories.
And as for the Eurozone, I think you are being much too simplistic about austerity. That wasn’t the result of economists being obtuse, not basing their ideas on observable facts. It had to with the battle of various political interests, especially in Germany and Greece itself.
There is a lot of truth in what you say about the euro being as much about political interests, political conflict, and political ambitions as economics, but nevertheless for the major nations of the EU to abandon their own currencies and engage in a program of monetary union with only a central bank to hold it all together was being reckless in the extreme.
The PTB in the eurozone must have somehow convinced themselves that the ECB was all they needed and that somehow wages and prices would all respond in neo-classical text book fashion to changing cicumstances.
Not all economists were oblivious to the dangers though! The warning was sounded loud and clear as early as 1992.
http://www.lrb.co.uk/v14/n19/wynne-godley/maastricht-and-all-that
Indeed there was plenty of advice against EMU at the time, especially from Anglo-Saxon academic types like Godley. Indeed British politicians and businessmen thought the whole project infeasible, and did not take it seriously until it happened (I remember talking to senior work colleagues in the finance industry about it). Not the first time that the British establishment underestimated other EU governments.
What you have to remember in the 1990s was that confidence in floating rate exchange policy was low. The southern European countries (and businesses) struggled to borrow on international markets in their own currency. For some countries (Portugal is the case study I looked at when studying for my degree) there was a progressive slide from stagnation to hyperinflation. The Euro project saved them – first the austerity and reform policies required to qualify improved international confidence, and then the currency itself slashed borrowing costs. The French had long since given up on floating the Franc freely and spent a lot of political energy shadowing the DM. The Germans saw the exercise as a political move – and maybe they were worried that upward pressure on the DM would make manufacturing uncompetitive (exactly the fate suffered by the UK while the Euro project was in progress). There was a convergence of interests, and it seemed to be working for a while. But the compromises required to get it in motion, and the denial amongst political elites of the currency’s implications, ended up in a mess. But beware the idea that a floating currency is a panacea. I don’t think it worked so well for the UK if you see the state of northern towns like Doncaster…