Nonsense Economics

In the UK, the Labour Party's Shadow Health Secretary, Andy Burnham, has been calling on his party to 'shout louder' about the failings of the governing coalition. His main concern was with the National Health Service, but Labour has an even better story to tell on the economy. The Prime Minister and Chancellor are keen to persuade us that austerity has been worth it. Unemployment has fallen for a second quarter running; there are the first signs of growth for two years. By concentrating on the elements of unfairness in the Coalition's economic policy - the cuts to public services, tax cuts for the rich - Labour are missing the chance to attack Osborne’s austerity policy on its central front: its utter failure, after three years, to bring about the promised revival of the British economy.

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What we see is the slowest and weakest ever recovery from a slump. There has been no growth to speak of in the last three years. Almost all of the growth which the five coalition years are expected to bring will come from population growth – much of it from immigration. We are running to stay in the same place.

Ministers tell us that there are plenty of new jobs; it is just British workers are too lazy or badly trained to take them up, so they are filled by foreigners. This may be partly true in London; but it is untrue for most places. Official statistics show that across the country there are five unemployed per job vacancy, compared to half this before 2007, and this has hardly shifted since the Coalition took office.

But what about those one million new jobs created in the private sector? These are not extra jobs. The public sector has shed 400,000 jobs, so at best we have 600,000 new jobs. And most of these are minimum-wage, part-time, zero hour contract jobs, signs of our newly flexible labour market.

Putting all this together, we can say that the economy is today slightly larger than it was in 2010 –though still 3.5% smaller than in 2008 - but with less output per person, and most people worse off. And, at almost 8%, unemployment has remained unchanged for three years.

What Labour should be arguing is that all this is the outcome of the coalition’s misguided and even wicked deficit-reduction policy, whose logic is perfectly captured by the Prime Minister’s ‘we can’t spend money we haven’t got’, and the Chancellor’s ‘we must learn to live within our means’.

This makes perfect sense when the nation’s resources are fully employed; but it is nonsense economics in the presence of massive unused resources. For in that case, the government’s means include these unused resources. If they were being properly utilised the government would have more money to spend; by spending more it would create the means to employ them.

So Labour should stake its bid for power on a promise to reverse the deficit-reduction policy. Unfortunately, Labour has bought the Conservative austerity story, quibbling mainly about the speed of deficit reduction. This is an intellectual capitulation. Labour leaders have been so terrified of being labelled ‘deficit deniers’ that they have been afraid to make the case that spending more money now is the surest way of getting the economy to grow and the deficit to shrink.

Ed Miliband, the Labour leader, was flummoxed when asked on BBC radio whether Labour would increase the deficit. Instead of saying boldly that Labour would look after the economy, and let the deficit look after itself, he hummed and hawed.

In a keynote speech in June, Ed Balls, the Shadow Chancellor, produced a masterpiece of convoluted logic. Conservative austerity policy has indeed been disastrous, he said, but Labour would be forced to continue it, because, as his leader Ed Miliband had said, it has to be ‘crystal clear about where the money is coming from’. Not apparently from the unused resources represented by the unemployed and under-employed!

In practice, the effect of deficit reduction policies depends not on the actual cuts made, but on the effect of these cuts on the level of economic activity. Spending cuts will not reduce the deficit if it reduces the economy at the same time, because the economy is the source of the government's revenues. Over the last two years, the government has taken about £100bn out of the economy in spending cuts and tax increases but there has been no reduction in the deficit as a percentage of GDP. This is because austerity has weakened the economy by just enough to nullify the fiscal ‘consolidation’.

Why is this not being shouted from the roof tops? Because the Opposition lacks the confidence to do so. It should reconnect its head with its heart.

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    The world’s leading thinkers and policymakers examine what’s come apart in the past year, and anticipate what will define the year ahead.

    Order now