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Labour views economy through the wrong end of a telescope

imageslookingtelescopeThere is no path to growth and prosperity for working people which does not tackle the deficit”. So said Ed Milliband last Thursday.

The Labour leader has finally succumbed to a baying media pack that insisted he commit himself to an economic goal set by Labour’s opposition: namely “tackling the deficit.”

I am no politician, but such capitulation to  economically illiterate commentators, is surely both politically unwise as well as economically nonsensical. The reason it is politically unwise is that Mr. Milliband is succumbing to the Chancellor’s flawed and frankly dishonest framing of the public deficit as the biggest challenge facing Britain’s economy. But while Mr Osborne must be delighted at luring his opponents into a debate that cannot be won, he is plainly very, very wrong.

The biggest threats facing the people of Britain, and therefore the economic issues upon which they will decide their votes, are as follows. First, the broken banking system – still not fixed seven years after ‘credit crunched’ in 2007, and still not lending at low rates to the real economy, in particular SMEs. Simmering public anger at a greedy and fraudulent banking sector has not diminished.   Second, a vast overhang of private debt, and the threat to the solvency of households, SMEs and corporates posed by a rise in interest rates. The “Alice in Wongaland” economy is not sustainable, and we all know it. Third the threat posed to all British voters by falling wages and spiralling deflation. Few of us understand deflation, but be sure it poses a very grave threat.  Fourth, the threat posed by climate change.

By overlooking these threats, and focusing on the public deficit, Labour  is not economically credible, and will fail to win the confidence of voters.

This is particularly so because Chancellor Osborne has proved beyond doubt that governments  – even his ruthlessly focussed Treasury – cannot control the budget deficit. We argued as much back in July, 2010, when Professor Victoria Chick and I published The economic consequences of Mr. Osborne.  We wrote then that:

the public sector finances are not analogous to household finances. A household can reduce its deficit by cutting its spending, but the public sector is too important for that. What happens to the public deficit depends on the reaction of the economy as a whole.”

By focussing on the deficit, Labour emulates the Coalition in viewing the economy through the wrong end of a telescope.

The plain fact is that the deficit is a function of the health of the economy (its share falls when the economy (i.e. employment) is expanding, and rises when the economy is failing). Because it is a function of the expanding or contracting”cake” that is the economy,  government is not able to control  its size – as George Osborne has found to his cost. Why would his opponents want to repeat his errors and failures?

Instead of promising to cut the deficit, Labour should be promising the people of Britain policies for investment in e.g. green infrastructure and nationwide high-speed broadband – investment that will generate skilled, well-paid employment, for all, including the millions of under- or part-time or zero-hours employed. Furthermore, because all expenditure  (both public and private) is income for someone else – both those in the public and the private sectors will gain from such public investment.  The investment to boost current private and public incomes can be financed by borrowed or printed money. Because the investment will generate income for both the private and public sectors -and tax revenues for government – the investment will pay for itself. Its not rocket science!

By raising wages, Labour could turn back the threat of deflation.  And by tackling both the broken banking system and the overhang of private debt – Mr. Milliband could offer the electorate a credible exit from the chronic, ongoing crisis of globalised capital.

If Labour were to do that, the deficit would take care of itself.

This article first appeared at Prime Economics

11 Comments

  1. Robert says:

    Miliband as leader is a joke I’m sorry but the bloke is so out of it. the Only chance labour had was if Gordon Brown stayed but he was so tainted with New labour.

    It’s not really worth talking about you look at labour today and you think Jesus how the hell did we get into this mess we have more people on the right then on the left we have a Progress party at this time and to be honest the fact is you may as well sit at home and let other vote or vote UKIP or Tory.

    The labour party should be renamed the Progress party let us the members have the labour name back we will try to get it going because to be honest it dead under the shower.

    1. swatantra says:

      What we need is a ‘Dean Martin’ leading the Party not a ‘Jerry Lewis’ as at present. And, the Party leading on a progressive agenda. And, only genuine members should be allowed OMOV. So that leaves a lot of fellow travellers aljust along for the ride out in the cold. The point about dropping the name ‘Labour’ is a good one because being a One Nation Party we don’t just represent a small special interest group (Unions) but the whole working people sector (70%)

      1. Robert says:

        The problem with labour is people like you mate, Tories who joined labour because of Blair. thank god the voters saw through you.

  2. Russell says:

    Spot on Ann. Keep saying it until they listen.

  3. David Ellis says:

    The national debt and the debts of the bankrupt banks which were added to it and which are six times greater than the national debt and the personal debts and the debts of hospitals and councils are owed ultimately to the super rich. Paying them off means a huge shift of wealth from poor to rich. Of course to not pay them off means your credit will be cut off as has happened to Greece.

    The Keynesian fantasy offered above would be like walking into a noose. I think I prefer the cynical realism of New Labour to these Keynesian demagogues. The reality is capitalism is screwed. Its continued existence means the inevitable pauperisation and destruction of billions. There is no alternative to socialist revolution. The only promises any politician should make to workers now is the promise to struggle. There are no easy answers unless you are an opportunist.

    1. Robert says:

      Brilliant Tory View.

  4. John reid says:

    Labour having a slogan a vote for labour is a vote to save the NHS,isn’t the vote winner we think it is, it may have worked in 97′ but it didn’t work in 92

  5. SANDRA CRAWFORD says:

    Is Miliband aware of this, but controlled by the “Progress Party.” They are heavily funded and very influential. Miliband’s leadership was in question the other week. When he and Ed Balls were criticising Osbournes strategy and had their five pint plan they met with constant attacks from the Lazard investment banker Mandelson. among the neocons there are also those with private health care and banking interests.
    The Labour Party needs another militant tendency purge – this time of the right.

    Then maybe they could consider creating sovereign money to spend into the economy which would allow people to earn it and clear their debts. Also tackle the billions avoided in taxation by all those rent seeking in the economy, banks, energy companies, rail companies and more. This would revive public services, and redistribute wealth by the payment of public sector workers.

    Another utterly insane stance in the Labour Party is its non opposition to the TTIP treaty. This will remove power from government to take any action to help the population as all corporations will be able to sue governments for taking any action that will cost them their predatory rent seeking.

  6. John reid says:

    Sandra why should progress care about What miliband says on this, they’re more interested in the centre ground triangulation ,on private public partnerships, hardly a description of how miliband is going about cautiously not distancing himself from current things, Austerity, the call for an inquiry into torture,etc,

  7. Robert says:

    John read the news Miliband says I’m in the middle I’m a in the center , he is part of the Progress group for god sake as you were until Blair walked away and you lost your main ideology.

    Old saying about leopards and spots.

  8. John reid says:

    Robert it could occur to you that Ed miliband knows elections were fought on the centre ground and he’s just saying that, someone who doesn’t want to address immigration, and didn’t mention the economy at his conference speech, isn’t really in the middle,
    As I’ve said to you several times I’m not and haven’t been part of progress.

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