May 29, 2012
For those who believe that the coalition has profoundly misjudged its economic strategy, good news would appear to have come in the form of Nick Clegg promising a ‘massive amplification’ of state investment. This would appear to suggest support for the measures that Labour has been advocating for some time. Credit easing and state investment of the funds that bond purchasers are begging the UK to take could give a boost to the economy which we have just heard has sunk into a double dip recession. When Cameron’s economic record has struggled such that Eurozone leaders are telling him where to take his advice on account of their record on growth exceeding Britain’s, something somewhere has evidently gone desperately wrong. Ed Balls’s August 2010 Bloomberg speech seems vindicated by every new piece of economic news. His argument that the country needed a ‘credible and medium-term plan to reduce the deficit and to reduce our level of national debt, but only once growth is fully secured and over a markedly longer period than George Osborne is currently planning’, seems borne out by events. As Jonathan Freedland wrote, ‘Ed Balls is steadily acquiring the rare right to deploy one of the most powerful sentences in politics: I told you so.’ Robert Skidelsky, Keynes’ biographer, has unsurprisingly welcomed Clegg’s statement, stating that ‘drop austerity, go for growth and the debt will start to come down’. However, unfortunately, I think there is good cause to be sceptical of any major economic policy change. This is not just because I don’t trust Nick ‘No More Broken Promises, I pledge to vote against any increase in fees’ Clegg. Nor is it because he cannot leverage such a change in strategy from the Conservatives (he does not have Cable’s nuclear option) on account of being the minor partner in a coalition government from which he cannot escape to any realistic prospect of electoral success given his party’s abysmal poll ratings. Instead, the reason for why change seems so unlikely is both how the coalition set out its plan and how the economic crash was defined. For the coalition government, this is a problem of path dependency. Having defined their rapid deficit reduction as essential to economic recovery, a change would be an enormous admission of failure for both political parties.
To change economic policy would demonstrate that the Lib Dems made the wrong judgement in signing up to the Conservative’s pace of deficit reduction. When the coalition was formed, the Lib Dems performed a volte-face on economic strategy. Their manifesto had stated that ‘if spending is cut too soon, it would undermine the much-needed recovery and cost jobs. We will base the timing of cuts on an objective assessment of economic conditions, not political dogma.’ Whilst before the election they had supported a ‘one-year economic stimulus’ through to 2011, by mid-May 2010 Clegg and Cable had become advocates of immediate austerity. In 2009, Cable wrote that ‘the apocalyptic cries of “national bankruptcy” are unhelpful scaremongering’. By June 2010, he had of course come to support rapid deficit reduction, explaining his change was made because he had been ‘persuaded that early action is absolutely necessary’. Lib Dems fell over themselves supporting Osborne’s claim that ‘Labour brought Britain to the edge of bankruptcy’, statements for which he was justly slapped down by the Treasury Select Committee. All this was further justified with recourse to that moronic note left by Liam Byrne. It would be a major U-turn to take a more Keynesian approach to economic policy.
A change in strategy would also be incredibly difficult because it would undermine the narrative that the Conservatives have propagated about the economic crash. The choice was made by the Conservatives to present the Great Recession commencing in 2008 as primarily a crisis of state debt rather than as a crisis triggered by enormous systemic financial sector failures that then resulted in the large deficit. This choice was likely made because this seemed the best way to attack Labour. A mess resulting from overspending by a Labour government is a much easier message for a Conservative party leader to make than a more nuanced recognition that state finances had been more prudent than the private sectors’ before the crash despite the treasury’s dependence on unsustainable finance sector revenues. Cameron and Osborne certainly never trumpeted any foresight of the crash nor offered any serious alternative economic policy paradigm before the crash. In 2007 they pledged to match Labour spending plans while in 2006 Osborne wrote that Ireland, even more of a credit fuelled unsustainable boom than the UK, represented ‘a shining example of the art of the possible in long-term economic policymaking’. Having made the choice then to define the crisis as one of state debt, the Conservatives have limited their options now. They are the original proponents of the view now repeated in every right wing paper that state spending cannot contribute to recovery. Simon Heffer’s statement, that ‘borrowing money, or printing more of it, would simply hasten Britain’s progress to Greek-style bankruptcy and financial implosion, wrecking living standards of Britons for a generation, and quite possibly longer’, could have come out of Cameron, Cable or Clegg’s lips at any point in the last two years. It is far easier for the coalition to muddle through blaming the eurozone, the weather or the Royal Wedding for the economic slowdown rather than their measures. A serious change of economic policy would go against everything that they had said since 2009 and would be an admission of the failure of plan A. Read more of this post