Labour views economy through the wrong end of a telescope

Old Town Pump Telescope, 1928,

Old Town Pump Telescope, 1928,

“There is no path to growth and prosperity for working people which does not tackle the deficit”. Ed Milliband, 11th December, 2014.

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 focused 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 focusing 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. ”