Thursday, July 29, 2010

What should Labour's economic policy be?

One of the first big challenges for Labour's next leader will be to set out their response to the Coalition's comprehensive spending review, and in the process define Labour's new economic policy.

Although this hasn't been a big feature of the leadership campaigns, it is possible to identify four main options which I've heard suggested:

1. The Blairite one set out by Pat McFadden. Continuing the economic policies set out by Alastair Darling and prioritising increased investment to increase economic growth while halving the deficit by cutting spending on public services, public sector pensions and welfare benefits by around £60 billion.

2. The Gordon Brown/Ed Balls strategy of maintaining higher levels of public spending on current priorities and reducing the deficit more slowly, aiming to stabilise levels of debt at c. 90% of GDP rather than 70%.

3. The leftie approach of massive cuts to targeted areas of spending such as defence and prisons, maintaining or expanding other areas of public spending, and raising income tax, corporation tax, capital gains tax, council tax, introducing new taxes such as a graduate tax and a mansion tax, while creating jobs through a Green New Deal.

4. Reject orthodox economics and the idea that the deficit is a problem entirely, and argue for an alternative based on an entirely new kind of political economy such as Modern Monetary Theory.

*

The leadership contest has been very good natured, but economic policy is where there is the potential for real divisions to arise within the Labour Party. The next leader needs to have a mandate from members for whichever economic policy they plan to pursue. The policy needs to be understood and backed by Labour's members and supporters, as well as credible and able to stand up to robust scrutiny. Not an easy task.

6 Comments:

At 4:26 pm , Blogger Will said...

It may not need saying, but the coalition is highly unlikely to come out of the next few years being rated strongly on the economy. Labour's economic policy, as a result, is probably their best chance to win back a majority. I suspect the UK will by then be looking for an anything-but-this answer and as such Labour will have a wide scope for differentiating themselves from the coalition.

 
At 5:50 pm , Anonymous Paul said...

This is an excellent summary of the four main approaches as they stand, but I think the real opportunity is to fuse 2-4 to create a narrative about our policy which goes:

a) The govt has lied about the dangers of the debt, and there are few if any constraints anyway in the short to medium term. It is perfectly possible to grow out of debt if our economic policy is correctly focused.

b) The best way to grow out of debt is to focus on full but socially and enviornmentally useful employment as a hook for the way we manage the economy. We should contrain aggregate demand to stop the economy overheating by pro-active and enlightened fiscal policy (post-Keynesian) and leave monetary policy as the sideshow that it is.

c) Thus there is no need for cuts, but the socially and environmentally harmful or neutral areas of public spending should be switched over time into useful public spending and high quality employment.

 
At 8:18 pm , Anonymous Paul Sagar said...

Well let's make things easier by excluding option 4 as economic madness and strategic suicide vis-a-vis the media and opposition parties (even if it might have some medium term benefits appealing to voters who don't want to carry on facing Tory cuts).

 
At 10:50 am , Anonymous Duncan said...

A long reply over here:

http://wp.me/pt0AC-ha

Duncan

 
At 4:51 pm , Anonymous Agog said...

Paul Sagar,

Sure, "don't scare the horses." But a bit more open-mindedness might help. The characterisation of the Modern Monetary Theorists as offering something "entirely new" is way off the mark (and whiffs a bit of scare tactics). The said theorists talk about their antecedents all the time: Lerner, Minsky and Godley as well as Keynes. It seems fair to characterise them as 'New Lernerians' because the core policy approach is very much inspired by his Functional Finance. With added extras reflecting more recent thought on how to achieve full employment without losing control of inflation.

Frankly, I'm perplexed at how younger people of the left are so in thrall to the IEA-style anti-Keynesian propaganda (note: this is not directed at anyone here). The Thatcherites/neoliberals/freemarketeers bankrupted much of the world economy a couple of years ago. And people persist in portraying the kind of policies that gave us 30 years of strong growth at high employment after WWII as some kind of nightmare. It's really weird to me. Our grandparents learned the lessons of the thirties, and built so much after the war. We should be looking to that generation for inspiration now.

 
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