Austerity has lost its credibility everywhere but London and Berlin. The shadow chancellor missed a golden opportunity
Europe is afflicted with the worst economic catastrophe since the second world war. Half the young people of the Mediterranean basin are reportedly out of work. Roughly 15% of productive capacity stands idle. Nation states are saddled with debts they cannot possibly repay. Austerity policies make the debts worse as they stifle growth. Economics is in intellectual lockdown.
Enter Britain's official opposition, in the form of shadow chancellor Ed Balls. This is surely his moment to make his mark on the continental stage. Labour's forebears fought the Great Depression. They pilloried the "bankers' ramp" that imprisoned MacDonald and Snowden in 1931. They cheered Keynes and swore that never again would productive capacity be subservient to financial greed.
What would Balls do in his speech on Monday? The answer is he joined the bankers' ramp. He agreed with George Osborne that the central pillar of coalition economic policy should be to cut the deficit, and with no compensating stimulus to economic activity. His only relief was the newest legal high, "infrastructure spending", which in the short term merely tips fees into the pockets of consultants. Balls is austerity-lite.
Everywhere but in London and Berlin, the policy of austerity has lost all credibility. The IMF's Christine Lagarde screams at Europe's central bankers to "do their homework" and return to growth. The US treasury pleads that "strengthening European demand is the most important immediate imperative". Rulers from Italy and Spain to France and the Netherlands are abandoning austerity and girding themselves to counter-cyclical spending.
People in work repay debt, not people out of work. A policy that forestalls its own objective must be stupid. State deficits may need reducing but, as Keynes said, the time for that is expansion not recession. For Osborne and Balls to focus on the deficit just now is like a doctor worrying about a chilblain when the leg has gangrene.
Balls seems trapped in a conviction that growth results fiscally from public spending or, at present, from quantitative easing. Since the first is balked by the obstacle of deficit reduction, emphasis has turned to the second. But this has been confined to printing and giving money to banks – currently to the tune of £375bn.
Interest rates have fallen to near zero, but QE has merely inflated the stock market. High streets are still depressed, with collapsing sales, falling orders and local banks understandably refusing to lend to businesses. With no extra demand, private investment has stalled. The failure of coalition monetary policy glares out from every boarded-up shop.
Unease with this policy is growing, not just from outspoken voices such as the economists Adam Posen, David Blanchflower and Lord Turner, but also from the new Bank of England governor, Mark Carney. But even they have their eyes fixed on investment, not demand. The idea that growth can be stimulated by borrowing and building is simply not working – be it houses, airports, high-speed trains or defence projects.
What the economy needs is "people's investment", money in circulation, consumer spending in the high street. Keynes said it. Friedman said it. Why is Labour not its champion? If the government can print billions for the banks, why not for the public? Why not write off or write down personal mortgages to ease the housing market, liberate so-called zombie households and businesses and promote labour mobility? Why not introduce mass scrappage schemes, cash aid to startups, handouts to families and pensioners? Don't borrow it. Just print the money and hand it out to make people spend it.
The textbooks say this will lead to inflation and moral decay. But money given to banks has not led to inflation – and when did Balls last talk of bankers' morality? The British economy has so much unemployed capacity that inflation is hardly an issue. Besides, inflation is a good way to cut debt. As Blanchflower wrote in the Guardian: "Five or six years of 5% inflation does the job nicely … and we don't have to go through this austerity nonsense."
When firms go bankrupt, their creditors lose their money, but staff and assets can be reused for future growth. Europe has no law of sovereign bankruptcy. Debts are forever. Greece and Spain seem doomed to being "debt colonies", their workers' surplus value channelled into paying everlasting interest.
Balls is as mesmerised by the new bankers' ramp as Osborne. He is not campaigning for a European treaty on sovereign debt restructuring, like Argentina's and Iceland and saved the day in Cyprus's. He is not championing monetary reflation. His proposals this week were driven by a desire to seem macho to the electorate, with cuts in fuel allowance, welfare, police and schools. His one demand-led measure, a temporary cut in VAT, was hardly radical.
I supported Thatcher's monetarism. At a time of high inflation and inflexible labour markets it made sense to curb money supply – and Thatcher never reduced public spending overall. The boot is now on the other foot. Britain is suffering an acute liquidity famine. To starve the economy of money and demand at such a time is lunacy.
Britain's political class, Balls included, remains in thrall to banking ideology. If bankers think austerity is good for the nation's soul, Osborne and Balls will agree. They are talking not economics but redemptive theology. Present and future generations must apparently pay for the sins of their fathers, with no hope of release, however daft the policy.
This is cruel rubbish. History has given the Labour party a golden opportunity to return to its principles and redefine the economic leadership of Europe. Balls has fumbled it.
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