It is not 1940s austerity under a Labour government that Ed Miliband should be invoking but 1950s recovery
'David Cameron genuinely tried to detoxify the Conservative party in the belief that his right wing had nowhere else to go … then along came Ukip." Thus spoke a senior Conservative figure recently, on the eve of Labour's truly amazing U-turn on economic policy in general and austerity in particular.
The speaker was one of many traditional Conservatives who were bemoaning the way their party, still suffering the fallout from rightwing resentment at the defenestration of Margaret Thatcher 23 years ago, seemed to be tearing itself apart. I lost count of the number of Tories who complained that "divided parties do not win elections".
Meanwhile, they noted with reluctant admiration how perceptive from the outlet had been the analysis by shadow chancellor Ed Balls of the weaknesses of George Osborne's economic strategy. They might not like Ed Balls; indeed, the shadow chancellor has a remarkable ability to put Conservatives' backs up; but how right he had been in predicting the failure of a strategy that has been dubbed with the oxymoron "expansionary fiscal contraction".
Before we go any further, it is worth addressing those critics who argue that the austerity policy is not the cause of the crisis. The answer is simple: those, alas all too few, of us who go on about the austerity policy are perfectly aware that the roots of the depression lay, and lie, with the failure of the financial system. The point is that programmes of austerity in the UK and the eurozone have aggravated that crisis and been almost tailormade to prevent a recovery.
Indeed, there is an impressive weight of evidence that recovery had begun in 2010, thanks to the collective impact of fiscal and monetary measures known as "the stimulus", but the recovery was aborted by the premature abandonment of the fiscal side of the stimulus. Indeed, pace the incoming governor of the Bank of England, Mark Carney, there is a limit to what monetary policy can do, as his central banking colleagues around the world are beginning to emphasise – a limit recognised decades ago by John Maynard Keynes, who emphasised the importance of fiscal policy.
Fiscal policy involves changes in the levels of taxation and public spending, in order to stimulate a depressed economy or to cool down one that is overheating. That policymakers may have ignored the "slowing down" side of fiscal policy is no argument against what should be a fitting response to depression, namely fiscal expansion.
The perversity of policies adopted in the UK and eurozone is that, far from going for fiscal expansion, the likes of George Osborne have deliberately opted for contraction.
It is certainly easy to point out that even in this objective they are missing their targets. The point is that they have not opted for conscious expansion. They talk about the importance of growth but do nothing to stimulate it. Indeed, perversely, they do the reverse. Hence, after the sensational fiscal tightening of the coalition years, last week Osborne piled on the pressure with yet more planned cuts.
Yet senior Labour party members, instead of capitalising on their success in attacking the government's failed strategy, choose to hoist the white flag and accept the broad thrust of the chancellor's policy, quibbling over the details, and even then sounding as though they are terrified of saying anything that might upset the rightwing press.
They call this the need for credibility. Do they not see that in the very act of seeking credibility they are losing it?
A veteran of many past Labour efforts at seeking credibility, Roy Hattersley, makes an appeal for sanity in a new book (The Socialist Way – Social Democracy in Contemporary Britain, I B Tauris). Labour has a choice, he says: "It can grub about in search of policies which will attract the swing voters and lose the next general election or it can become again an indisputable party of principle and win."
This economy, with masses of spare industrial and service capacity, and millions who are either officially unemployed or in work but underemployed, is crying out for a serious economic recovery programme. There are hundreds of thousands of houses or flats to be built, and there is a huge opportunity for investment in our public infrastructure – the infrastructure that the most rightwing entrepreneur requires in order to conduct private business.
Labour should be planning tens of billions of spending, in an economy that is running up to 15% below what historical trends indicate is possible. It is not 1940s austerity under a Labour government that Ed Miliband should be evoking but 1950s recovery.
The defence of Labour's U-turn is that "this is all about politics". Yet, as we were reminded by the Treasury's chief economic adviser, Dave Ramsden, last week, in a lecture at the Mile End Group, Queen Mary, University of London, it was because Balls rightly argued that the decision about entering the eurozone should be based on economics, not politics, that Gordon Brown instituted an enquiry based on what were known as "the five tests".
Ramsden was the key civil servant in charge of that exercise, and he made clear in his lecture on the 10th anniversary of the unveiling of the results that the result was not predetermined by Brown or Balls but was a genuine analysis.
Most people think Labour got it right putting the economic case above the political. It saddens me that they seem to be abandoning their economic case about austerity for what they seem to think is a short-term political advantage – which to my mind sounds dubious anyway.