Clik here to view.
As recession bites, the shadow chancellor's economic approach will gain admirers. Political reward will surely follow
I heard it first from a senior aide to the prime minister. But I've heard it a dozen times since. Confronted with the argument that the best way to breathe life into an economy gasping for air is not to strangle it tighter but to give it oxygen – that the way to boost growth is a jump-start stimulus rather than more austerity – there comes this reply: "Even if that's right economically, it will never fly politically."
That has become the automatic response to any suggestion that the coalition's plan A should be ditched and replaced with a Keynesian plan B, one that includes spending for growth. Some government spokesmen still cling to the line that "No credible economist in the world believes that" – although it becomes ever harder to sustain when a clutch of Nobel laureates, along with Martin Wolf of the Financial Times and the crossbench peer Robert Skidelsky, are lined up in the opposite camp.
Others are shifting ground, conceding that Keynes might have been right after all – that, paradoxical as it may seem, the best deficit-shrinking machine is a growing economy, even if it takes some initial borrowing to get the machine started – before hastily insisting that the politics makes it irrelevant. That man in Downing Street declared himself agnostic on the economic rights and wrongs of the question, preferring to cite the poll numbers that show "the electorate is in a different place", with voters agreeing by an 80-20 margin with the simple proposition that we are in a debt crisis to which the solution cannot be more debt. Daniel Finkelstein of the Times, a commentator very close to George Osborne's thinking, put it succinctly after last week's autumn statement. "Ed Balls ended up arguing that we are borrowing too much and that the way to borrow less is to borrow more … I promise you, this is never going to work politically. Ever."
But is he right? Is the opposition fated to watch powerless as the government pulls the national belt ever tighter, even as growth tumbles further towards the zero mark and recession, because the voters won't back any other course of action? Support for that view came in the weekend polls, suggesting that far from taking a hit after last week's recitation of gloom and doom, Osborne's ratings had either held firm or increased, putting the Tories a nose ahead of Labour. It is a remarkable thought, one that reverses all political conventional wisdom, which normally insists that when the economy tanks, so do the fortunes of the incumbent government.
The starting point for the anti-Keynesians – including those within Labour's own ranks – is that the idea is simply too hard to grasp. As Finkelstein argued, when the remedy to a debt crisis is framed as borrowing more to borrow less, it sounds like a paradox too far. Yet this might be no more than a problem of communication. Note the metaphor deployed by the Nobel prizewinner Paul Krugman, suggesting it was Osborne's austerity programme that was perverse, and comparing the chancellor to "a medieval doctor bleeding his patient, observing that the patient is getting sicker, not better, and deciding that this calls for even more bleeding". That single image conveys instantly both the folly of government policy and the logic of a Keynesian blood transfusion, vital to get the body economic back on its feet.
Persistent, empirical argument is essential too. A quick look at the record of British debt going back to 1830 shows that, by historical standards, our current indebtedness is no more than a modest uptick compared with, say, the late 1940s, when debt was five times as great as it is now – and yet it was precisely then, when the country really was drowning in red ink, that Keynes was advocating a fiscal stimulus.
Still, the problem is that Balls is right on the economics but not getting the political reward. As Adam Lent, the co-author of In the Black Labour – a new paper much discussed in opposition circles – argues, elections are not rounds of Mastermind, with victory awarded to "the smartest guy in the room". Labour can wave all the charts it likes, but it won't work if it runs counter to what the public regard as common sense.
What will shift public sentiment is not Labour speeches but time and events. In his first appearance before Labour MPs as shadow chancellor in January 2011, Ed Balls told his colleagues it would take until October before it was apparent whether the government's plan A was working economically and until mid-2012 before it was clear whether the situation could be turned in Labour's favour politically. He's already been vindicated on the first prediction. As for the politics, Balls believes there is a natural sequence that can't be accelerated. First, the public has to conclude that the current approach is not working. That is not as simple a step as it might seem: even consistently low growth and high unemployment figures will not settle it overnight. For voters who switched to the Tories or Lib Dems to declare that the government got it wrong will be to concede that they themselves got it wrong, and people are always reluctant to do that.
Even once they've made that critical shift, the public will need to make another – by wondering if there is an alternative. As one senior Labour figure puts it: "Before you're the answer, people have to ask the question." Current polling suggests we're not there yet. But Balls is surely right to believe that once cuts and job losses really hit home they will feel infinitely more real than the inherently abstract notion that is the deficit. At that point, voters will be looking for another way – and the question will then be: "Does Labour offer it?"
Which brings us to the problem that cannot be ducked: Labour's credibility. It doesn't matter if Keynesianism makes logical sense, and if people are crying out for answers: it will all be for nought if they simply don't trust Labour with the country's money. Some propose extreme remedies for that problem, ranging from a wholesale apology for excessive spending in the Blair-Brown years to the sacking of Ed Balls, hurled overboard as a living embodiment of the Labour economic record (an outcome that would delight the Tories).
Others offer less drastic solutions. The In the Black authors argued on these pages that Labour has to show it understands we now live in an age of austerity, that there is no longer "cash to splash" around, and that social justice will be pursued through reform rather than spending. It urges the party to be fiscally conservative to its core; not to pay lip-service to prudence while simultaneously opposing every coalition cut; and to devise a serious deficit-shrinking programme of its own. Only then will it be trusted enough to be heard.
You can see why that works as a political fix. But it is no rebuttal of the economic rightness of the Keynesian position. It is, in fact, fully compatible with a call now for a plan B, Britain's urgent need for which grows more apparent by the day. The key is in the timing. There is no contradiction in saying that the patient who lies bleeding needs a transfusion now, but that once he's back to good health he'll have to go on a diet. Keynes himself was no deficit-denier; he called for short-term stimulus in the bad times, fiscal prudence in the good times.
Right now it may seem a hard, complex case to make. But no matter how awkward the current politics, Labour's analysis remains the right one, a truth that will become clearer as the economy deteriorates further. Where the economics leads, the politics will surely follow.