Forget the funeral: this has been an atrocious week for the Con Dem economic experiment. First, the UK’s credit rating has been downgraded by another ratings agency, thus demonstrating that even against its own success criteria – Osborne has repeatedly stated that his aim was to maintain the UK’s AAA rating – Coalition Economics is failing.
Second, the Reinhart-Rogoff debacle, in which the classic paper arguing that a deficit of more than 90% of GDP has a depressing effect on growth has been shown to be based on unreliable data. If it has been the failure to spot basic errors in the Excel spreadsheets used to underpin the argument that has hit the headlines, the really damaging criticisms have surrounded the assumptions underlying the argument in the paper, which have been shown just to be plain wrong. There’s an interesting case study here in which a paper whose conclusions and assumptions have been hotly disputed in academic circles has been presented by mainstream politicians as unchallenged gospel; and perhaps the way in which a paper so full of errors managed to survive the peer-review process. [Edit – since writing the above I have learned that there appears not to have been a peer-review process. Which is in itself an indictment of the way in which economics and policy interact] It’s a fascinating example of confirmation bias at work, but also begs questions about the objectivity of the profession of economics itself – questions memorably raised in Inside Job, the film about the 2007 crash that showed the cosiness of the business, political and academic economics establishments.
And, still hanging over all of this is the IMF telling the UK to rethink its austerity plan, accompanied by its work on the multiplier and the growing empirical evidence that the austerity cheerleaders relied on the wrong assumptions in assessing the impact of the austerity agenda – I’ve blogged about this before.
In other words, in the UK Labour should be making the case against austerity with renewed vigour, pointing to the way in which, both in theory and practice, the consensus behind austerity is unravelling.
But they’re not.
In the context of the past week, this report in the New Statesman is jaw-dropping. Labour is still flirting with the idea of signing up to the coalition’s post-2015 spending plans: it apparently cannot make up its mind to ditch the rhetoric of austerity and commit itself to reversing policies whose effect becomes more obvious by the day. It looks like a failure of courage; not only is Labour failing to challenge the narrative that overspending caused the 2007-8 economic crisis, but, faced with austerity failing all around it, fails to challenge that agenda. Along with the kind of “supply-side Socialism” eloquently advocated by Chris Dillow here and here it should not be difficult to put together an attractive and economically-credible and empirically-founded programme as an alternative to austerity. It is already moving in the right direction with its commitment to build more social housing. But on the big economic issues, Labour still looks like a rabbit caught in the headlights; it needs to find the courage of its conviction (which in turn means looking beyond the Westminster bubble).
And it certainly needs to rethink its narrative on benefits, which looks increasingly desperate and, frankly, idiotic. The latest idea – a proposal that the unemployed should be offered loans in place of benefit – really achieves new levels of imbecility in a debate that has not been notable for its cool rationality. It was unsustainable private debt (not public debt and spending) that led to the crisis of 2007-8; more personal debt is not the answer. And talk of restoring the contributory principle is just dishonest; people still pay National Insurance. It is deeply ironic that Labour appears to be rejecting the responsible borrowing by the state that could unlock economic recovery while apparently encouraging private borrowing against an uncertain future for those who become unemployed because of … fiscal austerity. It’s the utter incoherence of all this that is so frustrating – there must be few things more heartbreaking than being an economically-literate member of the Labour Party just now.
It is the stuff of legend that in Gordon Brown’s Treasury, the group of central advisers was united by its enthusiasm for football. Now, presented with an open goal, the Labour forwards – many of them, like Ed Balls, part of Brown’s team – appear to be passing the ball backwards before shooting through their own net. When will they recover their sense of political direction?