by Anthony Painter

Following his very well received Bloomberg speech, I cautioned back in September on Uncut against a “no retreat, no surrender” political strategy. Ed Balls is now shadow chancellor. He faces a number of challenges. One of which is how to respond to the Bloomberg speech.

Actually the speech – if followed to its logical conclusion – provides a powerful political narrative that in some ways resolves one of Labour’s current problems: how does it free itself from the perceived failures of its past?

The speech had a core argument that was anything but deficit denial. It was actually a different strategy for dealing with the deficit. Counter-intuitively, but based on completely sound Keynesian economics, Ed Balls argued that, in these circumstances, government should pursue an expansionist fiscal policy. The result will be an economy that grows more quickly and creates more jobs. The government’s counterargument is that in an open economy there are limits to the degree to which you can do this. Furthermore, they said, by May 2010 the UK was breaching those limits (there was scant evidence for this as tracking long term interest rates demonstrates; though the argument was of risk rather than immediacy).

Even if you don’t accept the full implications of the Balls argument, there is a compelling case for maintaining demand in the economy to the maximum degree possible in these circumstances. Inflation has reared its ugly head once again, but wage levels indicate that this inflation is more imported than a reflection of domestic demand excesses.

However, the logic of this position forces you to look at recent economic history in a different way also. If we were to look back at the pre-crisis economy and consider the demand and output conditions in, say, 2006, what would we have expected to find in terms of the fiscal situation? Applying sound Keynesian principles, it is unlikely that with no negative output gap you would expect to see a current expenditure deficit. Yet there was such a deficit.

What makes economic sense makes political sense in this instance. Applying a sound Keynesian analysis one can accept that Labour’s fiscal policy in the run up to 2007 wasn’t quite right. Ed Balls can perform a service to Labour on its journey to reaching an honest appraisal about its past.

The notion that this deficit led to the financial crisis and economic collapse is laughable. And the argument that it explains the size of the deficit we now face can equally be dismissed: that was result rather than cause of the crisis. These arguments will be easier to make as long as Labour accepts the full economic logic of its position. Yes, the politics will be tough, but that will just serve to emphasise that Labour is able to be honest about its past and offers the type of economic competence that Ed Balls was so instrumental in crafting in the 1990s and the early part of this century.

The economic path outlined in Balls’ Bloomberg speech contained both economic and political risks. It does serve to emphasise the growth-sapping and employment-damaging aspects of the government’s policies. It will need to be nuanced, but it does provide a political framework. Ed Balls is not going to change his mind, but at least he can use his analysis for a new honesty about the past, even one that doesn’t concede the fundamentally outrageous and nonsensical arguments of the Tories and Lib Dems. It’s a more politically and economically risky approach. Which doesn’t mean it’s wrong. In for a penny, in for a pound.

Anthony Painter’s Twitter feed is @anthonypainter.

Tags: Anthony Painter, Balls' Bloomberg speech, Ed Balls, John Maynard Keynes

This entry was posted on Friday, January 21st, 2011 at 5:55 pm and is filed under Uncut. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.