The economic questions behind and beyond the election

by Jonathan Todd

Ed Conway characterises this as “fast becoming the election that economics forgot”. If non-economic factors are determining votes, we might note the uptick in Ed Miliband’s ratings, showing improvement against the variable that I’ve argued Labour should focus on: leadership.

It is a big Tory theme to ask, “do you want this oddity as prime minister?” If the people say, as they seem to, “actually, he’s not that bad”, then this a Tory problem. Nonetheless, Miliband’s ratings have been poor enough for long enough that they risk the electorate buying the stories that the incumbents peddle. Even when reality is inconsistent with rhetoric.

This rhetoric has claimed that Labour caused the global financial crisis (when Mervyn King, the ex Governor of the Bank of England, says otherwise), that Labour spent too much at crucial junctures (when the Tories then backed this spending), and that Labour failed to properly regulate the banks (when the Tories wanted less regulation).

As galling as it may be, though, too much time may have passed for public opinion to substantially shift on these debates. But there remain questions about where the economy is now and where it is going.

The rhetoric was of “the march of the makers” and renewal of competitiveness. The reality is that the balance of payments and productivity are both unprecedentedly awful, evidencing a troubling lack of competitiveness, which may explain two-thirds of economists recently surveyed reporting concerns about the government’s economic management.

The political vogue of economic metrics waxes and wanes. We were more agitated by the balance of payments in the 1960s. Unemployment became a bigger issue in the 1970s. Thatcherism made the money supply “the thing” in the 1980s.

Through the political lenses of the 1960s, our current balance of payments would get more attention. We should not need to put on our 1980s eyes to see the extraordinary monetary policy of QE and near negative interest rates as jaw-dropping. Yet we seem strangely immune to these bizarre phenomena. More positively, unemployment has not shot up over this parliament as it did at times in the 1970s and instead, has steadily declined.

With Labour’s focus on zero hours contracts, we query this employment’s quality. The wider picture is even more perturbing. Chronically low levels of private investment alongside near negative interest rates is consistent with the Larry Summers “secular stagnation” thesis that sees an excess of savings over investment representing a shortfall in demand. This results in low growth and inflation, both of which have simultaneously featured in the UK.

Japan is arguably about a decade further down this road. It now has a labour market where 40 per cent of workers are casual, which is a tremendous amount of zero hours contracts and the like. Lacking, or perceiving themselves to lack, investment opportunities, firms hold back investment and tick over by loading up on cheap labour, the productivity of which is also undermined by the dearth of investment.

The unhappy economies of this characterisation – zombie firms and low pay, low productivity workers – would be transformed by investment, which Summers argues government should more greatly provide, while his critics, such as Ben Bernanke, recently chair of the US Federal Reserve, claim it will come from the emerging world.

In a world where, as Paul Collier characterises it, a billion live in the developed world, a billion are not developing, and five billion are on a development trajectory, not only should the development assistance of the developed billion focus on “the bottom billion”, as our Uncut book argued, but any shortfall in investment opportunities in the developed billion should, consistent with Bernanke, be soaked up by the emerging five billion. If this were happening, however, we’d see bigger capital outflows from the UK, forcing down the pound and driving up exports, which, perhaps because the fragile Eurozone remains a vital UK export market, is not yet happening, at least not on a scale to wholly eradicate the UK’s “secular stagnation” symptoms.

These symptoms will likely remain the economic backdrop to the next parliament. When, if George Osborne remains chancellor, he would, I suspect, seek to refocus political lenses from their attention on the deficit over this parliament to taxation, while an Ed Miliband administration would seek to retune them to median wages.

If Labour wins, Miliband would need mechanisms to deliver rising wages in a context of “secular stagnation” – whether that means government playing a greater investment role, in line with the Summers theory, or deepening relations with the developing world, as Bernanke anticipates. Summers justifies Lucy Powell’s acknowledgement of additional borrowing for investment, while Bernanke encourages Labour to follow Tony Blair in looking well beyond Little England. If Labour loses, we should not lose sight of these big picture issues but the immediate political challenge may be to respond to Osborne’s attempts to discombobulate via taxation.

“The election that economics forgot” may, therefore, conclude by posing Labour big economic questions, irrespective of whether it leaves us in opposition or government. Under both scenarios, securing a more privileged political position for investment, rather than current spending, is likely to be an important strategic goal.

Jonathan Todd is Deputy Editor of Labour Uncut

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