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John Wight

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Why Miliband and Balls Are Wrong on the Economy

Posted: 14/01/12 13:42

The capitulation of the Labour leadership to the austerity and cuts agenda of the Tories and right wing press was confirmed by shadow chancellor Ed Balls' recent statement that Labour would not reverse the cuts and would maintain the pay freeze within the public sector if they win the next election (Balls Accepts Tory Cuts and Pay Freeze, Guardian, 14 January)

This comes in the wake of Ed Miliband's public statements to the same effect, statements made after the public criticism of his leadership by Maurice (Lord) Glasman, Labour peer and founder of the Blue Labour tendency within the party. This is a philosophy of conservative Labourism that espouses an emphasis on the role of voluntary organisations, churches and local charities in promoting mutualism and self help as opposed to centralism and a focus on equality. In essence Glasman was echoing the postulates behind Cameron's Big Society wheeze, at once a rejection of modern society and government as the necessary enabler of social and economic justice, and the embrace of a social model rooted in a rose tinted view of the past.

Blue Labour fell out of favour due to Glasman's controversial views on immigration, culminating in him calling for engagement by Labour with supporters of the English Defence League.

The fact that Miliband felt obliged to respond to Glasman's critique of his leadership with an attempt at burnishing his credentials with a near wholesale embrace of the Tory cuts agenda could prove a seminal moment in the political orientation of the party and its future direction.

The economic logic behind austerity remains as flawed now as it was when first announced by the coalition. Rather than understand the deficit as a consequence of a global recession decimating demand in the economy, with a sharp fall in tax revenues due to a sharp rise in unemployment, the government is intent on deepening the same cycle by introducing drastic cuts in spending in the forlorn hope that the private sector will invest and create new jobs to replace those lost. The fact that those new jobs will come with lower wages, pensions, and worse terms and conditions than the ones lost is a moot point as far as the Tories and their backers within big business and the right wing press are concerned.

The UK's deficit and national debt as a percentage of GDP currently compares favourably to other major economies. Currently it is sitting at around 60%. Compare this to France at just over 80%, Germany at 75%, Japan at 196%, and the United States at 60%, and the UK's national debt cannot in any way be described as extraordinary. It also compares favourably when measured historically. By the end of the Second World War it had climbed to over 200%, yet under these conditions the postwar Labour government initiated the largest and most wide ranging programme of structural reforms of any British government before or since.

Today, of course, the nature of the economy is far different from what it was then. The role of international markets as the determinant of domestic economic policy is hard to resist as a result of the success of free market nostrums in dominating the ideological and economic when it comes to the realm of ideas. We see this with the role of the ratings agencies in deciding the rate of borrowing for national economies, with the much prized AAA rating elevated to the status of a symbol of national prestige. It reprises Marx's analysis of credit as 'the economic judgment on the morality of man', with in this case the ratings agencies passing economic judgment on the morality of nations.

The idea that the likes of Standard & Poor's, Moody's and Fitch's, the three main international ratings agencies, operate in a politically and ideologically neutral environment is false. They make their profit from the fees they receive from banks, financial institutions and governments.

In this regard they have come in for sharp criticism over the fact they constitute a de facto cartel and continuously rate debt instruments and securities issued by banks more favourably than bonds issued by governments - this because the banks and financial institutions pay them more. The subprime mortgage crisis that hit the US in 2007 and was the catalyst for the global recession that followed is a case in point.

The difficulty for any national economy trying to come out of recession lies with the decline in international aggregate demand. In fact, there has long been a crisis in international aggregate demand due to the overconsumption that has been a factor in the West and the concomitant underconsumption of the developing world, leading to downward pressure on prices and rising levels of consumer debt.

The ongoing crisis in the eurozone negates the viability of Britain being able to export its way out of the recession, certainly not in the short term anyway, leaving either a policy of cuts or measures to stimulate domestic demand. This should range from the simple act of reversing the rise in VAT - and indeed cutting it below the 18% it was set at previously, which would benefit those on moderate to low incomes who spend rather than save - to implementing a system of progressive taxation and closing off tax loopholes, which for too long have ensured that the rich have been able to avoid contributing their fair share to the exchequer as a proportion of income.

Britain's under par infrastructure is crying out for major investment, as is a housing crisis that grows worse year on year. The jobs created would give a massive boost to domestic demand, with every pound invested having a multiplier effect throughout the rest of the economy. Inflation could be controlled via a combination of taxation and interest rates. The only pay freeze within the public sector should be applied to management and high earners, such as the 9000 who are currently taking home more pay than the prime minister.

When it comes to welfare, Labour needs to fight for those on benefits rather than accepting the narrative that they are workshy scroungers who are morally deficient and deserve to be treated as criminals. The government's cuts in housing benefit and its policy of forcing people on disability benefits to come off on spurious grounds must be reversed. The current level of Jobseekers Allowance is set far too low to achieve anything other than forcing claimants to survive by entering the black economy. Furthermore, the knock-on effect of rising levels of stress related illnesses, crime, and other social maladies associated with poverty impact society as a whole. In economic terms, demand needs to be introduced at the bottom rather than the top of the income scale, where people are more likely to spend their money in the real economy.

Also as a matter of priority should be more government control over the operations of the banking sector, with a view to engineering a gradual replacement of an economy configured around inflated property prices that has dominated over the past three decades with one based on new technologies, green industries, and manufacturing.

The aforementioned constitutes a concrete and viable alternative to the status quo. Unfortunately, the current Labour leadership seems unfit to the task of breaking through the free market consensus of the establishment, including the media, to argue that alternative.

What should never be forgotten is that any debate over the economy is fuelled as much by ideology as economics. The public capitulation of Ed Miliband and Ed Balls to the right wing narrative of austerity reveals an ideological accommodation to the free market that should worry every Labour member and supporter who had higher expectations and hopes of a resurgence of the left within the party after the last leadership election.