The latest in the cuts saga: Trichet v Bernanke

Which of the two is more familiar with “depression economics”?

There has been much discussion of the op-ed by Jean Claude Trichet, the French governor of the European Central Bank, in today's Financial Times. The Tories will be pleased to see Trichet wholeheartedly and passionately backing the draconian "austerity" measures adopted by European governments in recent weeks, writing:

With hindsight, we see how unfortunate was the oversimplified message of fiscal stimulus given to all industrial economies under the motto: "stimulate", "activate", "spend"! . . . there is little doubt that the need to implement a credible medium-term fiscal consolidation strategy is valid for all countries now

Trichet's comments cannot be ignored and will, as I said, bolster the deficit hawks on the right. But, for me, the more significant and fascinating contribution to this debate has been from Ben Bernanke, governor of the US Federal Reserve. Speaking yesterday in front of the House financial services committee on Capitol Hill, Bernanke spurned the UK and the eurozone's approach to the deficit, rejecting immediate cuts and instead urging legislators to maintain support for fiscal stimulus.

From the Guardian:

In a second day of testimony to Congress, Bernanke said the Obama administration should delay measures to reduce Washington's record budget deficits by cutting spending or increasing taxes.

"I believe we should maintain our stimulus in the short term," Bernanke said, as the latest batch of economic data from the world's biggest economy showed an increase in weekly unemployment claims, a drop in home sales and the second easing of activity in three months.

Bernanke's opposition to fiscal retrenchment until economic recovery has been assured is in contrast to the approach favoured by Britain and the eurozone countries, where governments believe action to reduce budget deficits cannot be delayed.

Bernanke is not your run-of-the-mill central banker, and his views on "depression economics" carry special weight in a way in which Trichet's do not. He spent much of his pre-Fed, academic career immersed in studying the causes and consequences of the Great Depression in the 1930s, publishing essays and books on the subject.

As Dennis Cauchon wrote in USA Today, "Bernanke, a former Princeton University economist, is considered the pre-eminent living scholar of the Great Depression. He is practising today what he preached in his book: Flood the system with money to avoid a depression."

So who are you going to trust on avoiding a rerun of the 1930s? The American central banker or the European central banker? I know who my money's on.

Meanwhile, if you want to read a rebuttal to Trichet's piece, check out this op-ed from the US economist Brad DeLong, also writing in the Financial Times. DeLong writes:

History teaches us that when none of the three clear and present dangers that justify retrenchment and austerity -- interest-rate crowding-out, rising inflationary pressures on consumer prices, national overleverage via borrowing in foreign currencies -- are present, you should not retrench and austerity: don't call the fire truck when there is no smoke. And history teaches us that when economies suffer from high unemployment, enormous excess capacity, incipient deflation, businesses terrified of a lack of customers, and an enormous excess demand for high quality assets, then is the time for expansion and stimulus: when the deck is awash, start bailing.

Yet Jean-Claude Trichet rejects these counsels of history. He seems to me to place himself in the position of, as British interwar bureaucrat R.G. Hawtrey described his precedessors at the start of the Great Depression, somebody: "crying 'Fire! Fire!' in Noah's flood."

Mehdi Hasan is a contributing writer for the New Statesman and the co-author of Ed: The Milibands and the Making of a Labour Leader. He was the New Statesman's senior editor (politics) from 2009-12.

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Who really controls the Labour Party now?

Jeremy Corbyn's allies will struggle to achieve their ambition to remove general secretary Iain McNicol.

Jeremy Corbyn's advance at the general election confirmed his place as Labour leader. Past opponents recognise not only that Corbyn could not be defeated but that he should not be.

They set him the test of winning more seats – and he passed. From a position of strength, Corbyn was able to reward loyalists, rather than critics, in his shadow cabinet reshuffle. 

But what of his wider control over the party? Corbyn allies have restated their long-held ambition to remove Labour general secretary Iain McNicol, and to undermine Tom Watson by creating a new post of female deputy leader (Watson lost the honorific title of "party chair" in the reshuffle, which was awarded to Corbyn ally Ian Lavery).

The departure of McNicol, who was accused of seeking to keep Corbyn off the ballot during the 2016 leadership challenge, would pave the way for the removal of other senior staff at Labour HQ (which has long had an acrimonious relationship with the leader's office). 

These ambitions are likely to remain just that. But Labour figures emphasise that McNicol will remain general secretary as long he retains the support of the GMB union (of which he is a former political officer) and that no staff members can be removed without his approval.

On the party's ruling National Executive Committee, non-Corbynites retain a majority of two, which will grow to three when Unite loses a seat to Unison (now Labour's biggest affiliate). As before, this will continue to act as a barrier to potential rule changes.

The so-called "McDonnell amendment", which would reduce the threshold for Labour leadership nominations from 15 per cent of MPs to 5 per cent, is still due to be tabled at this year's party conference, but is not expected to pass. After the election result, however, Corbyn allies are confident that a left successor would be able to make the ballot under the existing rules. 

But Labour's gains (which surprised even those close to the leader) have reduced the urgency to identify an heir. The instability of Theresa May's government means that the party is on a permanent campaign footing (Corbyn himself expects another election this year). For now, Tory disunity will act as a force for Labour unity. 

George Eaton is political editor of the New Statesman.

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