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Beware Labour’s deficit hawks

The party’s Hooverites are encircling Ed Miliband.

In my column this week ("Let Miliband be Miliband"), I argue that the new Labour leader has to stand up to pressure from the Tories, the media and the Blairites inside his own party, who want him to tack to the right and conform to conventional wisdom.

With the departure of his elder brother, David ("Labour's lost leader", wails the headline in the Murdoch-owned, Tory-supporting Times), the pressure on Ed to "moderate" some of his positions has intensified. "He has to move right on the deficit," a Mili-D supporter told me in Manchester, as if deficit reduction is a right/left issue. It isn't: it is a right/wrong issue.

But Labour's deficit hawks are getting more and more vocal. The outgoing shadow chancellor, Alistair Darling, warned against the party retreating from his four-year-halve-the-deficit plan at the conference in Manchester, and said Labour had to be "realistic and credible". The former City minister Kitty Ussher, now head of the think tank Demos, used a column in yesterday's Financial Times to urge Miliband to "toughen up on cuts":

The changed environment must now spur him to harden, not soften, [the Darling] position.

"Changed environment"? What could she be referring to? The rather convenient IMF report, published on Tuesday, which praised the coalition's austerity measures — despite the Fund having warned a fortnight ago that "[m]ost advanced countries should not tighten fiscal policies before 2011: tightening sooner could undermine recovery"? Perhaps she missed the economist Adam Posen's remarks this week. From the FT:

The UK faces a long period of sluggish growth, with high unemployment and falling prices, unless the authorities act quickly to stimulate the economy, an influential adviser to the Bank of England has warned.

Sounding the alarm over the possibility of years of stagnation, Adam Posen, an external member of the Monetary Policy Committee, rejected the upbeat arguments issued on Monday by the International Monetary Fund about the economy's nascent recovery.

With the prospect of a repeat of 1930s stagnation rather than 1970s inflation, Mr Posen urged the Bank to restart the money printing presses to inject more life into the economy.

Posen, rather ominously, added:

Let us not forget that it was sustained high unemployment and austerity, the sense that governments were unresponsive to average people's dire economic conditions, which led to the rise of extremist intolerant parties in pre-war Europe.

The current debate over deficit reduction is being conducted on the basis of politics, not economics. The Blairite deficit hawks, fans of triangulation, want to meet Cameron and Osborne somewhere in the "middle", regardless of the fragility of the economic recovery, the lessons of economic history or the principles of Keynesian demand management.

Their central, short-term goal is to prevent Ed Balls from securing the shadow chancellor's brief, even though Balls is the party's best economist and an unrivalled attacker of the Tories (see Gove, Michael). His Bloomberg speech, outlining a progressive and Keynesian alternative to the coalition's cuts agenda, has been hailed by commentators and economists from across the spectrum.

In fact, despite whispers about him lacking "credibility" on the deficit, Balls's position is backed by the Nobel Prize-winning economists Paul Krugman and Joseph Stiglitz, the Financial Times duo Martin Wolf and Samuel Brittan, and the governor of the US Federal Reserve (and scholar of the Great Depression), Ben Bernanke. Are they not "credible" enough for the British commentariat or the Labour right? Personally, I think the words "credible" and "credibility" should be banned from all discussions of the deficit.

(On a side note, on the subject of language, before Labour members or supporters get upset with me for using the derogatory phrase "Hooverites" in the standfirst — above — I should point out that I'm quoting Joe Stiglitz here. He told me, in an interview back in February, that deferring to the credit ratings agencies and "scaremongering" about the debt marked a victory for the "Hooverites" over the "Keynesians".)

I was delighted, however, to see Ed M tell Channel 4 News last night that he would want to tax more than the Darling plan allows for, and it is important that the debate over deficit reduction revolves not just around the timing for cutting, halving or eliminating the state's overdraft, but also the preferred ratio of spending-cuts-to-tax-rises. Ed Balls was the first Labour leadership candidate to argue that Labour's plan should be based on a 50:50 ratio between the two and to point out that Norman Lamont and Kenneth Clarke used a similar ratio when the Tories were cutting the deficit in the 1990s.

I happen to believe that Balls is the best candidate for the job of shadow chancellor (and I made my case for him in my column last week). Others have suggested Yvette Cooper, who is also a strong candidate with an impressive CV. But, outside of this particular married couple, who are the other candidates for the job? Are there any? And will they help Labour stand up to the economic illiteracy of the coalition's fiscal sadists?

Ed M — over to you.