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What Britain could learn from the mistakes of Reaganomics

Cutting spending so drastically while raising taxes can only lead to fewer jobs and an overvalued st

I was at the University of Exeter on 24 May to give a lecture on whether inflation or deflation is the greater threat (the answer is deflation, since you ask, and that is why the Bank of England mustn't raise interest rates any time soon). While there, I met up with my friend Steve Smith, who has transformed the university since becoming its vice-chancellor in 2002.

Steve, who also serves as president of Universities UK, the representative organisation for the country's universities, is a strong advocate of the use of "contextual data", such as a student's school or family background, in the admissions process. In an article in Times Higher Education last year, he quoted compelling evidence from the Sutton Trust: "Those educated at independent schools were 4 per cent less likely to achieve a First- or Upper-Second-class degree than otherwise similar students educated in state schools." Some at Oxford and Cambridge would do well to listen.

From Exeter, I travelled to London, where I got stuck in a traffic jam outside Buckingham Palace as a couple of hundred soldiers on horseback passed by, heading to a parade for Barack Obama. I was on my way to give a talk for the British Property Federation, whose other key­note speaker was the Business Secretary, Vince Cable. Before our talks, I had a brief but illuminating discussion with the Lib Dem minister.

I have to say I was impressed and agreed with many of the points he raised in his interview with Jason Cowley in last week's NS. Vince and I are both worried about deflation: that we may face a number of years of very slow growth, coupled with the continued danger of another major financial implosion. The big difference between us is that I don't share his view that the markets necessitated austerity on the scale, or at the speed, that the government chose.

Good riddance

I'm not alone. Obama, despite the friendly flipping of burgers and ping-pong matches during his visit to London, refused to endorse the coalition government's policy of slashing and burning the British economy. This was embarrassing for Downing Street, whose spinning that the US president was likely to do so had apparently annoyed the White House. That week, the Organisation for Economic Co-operation and Development (OECD), which the Chancellor, George Osborne, has frequently claimed supports his policies, lowered its growth forecast for the UK economy. Its chief economist, Pier Carlo Padoan, suggested in an interview that there is "scope for slowing the pace" of spending cuts, because growth in the UK economy has ground to a halt.

Meanwhile, the Office for National Statistics (ONS) left GDP growth in the first quarter of 2011 unrevised at 0.5 per cent and suggested that there were alarming weaknesses in both consumption and investment. Exports were a strong driver but it appears that even they are now slowing. Growth was also driven by a strong contribution from government final consumption expenditure, which rose 1 per cent in the first quarter. In consequence, according to the ONS, public-sector borrowing increased sharply in April to £10bn, compared to £7.3bn in April 2010. This is the highest public-sector borrowing figure for April on record. Various cabinet members reportedly expressed deep concern about the slowing economy at their weekly meeting on 24 May.

A more positive development was Andrew "Death" Sentance's departure from the Bank of England's Monetary Policy Committee (MPC), after ingloriously attending 56 meetings. His views have closely and negatively correlated with events. In February 2008, he argued: "An outright recession - in which economic activity falls year-on-year - is a remote risk for the UK economy at present." On 24 September 2008, days after the collapse of Lehman Brothers, he argued that there would be no recession.

His calls for a rise in interest rates to curb inflation have been entirely misplaced, as a rise would risk plummeting the UK economy back into recession, or worse. Cable emphasised in his NS interview that the UK does not have "an underlying inflation problem", so presumably he, too, is glad to be shot of Sentance. And so, it seems, are fellow MPC members: Adam Posen wrote in the Financial Times on 26 May that raising rates would be the wrong policy response, and Paul Fisher made similar comments in an interview in Edinburgh.

A great loss

I can reveal here for the first time that Chris Pissarides, professor of economics at the LSE, whom I have known for over 25 years, was interviewed by the Treasury to replace me on the MPC in 2009 but was rejected in favour of David Miles, formerly chief UK economist at Morgan Stanley. Subsequently, Pissarides, who has been critical of the government's austerity programme, won the 2010 Nobel Prize in Economic Sciences for his work on labour markets.

On 29 May, Pissarides told me that the recovery is obviously faltering but he doesn't believe we are headed for a double dip. Rather, he thinks that, with near-zero interest rates and quantitative easing (QE) having limited potential, fiscal policy involving the use of government spending and taxation has the best chance of speeding up the recovery. With this tool taken away, the Nobel laureate believes, recovery is dependent on the private sector picking up speed unaided and will, therefore, be anaemic for a long time.

His view remains, like mine, that there were never urgent debt problems in the UK before and there aren't any today. All that was needed, he says, "was a well-articulated policy of how the debt was going to be tackled when recovery became more robust". His preferred action now is postponement of fiscal contraction, com­bined with no change in monetary policy, including QE. He agrees with Larry Summers, former director of Obama's National Economic Council, that the idea of an "expansionary fiscal contraction" is oxymoronic. It reminds him, he told me, of an idea that appealed so much to Ronald Reagan: cut tax rates and the economy will be stimulated to the extent that tax revenue will rise. The result was a huge deficit. Similarly, Pissarides says, cutting government spending and raising taxes as the coalition is doing will lead to fewer jobs and sterling being overvalued, which hurts exporters. The pound stands at $1.64 compared to $1.45 a year ago.

Pity. It sounds as if Pissarides would have been a great replacement for me on the MPC.

David Blanchflower is NS economics editor and a professor at Dartmouth College, New Hampshire, and the University of Stirling

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

This article first appeared in the 06 June 2011 issue of the New Statesman, Are we all doomed?

David Young
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The Tories are the zombie party: with an ageing, falling membership, still they stagger on to victory

One Labour MP in Brighton spotted a baby in a red Babygro and said to me: “There’s our next [Labour] prime minister.”

All football clubs have “ultras” – and, increasingly, political parties do, too: although, in the case of political parties, their loudest and angriest supporters are mostly found on the internet. The SNP got there first: in the early days of email, journalists at the Scotsman used to receive bilious missives complaining about its coverage – or, on occasion, lack of coverage – of what the Scottish National Party was up to. The rest soon followed, with Ukip, the Labour Party and even the crushed Liberal Democrats now boasting a furious electronic horde.

The exception is the Conservative Party. Britain’s table-topping team might have its first majority in 18 years and is widely expected in Westminster to remain in power for another decade. But it doesn’t have any fans. The party’s conference in Manchester, like Labour’s in Brighton, will be full to bursting. But where the Labour shindig is chock-full of members, trade unionists and hangers-on from the charitable sector, the Conservative gathering is a more corporate affair: at the fringes I attended last year, lobbyists outnumbered members by four to one. At one, the journalist Peter Oborne demanded to know how many people in the room were party members. It was standing room only – but just four people put their hands up.

During Grant Shapps’s stint at Conservative headquarters, serious attempts were made to revive membership. Shapps, a figure who is underrated because of his online blunders, and his co-chair Andrew Feldman were able to reverse some of the decline, but they were running just to stand still. Some of the biggest increases in membership came in urban centres where the Tories are not in contention to win a seat.

All this made the 2015 election win the triumph of a husk. A party with a membership in long-term and perhaps irreversible decline, which in many seats had no activists at all, delivered crushing defeats to its opponents across England and Wales.

Like José Mourinho’s sides, which, he once boasted, won “without the ball”, the Conservatives won without members. In Cumbria the party had no ground campaign and two paper candidates. But letters written by the Defence Secretary, Michael Fallon, were posted to every household where someone was employed making Trident submarines, warning that their jobs would be under threat under a Labour government. This helped the Tories come close to taking out both Labour MPs, John Woodcock in Barrow and Furness and Jamie Reed in Copeland. It was no small feat: Labour has held Barrow since 1992 and has won Copeland at every election it has fought.

The Tories have become the zombies of British politics: still moving though dead from the neck down. And not only moving, but thriving. One Labour MP in Brighton spotted a baby in a red Babygro and said to me: “There’s our next [Labour] prime minister.” His Conservative counterparts also believe that their rivals are out of power for at least a decade.

Yet there are more threats to the zombie Tories than commonly believed. The European referendum will cause endless trouble for their whips over the coming years. And for all there’s a spring in the Conservative step at the moment, the party has a majority of only 12 in the Commons. Parliamentary defeats could easily become commonplace. But now that Labour has elected Jeremy Corbyn – either a more consensual or a more chaotic leader than his predecessors, depending on your perspective – division within parties will become a feature, rather than a quirk, at Westminster. There will be “splits” aplenty on both sides of the House.

The bigger threat to Tory hegemony is the spending cuts to come, and the still vulnerable state of the British economy. In the last parliament, George Osborne’s cuts fell predominantly on the poorest and those working in the public sector. They were accompanied by an extravagant outlay to affluent retirees. As my colleague Helen Lewis wrote last week, over the next five years, cuts will fall on the sharp-elbowed middle classes, not just the vulnerable. Reductions in tax credits, so popular among voters in the abstract, may prove just as toxic as the poll tax and the abolition of the 10p bottom income-tax rate – both of which were popular until they were actually implemented.

Added to that, the British economy has what the economist Stephen King calls “the Titanic problem”: a surplus of icebergs, a deficit of lifeboats. Many of the levers used by Gordon Brown and Mervyn King in the last recession are not available to David Cameron and the chief of the Bank of England, Mark Carney: debt-funded fiscal stimulus is off the table because the public finances are already in the red. Interest rates are already at rock bottom.

Yet against that grim backdrop, the Conservatives retain the two trump cards that allowed them to win in May: questions about Labour’s economic competence, and the personal allure of David Cameron. The public is still convinced that the cuts are the result of “the mess” left by Labour, however unfair that charge may be. If a second crisis strikes, it could still be the Tories who feel the benefit, if they can convince voters that the poor state of the finances is still the result of New Labour excess rather than Cameroon failure.

As for Cameron, in 2015 it was his lead over Ed Miliband as Britons’ preferred prime minister that helped the Conservatives over the line. This time, it is his withdrawal from politics which could hand the Tories a victory even if the economy tanks or cuts become widely unpopular. He could absorb the hatred for the failures and the U-turns, and then hand over to a fresher face. Nicky Morgan or a Sajid Javid, say, could yet repeat John Major’s trick in 1992, breathing life into a seemingly doomed Conservative project. For Labour, the Tory zombie remains frustratingly lively. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.

This article first appeared in the 01 October 2015 issue of the New Statesman, The Tory tide