Brown's new world order

The Inside Track with Jonathan Freedland plus Kev

The Inside Track with Jonathan Freedland plus Kevin Maguire, Martin Bright, Peter Wilby plus Tara Hamilton-Miller

It's only an academic question, but it has suddenly acquired more force, now that he's about to become prime minister. Could Gordon Brown have stopped the Iraq war?

Say Brown had joined Robin Cook in resigning on principle in March 2003. Tony Blair would have had only two options: to quit or to back down to save his government. He would have had to phone George W Bush and tell him that British troops would not, after all, be joining the US military in Operation Iraqi Freedom. We know from all the insider accounts that Bush was determined not to go to war alone. Indeed, he was prepared to go to inordinate lengths to keep his British ally on board. The president could not allow his war to seem like an act of American caprice, rather than the action of the international community. Bush would have had to delay the invasion, thereby giving the UN arms inspectors more time - perhaps enough to discover that Saddam Hussein had no weapons of mass destruction after all. The chain of logic is clear. No Brown, no Britain. No Britain, no war.

Brown never did take that decisive step. He kept well out of what was the defining battle of the Blair years, declaring his view only during the 2005 general election campaign when asked point-blank if he would have handled Iraq the same way as Blair. "Yes," Brown said - and said no more.

From now on, enigmatic distance from key foreign policy issues will not be an option. Brown will have to lead and decide. There can be no delegation of international affairs, the way Blair delegated the economy to his Chancellor. Foreign policy is close to the essence of the prime minister's role. And, as predecessors from Churchill through Eden to Thatcher would surely testify, it's what can make or break you.

Brown will arrive at No 10 with only the sketchiest record in foreign affairs. That is partly thanks to the division of labour entailed by the Granita accord: Gordon got domestic, Tony got the rest of the world. If that was the bargain, Brown stuck to it faithfully, never once cutting across Blair's international turf. That's the charitable reading. Brown's critics have a harsher gloss. For them, his silence on Iraq was motivated by his Macavity-like habit, identified by the former mandarin Lord Turnbull, of vanishing at the first sign of trouble. Either way, Brown's experience in the diplomatic arena is thin. One über-Blairite warns that, when the first international crisis strikes, Brown is not going to know what has hit him. "If Iran invades southern Iraq, you can't commission Derek Wanless to do an 18-month review. You have to decide what to do now. Today."

And foreign policy is notoriously unpredictable. It is often barely a policy at all, less a predetermined strategy than a series of reactions to unforeseen events. After all, who knew in 1997 that Blair would emerge as a muscular neoconservative? Brown could end up surprising us just as much.

It is not only outsiders who are in the dark about his intentions. I asked one pro-Brown cabinet minister what his new boss planned to do internationally and received a candid reply: "I don't know." Incredibly, the man who will be prime minister next month has no full-time foreign policy adviser.

So we're left looking for clues, in his speeches and in his past record. One conclusion emerges straight away: when Brown looks for a way into an international problem, he heads for the door marked "Economics". The most obvious example is the Israel-Palestine conflict. In 2005, Brown deployed his trusted lieutenant Ed Balls, along with a Treasury official, Jon Cunliffe - whom some tip to move over to No 10 to advise on foreign affairs - to study, on behalf of the G8, prospects for "supporting the Middle East peace process through economic development". The idea was to replicate for Israelis and Palestinians what had worked so well in Northern Ireland: ensuring a flow of investment and jobs into a former war zone, giving the next generation a stake in peace. If today an 18-year-old Catholic lad in Belfast would rather get a job in some plush corporate HQ than become an IRA volunteer, why couldn't the same be true of young Palestinians of the future, choosing a career with an internet start-up over "martyrdom" with Hamas?

Something to lose

It's not just the Middle East conflict: ask Brown about Afghanistan, and his first answer is that the Afghans need an alternative crop to the poppy. He speaks about the need for investment in Iraq, too. Peace will hold, he believes, when people have something financial to lose. This economist's approach to foreign affairs might just be a function of Brown's CV: until now, economics was the only way he was allowed on to the world stage without treading on Blair's toes. But it goes deeper than that, revealing something of what Brown genuinely believes. There are flaws in the approach, to be sure. On Israel-Palestine, it's clear that investment will be vital after the two sides have signed a peace agreement. But the politics surely has to come first (just as investment in Ulster could come only after a meaningful ceasefire). To talk about industrial parks and apprenticeships now, while Hamas is firing rockets at Israel, Israel is shelling Gaza, and Fatah and Hamas are killing each other, risks looking idealistic, if not irrelevant.

There are other important pointers. Brown's championing of help for the developing world is well known, from his leading role in the campaign to cut debt to his invention of the International Finance Facility, designed to increase development aid with money from the bond markets. In both cases, Brown chivvied other governments to do their bit, even bringing a Republican US Treasury secretary, John Snow, on board for debt relief. That could be a precedent, a sign that coalition-building is not beyond him. It has also won him a strong reputation among NGOs and church groups.

What does this belief in development aid, typified by his tripling of the Department for International Development's budget, tell us about Brown? Admirers say it demonstrates his core belief that poverty is a scourge that governments have to tackle, at home and abroad. This, they say, is the legacy of his upbringing in the manse, the tangible evidence of his sotto voce brand of Christian socialism. Yet it would be a mistake to read Brown's belief in development as entirely abstract and ethical. Rather, it illuminates what might be a funda mentally different approach to the hard-headed, real-world questions thrown up by the "war on terror" - fundamentally different, that is, from the policy pursued by Blair.

If expressed in a soundbite, this would be "tough on terrorism, tough on the causes of terrorism". Brown is too canny to say anything that could be understood as justifying terrorist murder, but privately he argues that there are conditions in which violent extremism can flourish. These include states that break down through desperate poverty and disease.

Blair hangover

Of course, that doesn't explain the 19 hijackers of 9/11, most of them from comfortable Saudi backgrounds. But Brown is looking ahead to the failing states of Africa, worried that they could fall prey to al-Qaeda. In a speech in April to Labour Friends of Israel, he spoke at length about finding partners in Africa. His belief is that helping those countries - say, by funding education for those 120 million of the world's children who don't go to school - is both a moral good in itself and pragmatically smart, preventing jihadism winning more recruits. Brown talks often of the postwar Marshall Plan, which spent US money on European and other countries, in part to prevent them falling into the pro-Soviet column. He may well see aid to Africa the same way, with jihadism the new global menace to be defeated.

As for Iraq itself, a move is expected early, if only to draw a line under the hangover of the Blair era. The likeliest would be an accelerated troop withdrawal. But Brown would be wary of spinning that as a repudiation of Blair's war: after all, he knows that we know that he voted for it, and saw the raw anger for himself as an anti-war heckler was ejected from a hustings meeting he addressed on 20 May.

What's more, Brown still privately defends the decision to invade. He argues the case not on the grounds of weapons of mass destruction or Saddam being a vile dictator, but that Iraq's serial defiance of repeated UN resolutions could not go unpunished. Critics of the war will say that Saddam could hardly have been defying UN resolutions when, as we now know for sure, he had indeed disarmed.

Brown might want to couple any withdrawal from Iraq with another gesture, perhaps in the opposite direction. He might, for example, boost the British presence in Afghan istan, as if to allay any fears in Washington that Britain under him was going soft. But any desire to prove his hard power credentials is unlikely to include signing up for a military solution to one of the most pressing questions waiting for him in the Downing Street in-tray: Iran's apparent desire to acquire nuclear weapons. On 13 May, Brown said he did not anticipate any attack on Iran, because the process of multilateral engagement and negotiation is working. Indeed, he even spoke of a "new multilateralism", in which disputes will increasingly be settled through international institutions and dialogue. It may be too hopeful, but it suggests at least a different starting point from Blair, who sent British troops into combat five times in his first six years.

Then comes the crucial relationship, the one with the US. Of all Brown's diplomatic moves, this is the one that will be watched most intensely. There won't be the love-in that Blair struck up with Bush, if only because Brown knows how dearly that cost his predecessor, but it might be more complex than some hope. Brown is a known Americanophile - much more than was the French-speaking, Tuscany-visiting Blair. He reads American books and, famously, used to holiday annually in Cape Cod. His friendships range from Ted Kennedy to Alan Greenspan, the former head of the Federal Reserve. Brown will certainly be able to do business in Washington.

Aberrational fantasies

Brown also has the equipment to be more discerning than Blair ever was. Blair was powered by an undifferentiated belief that he had to be close to the White House, whoever was in it, whatever they did. Brown will be better able to distinguish enduring American interests from aberrational, neoconservative fantasies, siding with the US for the former and keeping his distance from the latter. He will be an enthusiastic, loyal ally of the US - but his support will not be unconditional. And if, once Bush goes in January 2009, the president is replaced by a Democrat, from the party with which Brown has good, personal links, so much the better.

On Europe, we have had several glimpses of the shape of things to come. Brown's impatience at finance ministers' meetings, and his derailment of British membership of the euro, suggest a sceptic. He loathes the Common Agricultural Policy, a piece of protectionism that cannot be defended in an era of global free trade. With the French and the Germans now talking of resuscitating the corpse of an EU constitution, reclothing it as a treaty, a collision seems likely. Brown would not want to rouse the ire of the Eurosceptic press by driving such a treaty through parliament; but nor could he risk submitting it to a referendum that he could lose. Expect some trademark footwork to get this booted into the long grass.

Where Brown would like to set a lead, rather than just react, is on the aid and trade agenda he has made his own (his only beef with the Make Poverty History campaign is that he thinks it should be pushing governments, including his, harder), and also on climate change. He wants to outman oeuvre the Tories on this territory not by matching David Cameron wind turbine for wind turbine, but by coming up with the kind of large-scale breakthrough that would make Cameron look like a lightweight. He speaks of plans for the reforestation of the Congo, of recasting the beleaguered World Bank as a new Environment Bank, of establishing a carbon market in London. This is the level he wants to operate on; he'll leave the organic broccoli to Cameron.

These, then, are the instincts that should steer Gordon Brown when he enters the international arena as leader of what is still one of the world's most powerful nations. How much will they determine what he does in office? The lesson of recent history is that they may be no guide at all. As Tony Blair discovered one September morning in 2001, everything can change when a single event comes out of a clear blue sky.

Jonathan Freedland writes for the Guardian

This article first appeared in the 28 May 2007 issue of the New Statesman, Gaza: The jailed state

MILES COLE
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The new Brexit economics

George Osborne’s austerity plan – now abandoned by the Tories – was the most costly macroeconomic policy mistake since the 1930s.

George Osborne is no longer chancellor, sacked by the post-Brexit Prime Minister, Theresa May. Philip Hammond, the new Chancellor, has yet to announce detailed plans but he has indicated that the real economy rather than the deficit is his priority. The senior Conservatives Sajid Javid and Stephen Crabb have advocated substantial increases in public-sector infrastructure investment, noting how cheap it is for the government to borrow. The argument that Osborne and the Conservatives had been making since 2010 – that the priority for macroeconomic policy had to be to reduce the government’s budget deficit – seems to have been brushed aside.

Is there a good economic reason why Brexit in particular should require abandoning austerity economics? I would argue that the Tory obsession with the budget deficit has had very little to do with economics for the past four or five years. Instead, it has been a political ruse with two intentions: to help win elections and to reduce the size of the state. That Britain’s macroeconomic policy was dictated by politics rather than economics was a precursor for the Brexit vote. However, austerity had already begun to reach its political sell-by date, and Brexit marks its end.

To understand why austerity today is opposed by nearly all economists, and to grasp the partial nature of any Conservative rethink, it is important to know why it began and how it evolved. By 2010 the biggest recession since the Second World War had led to rapid increases in government budget deficits around the world. It is inevitable that deficits (the difference between government spending and tax receipts) increase in a recession, because taxes fall as incomes fall, but government spending rises further because benefit payments increase with rising unemployment. We experienced record deficits in 2010 simply because the recession was unusually severe.

In 2009 governments had raised spending and cut taxes in an effort to moderate the recession. This was done because the macroeconomic stabilisation tool of choice, nominal short-term interest rates, had become impotent once these rates hit their lower bound near zero. Keynes described the same situation in the 1930s as a liquidity trap, but most economists today use a more straightforward description: the problem of the zero lower bound (ZLB). Cutting rates below this lower bound might not stimulate demand because people could avoid them by holding cash. The textbook response to the problem is to use fiscal policy to stimulate the economy, which involves raising spending and cutting taxes. Most studies suggest that the recession would have been even worse without this expansionary fiscal policy in 2009.

Fiscal stimulus changed to fiscal contraction, more popularly known as austerity, in most of the major economies in 2010, but the reasons for this change varied from country to country. George Osborne used three different arguments to justify substantial spending cuts and tax increases before and after the coalition government was formed. The first was that unconventional monetary policy (quantitative easing, or QE) could replace the role of lower interest rates in stimulating the economy. As QE was completely untested, this was wishful thinking: the Bank of England was bound to act cautiously, because it had no idea what impact QE would have. The second was that a fiscal policy contraction would in fact expand the economy because it would inspire consumer and business confidence. This idea, disputed by most economists at the time, has now lost all credibility.

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The third reason for trying to cut the deficit was that the financial markets would not buy government debt without it. At first, this rationale seemed to be confirmed by events as the eurozone crisis developed, and so it became the main justification for the policy. However, by 2012 it was becoming clear to many economists that the debt crisis in Ireland, Portugal and Spain was peculiar to the eurozone, and in particular to the failure of the European Central Bank (ECB) to act as a lender of last resort, buying government debt when the market failed to.

In September 2012 the ECB changed its policy and the eurozone crisis beyond Greece came to an end. This was the main reason why renewed problems in Greece last year did not lead to any contagion in the markets. Yet it is not something that the ECB will admit, because it places responsibility for the crisis at its door.

By 2012 two other things had also become clear to economists. First, governments outside the eurozone were having no problems selling their debt, as interest rates on this reached record lows. There was an obvious reason why this should be so: with central banks buying large quantities of government debt as a result of QE, there was absolutely no chance that governments would default. Nor have I ever seen any evidence that there was any likelihood of a UK debt funding crisis in 2010, beyond the irrelevant warnings of those “close to the markets”. Second, the austerity policy had done considerable harm. In macroeconomic terms the recovery from recession had been derailed. With the help of analysis from the Office for Budget Responsibility, I calculated that the GDP lost as a result of austerity implied an average cost for each UK household of at least £4,000.

Following these events, the number of academic economists who supported austerity became very small (they had always been a minority). How much of the UK deficit was cyclical or structural was irrelevant: at the ZLB, fiscal policy should stimulate, and the deficit should be dealt with once the recession was over.

Yet you would not know this from the public debate. Osborne continued to insist that deficit reduction be a priority, and his belief seemed to have become hard-wired into nearly all media discussion. So perverse was this for standard macroeconomics that I christened it “mediamacro”: the reduction of macroeconomics to the logic of household finance. Even parts of the Labour Party seemed to be succumbing to a mediamacro view, until the fiscal credibility rule introduced in March by the shadow chancellor, John McDonnell. (This included an explicit knockout from the deficit target if interest rates hit the ZLB, allowing fiscal policy to focus on recovering from recession.)

It is obvious why a focus on the deficit was politically attractive for Osborne. After 2010 the coalition government adopted the mantra that the deficit had been caused by the previous Labour government’s profligacy, even though it was almost entirely a consequence of the recession. The Tories were “clearing up the mess Labour left”, and so austerity could be blamed on their predecessors. Labour foolishly decided not to challenge this myth, and so it became what could be termed a “politicised truth”. It allowed the media to say that Osborne was more competent at running the economy than his predecessors. Much of the public, hearing only mediamacro, agreed.

An obsession with cutting the deficit was attractive to the Tories, as it helped them to appear competent. It also enabled them to achieve their ideological goal of shrinking the state. I have described this elsewhere as “deficit deceit”: using manufactured fear about the deficit to achieve otherwise unpopular reductions in public spending.

The UK recovery from the 2008/2009 recession was the weakest on record. Although employment showed strong growth from 2013, this may have owed much to an unprecedented decline in real wages and stagnant productivity growth. By the main metrics by which economists judge the success of an economy, the period of the coalition government looked very poor. Many economists tried to point this out during the 2015 election but they were largely ignored. When a survey of macroeconomists showed that most thought austerity had been harmful, the broadcast media found letters from business leaders supporting the Conservative position more newsworthy.

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In my view, mediamacro and its focus on the deficit played an important role in winning the Conservatives the 2015 general election. I believe Osborne thought so, too, and so he ­decided to try to repeat his success. Although the level of government debt was close to being stabilised, he decided to embark on a further period of fiscal consolidation so that he could achieve a budget surplus.

Osborne’s austerity plans after 2015 were different from what happened in 2010 for a number of reasons. First, while 2010 austerity also occurred in the US and the eurozone, 2015 austerity was largely a UK affair. Second, by 2015 the Bank of England had decided that interest rates could go lower than their current level if need be. We are therefore no longer at the ZLB and, in theory, the impact of fiscal consolidation on demand could be offset by reducing interest rates, as long as no adverse shocks hit the economy. The argument against fiscal consolidation was rather that it increased the vulnerability of the economy if a negative shock occurred. As we have seen, Brexit is just this kind of shock.

In this respect, abandoning Osborne’s surplus target makes sense. However, there were many other strong arguments against going for surplus. The strongest of these was the case for additional public-sector investment at a time when interest rates were extremely low. Osborne loved appearing in the media wearing a hard hat and talked the talk on investment, but in reality his fiscal plans involved a steadily decreasing share of public investment in GDP. Labour’s fiscal rules, like those of the coalition government, have targeted the deficit excluding public investment, precisely so that investment could increase when the circumstances were right. In 2015 the circumstances were as right as they can be. The Organisation for Economic Co-operation and Development, the International Monetary Fund and pretty well every economist agreed.

Brexit only reinforces this argument. Yet Brexit will also almost certainly worsen the deficit. This is why the recent acceptance by the Tories that public-sector investment should rise is significant. They may have ­decided that they have got all they could hope to achieve from deficit deceit, and that now is the time to focus on the real needs of the economy, given the short- and medium-term drag on growth caused by Brexit.

It is also worth noting that although the Conservatives have, in effect, disowned Osborne’s 2015 austerity, they still insist their 2010 policy was correct. This partial change of heart is little comfort to those of us who have been arguing against austerity for the past six years. In 2015 the Conservatives persuaded voters that electing Ed Miliband as prime minister and Ed Balls as chancellor was taking a big risk with the economy. What it would have meant, in fact, is that we would already be getting the public investment the Conservatives are now calling for, and we would have avoided both the uncertainty before the EU referendum and Brexit itself.

Many economists before the 2015 election said the same thing, but they made no impact on mediamacro. The number of economists who supported Osborne’s new fiscal charter was vanishingly small but it seemed to matter not one bit. This suggests that if a leading political party wants to ignore mainstream economics and academic economists in favour of simplistic ideas, it can get away with doing so.

As I wrote in March, the failure of debate made me very concerned about the outcome of the EU referendum. Economists were as united as they ever are that Brexit would involve significant economic costs, and the scale of these costs is probably greater than the average loss due to austerity, simply because they are repeated year after year. Yet our warnings were easily deflected with the slogan “Project Fear”, borrowed from the SNP’s nickname for the No campaign in the 2014 Scottish referendum.

It remains unclear whether economists’ warnings were ignored because they were never heard fully or because they were not trusted, but in either case economics as a profession needs to think seriously about what it can do to make itself more relevant. We do not want economics in the UK to change from being called the dismal science to becoming the “I told you so” science.

Some things will not change following the Brexit vote. Mediamacro will go on obsessing about the deficit, and the Conservatives will go on wanting to cut many parts of government expenditure so that they can cut taxes. But the signs are that deficit deceit, creating an imperative that budget deficits must be cut as a pretext for reducing the size of the state, has come to an end in the UK. It will go down in history as probably the most costly macroeconomic policy mistake since the 1930s, causing a great deal of misery to many people’s lives.

Simon Wren-Lewis is a professor of economic policy at the Blavatnik School of Government, University of Oxford. He blogs at: mainlymacro.blogspot.com

 Simon Wren-Lewis is is Professor of Economic Policy in the Blavatnik School of Government at Oxford University, and a fellow of Merton College. He blogs at mainlymacro.

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt