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Opposing austerity is not enough – Labour’s leaders need lessons in economics, fast

John McDonnell’s economic advisor speaks out about about Labour's fiscal and welfare policies.

I have made it clear on several occasions that I am not a Jeremy Corbyn supporter and have never even spoken to him – but I want to help Labour and to make sure that the party does and says sensible things. I am a member of Shadow Chancellor John McDonnell’s economic advisory board and we are trying to help Labour put together credible economic policies. We have only met once but the plan is to convene every quarter from now on. The economists in the group are smart, left-leaning and credible, though it will take some time to produce a coherent new economic strategy that party members share. Game on.

Since the start of the Great Recession nearly eight years ago, ordinary working people have experienced big falls in their living standards. Real wages are still down by 9 per cent since 2008 and 2.5 per cent since the coalition was formed in May 2010. At the same time, the incomes and wealth of those at the top have risen sharply as house prices skyrocketed in London and the south-east.

It is perfectly sound economics to try to make the system fairer. The Conservative argument – that you pay the poor less and they work harder but pay the rich more and they work harder – makes no sense at all. Work makes people happy. Well-paid work makes them happier still. Too many people are constrained by not being able to get enough hours, or are stuck in temporary jobs, and that is especially true of the young whom the Tories have abandoned.

The tax code can clearly be made fairer by moving away from indirect taxes to fairer direct taxes. Cuts in taxes at the low end can be paid for by increasing taxes on incomes at the top. The poor respond to incentives even more than the rich do. Labour needs to focus on improving the well-being of the ordinary person on the Clapham (and other more northerly) omnibus(es). Means-tested bus passes for OAPs make sense, though. I don’t need one. The Labour Party must become the party of the young and of the future. The Tory party is the party of the old and the past.

I am conducting an independent review for the shadow chancellor on the remit of the Bank of England. The idea is, in time, to come up with improvements to the remit. It is important that the review is seen to be – and is – independent and considers views from across the political spectrum. We are in search of good ideas. It was the Labour Party that established an independent Bank of England and kept Britain out of the euro. We need to come up with suggestions that would have improved the UK’s performance over the past decade. Labour must lead the way.

These are early days and the new Labour Party still doesn’t have many economic policies to speak of. The problem is that opposition to austerity on its own is not enough. It is time to start thinking about how Labour can become a credible opposition – and that requires getting real about the economy.

The new Labour leaders are not economists and are going to have to learn fast. They will have to accept the realities of capitalism and modern markets, like it or not. No more silly stuff about companies not being able to pay dividends if they don’t do X or Y. If companies are not allowed to pay dividends, share prices will potentially rise instead. If you raise corporate taxes too high, companies may move to Ireland or elsewhere, where they are lower. Economic policy is, more often than not, applied common sense.

Plus, markets work. The one thing we know about incomes policies (such as price and wage controls) is that they don’t work. Firms just promote people.

Markets can be made to have less unpleasant side effects. Efficiency doesn’t always produce acceptable distributional effects and there may be an under-provision of public goods. The optimal allocation of resources may still be perfectly disgusting. Rising congestion times don’t matter if you have your own helicopter. This represents an opportunity for Labour to make the markets work better for ordinary people.

The “cocktail of threats” identified by the Chancellor recently already appears to be hitting the UK. The optimistic Autumn Statement is already history. The slowing of the world’s biggest economy, that of the United States, caused big problems in 2008 and the concern is that the slowing of China, the second-largest, may cause a comparable downdraught in 2016. Because of falling demand to ship goods, it is cheaper today to rent a 1,100-foot-long cargo ship for a day than it is to hire a Ferrari. Apparently, it is also cheaper to buy a container and send it on the high seas for a year than to rent a local storage locker. My favourite measure of demand, the Baltic Dry Index, which measures the cost of renting a massive ship carrying dry goods such as iron ore and wheat, stood at around 12,000 in 2008 before it collapsed. It is now at 354. Indices of Chinese container volumes have also plummeted recently. It isn’t just that the supply of oil is up; global demand for commodities and manufactured goods in particular has fallen. Beware the Ides of March.

It is hard to identify when a country is entering a downturn but we may already be in one and Labour needs to have a response ready. More stimulus and the end of austerity are the answer, I hear you say – but then what? Which shovel-ready projects should be funded? And should there be a cash-for-fridges-and-old-clunkers scheme? Should VAT be cut and, if so, by how much? Should the Monetary Policy Committee engage in more quantitative easing and, if so, of what type? Should it cut rates to negative and, if so, how low could they go?

George Osborne’s reckless austerity and welfare cuts are the opposite of what is needed. So this is a chance for Labour to get its retaliation in early and often. There will be interesting days ahead.

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

This article first appeared in the 28 January 2016 issue of the New Statesman, Should Labour split?

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The Prevent strategy needs a rethink, not a rebrand

A bad policy by any other name is still a bad policy.

Yesterday the Home Affairs Select Committee published its report on radicalization in the UK. While the focus of the coverage has been on its claim that social media companies like Facebook, Twitter and YouTube are “consciously failing” to combat the promotion of terrorism and extremism, it also reported on Prevent. The report rightly engages with criticism of Prevent, acknowledging how it has affected the Muslim community and calling for it to become more transparent:

“The concerns about Prevent amongst the communities most affected by it must be addressed. Otherwise it will continue to be viewed with suspicion by many, and by some as “toxic”… The government must be more transparent about what it is doing on the Prevent strategy, including by publicising its engagement activities, and providing updates on outcomes, through an easily accessible online portal.”

While this acknowledgement is good news, it is hard to see how real change will occur. As I have written previously, as Prevent has become more entrenched in British society, it has also become more secretive. For example, in August 2013, I lodged FOI requests to designated Prevent priority areas, asking for the most up-to-date Prevent funding information, including what projects received funding and details of any project engaging specifically with far-right extremism. I lodged almost identical requests between 2008 and 2009, all of which were successful. All but one of the 2013 requests were denied.

This denial is significant. Before the 2011 review, the Prevent strategy distributed money to help local authorities fight violent extremism and in doing so identified priority areas based solely on demographics. Any local authority with a Muslim population of at least five per cent was automatically given Prevent funding. The 2011 review pledged to end this. It further promised to expand Prevent to include far-right extremism and stop its use in community cohesion projects. Through these FOI requests I was trying to find out whether or not the 2011 pledges had been met. But with the blanket denial of information, I was left in the dark.

It is telling that the report’s concerns with Prevent are not new and have in fact been highlighted in several reports by the same Home Affairs Select Committee, as well as numerous reports by NGOs. But nothing has changed. In fact, the only change proposed by the report is to give Prevent a new name: Engage. But the problem was never the name. Prevent relies on the premise that terrorism and extremism are inherently connected with Islam, and until this is changed, it will continue to be at best counter-productive, and at worst, deeply discriminatory.

In his evidence to the committee, David Anderson, the independent ombudsman of terrorism legislation, has called for an independent review of the Prevent strategy. This would be a start. However, more is required. What is needed is a radical new approach to counter-terrorism and counter-extremism, one that targets all forms of extremism and that does not stigmatise or stereotype those affected.

Such an approach has been pioneered in the Danish town of Aarhus. Faced with increased numbers of youngsters leaving Aarhus for Syria, police officers made it clear that those who had travelled to Syria were welcome to come home, where they would receive help with going back to school, finding a place to live and whatever else was necessary for them to find their way back to Danish society.  Known as the ‘Aarhus model’, this approach focuses on inclusion, mentorship and non-criminalisation. It is the opposite of Prevent, which has from its very start framed British Muslims as a particularly deviant suspect community.

We need to change the narrative of counter-terrorism in the UK, but a narrative is not changed by a new title. Just as a rose by any other name would smell as sweet, a bad policy by any other name is still a bad policy. While the Home Affairs Select Committee concern about Prevent is welcomed, real action is needed. This will involve actually engaging with the Muslim community, listening to their concerns and not dismissing them as misunderstandings. It will require serious investigation of the damages caused by new Prevent statutory duty, something which the report does acknowledge as a concern.  Finally, real action on Prevent in particular, but extremism in general, will require developing a wide-ranging counter-extremism strategy that directly engages with far-right extremism. This has been notably absent from today’s report, even though far-right extremism is on the rise. After all, far-right extremists make up half of all counter-radicalization referrals in Yorkshire, and 30 per cent of the caseload in the east Midlands.

It will also require changing the way we think about those who are radicalized. The Aarhus model proves that such a change is possible. Radicalization is indeed a real problem, one imagines it will be even more so considering the country’s flagship counter-radicalization strategy remains problematic and ineffective. In the end, Prevent may be renamed a thousand times, but unless real effort is put in actually changing the strategy, it will remain toxic. 

Dr Maria Norris works at London School of Economics and Political Science. She tweets as @MariaWNorris.