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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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Two referendums have revived the Tories and undone Labour

The Scottish vote enabled the Conservatives' rebirth as the party of the Union; the Brexit vote has gifted Theresa May a project to reunite a fragmented right.

In the final week of the Scottish independence referendum campaign, as the Union appeared in peril, David Cameron pleaded with voters to punish his party rather than Scotland. “If you are fed up with the effing Tories, give them a kick,” he said. Cameron’s language reflected a settled view: the Conservatives were irredeemably loathed by Scots. For nearly two decades, the party had no more than one MP north of the border. Changing the party’s name for devolved contests was discussed.

Since becoming Conservative leader, Theresa May has pursued a hard – she prefers “clean” – Brexit strategy that Scots voted against and the Conservatives have achieved a UK-wide poll lead of 20 points.

Yet rather than regressing, the Scottish Conservatives have resurged. On 22 April, a Panelbase poll put them on 33 per cent in Scotland (a rise of 18 points since 2015). A favoured Labour barb used to be that there were more pandas (two) in Scotland than Tory MPs (one). The poll would leave the Tories with 12 seats and Corbyn’s party with none. Tory aides confess that they were surprised by the figures but declare there are “no limits to our ambitions” in Scotland.

The roots of this recovery lie in the 2014 independence referendum. The vote, and the SNP’s subsequent landslide victory in the 2015 general election, realigned Scottish politics along unionist and nationalist lines. Led by Ruth Davidson, the Scottish Conservatives have ably exploited the opportunity. “We said No. We meant it,” the party’s official slogan declares of Nicola Sturgeon’s demand for a second referendum. Under Ruth Davidson, the Tories have already become the official opposition at Holyrood.

Labour is torn between retaining unionists and winning back nationalists. It has been punished for its equivocation, as it is being punished over its confused response to Brexit. In April 2016, the Scottish Labour leader, Kezia Dugdale, said that it was “not inconceivable” that she could back independence if the UK voted to leave the EU (and earlier suggested that MPs and MSPs could be given a free vote). Jeremy Corbyn recently stated that he was “absolutely fine” with a second referendum being held.

“For us it’s a badge of honour but there are some people in Scottish Labour who are quite queasy about that word [unionist] and I think Jeremy Corbyn would be very queasy about it,” Adam Tomkins, a Conservative MSP for Glasgow and public law professor, told me. “Don’t forget the Northern Ireland dimension; we’ve all seen the photos of him rubbing shoulders with leading republicans. The Scottish Union is very different to the Irish Union but the word migrates.”

The irony is that Corbyn allies believed his anti-austerity, anti-Trident platform would allow Labour to recover in Scotland. Yet the pre-eminence of the national question has left it in a political no-man’s land.

In contrast to the rest of the UK, Scots backed Remain by 62 per cent to 38 per cent. Far from protecting EU membership, as David Cameron had promised in the referendum campaign, the preservation of the Union now threatened it. Theresa May has since yielded no ground, denying Scotland both a second independence referendum on terms dictated by the SNP and single market membership. But polls show no rise in support for independence.

Conservative aides believe that Sturgeon miscalculated by immediately raising the prospect of a second referendum following the Leave vote last June. Families and communities were riven by the 2014 contest. Most had little desire to disrupt the uneasy peace that has prevailed since.

Nor are the politics of Brexit as uncomplicated as some assume. Thirty-six per cent of SNP supporters voted Leave and more than a third of this bloc have since turned against independence. As elsewhere, some Remainers have accepted the result and fear the instability that secession would cause. Scotland’s trade with the UK is worth four times as much as that with the EU. Davidson, who was one of the most forceful advocates for Remain, says that pursuing independence to counter the effects of Brexit would be “stubbing your toe to then amputate your foot”.

Theresa May, who spoke of the “precious” Union when she became Prime Minister, has devoted great attention to Scotland. Cabinet ministers are instructed to develop a “Scottish plan” when they formulate policy; buildings funded by the UK government now bear its insignia. Davidson’s influence was crucial to May’s decision to retain the 0.7 per cent foreign aid commitment – an emblem of compassionate conservatism.

After a decade of SNP rule, Tory aides believe that their rival’s poor domestic record, most notably on education, is “catching up with them”. More than a year has elapsed since the Scottish Parliament passed new legislation. “We’ve got a government that simply isn’t very interested in governing,” Tomkins said. “I thought that Nicola [Sturgeon] would change that. I was wrong.” What preoccupies the SNP is the constitutional question.

Shortly after the remarkable Scottish polls, a new survey showed the Tories on course to win the most seats in Wales for the first time since 1859. For some former Labour supporters, voting Ukip is proving a gateway drug to voting Conservative.

Two referendums have now realigned politics in the Tories’ favour. The Scottish vote enabled their rebirth as the party of the Union; the Brexit vote has gifted May a project to reunite a fragmented right.

Before the 2015 general election, Labour derided the Tories as a southern English force unworthy of their official name: the Conservative and Unionist Party. Partly through accident and partly through design, May and Davidson are now reclaiming it. 

George Eaton is political editor of the New Statesman.

This article first appeared in the 27 April 2017 issue of the New Statesman, Cool Britannia 20 Years On

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