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Chris Huhne spent his last night of freedom watching me do karaoke to “Teenage Kicks”

Tom Watson's diary.

The fightback

To Easington, where I am the guest of Grahame Morris MP for the constituency annual dinner. Our backdrop was a new National Union of Mineworkers banner. Where once there was a pithead, the banner now portrays a newly built school with happy children excitedly leaping into their future.

I couldn’t help but be struck how these potent symbols of our past were being used to project a new hope for the coal communities. Which is perhaps why there was fury directed towards Michael Gove, who that week had attacked local schools for having “the smell of defeatism”. The working classes of Easington have been in plenty of battles, but on the evidence of last week they’ve never been defeated.

Then a post-midnight drive through the mist and fog to wake up in the rustic peace of Keswick for the Words by the Water festival, to discuss my book Dial M for Murdoch. I shared a dressing room with the Guardian’s indefatigable Polly Toynbee. “Why are your frontbenchers not more angry?” she asked me. She’s right. I resolved there and then to work with the team of grass-roots members who are organising more than 53 protests against the bedroom tax.

The paperback

The former Labour MP Chris Mullin says he thought the art of political debate was over until he started to address literary festivals. He’s not wrong. The audience was intensely interested in the fine detail of the Leveson proposals and kept me on my toes.

I was struck by how even the most politically aware audience has almost given up on Westminster. Trust in public institutions is at an all-time low. We’re going to have to address the trust deficit if we are to strengthen civil society post-hacking, post-MPs’ expen - ses, post-banking crisis.

Jailhouse rock

The finest part of the weekend was the wedding of Charlotte Harris – the incisive media lawyer who cracked open the phone-hacking case – and her debonair fiancé, James Burr. Poor Chris Huhne was there, looking wistful. I couldn’t help thinking that spending your last night of freedom listening to me singing “Teenage Kicks” with a karaoke band would make prison seem a more tolerable fate. He got an eight-month sentence the next day. Even though he lied to a court, the sentence seemed hard for a scandal that started with a speeding offence.

Lazy Labour

Fair bit of ribbing wherever I’ve been about “Lazy Labour”, a nickname mentioned last week in an interview with Jim Murphy in this magazine. Reminded me of the old story about Roy Jenkins. The Balliol-educated son of the south Wales mineworkers’ leader, Jenkins had entered parliament in 1948, just as Nye Bevan was in the throes of founding the NHS.

In the smoking room one evening, it was suggested to Bevan that Jenkins, though clever and articulate, might be lazy. Bevan didn’t hesitate: “Lazy? Lazy?” he shrieked. “A boy from Abersychan with an accent like that – whatever he is, he’s not lazy.”

And Bevan was right. Whatever Jenkins was or wasn’t, the ensuing half-century proved beyond doubt: he wasn’t lazy.

The current “controversy” is almost equally amusing, and typically lazy. A classic mediadriven fuss over nothing, in which a Labour frontbencher making a perfectly reasonable point has his words twisted to resemble an attack on (of all people) me.

Changing times

In the brouhaha over Murphy, some central points – on which we all agree – have been entirely overlooked. On one level, the “debate” has been couched in terms that have romanticised the New Labour era. And yet sentimental attachment to old dictums is the very antithesis of everything that Tony Blair and New Labour were about.

Media critics attempting to beat Ed Mili - band with this stick are not just wrong, but incoherent in their own terms. Not only is it wrong to go back to the past, no sane person has ever said that and nobody is saying it now.

The interpretation that media critics have been putting on the word “segmentation”, as though it were a divisive strategy, is dis - ingenuous. Unless you have either a single voter, or 60 million unrelated individual voters, somewhere in the middle you always have groups of voters. To talk to them is hardly to abandon the middle ground.

Stuck in the middle

Most preposterous of all, bored pundits have tried to present some Labour colleagues as believing that appealing to disillusioned Lib Dem voters is some kind of exclusive, zerosum strategy. I don’t believe (and I don’t say this lightly) any Labour MP is that stupid.

Lib Dem activists may well be a crazy sect of staring-eyed obsessives but their voters are anything but. They are slap-bang in the middle of the national mainstream. Millions of them now feel betrayed by the Lib Dems and are looking for a new home. Failure to compete for that group of people would be an abrogation of serious politics and a dereliction of duty.

What the media pundits really mean is that Ed is too left-wing. The Daily Mail and the Sun won’t be happy until Ed fights the election on a right-wing agenda, which goes further right than Blair, and probably in some cases than the Tories.

The one thing Tony taught us is not to be sentimental about the past. We can’t just repeat what happened in the Nineties and expect the old magic to work again.

Blair was not electorally successful because he was right-wing, he was successful because he was right – particularly on some of the important socio-economic issues in the early days.

You win elections by talking to all the people about the things that matter most to them, by giving them a real choice, by being right for the time. Every Labour frontbencher knows that. Bring on 2015.

Tom Watson is the MP for West Bromwich East and deputy chair of the Labour Party

Tom Watson is the MP for West Bromwich East, and Deputy Chair of the Labour Party. He is also an avid gamer and campaigner for media integrity.

This article first appeared in the 18 March 2013 issue of the New Statesman, The German Problem

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.

***

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