Inside “Next Labour”

Douglas Alexander and Ed Miliband are not only spearheading Labour’s election campaign, but leading

It was, in many ways, a classic New Labour gathering: a minimalist north London drawing room, freshly squeezed orange juice and mineral water being served, fruit and HobNobs being eaten, and top of the agenda for a five-hour Sunday strategy meeting were the key manifesto messages for the election. Ideas were distributed, and those attending were expected to turn up with notes, not just on party policy but, inevitably, on the Conservatives as well.

There was one important difference between this and any equivalent meeting in election campaigns gone by: it was attended, indeed run, by a new generation of Labour power brokers. This is a generation looking to forge a new agenda for the new decade, not one wishing to frame the coming election as a bid for a "fourth term".

Hosting the meeting on Sunday 7 March was Ed Miliband, Labour's manifesto co-ordinator, whom many see as a future leader. Sitting beside him was his close friend Douglas Alexander, election campaign co-ordinator. In addition, there were advisers from their offices and the No 10 Policy Unit.

Miliband, who is 40, and Alexander, 42, are leading what you might call "Next Labour", a post-Blair, post-Brown generation of ambitious cabinet ministers who are determined not to give up power to the Tories. Though their formative political experiences were during the decade-long civil war between Gordon Brown and Tony Blair, they are, in party terms, "postwar" politicians, desperate to move on.

While Brown concentrates on governing, Miliband and Alexander, along with the New Labour veteran Peter Mandelson, are carefully guiding Labour into campaign mode.

Miliband and Alexander first met 20 years ago in the kitchen of Ed's elder brother, David. Ed was an undergraduate, his brother worked for Blair and Alexander worked for Brown.

The bond between Alexander and the younger Miliband deepened on a holiday in Ireland in 2000, which they shared with James Purnell, another member of the Next Labour generation who surprised his peers last month by announcing he is to stand down as an MP. Since 2000, Miliband and Alexander have holidayed together in Scotland, France and the US.

In 1997, Alexander, then a practising lawyer in Scotland, took leave of absence to share the Treasury office in which Miliband was working as a special adviser; in 1999 they were both responsible for the Scottish Parliament election campaign that overturned the Scottish National Party's poll lead.

Despite his youthful appearance, Alexander is now an old hand at election campaigns. He insists, however, that this may be his toughest yet, and that he and his colleagues face "the fight of our lives" to retain office.

Comeback kids

Several cabinet ministers have long despaired of Brown in private; another recently told friends that he is happy to be sidelined so that he can avoid sharing the blame for defeat. Others on Labour's fringes argue in private that the party could use a period in opposition to renew. On a practical level, they believe that losing the next election would allow Labour to sidestep harsh spending decisions and the ill-feeling that would follow.

If some have given up the fight, Alexander and Miliband believe not only that Labour must fight hard to win, but that it can win. To make this happen, the pair are having to work long hours. Aside from a brief appearance with his father and son at the Emirates Stadium in north London to watch the recent Brazil-Ireland football friendly, Alexander accepts that, for the next couple of months at least, he will have very little spare time. "The Brazil game was the first night off I've had in as long as I can remember," he told me. "This is the second Sunday in a row that I'll see more of Ed [Miliband] than my wife and kids."

At 8.30 each morning he attends a strategy meeting, in his role as co-ordinator, with Peter Mandelson and Harriet Harman. With departmental as well as party duties - Alexander flew to Afghanistan after the 7 March meeting - the day then often runs into the early hours of the next. "We are still behind," he says, sitting in a café near Ed Miliband's house in north London. "But the momentum is with us."

As the New Statesman revealed last week, Labour's 2010 strategy was drawn up in December and submitted to the Prime Minister by Alexander two days before Christmas. The plan proposed the campaign strapline "A future fair for all" (this was accepted and became Labour's official slogan at a launch last month); it also outlined the main campaign themes and included a 150-page dossier on the cost of Conservative spending and tax policies, subsequently launched by Alistair Darling in early January.

In the event, this year's early sparring against the Tories has gone better than most within Labour could have hoped. Indeed, Alexander expresses genuine surprise at how unprepared the Tories have been. "'The same old Tories' is not a line - it's a truth," he says. "Change is a process, not a destination."

He shows me a file of past Conservative manifesto pledges that highlights similarities between policies then and today. "What we've seen of the Tories' draft manifesto suggests that they've changed the cover, but not the content. In 2005 they asked: 'Are you thinking what we're thinking?' But they seem still to be thinking what they were thinking."

He adds, with a smile: "It's a bit like someone who puts an old pair of flares in the drawer for five years and then gets them out again to see
if they're fashionable." Alexander believes that the Tories are trapped by their own manifesto, which will show their policies to be in disharmony with the prevailing mood music.

Alexander and Miliband were among the first few members of cabinet to realise that David Cameron, far from being the "heir to Blair", had not changed or modernised his party. The document detailing the parallels between past and present Tory manifestos shows an alarming number of policies - such as the cap on immigration and pledges to cut inheritance tax - that differ little, if at all, from those promised in 2005 and 2001.

Can Labour win the campaign, given the disparity in funding between the two parties? (The Conservatives are thought to be planning to spend £18m - the legal maximum - during the four-week election campaign; Labour will have £8m at best.) The answer lies in how Labour deploys its resources. So while the Tories are spending heavily on more conventional forms of campaigning - such as posters and leaflets - Labour has been busy making direct contact with voters. "The figure is in excess of 100,000 face-to-face contacts every week," says a senior party insider. "That's roughly three times the level we were making at a similar point in 2005."

As Will Straw has noted on the Left Foot Forward blog, Professors Alan Gerber and Don Green of Yale University have shown that face-to-face contact has a far greater impact on voter turnout than either phone calls or mail. Leaflets increase turnout by 1.2 per cent; volunteer phone calls increase turnout by 3.8 per cent; and door-to-door canvassing increases turnout by between 7 and 11 per cent. "At the end of the day, it's people not posters that win elections," Alexander says.

The New Statesman has learned that the Tories are planning to launch another poster blitz, and have reserved billboard sites across the country. This, after they spent £500,000 on a poster campaign (the infamous "airbrushed" Cameron) that was widely ridiculed and traduced in the blogosphere.

On the ground, there is little sign of a concerted campaign of door-knocking by the Tories. Instead, unpersonalised leaflets are being distributed en masse, having first been vetted by Tory central command.

Explaining the dip in the polls for the Tories over the past few weeks, Alexander sees a link between old policies and old campaign techniques. "They haven't done the heavy lifting on their policies, and they haven't done the heavy lifting on their campaigning. And, in any campaign, if you haven't done the heavy lifting, it all starts to unravel."

Miliband or Miliband?

If, against all odds, Labour retains office, Alexander and Miliband will deserve much of the credit. But if Labour loses, neither may feature in the leadership contest that would follow. Alexander is not promoting himself as a future leader, while it is possible that Ed Miliband will not bring himself to challenge his elder brother, David, whom many party insiders expect to stand and win.

Miliband Sr will doubtless be challenged by Ed Balls, a Brown loyalist, but one whom critics see as a less collegiate member of the group. Balls's wife, Yvette Cooper, the 40-year-old Work and Pensions Secretary, recently tipped as potentially "Labour's first permanent woman leader" by Sunder Katwala, general secretary of the Fabian Society, remains one to watch. Liam Byrne, the 39-year-old Chief Secretary to the Treasury, and the Health Secretary, Andy Burnham, 40, are also mentioned as outside contenders.

However, one key government insider says: "The next leader will be called Ed or Miliband. No, let me correct that. He will be called Miliband or Miliband."

The leadership question is for another day. But, one way or another, it looks as if power is shifting to the "Next Labour" generation.

James Macintyre is political correspondent for the New Statesman.

This article first appeared in the 15 March 2010 issue of the New Statesman, Falklands II

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.

***

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