New Times,
New Thinking.

1 September 2010

The choice is yours — Balls and Bernanke, or Slasher

Speeches by the Labour leadership contender Ed Balls and the chairman of the Fed, Ben Bernanke, have

By David Blanchflower

As I was going to my office at Dartmouth College, New Hampshire, on Sunday to start writing this column, I came across large numbers of people, young and old, in the streets of Han­over, dressed as the Hulk, Spider-Man, Atom Ant and other superheroes. I even saw one of my young economist colleagues in a yellow Batman cape and flip-flops. I decided not to join in as I don’t look good in tights.

In 2009, the children’s hospital at Dartmouth, at its annual fundraiser, set a Guinness World Record for the most superheroes – 1,016 – gathered in one place. That record was recently surpassed by 1,245 caped crusaders at Federation Square in Melbourne, Australia. So this year, the children’s hospital was set on reclaiming the record. The local paper, the Valley News, reckons that more than 1,500 freedom fighters showed up. I will keep you updated on whether Australia has officially lost the record. The World Cup was never this exciting.

Speaking of superheroes, I was much taken by two very important speeches in the past few weeks: one by the Labour leadership contender Ed Balls and the other by the chairman of the US Federal Reserve, Ben Bernanke. Both speeches were devastating critiques of the withdrawal of monetary or fiscal stimulus at a time when the recovery is stalling.

At Bloomberg in London on 27 August, Balls made what was probably the most impressive and insightful speech on the UK economy by a British politician in a long while. At last, a speech on economic policy from a politician who knows what he is talking about! The Observer’s subsequent interview with the fumbling Lib Dem Chief Secretary to the Treasury, Danny Alexander, in which he upset the Tory right by saying that taxes could not come down for years, confirmed that he does not.

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More able than Cable

As Irwin Stelzer said in last week’s NS, Balls, a former Financial Times journalist who trained at Oxford and Harvard, “has a solid grasp of economics” and “is the best economist of the Labour candidates”. I would go further and say that he is clearly the most economically astute current MP bar none. Sorry, Vince.

In his speech, Balls shredded the arguments in favour of austerity that were made by the Chancellor, George Osborne, at the same venue just ten days earlier. Balls said Osborne’s speech was wrong in its analysis of the past, reckless in its diagnosis of the current situation, and dangerous in its prescription for the future.

By contrast, he carefully laid out the historical evidence showing that austerity programmes have not worked in the past but have led to low growth, social unrest and high levels of unemployment. He argued that the coalition government is not only leaving the UK badly exposed to the coming economic storm but is “undermining the very goals of market stability and deficit reduction, which their policies are designed to achieve”. I couldn’t agree more.

In a challenge to Osborne, whom he calls a “growth denier”, Balls said: “I would like him to point to the precedent, from British economic history, which says that, with slowing growth in our main trading partners and companies deleveraging, it is possible for public-sector retrenchment to stimulate private-sector growth and job creation.” There is none. The slower, steadier path to deficit reduction that Balls has proposed is the right path.

Then came the revelation that Balls opposed Alistair Darling’s plan to halve the deficit in four years, and continues to do so. For many months in this column, I have made clear the dangers of falling back into recession. I have never believed it was appropriate to set out a plan to reduce the deficit by a certain date,

principally because of the high levels of uncertainty we face. Economic policy in these circumstances has to be path-dependent. Much rests on the extent to which the world economy slows and whether the banks start lending and firms begin investing and hiring again. Plus, it remains an open question whether consumers will start spending again.

Worryingly, the coalition still appears to have no plan B, though house prices have apparently begun to fall again and the number of first-time buyers has dropped sharply. The government’s plans, which Balls rightly calls “heartless and wrong-headed”, are the road to disaster.

Bernanke’s much-anticipated speech, made at a meeting of central bankers at Jackson Hole, Wyoming, had much the same tone as that of Balls. The ex-chairman of the economics department at Princeton and scholar of the Great Depression argued that, because the task of economic recovery and repair remains far from complete, this is no time to end the stimulus.

Stark warning

Bernanke warned that high unemployment – particularly long-term unemployment – not only imposes heavy costs on the unemployed and their families and on society, but also “poses risks to the sustainability of the recovery itself through its effects on households’ incomes and confidence”. It is a stark warning for the UK, where confidence has been hit recently and incomes are falling.

Bernanke also provided a set of policy options, including his favoured option of expanding the Fed’s holdings of longer-term securities – that is, more quantitative easing. Less attractive options, in his view, include easing financial conditions through its communication (for example, by modifying its post-meeting statement), lowering the rate of interest the Fed pays on reserves and increasing its inflation goals. Notably, he made no mention at all of slashing public spending and raising taxes as a feasible way of dealing with the deficit. Sorry, Slasher, no justification for your policies here.

Indeed, Bernanke argued that the federal fiscal stimulus in the US is expected to fade, “but likely not so quickly as to derail growth in the coming quarters”. Contrast this with the UK, where the austerity Budget is likely to wreck growth. On 30 August, the chief economist at the British Chambers of Commerce, David Kern, warned that the coalition cuts “increase dangers of a double-dip recession”.

Balls may not be a superhero but his economic analysis is totally credible. In my view, he certainly has the credentials to be the next shadow chancellor. If I were Osborne, I would shudder at the prospect of debating with such a sharp economist at the despatch box.

David Blanchflower is a labour economist and a professor at Dartmouth College, New Hampshire, and the University of Stirling

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