Going beyond A and B

The following was the basis for my speech on austerity at last weekend’s Battle of Ideas conference. It was also submitted as an opinion piece to CityAM but not published.

A debate on how to revive the British economy is urgently needed. That might seem an odd thing to say given that there appear to be endless wrangles about economic policy. But look more closely and it should be clear that what passes for disagreement at present only amounts to a phony war.

It is easy to see why the public gets the impression of an ardent political clash over fundamental economic principles. Politicians and the media are happy to have it that way.

According to this narrative the Tories are the supporters of austerity and cuts while Labour is the party of growth and high public spending. The same conflict is sometimes presented as Plan A versus Plan B. It is then simply a matter of voters choosing which side they are on depending on their political predilections.

Sometimes these different views are, implicitly at least, linked to particular economic outlooks. So the recent three-part Masters of Money television series by Stephanie Flanders on the BBC looked at three key economic thinkers – John Maynard Keynes, Friedrich Hayek and Karl Marx – with the implication that the first two at least represent the two sides of the current debate.

Flanders also pointed to an internet video with almost four million hits showing actors playing Keynes and Hayek debating in a musical rap. As it happens the video is informative and entertaining but the easy temptation to link it to Britain’s political parties should be resisted.

In practice the Conservatives are certainly a long way from their own hype. David Cameron, the prime minister, frequently claims that: “the solution to a debt crisis cannot be more debt.” This may be true but that has not stopped public debt rising in real terms under his government. This point is clearly demonstrated in a recent report by the Centre for Policy Studies, a centre-right think tank.

Nor are the Tories planning to savage public spending in aggregate. There may well be sharp cuts in certain areas but, even if the coalition meets its target, public spending will still be about 40% of GDP in a few years’ time. That is a world away from the minimal spending advocated by supporters of limited government such as Hayek.

Labour is no better. It often gives the impression, without actually saying so, that it is against public spending cuts in principle. But listen more carefully and it becomes clear that Labour is not against austerity.

The opposition’s disagreement is essentially about timing. It argued that now is not the right time to make sharp cuts but it emphasises it is willing to do so in the future. Labour hopes that the economic cycle will at some point turn upwards and that will be the time to slam on the brakes. This is not so much Keynesianism as a desperate hope that maintaining a fiscal stimulus for a little longer will rescue the economy.

The supposedly great disagreement between the Conservatives and Labour therefore amounts to a squabble over when best to squeeze public spending. Would it be better to start a little earlier, as the Tories prefer, or is waiting a bit preferable?

But it is not just what the two sides say that is the problem. There is also what they leave out.

Both sides say relatively little about production or what is often called the “supply side” of the economy. Instead they focus on measures to fine tune demand such as quantitative easing and public spending.

When the supply side is mentioned it is generally as an afterthought. Both sides would say they favour some reforms to bolster production but it is a priority for neither.

Yet at root the key economic problem facing Britain is one of a sluggish productive sector. On average investment levels in the real economy are low.

Of course it is always possible to point to some firms that are doing well. But from the perspective of policy the key challenge is to revitalise the economy as a whole. The role of the state in this process should be to promote economic restructuring rather than propping up failing enterprises. A new round of investment and economic growth is desperately needed.

Indeed the economic history of the past three decades can essentially be seen as one of all governments prevaricating over tackling economic challenges. They have preferred to boost the economy artificially with high public spending rather than foster economic dynamism. From this perspective Britain’s high debt levels should be seen as a symptom, rather than a cause, of its underlying problems.

On second thoughts perhaps there is some merit in talking about a Conservative Plan A versus a Labour Plan B after all – although not in the way generally assumed. Even between them the two sides only seem capable of using two letters of the alphabet.