Why there’s more to Ed Miliband on the economy than many think


5:25 pm - August 21st 2013

by Duncan Weldon    


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Ahead of the 2010 election much of the ‘economic debate’ was in reality a debate about the deficit and what combination of cuts and tax rises would be required to close it over what time period.

This whole spectacularly missed the point. The deficit was a symptom of wider economic problems not their cause – the real question should have been, why did we end with such a large deficit in the first place and what can be down to address that?

As the IMF has very clear shown, the UK deficit originated not from excessive public spending but from a collapse in tax revenues. And the reason the drop in taxation was so acute, was that it had become reliant on frothy asset markets and too few sectors.

In reality the UK faces three key problems – a problem of jobs and their quality, a problem of wages and a lack of investment.

The recent pick-up in growth cannot be seen as a confirmation that the government were right all along. They aimed for a rebalanced, steady and smooth recovery. Instead we had the best part of three years of economic stagnation followed by a recovery which is just as unbalanced as the growth we experienced pre-crash.

The crash was not caused by reckless driving but by problems with the car itself.

Our economy has serious problems – it is too dependent on consumer spending that is often debt funded, investment is too low, growth is too concentrated in too small an area and in too few sectors, the rewards from growth have increasingly been captured by those at the top, decision making is too short term and for too long the state has been left to pick up the pieces and paper over the cracks.

Labour at least seem to understand that we face bigger problems than simply boosting growth or reducing the deficit.

Whether one calls it ‘responsible capitalism’, ‘predistribution’, ‘economic reform’ or ‘rebalancing’, they are outlining an agenda that is about fundamentally shifting our national business model towards a higher waged, higher skilled, higher productivity path.

This is an ambitious agenda but perhaps a much harder to explain one. The tools used are more about building institutions than direct intervention. You don’t reverse 30 year trends in one parliament nor can you fundamentally alter how an economy works in one Budget.

Some people seem not to grasp this.

In February this year, Ed Miliband made one of the most thoughtful speeches on the economy I have heard from any major politician. At its core was an argument about changing the way our economy works but what grabbed people’s attention was some fiscal tinkering around the 10p tax rate.

For what it’s worth I think the economic reform agenda represents the surest, most sustainable way to generate steady growth, to protect and increase living standards and ultimately to deal with the deficit.

The big idea here is the direction of travel and the ambition not the individual policies. Each alone (whether extending training levies across sectors that want them, setting up a proper well capitalised SME and infrastructure bank, extending the living wage, changing corporate governance as outlined in the Cox Review, establishing regional banks, etc, etc) might not sound like much, but this a case of the total being more than the sum of its parts.

Too many people seem to be focussing on the trees and completely missing the woods.


A longer version of this post is here.

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About the author
Duncan is a regular contributor. He has worked as an economist at the Bank of England, in fund management and at the Labour Party. He is a Senior Policy Officer at the TUC’s Economic and Social Affairs Department.
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Reader comments


1. Man on Clapham Omnibus

No-one doubts the quality of Milliband as a thinker. I think the biggest issue is whether the country is saveable. You mentioned a few figures but missed out that when all debt obligations are taken into account we are talking of a national debt of around £900 billion.

I also find the issue of developing highly skilled people a big question. The issue with corporate oligarchic capitalism is the market dominance of huge corporations wielding disproportionate economic and political power. This dominance has resulted in huge wealth moving from the middle and poorer classes to the richer.
This concentration of wealth and power is anathema to the narrow confines of ordinary political discourse. It also restricts the resources toward educational or welfare changes that may be required. Additionally the Labour party is riddled with individuals that are sworn to the right wing solutions of New Labour,quite apart from the immorality of those who supported Blair’s atlanticist adventures.
That IMO pretty much writes the Labour party out the equation of anything but minimal and temporary economic amelioration.
There certainly needs bold action but the Labour party being a product of capitalism is totally unfitted to reform it.

If you don’t make anything, then you have nothing to sell.

After the bicycle theory, we have another new employment theory from a government minister:

“Young lack the grit to get jobs: Too many school leavers aren’t fit for work, says Minister”
http://www.dailymail.co.uk/news/article-2398505/Young-lack-grit-jobs-Too-school-leavers-arent-fit-work-says-Minister.html

But will this new theory feature in Gove’s reform of the syllabus for economics at A-level?

Btw according to a recent FT news report, the number of candidates sitting Economics at A-level has gone up:

“The dismal science of economics has experienced a surge in popularity since the UK recession, with a 50 per cent increase in candidates studying the subject at A-level since the financial crisis first hit in 2007. . . ” [FT 15 August 2013]

Any comments about this from the LibDems yet?

4. Paul peter Smith

@ Bob B
You could take the news that economlcs student numbers are up in two ways;
1. The young are striving to understand the smoke and mirrors world of financial politics that they have been born into, or
2. The smartest of our offspring want to know how to play the game.
Personally I think both are true, but one is obviously more desireable than the other.
As for ‘youngster’s not fit for work’, whose fault is that then, political class? Both the ridiculous idea that a generation is worthless and the fact that for some members of that generation, its true, are the direct result of the self serving machinations of this disgusting idea of a political class whose increasingly less distinguishable members we get the ‘choice’ of voting for.

Paul peter Smith

Try the FT report on what could have motivated the increase in the numbers of A-level candidates taking economics, which is usually rated among the more difficult subjects. That FT report mentions the Queen’s visit to the LSE in 2008 when she reportedly asked: Why did no one see this [meaning, the crisis] coming?

But some did. The Economist ran an article in 2002 on the house-price bubble. In 2003, Warren Buffett warned about increasingly complex financial derivatives which few understood and suggested a catastrophy loomed.

Admittedly, the previously prevailing Rational Expectation theorists have a challenging time of it but Keynes and Minsky are in the emerging orthodoxy – once again.

What might have motivated those economics A-level candidates are those league tables of graduate salaries which rank economics graduates pretty high up.

6. Man on Clapham Omnibus

5. Bob B

Keynes and Minsky are in the emerging orthodoxy – once again.

This may be good but is growth a sustainable paradigm for the future I wonder.

7. Mike Killingworth

[1] MotCO – the problem is power itself, of which wealth is only a measure.

Humanity has yet to invent a means of abolishing power.

8. Man on Clapham Omnibus

7. Mike Killingworth

Ok so flesh power out for me. What does power depend on?

@ Duncan

You aren’t telling the whole story here. Whilst it is true that tax revenues fell dramatically, the deficit became so large because government spending and other obligations had also ballooned under Labour. Welfare spending more than doubled, spending on the NHS massively increased and large off balance sheet liabilities also accrued (PFI, public sector pensions).

These are all sticky, so change little (or even increase) in a recession, and are hard to cut back. Labour’s fallacy was that they couldn’t acknowledge that they were overspending in good times, creating a structural problem should a recession ever hit.

10. gastro george

@Tyler

“Welfare spending more than doubled”

Nominal welfare spending per capita (2005 base), source: http://www.ukpublicspending.co.uk/

1997 = £1,400.05
2007 = £1,400.38

@ Gastro George

Per capita for welfare alone you are correct. Question then has to be asked why in a period of increased growth and low unemployment this didn’t *decrease*.

You also ignore the two other main drivers of a structural deficit. Pensions and healthcare.

Take those into account and spending went from 200bn to 340bn between 1997 and 2010. In per capita terms that equates to an increase from 3200pp to 5200pp, or in GDP terms 19% of GDP to 24% of GDP – a simply enormous shift.

Total government spending also accelerated from 38% of GDP to 45% of GDP in the same period, and hit a low in 2001 of 35% at which point Brown stopped following the previous Tory government’s spending plans.

Whichever way you look at it, government spending increased dramatically as a % of GDP under Labour.

12. gastro george

@Tyler

“Total government spending also accelerated from 38% of GDP to 45% of GDP in the same period.”

Total spending as % of GDP, source: http://www.ukpublicspending.co.uk/

1997 = 37.15%
2007 = 38.69%

You know full well that you’re choosing to include post-crash increases to make your “point”.

@ Gastro George

Um yes, that is the *whole* point of a *structural* deficit. They don’t look so bad until the economic music stops and you have a recession – and it was Brown and Balls who left the UK in such a dire situation when it did.

We are looking at Labour spending here, and Labour were in charge 1997 to 2010….though they followed Tory spending plans till 2001. Had spending growth not outpaced GDP growth (or even better, tax revenue growth) the UK simply wouldn’t be in as big a mess. Brown turbocharged spending by running significant deficits and increasing inflexible social security spending on top of what GDP growth could pay for.

Do also note, that these Labour spending figures DON’T include off-balance sheet spending. PFI adds another 250bn in the Labour years, and unfunded pension liabilities even more. The true picture is even worse than the official numbers make out.

14. gastro george

@Tyler

I’m not sure how you can accuse Balls and Brown of “leaving the UK in such a dire situation” when spending as a proportion of GDP increased only marginally between 1997 and 2007.

Somehow you seem to be expecting us to believe that:
1. A Tory government over this period would have done much different. FWIW, spending in the Major years show only similar marginal differences.
2. A Tory government wouldn’t have suffered crash.

Both are remarkably unlikely.

@ Gastro

Let me try to spell it out for you in a way you can understand.

Growth was good between 1997 and 2007, but was partly so good because of credit increasing – not sustainable.

Labour took the proceeds of that growth and spent it on stuff which is inelastic to economic growth – social security and health. This means that if growth slows down those costs DO NOT go down.

Labour then spent even more money, running a fairly sizeable budget deficit in years of growth, as well as taking a lot of spending off the balance sheet, masking the true extent of spending.

Then the crash happened (not Labour’s fault) and growth collapsed. Because of all this extra spending though, the budget deficit ballooned to critical levels – thanks to the massive structural deficit Labour had created.

Had Labour not spent so much, we wouldn’t be in the situation we are in today. It’s pretty disingenuous to suggest that you can credit Labour for the 1997-2007 record then ignore the fallout from their actions from 2007-2010.

16. gastro george

@Tyler

Quit the patronising.

“Labour took the proceeds of that growth and spent it on stuff which is inelastic to economic growth – social security and health.”

Social security we’ve already been through:
1997 = £1,400.05
2007 = £1,400.38

Good luck on persuading anybody that either health expenditure should have been less between 1997 and 2007, or that the Tories would have spent less.

“Labour then spent even more money …”

Details please, and evidence that the Tories would have spent less.

“It’s pretty disingenuous to suggest that you can credit Labour for the 1997-2007 record then ignore the fallout from their actions from 2007-2010.”

I’m claiming no credit for Labour – just that their policies were not different than we could have expected from the Tories. Yes, the crash was inevitable. Yes, the (same-as-Tory) policies should have been different.

17. gastro george

BTW, how are Japan bond yields going? The last time I looked they were under 0.8%.

gastro george,

What the Tories would have done is not relevant. (Cameron and Osbourne pledged to match Labour spending, to their shame, but a different course may have been taken had prior election results been different).

The fact is that Labour spent quite a lot more than they were bringing in, despite a very long period of growth. The budget for Brown’s election-that-never-was was going to increase govt spending to 48% i believe.

No matter the key point is that we borrowed when we shouldn’t have.

Questions such as:

a) What is the correct level of govt spending
b) What is the correct level of personal tax
c) What is the correct level of corporate tax
d) Etc Etc

Were simply kicked down the road.

Those that say our level of government spending was low relative to others, or whatever, miss the point.

As an indicative over-simple example:

Labour wanted to increase spending on school buildings.
This should have meant more tax, cuts elsewhere, or restricting increases to increases in growth.

However, a different solution was found: borrow the money, thus getting the popularity without upsetting taxpayers.

@Jack C

“However, a different solution was found: borrow the money, thus getting the popularity without upsetting taxpayers.”

You make it sound like the Labour government was the first to use this method.

A look at the Tory record (2 yrs surplus in 18) shows otherwise.

20. gastro george

@Jack C

“The budget for Brown’s election-that-never-was was going to increase govt spending to 48% i believe.”

“Labour wanted to increase spending on school buildings.
This should have meant more tax, cuts elsewhere, or restricting increases to increases in growth.”

Just to repeat:

Total spending as % of GDP, source: http://www.ukpublicspending.co.uk/

1997 = 37.15%
2007 = 38.69%

So not 48%, and overall spending was more or less in line with growth.

The comparison with the Tories is entirely germane. They are trying to paint the current crisis as one of Labour over-spending, amid much re-writing of history. This helps them politically but, as we can see from the real figures, expenditure was entirely normal and, if you were to both to check out the stats, on average, lower than that of the Major government.

Finger pointing at public expenditure is also useful in providing support for the current government’s austerity programme. It entirely misses the point that the crisis was caused by private debt, not public debt.

gastro george,

I was making the simple point that Labour over-spent after 2001. We had sustained growth, so it should not have been necessary. This led to a structural deficit.

What the Tories did is irrelevant.

22. gastro george

A simple point that’s unsupported by the evidence?

@ Gastro

“Quit the patronising.”

You are using the only measure of spending which doesn’t show an increase, ignoring health and importantly pensions. I’ve be through the numbers above, and you seem to have ignored them, as well as any understandng of what a structural deficit is. Untiil you do recognise the short-sighted nature of your argument, please expect to be patronised.

“Details please, and evidence that the Tories would have spent less.”

Labour followed Tory plans 1997-2001, and government spending as a % of GDP fell. It started climbing again after 2001.

“BTW, how are Japan bond yields going? The last time I looked they were under 0.8%.”

This is what happens when the BOJ engages in massive QE bond purchasing. Problem comes when they stop. Taking the US example, jsut the threat of tapering of QE has sent bond yields shooting higher (1.3% higher for the US 10y) and has taken US mortgage rates along for the ride.

“A simple point that’s unsupported by the evidence?”

I’ve walked you through the evidence a few times now. Getting bored of doing so.

24. gastro george

“You are using the only measure of spending which doesn’t show an increase, ignoring health and importantly pensions.”

That’s funny, because I always thought that total meant, kind of, total.

You want to show me where is says total spending excludes health and pensions on that site. Honest question.

“… as well as any understanding of what a structural deficit is.”

Well we both know that the structural deficit is a controversial concept both in terms of what it actually is and whether it has any significance or not. So just asserting it’s importance tends a generate a “meh”.

“I’ve walked you through the evidence a few times now.”

OK, I’ll leave you to your Private Fraser act.

@ Gastro

“You want to show me where is says total spending excludes health and pensions on that site. Honest question.”

On the UK public spending website it has 3 catagories which make up the social security spend.

They are welfare, pensions and healthcare. You can simply set the chart to display all three at once. Take the greater social security budget and it does show a massive increase.

If nothing else, the narrow welfare (housing, unemployment benefit etc) numbers are unlikely to increase much during a time of good growth. Given that you exlcude the years past 2007 in your argument, and those were the years recession hit, you are setting up a strawman. More so given you exclude the greater social security spend to make your argument.

“Well we both know that the structural deficit is a controversial concept both in terms of what it actually is and whether it has any significance or not.”

Not controversial at all, certainly not in the land of economics and finance. What is hard is to measure it exactly though.

26. gastro george

“On the UK public spending website it has 3 catagories which make up the social security spend.

They are welfare, pensions and healthcare. You can simply set the chart to display all three at once. Take the greater social security budget and it does show a massive increase.”

OK, you were referring to the welfare statistics, not the total spending statistics. I was just responding to your statement that “Welfare spending more than doubled” and, unsurprisingly, chose to look at the statistics that were labelled as “welfare”. This happens to not include health and pensions. If your definition of welfare corresponds to welfare + health + pensions, then I’m not going to argue that that didn’t increase.

My latter point was that, wheil some expenditure had increased, as total spending hadn’t increased, then it’s hard to label the whole as a government overspend.

“Not controversial at all, certainly not in the land of economics and finance. What is hard is to measure it exactly though.”

Yes, that’s what I meant. Not that it’s existence was controversial but how to determine it. But my point is about it’s significance, or not.

“Given that you exlcude the years past 2007 in your argument, and those were the years recession hit, you are setting up a strawman.”

Which brings us back to the same old arguments.

Your position is that the levels of spending were “unsustainable” because when the inevitable recession occurs, they become “unaffordable”. This is despite those levels of spending being unremarkable for governments of any colour and, BTW, they weren’t in times of boom, because 2-3% growth has historically been the norm.

@ Gastro

“If your definition of welfare corresponds to welfare + health + pensions”

I was talking about social security as a whole. That kind of spending tends to be very inelastic, so doesn’t decrease in a recession, and sets up the structural deficit.

“My latter point was that, wheil some expenditure had increased, as total spending hadn’t increased, then it’s hard to label the whole as a government overspend.”

That Labour was running a deficit (even of 3% ish) meant spending was increasing (much) faster than growth – remember deficit is measured as a % of total GDP whereas tax revenues are normally 40% ish of GDP. it also fails to include the off balance sheet stuff. PFI is another 250bn of liabilities, and public sector pensions are another huge number (though off the top of my head I don’t know how much) as Labour hired approx 1m more civil servants, with the associated final salary pensions.

Indeed, unfunded liabilities like PFI and pensions (total unfunded pensions are approx 1500bn, as I say not sure how much Labour added to this) are huge risks to the UK economy, and if you include those numbers our debt/GDP looks more like Japan, who at least have a fully funded pension sector accounted for in their massive debt.

By OECD figures, general government spending in Britain in 2007, as a percentage of national GDP, was a whisker ahead of Germany and lower than in Denmark, Sweden, Netherlands and France. So much for the mythology of over-spending by the Labour government.

Where the Labour government did fail was in regulating the banks but then the Conservatives in opposition had kept calling for more and more deregulation.

In the FT on 4 November 2011, Bob Diamond, head of Barclays Bank, is reported as saying in a BBC Today interview this morning that the Banks must accept responsibility for what went wrong. In the interview — which I listened to — he repeatedly said that banks must work towards a situation where banks could fail without taxpayer support and without causing systemic instability.

In a remarkable newspaper interview, Mervyn King complained that banks’ only concern was to “simply maximise profits next week” and that “imbalances” were returning to the sector. He also criticised the bonus culture, and appeared to suggest that he will find ways of clamping down on banks making money out of “gullible or unsuspecting customers”. [Independent 6 March 2011]

Mr King urges high street banks to take a better, longer term view towards their customers and to stop focusing on the need to “simply maximise profits next week”.

He accuses them of routinely exploiting their millions of customers. “If it’s possible [for financial services firms] to make money out of gullible or unsuspecting customers, particularly institutional customers, [they think] that is perfectly acceptable,” he says. [Telegraph 4 March 2011]

“People have ‘every right to be angry’ with banks for the UK’s financial crisis, the outgoing Bank of England (BoE) governor Sir Mervyn King says. In one of his last interviews before stepping down, for BBC Radio 4′s Desert Island Discs, he expressed sympathy with public frustration as slow growth takes its toll on living standards.”
http://www.bbc.co.uk/news/business-22732399

More from Sir Mervyn King when he was Governor of the Bank of England:

“Mervyn King, has expressed ‘surprise’ that the public is not more angry with the bankers who caused the recession.” [Telegraph 1 March 2011]
http://www.telegraph.co.uk/finance/economics/8355475/Anger-at-the-banks-is-justified-Mervyn-King-says.html

Try this link for OECD figures on general government expenditure as percentages of national GDP for OECD countries (scroll down for the chart):
http://www.oecd-ilibrary.org/docserver/download/4211011ec010.pdf?expires=1377284026&id=id&accname=guest&checksum=E09B269028FA569F1A9542CBE054C4A7


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