A Way Forward for the Centre Left on Deficits


Queuing for bread, Nicolae Tonitza, 1920

by Simon Wren-Lewis

When it comes to fiscal policy the politics of the right at the moment [1] could be reasonably described as deficit fetishism. The policy of the centre left in Europe could also with some justification be described as growing appeasement towards deficit fetishism. Given its success for the right in Europe, it seems unlikely that this side of the political spectrum will change its policy any time soon. [2] Things appear a little more malleable on the centre left. In the UK, in particular, we will shortly have new leaders of both Labour and the Liberal Democrats. In addition, the Scottish Nationalists have adopted the rhetoric of austerity, even though their fiscal numbers were not far from the other opposition parties during the elections.

Attempts to get the centre left to avoid deficit fetishism need to fight on two separate fronts. First, politicians and/or their advisers need to be taught some macroeconomics. Academics too often assume that politicians either know more than they actually do, or have behind them a network of researchers some of whom do know some macroeconomics, or who have access to macro expertise. I used to believe that. The reality seems to be very different: through lack of resources or lack of interest, the knowledge of left of centre politicians and their advisers often does not extend beyond mediamacro.

The second front involves the politics of persuasion: how can politicians successfully persuade voters that deficit fetishism, far from representing responsible government, in fact represents a simplistic approach that can do (and has done) serious harm? I think for academics this is a far more difficult task for two reasons. First our skills are not those of an advertising agency, and we are trained to follow the scientific method rather than act as a lawyer arguing their case (although, if you believe Paul Romer, the scientific method is not universally adopted among macroeconomists). Second, the experience of the last five years on the centre left is that deficit fetishism helps win elections.

It my last post I tried to argue why the success of deficit fetishism was peculiar to a particular time: the period after the recession when households were also cutting back on their borrowing, and where the Eurozone crisis appeared to validate the case for austerity. In other times households try to borrow to invest in a house, and firms try to borrow to invest in good projects. As a result, once the debt to GDP ratio has begun to fall, and yet interest rates remain low, the power of alternative narratives like ‘it makes sense to borrow to invest in the future when borrowing is cheap’ will increase.

Yet responding to deficit fetishism by implying the deficit does not matter, or that we can print money instead, or even that we can grow our way out of the problem, is unlikely to convince many. [3] It just seems too easy, and contradicts people’s personal experience. The trick is to appear responsible on the deficit, but at the same time suggesting that responsibility is not equivalent to fetishism, and other things matter too. I think this provides a powerful motivation at this time for a policy that is designed to obtain balance on the current balance (taxes less non-investment spending) rather than eliminating the total deficit. This is far from ideal from a macroeconomic point of view, as I discuss here, but as a political strategy in the current context it has considerable appeal. In the UK it allows you to attack the ‘excessive and obsessive austerity’ of Osborne, who is ‘failing to invest in the future’, while following a policy that it is difficult to label irresponsible. [4]

Of course this policy was close to that adopted by Labour, the Liberal Democrats and the SNP at the last election, so many will just say it has already failed. I think this is nonsense for three reasons. First, the policy I’m advocating is a combination of targeting a zero current balance, and at the same time arguing aggressively against excessive austerity. Labour deliberately avoided being dubbed anti-austerity during the election. (The Liberal Democrats were handicapped by arguing for austerity for the previous 5 years as part of the coalition.) The only party to adopt an anti-austerity line was the SNP, and it did them no harm at all. Second, the reason Labour wanted to avoid pushing the policy at the election was that they felt they had tried this a few years before and failed, but as I argued previously deficit fetishism only shrives in a particular context, and that context is passing. Third, what sank Labour on fiscal policy was that people swallowed the Conservative line that it was Labour’s profligacy that caused the need for austerity, essentially because this line went unchallenged for five years.

This last point is worth expanding on. Too many in the Labour party think that because many people now believe this idea, the best thing to do is pretend it is true and apologise for past minor misdemeanours (knowing full well it will be interpreted by everyone else as validating the Conservative line). This is almost guaranteed to lose them the next election. It will just confirm that the last Labour government was fiscally profligate, and the Conservatives will quote Labour’s apology for all it is worth. To believe that this will not matter by 2020 is foolish – it is the same mistake that was made in the run up to 2015. It is no accident that political commentators on the right are arguing that this is what Labour has to do. So the first task for Labour after the leadership election is to start to contest this view. They should follow the advice that Alastair Campbell is said to have given after 2010, and set-up an ‘expert commission’ to examine the validity of the Conservatives claim, and then follow through on the inevitable findings. [5]

I can understand why it may seem easier right now to avoid all this, adopt deficit fetishism and ‘move on’. But to do this accepts the framing of economic competency as being equivalent to deficit fetishism, and therefore forfeits a key political battleground to the right. In addition, once you accept severe deficit reduction targets, it becomes much more difficult to argue against the measures designed to achieve them, as on every occasion you have to specify where else the money would come from. (In the UK, that partly accounts for the disaster we saw on the welfare bill. In Europe it leads to the travesty of what was recently done to Greece, where Greece was only allowed to stay in the Eurozone at the cost of adopting harmful additional austerity.) As we have seen in the UK and elsewhere in Europe, there is a large amount of popular support for an anti-austerity line, and if the centre left vacates that ground the vacuum will be filled by others. Arguing against deficit fetishism (or in more populist terms ‘obsessive austerity’) while pursuing fiscal responsibility through a balanced current budget can become a winning strategy for the centre-left in Europe over the next few years.

Piece crossposted with MediaMacro


[1] It is easy to forget that there is nothing that makes this the inevitable policy of the right. George W. Bush took the reduction in the US deficit under Clinton as a cue to cut taxes and raise the deficit.

[2] This sentence is just for those who like to ask why I tend to write more posts giving advice to the centre-left rather than to the right on this issue.

[3] I have argued for ‘QE for the people’, but always as a more effective tool for the Bank of England to stabilise the economy and not as a more general way for governments to finance investment. (Even if this becomes ‘democratic’ along the lines suggested here, the initiative must always come from the Bank.) As for growing your way out of debt, this is much closer to the policies that I and many others have argued for, but it may unfortunately be the case that at the low point of a recession this line is not strong enough to counter deficit fetishism.

[4] It was also the main fiscal mandate of the last coalition government, of course. This could be supplemented by targets for the ratio of government investment as a share of GDP. As long as these are not excessive, an additional debt or deficit target seems unnecessary.

[5] The question should not be ‘did Labour spend too much before the recession’, because that is not the line that did the damage. The question should be more like ‘did the Labour government’s pre-2008 fiscal policy or the global financial crisis cause the 2009 recession and the subsequent rise in the UK deficit?’