Labour’s macroeconomics

I was in Liverpool for Labour’s Conference this year, with a balcony credential i.e.  I could enter the conference, fringe rooms and exhibition hall. As I was not a delegate, I spent a bit more time in the fringe and the bars, and much less time in the hall. Last year I was able to report on nearly every debate, I cannot do that this year, but I observed both Reeves (video | text) and Starmer’s (video | text) speeches and the platform’s control-freakery, some of which I reported earlier.

Interesting highlights include Reeves’ promise that she will chase the beneficiaries of the covid procurements (and other corruptions in the government procurement chain). I am concerned about the promise to reduce consultancy fees, because while some consultancy projects are wasteful and of questionable value, many are caused by the fact that the Civil Service and local government won’t pay the going rate for scarce skills.

Reeves continues to play her, “I am an economist card”, but there are those of us who feel that it means she is tied to one and only one theory of macro-economic management. This fear was reinforced by a video of Mark Carney, the previous Bank of England Governor, who wished her well.

Both of these speeches if anything was slightly to the left of speeches made previously, or at least since Reeves’ secureonomics speech in NYC; I thought I had commented on the latter speech but it seems not. I did make some notes, in which I quote, Prof. Simon Wren Lewis, as saying,

 “What is arbitrary is having a target for debt to be falling regardless of whether that debt arises from current spending or investment”

which I believe sums up his argument well. I also quote Richard Murphy on independence of the Bank of England, and James Meadway who argues that taxes must be raised and that conceding to debt fetishism traps Labour’s policy freedoms. He argues for clarity on tax, clarity on the financial rules and detail on the investment plan. It’s possible, that conceding the need to reduce debt will enable attacks on the policy not defend it. I have some sympathy with Murphy, and have come to agree with Meadway.

Starmer announced the increase in housing new starts target by proposing changes to the planning permission process to make Nimbyism harder.

This line from the speech is excellent, “ [his] party would, in 2024, have to emulate its achievements in 1997 – “to rebuild a crumbling public realm” – 1964 – modernise an economy “left behind by the pace of technology” – and in 1945 – “to build a new Britain out of the trauma of collective sacrifice”.

He argues that the next Labour Government will need to do all three.

But I wonder if waste and brown field sites are enough to do what’s needed. Certainly, the corruption in the government supply chain if cleaned up should create some space in terms of fiscal management, but whether it’s enough is highly questionable. Admittedly they are hoping to replace the most profligate government in history and so eliminating waste may yield some benefits, but whether it can be recovered without a reduction in service levels will be more difficult to predict.

The economist, in an article entitled, “Britain’s Labour Party embraces supply-side social democracy” is happy, but with the acceptance of QMT they would be. In many ways, I sort of think that the headline sums up the macroeconomics of the current Labour Party; it’s a new supply side regime which is fine, but if they ignore demand, including export demand, then a mixed economy’s growth driven by the private sector will choke. There’s no point in pump priming investment if the new plant’s output can’t be sold (or otherwise used).

One tool to increase demand, would be to tax the rich and give to the poor, whether, through increasing the minimum wage and public sector wages or through increasing benefits since the poor spend more of any incremental income than the rich.

Rachel Wearmouth in her review, highlights Reeves increased credibility within Starmer’s team, notes the increased weight and support of business opinion;  the article is subtitled with the prediction that the succession will be between Reeves and Streeting; the latter seems to have chosen the hard route, Labour always elects the most left wing person they think will win.

Ultimately while they have the goal to deliver high growth, and growth is the best, maybe the only way to rectify the public finances, how this can be done without reversing Brexit and inflating aggregate demand is a question to be answered. They choose to be restricted to supply side measures only and even funding these supply side measures will remain difficult while they maintain the harshest aspects of their fiscal responsibility rules and their promises on tax i.e. no increases in VAT, income tax and no new wealth taxes.

The Growth target is a worthy goal but lacks the means of achieving them. This could easily be corrected even if you think that fiscal rules are necessary.

Between the two speeches, conference debated and carried a motion entitled critical infrastructure which called on the next Labour Government to renationalise energy and the railways. Of course, the shadow cabinet immediately repudiated this policy. It’s fortunate for them they were able to keep the anti-privatisation in the NHS motion off the order paper. It’s highly likely that if the SHA motion had been debated, like the nationalisations, it would have been carried. I say fortunate, they had to break the rules in order to keep it off the order paper.

The leadership will be very happy with the conference, at least they did not say go back to your constituencies and prepare for government.

For various reasons this took several days to write and post, I have backdated it to the day of Rachel Wearmouth’s article i.e. 13^th October. Six days later Labour won two crushing by-election victories in middle England, bookending the Conference which had opened shortly after Labour won the Rutherglen and Hamilton West by-election in Scotland. ; the leadership will argue with good evidence they are doing something right.