Wednesday 17 July 2013

Vince Cable hauled over the Coles (ouch!)

Both my friend John Cole and I heard Vince Cable's address to last week's Social Liberal Forum meeting in Manchester with very mixed feelings. Here is John's "open letter" to Vince.  I'll be interested in the reply.

Dear Dr Cable

I was present when you gave your presentation of the Social Liberal Forum in Manchester on Saturday.   Thank you for that presentation – with much of which I wholly concurred.  We do need to re-balance the economy in the direction you pointed to and you are quite right to advocate a proactive business strategy for government.

However, there were points in your presentation where I beg to differ from you.

I am pleased that you did not castigate the previous Labour government for excessive deficit spending prior to 2008.  Conservative ministers and commentators (and I am afraid some Liberal Democrats too) have sought to perpetuate the myth that our current fiscal crisis was caused by wildly excessive current government spending. (The evidence that this was NOT the case has been presented, using OBR and ONS statistics, by Prof. Simon Wren-Lewis  - I suggest you check his blog “Mainly Macro” - 12th June  2013).         Instead you appear to  criticise Labour for relying on high but uncertain tax revenues from both the housing market and the financial services sector to fund government spending (with consumer spending being supported by excessive lines of credit).  This argument has more traction and I give you credit for having been early into the field to raise the alarm on this front.    However, bearing in mind that the Conservative official opposition and the   broadsheet commentators were endorsing Chancellor Brown's policies, this leaves them ill-placed to criticise at this point in time.  In short, your criticism of Labour in power applies equally to Cameron and Osborne on the shadow benches.

I note that you,  like me, read your economics at university at a time when Keynesianism was in full fashion.  I feel you were too quick today to dismiss Keynesian remedies for dealing with the current flat-lining  performance of the UK economy.  I acknowledge (as Keynes undoubtedly would, if he were alive today) that the UK economy is much changed in the last 70 years, as has the world economy.  There have been significant institutional changes, economies are more open and trade is more globalised.  Worst of all, power and influence  has transferred from sovereign governments to large, transnational corporations, creating a democratic deficit.  Present circumstances are far less propitious for enacting a classic Keynesian reflation via deficit spending, but that does not mean to say that an updated, re-configured Keynesian approach has nothing to contribute.  If he were with us today I am confident Keynes would revamp his policy prescription.  To dismiss Keynesian policy, as you appeared to do,  is to throw out the baby with the bathwater.   I am sure that Paul Krugman,  Joe Stiglitz (not to mention Simon Wren-Lewis) would agree with me (see Paul Krugman's excellent book “End This Depression Now” ).  

The “Bathwater Theorem”, which holds that the level of the bathwater (national income) will rise only when injections exceed leakages is as true today as it was in 1936.

This brings me to my next point:  You claimed rather triumphantly that Labour has now recognised the “inappropriateness” of  its policies when in government and, more especially the inappropriateness of the Keynesian approach advocated by Ed Balls (e.g. in his Blomberg speech).  I think Labour has made a mistake in hauling down its colours – it has been pusillanimous.  The change of tack can, to my mind, be explained only by an excessive paying of attention to focus groups and a surrender to the drip, drip, drip of (ill-informed) criticism in the red-tops.   Labour is triangulating. 

(By the by, I do not carry a torch for the Labour Party, but I do carry one for intellectual honesty).

Ed Balls and Labour should stick to their guns because, in my view, (and supported by the evidence) they are on the right side.   By contrast George Osborne, David Cameron, Danny Alexander, David Laws and to an extent yourself, are on the wrong side of this argument.

Why do I assert this?  For three reasons:

1 The evidence which is adduced by Krugman,  Stiglitz,  Richard Koo,  Simon Wren-Lewis,  Martin Wolf etc. etc. etc.

2 The collapse of the intellectual/academic case for austerity and “expansionary fiscal consolidation”.  The work in this area of Alesina and Ardegna, on the one hand and Rheinhart and Rogoff on the other has been subjected to close scrutiny and found wanting.  More than that, their work is discredited.

3 Institutions such as the IMF and OECD, which originally “bought” the Rheinhart-Rogoff and Alesina-Ardegna line and advocated austerity are now gently changing their tune and recognising the value of fiscal stimulation.  (Whilst at the highest levels the tone of the IMF's new tune is quite muted,  at a lower level IMF staffers are coming up with papers which evidence the damage which austerity policies are doing around the world).

Do you disagree with me?   Do you feel I have got this wrong?  I could ask you to feel free to state your position – but there I must give pause because you are in government as a cabinet minister and are bound by collective responsibility.  Neither privately nor publicly can you agree with me.  However, I can cherish the thought that there is a possibility that privately  you do agree with me, even if you can't say so.

On that note I shall finish.

Yours sincerely

John Cole

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