Not so much back to 1970s, more to the economic debate of 1930s

The leak and then publication of the Labour Party’s general election manifesto triggered the much-expected claim by the Conservatives that it marked a return to the bad old days of the 1970s when growth was weak, inflation high, and the UK had to go cap in hand to the IMF for a bailout.

Never mind that the 1970s problems were as much caused by the embargo by OPEC as by domestic mismanagement by both Tories and Labour - nor that it was also actually a decade of rising living standards, growth in credit, and rising property prices. It was still a good slur and was eagerly picked up by Theresa May’s allies in the rightwing press.

In fact, the Tory and Labour manifestos do take us back, but to the 1930s and 1940s when the great rival hegemons of macroeconomic thought, John Maynard Keynes and Friedrich von Hayek, were waging an intellectual battle that echoes down to the present day. At the heart of the debate is whether governments should borrow, or not, to stimulate economic growth.

For the first time in living memory voters will have a choice between two very different fiscal policies - tax and spending in plain English. The details of each document have been brilliantly analysed by Disclaimer: here for the Tories and here for Labour.

Labour will raise £48.6bn in tax to fund £48.6bn of day-to-day spending and borrow an extra £250bn to fund long term assets including privatisations of the mail, rail, and water industries. The Conservatives’ manifesto has some 60 uncosted pledges but a commitment to balance the budget by the middle of next decade - implying that any extra spending will now be clawed back in a new round of austerity in the early 2020s.

At last - a real economic debate! 

The campaigns by the two major parties ahead of the last two elections revolved around what Capital Economics has called a “phoney debate” over how to spend the same small amount of money rather than whether to raise the deficit by tax or borrowing.

They point out that, in the lead up to the 2010 election, the difference in planned fiscal savings amounted to just £6bn per year, at a time when the budget deficit was almost £170bn. This reflected a common acceptance of the need for a sustained period of fiscal consolidation in the face of a large deficit.

This time is different. Labour’s tax and spending plans would mean that net debt would be more than £100bn higher in 2021-22 than in the March 2017 Budget forecasts. Given that interest rates are so low this is an excellent time to borrow - as it has been for some years - to fund investment in infrastructure that will have huge long-term gains in terms of future economic output.

The Conservatives on the other hand are almost certain to use the election campaign to warn that Labour’s policies would burden the country with debt, when it is already nursing a £1.7 trillion burden. This would simply sap money away from private sector endeavour as the government paid more in interest to service the debt on money that would almost certainly be wastefully spent.

At last - a real economic debate! Back in the 1930s and 1940s there was a debate inspired by the Great Depression that had wreaked misery across the Western world. Keynes believed the state should “prime the pump”, using its economic weight to kick-start a recovery, by encouraging spending and investment that would not otherwise take place. Spending by the state would lead to greater spending by people and thus by businesses and ultimately leading to more people finding a job.

Keynes’ views on economics were challenged by Hayek, who said that the problem with central planning was that there was no rational decision to put money into one good or another service, because there was no price system to weigh the alternatives. They money would simply crowd out the better alternatives that the private sector would choose.

‘It Was Keynes Wat Wun It’

The 1930s being the 1930s, the debate was carried out via letters and lectures and Hayek and Keynes never debated the issue head on (perhaps May’s and Corbyn’s decision to shun the TV debates is an unconscious echo of that!).

But the debate continued through the calm of the Keynesian era of the 1950s and 1960s and through to the turmoil of the 1970s that saw the start of the revival of Hayek's thinking and its adaptation into the neoliberal agenda that has dominated since 1979 in the UK.

Certainly one interpretation of recent history is that policymakers drew heavily on Keynes’s General Theory when they united to order a $1 trillion injection of public money into the world system in 2009, averting another Great Depression and putting the West back onto the path to growth.

At that point policymakers opened their copies of Individualism and Economic Order and ordered cuts in public spending in order to reduce the deficits, pushing the UK and Europe close to a new recession and, in the case of Greece, into a genuine depression and mass unemployment. There are, of course, alternative interpretations.

Readers wanting to learn more could dip into potted biographies of these giants - and eight others - of economics here, but for lighter entertainment set aside seven minutes to watch the rap version. No, seriously do - 6 million other people have.

It is possible that the clear positing of the argument for fiscal intervention has helped shift the opinion polls in Labour’s favour and if they win, it would be fair for The Sun to splash with ‘It Was Keynes Wat Wun It’.

More about the author

About the author

Phil has run Clarity Economics, a London-based consultancy, since 2007 and, before that, was Economics Correspondent at The Independent.

Phil won feature writer of the year Work Foundation Work World media awards in 2009, and was commended by the Royal Statistical Society in 2007.

He is the author of Brilliant Economics and The Great Economists.

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