Balls's history lesson was compelling, but there are significant omissions in his analysis.
Ed Balls, the Shadow Chancellor of the Exchequer, spoke at the London Business School on Monday. Entitled “Beyond the Third Way: A new inclusive prosperity for the 21st Century” he gave a speech of no little ambition that set out the challenges faced by both Britain and the global economy.
“This morning I do not intend to talk about the short-term challenges that economic policymakers face here in Britain—the new normal for interest rates, how to boost housing supply, the right pace for deficit reduction,” said Balls. “Instead, I want to stand back and ask what the economic trends we have seen over the last twenty years can teach us about how we should shape our economic policy for the next twenty.”
Balls went back to the Blair / Clinton era, and to the moment when a new settlement between markets and social democratic principles was forged—the Third Way. “My argument,” said Balls, “is that the ‘Third Way’ did not deliver because the world was changing in a more profound way than any of us anticipated.”
Back in the 1990s, said Balls, globalisation was throwing up all sorts of new challenges, especially in trade and workforce skills. But Balls acknowledged that Labour missed three things: first, the growing instability in the financial system; second, the mobility of labour forces; and third, the profound technological changes that were under way. “The result has been, for most developed countries, rising income inequality on a scale not seen since before the First World War,” said Balls.
This is the most critical problem facing Britain, in Balls’s analysis. If Britain cannot deal with social inequality, then the country will not be able to make the most of its workforce, will not be able to compete in global markets and will not be able to escape from the economic slough of despond into which it has fallen. The solution to this bind is threefold, said Balls: tougher global co-operation; good jobs and skills; and a new industrial policy.
In addition, Balls made clear that if Labour were to win the General Election next year, it would stop the reduction in corporation tax, which is the Coalition’s plan. Instead, Labour would freeze business rates. This was the headline announcement of the morning.
This was a speech of substantial ambition, which aimed to give a sense of the deep thinking that Labour is doing on the economy. At the core of its analysis was the notion that something has gone wrong: that the present structure of Britain’s economic model and the growth that it yields are somehow askew, so that the—to coin a phrase—proceeds of growth are not being distributed as they ought. Labour’s aim would be to “restore the broken link between the wealth of the nation and family finances.”
It was a well-thought-out argument of some complexity. It gave a clear indication of how Labour intends to campaign on the economy in the run up to the General Election. But there are flaws in this analysis.
The first was suggested by Balls’s rhetorical decision to confine his retrospective analysis to the past 20 years. He said that this was an arbitrary decision, as it coincided with the moment when he decided to leave his job at the Financial Times to join the Labour Party. But the economic cycle that gave birth to the present troubled economic conditions did not start 20 years ago, but 30. If Balls had gone back that far, it would have taken him to the point at which Paul Volcker, who in the late-1970s had been appointed Chairman of the US Federal Reserve, finally succeeded in expunging inflation from the US economy. It was this achievement that allowed his successor Alan Greenspan to introduce a long-term low interest rate policy at the Fed, one that eventually helped fuel the asset price bubble that popped with such cataclysmic results in 2008.
Seen in this 30-year perspective, the Third Way becomes just another feature of a 30-year interest rate cycle—low interest rates in the US and global markets meant big profits for finance and for business, which helped fill treasuries with funds for national spending projects. Lord Mandelson’s famous “filthy rich” comment famously expressed Labour’s sense of ease at this arrangement.
But more than this, the loose credit conditions that arose from persistent low interest rates were to the benefit of the asset-owning classes. Much excitement has been caused by Capital in the 21st Century, the book by Thomas Piketty, the French economist, in which he shows that, when returns on capital exceed growth, social inequality increases. Labour circles have been energised by the book, and by its contention that developed economies are essentially flawed in the way they tend towards inequality. But a less settling thought for Labour is that the boom of the early 2000s, which it oversaw, boosted returns on investments in precisely the way that Piketty deplores. In this way, the history lesson given by Balls, in which the causes of Britain’s inequality are predominantly external, is open to substantial challenge. It has domestic causes also, many of them occurring under the Blair Brown government, of which Balls was a senior part.
It is unlikely that the next election will hinge on competing analyses of economic history. More significant will be whether voters feel better off. Last week, Standard and Poor’s, the ratings agency, upgraded Britain’s economic outlook, commenting on the country’s “robust and broadening recovery.” Consumer spending is up and UK business investment was up 5 per cent in the first quarter of 2014, the fifth quarterly increase in a row. Goldman Sachs now thinks the UK will grow at 3.4 per cent this year, a rate that contrasts sharply with the economic problems that persist in the Eurozone.
There is an added statistical fillip coming in September, when the Office for National Statistics publishes revised figures for the UK national accounts. This will change the way that the ONS measures Gross Domestic Product and it is thought that the effect of these revisions will be to show that the recession was not as deep as previously thought. The change is also expected to show that the pre-crisis peak in 2008 was regained at the beginning of 2014 and that the weakness in productivity growth was not as dire as initially thought. All of which will pose substantial problems for Labour’s economic messaging in the run-up to the election.
Balls’s speech was impressive for its scope and sense of moral conviction. “Beyond the Third Way” is a good title, echoing Tony Blair’s speech in which he ditched the party’s famous Clause IV. But when it comes to the economic fall-out from the 2000s, it feels a little soon to leave the past behind—no matter how much Labour would like to do so.
