The Most Pernicious Allegory To Have Disgraced Economic Thinking

My comrade, Yanis Varoufakis writes:

Rarely has a lacklustre policy been abandoned for a reason so bad that it threatens to inflict long-term damage on a society. Independently of whether the £28bn green investment programme was the right policy for the next Labour government to commit to, Rachel Reeves’s reasons for ditching it were an undeserved gift to the Tories and a partial vindication of their disgraceful flirtations with an austerian, anti-green political narrative.

Speaking on BBC Radio 4’s Today shortly after her U-turn on Labour’s headline £28bn green transition programme, the shadow chancellor explained her decision by claiming that, under Jeremy Hunt, the Treasury is “planning on maxing out the credit card”, adding for good effect that the Tories are “maxing out the headroom ahead of the next general election” thus limiting “what an incoming Labour government will be able to achieve”. By comparing the state’s coffers to an overladen credit card, Reeves endorsed an insidious fallacy.

If we owe George Osborne anything, it is irrefutable empirical evidence that using the analogy of a credit card for a nation’s budget (along with inane “belt tightening” and “fixing the roof when it is sunny” metaphors) is a terrible basis for prudent fiscal policy. It is true that the Tories will leave scorched earth behind for the next government, with a budget dripping in red ink and a pitiful level of investment in the technologies and services the UK needs to escape a long-term slump. But this is precisely the reason why Labour must reject the austerian urges that, inevitably, spring from the credit card analogy.

When your credit card is “maxed out”, you do indeed need immediately to tighten your belt. The reason why parsimony works for you, and helps limit your debt, is that you are blessed with an income that is independent of what you decide to spend money on. In other words, if you don’t buy the shoes or new phone you covet, your income will not diminish, and so your deficit will shrink reliably. But the state’s budget is nothing like a credit card. As chancellor of the exchequer, your (tax) income is highly dependent on your (public) spending. Limit your spending and you have limited your income too. This is why the more Osborne slashed public spending in the 2010s, the more money he needed to borrow. By adopting the “maxed credit card” narrative, Reeves endorsed Osborne’s flawed logic and, indirectly, absolved the Tories for the wanton damage they have inflicted on a generation of Britons.

Austerity, and the credit card analogy that provides its thin veneer of logic, is not just bad for workers and people in desperate need of state support during tough times; it also depresses investment. By hastening the stagnation of a society’s aggregate income, it signals to businesses that they would be mad to put money into building up the capacity to produce the output that society is too impecunious to buy. That’s how austerity undermined investment in Britain and that’s how it will annul Labour’s ambition to draw in private green investments, now that Reeves has ditched her modest green public investment plan, replacing it with wishful thinking that the private sector will, magically, make up the difference.

But none of this means that the ditched £28bn policy was optimal or, indeed, that an incoming chancellor can safely commit the Treasury to borrow and spend unlimited amounts. The difficulty that any British government faces today is that, since President Biden inaugurated his expansive green transition spending spree (improbably labelled the Inflation Reduction Act), the UK is caught up in a subsidy war between the US, China and, to some extent, Germany and France. This is a multitrillion-dollar subsidy contest that the UK cannot win and, thus, should not enter. In this context, were it to be spent as planned (i.e, as Inflation Reduction Act-like subsidies for private business), Labour’s £28bn would be a mere drop in the ocean, incapable of diverting the torrent of capital rushing into the US and China.

If subsidies are a fool’s wager when competing with the US, whose central bank mints the world’s reserve currency, what should Britain do? Having dropped the fantasy that subsidies can attract battery manufacturers and microchip producers to the UK in numbers consistent with a British green industrial revolution, a Labour government should do two things. Set aside a modest sum (say, £6bn) to subsidise energy conservation and, critically, found a public investment bank to inject green investments into green tech enterprises directly (private or public) to the tune of up to 3% of national income annually. These large sums can be raised, not through Treasury bonds that need to be repaid by taxpayers, but by bonds issued by a new public investment bank – to be repaid from the proceeds of the green enterprises they fund. The Bank of England could also help with an announcement: if the price of these green bonds were to fall below a certain point, it would buy them second-hand – even while selling off its stock of Treasury bonds. This mere announcement would ensure it would not need actually to buy them because investors would rush in to snap them up, thus leaving Britain’s public debt servicing costs unaffected.

In 1942, John Maynard Keynes proclaimed: “Let us not submit to the vile doctrine of the 19th century that every enterprise must justify itself in pounds, shillings and pence of cash income … Assuredly we can afford this and so much more. Anything we can actually do, we can afford.” Britain’s conundrum, today, is that the next government, whose job will be to fix the Tories’ mess, is led by politicians who share neither Keynes’s aims nor his innovative approach to public finance. Judging by Reeves’s recent performance, they seem to care more about the fiscal hawks in their midst and in the Tory press. So much so that, to prove their mettle as bona fide austerians, they adopt the most pernicious allegory to have disgraced economic thinking.