The scale of the stimulus is the debate Labour needs

As austerity maintains a grip over Europe, the left is desperately casting about for policies that will both win them support and drive forward economic growth. Surprisingly there has been no significant debate on the merits of a major economic stimulus programme.


There is now a public recognition that austerity is harming all of Europe’s economies and inBritain, Ed Miliband has made clear that austerity is ‘failing’. But that condemnation of austerity, or the effects of austerity, is not yet matched by an alternative economic policy that explicitly rejects spending cuts.


Paul Krugman’s summer media blitz inLondon, when he argued we need government investment, not austerity, to get through the economic crisis, should have blown open a much-needed debate within the Labour Party on a investment-based economic alternative.


But talking to Decca Aitkenhead, he said, ’As far as I can make out, the serious opposition to the coalition’s policy is basically a half-dozen economists, and it looks as if I’m one of them.’


Krugman took Labour to task for its weak opposition to Tory spending cuts, a policy he called ‘deeply destructive’. He argued the Tories are not prepared to adopt a different model because ‘economic recovery was never the point; the drive for austerity was about using the crisis, not solving it.’

His call for greater government investment was based on the multiplier, which he explained on Radio 4’s Today programme at the time. More recently the IMF’s World Economic Outlook stated the multiplier impact of spending cuts is having a greater effect than expected. As Jonathan Portes explained it, ‘the bigger the fiscal consolidation, the worse growth has been relative to IMF forecasts – implying that the Fund was drastically underestimating the negative impact of fiscal consolidation’.


Mick Burke, of Socialist Economic Bulletin, who has consistently made the case for greater government investment, said ‘The debate on the size of the multipliers is effectively debate about the role of the state in determining economic activity’ and that the driving force of our current economic contraction is the fall in public investment.

So how much should we, and can we, invest?


Labour’s Five Point Plan, as good as it is, seems wholly inadequate for the scale of the crisis. Ed Balls’ latest pledge, to build 100,000 homes through the £3 billion expected from the sale of the 4G mobile phone spectrum, is another welcome step, but remains limited by the scale of the windfall.


Anthony Painter in his summer article talked of investments of £10 billion. One would suspect this is what George Irvin would describe as ‘peanuts’ in his blog asking how Labour will respond to Krugman. Jonathan Portes of the National Institute for Economic and Social Research recommends a £30bn investment programme to which Martin Wolf of the FT responded, ‘I would go for far more’.


But how much further?


With the cost of borrowing lower than ever, the government can afford to do more to get the economy moving.


We know austerity is failing. It is the scale of the stimulus that needs now to be debated in the Labour Party.


Dean Baker argues US stimulus spending has boosted growth

Dean Baker of the Center for Economic and Policy Research in the US was interviewed for Radio 4′s Today programme by Mark Mardell, where he argued that stimulus spending had created jobs and growth, in direct contrast to the UK’s austerity programme which has seen growth fall and unemployment increase.


Listen again to the item at 2hr33.


Mark Mardell:
Obama has to make the point forcefully in an election year, when the stimulus was devised, he told his advisers he wanted spending on what he called a moonshot project, something big and memorable like the New Deal’s Hoover Dam. Instead he got small scale instantly forgettable plans with little political impact. But Dean Baker from the Center for Economic and Policy Research says it’s worked and it’s a pretty cut and dried case.

Dean Baker:
Well it seems to me it’s a text book Keynesian story that when you’re in the middle of a downturn, if you cut back, if you have austerity, as the UK has done, then you have slower growth or recession depending on how far they’ll actually go but in any case its really dampened growth there.

In the United States we haven’t had the same sort of austerity, we haven’t had as much stimulus as some of us would think would be appropriate but the economy is still growing. Most put the stimulus as having created three million jobs, adding around 2 percentage points to GDP growth and that looks pretty much right to me, so he certainly made a big difference and I think he deserves credit for it.

Mark Mardell:
But UK fans of cuts would argue the US has been saved from a profligate stimulus by its system of government. There has been austerity. There have been many cut backs in individual states from California to Illinois. Just as fast as Obama pumped money into the economy, they pumped it out. But Dean Baker doesn’t think that helped…

Dean Baker:
States have been a drag on growth, so if you look we lost probably 3-4 tenths a percentage point of growth because most of the states have been forced to cut back to balance their budget. Also, the fact that the stimulus ended. The bulk of the stimulus took place in the year 2009-2010. The economy slowed to a crawl in the first half of 2011, when the stimulus was winding down, so all this fits the Keynesian story really to a T.