Avoiding the Last Social Democrat. The last thing we need are new fiscal rules

It looks like people want to discuss “fiscal rules” again.

seems in @hopisen & @anthonypainter 's view Labour can only earn fiscal credibility by putting someone else in charge http://t.co/0zjXz3kH9M

— Declan Gaffney (@djmgaffneyw4) June 23, 2013

The first problem here is the obvious one. As in this post, the period when the “fiscal rules” supposedly weren’t working and the government budget was out of control is the flat bit on this chart:

But, they say, if the government had reduced the debt to GDP ratio more in the 2000s, that would have made “more room” for stimulus in 2008-2009! This, however, is just a case of assuming the conclusion. In what way did we run out of “room”? Presumably, we’d know if we had done because there would have been some sort of spike in government borrowing interest rates, which there wasn’t. The fiscal stimulus didn’t actually reach the limits of the possible, and it was reversed for well-known political reasons. That said, although it wasn’t very big it did work, which is worth bearing in mind.

The idea that we needed more “room” for stimulus only makes sense on the assumption that the government debt market blew up and wrecked the economy. But that didn’t happen. So, we’re still where we were in 2010 and in 2011 – desperately pretending that there was a government debt crisis in 2007, and that George Osborne is right. Also, if we had had a more cutsy politics in the 2000s, this might have had consequences in itself. There is no point having more fuel in the tank if there is no intention to floor the pedal.

It’s also not obvious that running a tighter budget in the 2000s would have been a good thing. All other things being equal, if public spending had been lower or taxes higher, you’d tend to expect that the Bank of England might have set lower interest rates. I’m not convinced the UK in 2005-2007 really needed the housing market pumping up even more, to say the least. The Bank specifically ignored asset markets in general, and housing in particular, and also used measurements of inflation that exclude the cost of housing, so it might well have fallen into that one. It wouldn’t even have been the stupidest thing Mervyn King pulled.

These are secondary points, though. The real question is “why bother discussing fiscal rules at all?”

After all, if there was something wrong with the fiscal rules, this means either that they were impossible to comply with, or else that they were complied with, but the targets they set were wrong. But this only makes sense if the problem was a fiscal one, and the government debt market blew up in 2007. Otherwise, all we’re saying is that fiscal rules in themselves didn’t work. In which case, why bother even talking about them? What is the point? Why on earth would we want tougher nothing and more futility?

To understand that, we need to talk about Liam Byrne. Here’s Paul Waugh interviewing him.

Byrne’s book also reveals some more detail on his life in Government and it has a fascinating passage about how he and Treasury civil servants picked up in 2009 the real problem of the ‘squeezed middle’.

Led by Simon Gallagher, now one of the economic team in the British embassy in Berlin, a special four-strong team of officials drafted a document that spotted that the rot had set in back in 2005, well before the financial crisis. “The Treasury had a secret name for it. It was called the Future of the English Working Class,” Byrne reveals. For families on median incomes, real disposable income grew at a neglible 0.14%. The Treasury found that from 2001-2008, UK productivity rose 9%, but workers’ share in national earnings fell 73% to 69%.

Well, hello. If there was something seriously wrong with UK economic policy in the 2000s, it wasn’t that the golden rule lacked additional toughosity. Here’s Gavin Kelly:

Because at the heart of this is the truth that no department in Whitehall really sees it as their job to worry about big trends in living standards facing the working population of this country. Obviously everyone has in interest in it but no-one really owns it. And I think that is a problem which will still exist today because you don’t change the nature of Whitehall departments quickly.

The incredible thing here is that Byrne then talks about “skills” a bit, and starts going on about “triple locks” and capping how long you can spend on the dole and, Jesus wept, “Work Programme 2.0”. Clearly, this was unacceptable knowledge. It’s worth remembering just how godawful Liam Byrne, one of the people in British politics I despise most, was as a minister. Nobody was keener to thrash disability benefit claimants, bully refugees, or push idiotic identity cards than he was.

And this was no accident. What he was doing was pursuing what I think of as the Redwood-Goodhart synthesis – the doctrine that you can’t have a more egalitarian economic settlement any more, because of some combination of globalisation and those people, and therefore the government must offer some other kind of political goods. This is usually either the flag (Redwood) or else the enforcement of some sort of supposedly popular norm (Goodhart). Blairism combined this species of unpopular populism with recycling tax revenue into tax-credits, LHA payments, and public investment. (In fact, it strikes me that the unpopular populism and big construction came from Blair, the recycling taxes into tax credits from Brown.)

So, we ended up with a hell of a lot of people drawing tax credits, a hell of a lot of people’s landlords drawing LHA, all of them very vulnerable to Tory cuts. What we needed was change at the source.

This is where people start talking about “predistribution”. There’s a good point here; the Blairite version of social democracy was basically tactical, but a policy that actually shifted the labour share of national income would be strategic. There was nothing much in the combination of WTC and ASBO that made it easier for Labour, or labour, to win again in the future. It’s the combination of successive actions that lead towards the aim that Clausewitz said constituted strategy. You might almost say that social democracy is tactics and socialism is strategy.

Now if you’re creating a strategy, you obviously need to understand the landscape. Simon Wren-Lewis complains that we are asked to live with a “post-truth media”; his comments thread erupts with evidence that we live in a post-factual society, barking and bubbling and pushing their Fraser Nelson-esque pseudofacts.

It’s no good whining. Just proferring the facts hasn’t worked and will never work, because the ignorant are not fact-deficient persons who need fact-pills. Rather, they’re like that because they want to believe. Occasionally, you get an opportunity to surprise people, as Ed Balls did in revealing to the political nation the astonishing discovery that benefits to pensioners are actual money, just like “welfare”. But you can’t plan for these. As a result, I’m quite sympathetic (like AVPS) to efforts to come up with ways of managing the public finances that provide the sop, while removing the dangerous substance. If you look at Miliband’s speech, the operational content is not all that different to the Brown-era fiscal rules.

As for the idea of managing the “structural” welfare bill, there’s an interesting strategic hook here; if wages do better, or housing costs come down, this goal is served. It might even serve to justify action on them, which leads to this point.

So then we look at something like this. The danger is clearly that we end up with #shitnudge and hot air, and not even any tax-credit gimmes.

In a sense, we’re already seeing this scenario, which I think of as The Last Social Democrat, playing out in Europe. Hollande’s PS government in France is stuck with the Euro, doing not much but fighting fires. The SPD in Germany polled 22% this week, having decided to pick the former regulator of WestLB Peer Steinbrück as its candidate and the guy responsible for some of the nastiest tabloid attacks on the Greeks as his PR man.

The hope is, of course, that this is just the working out of the adjustments that started in 1968. Rather than a great block of SPD red, they’ll have a rainbow of Die Linke, er, red, Green green, etc. But the horror is that Merkel ditches the Liberals and goes for a coalition with the Greens. This would have a substantially bigger majority. Watered-down greenism, lots of talk about local shops, no discernable class politics, and Austrian economics? It sounds a lot like In the Black Labour, or indeed the David Cameron of five minutes before the polls closed in 2010. And to be honest, from there I can’t see any reason for most Europeans to ever vote again.

They’re even at it in Brazil. Self-inflicted stagnation therapy? Yes.