A reputation for economic competence can be lost in a day and take a generation to win back. Ask the Conservatives.
George Soros did for them on 16 September 1992 when his selling of the pound drove Britain out of the Exchange Rate Mechanism. The Conservatives lost three elections on the trot after Black Wednesday.
Labour, too, knows how long the rehabilitation process can be. No single event was to blame for Jim Callaghan losing the 1979 election; rather it was the combination of record peacetime inflation, a sterling crisis, a squeeze on living standards and the Winter of Discontent. There followed an 18-year gap before voters were again prepared to trust Labour with their money.
So, the challenge for Jeremy Corbyn and his shadow chancellor, John McDonnell, this week is obvious. Labour can win the next election only if the public is convinced that the opposition will make a decent fist of running the economy. If it is not convinced, it will stick with the status quo, as it did in May.
The evidence from the last parliament is that voters formed a view of Labour under Ed Miliband’s leadership pretty quickly, so what the Corbyn team says and does in its first few weeks will be crucial. The fact that Corbyn’s opinion poll ratings are even lower than those for Michael Foot in his early days as Labour leader in 1980 highlights the danger.
In the next two days, Corbyn and McDonnell have their best, perhaps their only, opportunity to show that Labour has a credible economic plan. It is a recognition of how tough this task is going to be that McDonnell feels it necessary tell the party conference on Monday that a future Labour government would live within its means.
Corbyn and McDonnell will be hoping to exploit the fact that the UK economy has not really recovered from the financial crisis and economic downturn of 2008-09, despite almost seven years of 0.5% interest rates and £375bn of money creation through the government’s quantitative easing programme. Borrowing by the state is much higher than planned and deficit reduction is way off course. Jobs have been created but they have tended to be low-paid and low-skill. As a result, Britain’s productivity gap with other leading G7 countries narrowed under John Major and Tony Blair but has since widened to 20% – its highest level since the data were first collected in 1991. The financial crisis has left Britain a much poorer country than it would have been had the crash never happened. Had output per head continued to grow at its pre-slump level, it would be 18% higher than its present level.
The economy grew strongly in 2013 and 2014, and the Office for National Statistics is likely this week to revise up its estimates of growth in both years, but there have been signs recently of a slowdown. This could be a blip, but it might not be. Andrew Haldane, the chief economist at the Bank of England, floated the idea this month that a third stage of the global economic crisis is upon us. Stage one was the meltdown in the banks; stage two was the near-collapse of the eurozone; stage three threatens to be trouble in emerging markets.
A fresh downturn would create a real headache for policymakers. Faced with higher budget deficits caused by slower growth, would they intensify austerity programmes? With interest rates already virtually zero, would they respond by cranking up the electronic printing presses for a further dose of QE? The answers to these two questions are no and yes. Finance ministries would ease up on austerity and contemplate new ways to stimulate the economy. In these circumstances, Corbyn’s flagship policies – against austerity and in favour of People’s QE – would be in line with mainstream thinking. As was discovered after the collapse of Lehman Brothers in 2008, in a crisis anything goes.
Haldane has mused about the possibility of charging negative interest rates for people holding cash; an alternative would be so-called helicopter drops of money, with the Bank of England creating enough money to allow the Treasury to write a cheque to every adult in the land.
People’s quantitative easing is simply an alternative form of helicopter money, a term patented by that well-known leftie Milton Friedman. It would provide an anti-recessionary demand boost to the economy, but do so through investment rather than consumption, and so with less of a negative effect on Britain’s already worryingly high balance of payments deficit. Labour would have a perfectly respectable plan for dealing with the crisis. Even better, they could turn the tables on the Conservatives and accuse them of “failing to mend the roof while the sun was shining”. The (utterly preposterous) charge that Labour caused the global financial crisis of 2008 would no longer have the same political potency.
It sounds simple, but it won’t be. For a start, there might not be another financial crisis any time soon. Should the economy continue to grow at a reasonable rate with wage growth outpacing inflation, it will be harder for Labour to get a hearing. Corbyn and McDonnell will have to show that they have answers to chronic rather than acute problems: weak productivity, under-investment, and the current account deficit. Labour would need to tackle one of its own perennial weaknesses: the perception that it knows a lot more about how to spend money than how to make it.
There is also the possibility that there is a crisis between now and 2020 but that the public decides that voting Labour is too risky. The precedent here is the 1992 election, which took place at the tail end of a recession entirely caused by Conservative economic mismanagement that led to a colossal boom bust in the housing market resulting in record home repossessions and business failures, and 3 million people on the dole. Times were tough but voters thought they would be even tougher under Labour. They stuck with the Tories.
The 1997 election was different. By then the economy was in its fifth year of strong growth so voting Labour was not so risky. The Conservatives got no credit for the recovery, since it only began after the enforced change in policy forced on Major by the humiliation of Black Wednesday. Conditions were perfect for a Labour victory.
The fact that the flaws in Tony Blair’s blueprint for making Labour economically credible were exposed in the financial crisis of 2008 means that the process has to begin again. That’s the challenge for Corbyn. If voters trust him with their money he can win. If they see him as the bloke who didn’t sing the national anthem and thinks every economic problem can be solved by printing more money, Labour will lose, and lose badly.
This article was written by Larry Elliott Economics editor, for theguardian.com on Sunday 27th September 2015 13.18 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010