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British Labour – light years away from 1945 on another planet

The problem of living in Darwin some of the time is that the normal day to day travel that one engages in while pursuing professional life becomes very onerous. It is a four hour flight to any of the capital cities (whereas most were around 1 hour or so from Newcastle). Further, the flight schedules are crazy because Darwin Airport has no curfew (because there is no residential areas nearby) and so you catch planes to and from, say Melbourne at 1.45 in the morning, fly all night, then have to hit the ground running to meet work commitments. This part of Darwin life is very austere. Talking about austerity – in a much more significant way, however – I read that Mr Ed Miliband, thinks he is the 2013 version of Clement Atlee and he can do great and radical “Labour” things in Britain while pursuing a neo-liberal economic austerity program. My immediate reaction was who does he think he is kidding. Sadly, the British Opposition leader seems to think his party can defy basic accounting – that is, reinvent the rules of addition and subtraction – as he tries to present himself as a small target but one imbued with traditional British Labour Party values. The point of this blog is to explain why this neo-liberal bluster is so anti-1945 Labour, without dwelling too much on history. My personal austerity (flying overnight last night) has impinged on my time to wax lyrical today!

The economics are that a government can use fiscal policy to change the composition of spending within a given level of economic activity. So if the politics permit, a government could shift spending to promote equity for example while leaving the overall net public injection.

This is not to say that the level and composition of public spending are independent of each other, which is an assumption that underlies the rhetoric of the current Opposition leader.

The level of government net spending is a significant influence on aggregate demand and hence national income and employment generation. In times of high pressure (low unemployment), many policy initiatives can be effectively pursued more easily than if there is massive unemployment.

It is much easier bringing in significant equity reforms when times are good. Distributional shifts are very hard to accomplish politically when there is crisis because there are too many losers.

I will come back to this argument presently.

But first, here is a little historical context. The following graph shows the British unemployment rate from 1881 to 2012 (annual data).

The red segment of the graph (no particular colour meaning) is the period when Clement Atlee was the Prime Minister and clearly the current Opposition leader thinks is a reference point for his narratives.

I used the Labour Trends Special Feature (January 1996) – Unemployment statistics from 1881 to the present day – published by the British Government Statistical Service (Labour Market Statistics Group), which is now the Office of National Statistics for data between 1881-1970.

The current ONS data was used from 1971 to 2012.

Whatever else we might think about the period from 1945 to 1951 – including the nationalisations of coal, the central bank and transport (rail and road haulage), the utilities (electricity and gas) etc – the policy stance adopted by the British government maintained an unemployment rate that averaged 1.8 per cent.

The other point is that the UK current account balance was typically in substantial surplus during this period – which regular readers will immediately know provides certain policy options that are not available to a nation that is running significant external deficits as Britain is today (more about which later).

On June 21, 2013, the UK Guardian published an interview with the British Opposition leader – Ed Miliband on the Saatchi-Lawson pictures: ‘our duty is to intervene’ – where Ed Miliband started channelling Clement Atlee, at least in the way spin merchants do who try to command respect from history but are, in fact, violating that historical connection.

There was an accompanying article (June 21, 2013) – Labour can achieve radical change amid austerity, says Ed Miliband

The second Guardian article notes that:

Miliband has urged his party to remember that the post-war Labour government achieved radical social change while also managing to run budget surpluses in a time of austerity.

The Labour leader urged party members concerned about his decision to accept coalition spending plans for 2015-16 to recognise that high day-to-day spending is not the only route to social justice and that Clement Attlee created the welfare state and NHS while also balancing the budget.

The first cited article quoted the Opposition leader as saying:

If you go into the roots and history of the Labour party and think about our most dramatic society-changing government, the 1945 government, we all remember the NHS, building homes, and the family allowance …

What is less remembered is the other half – yes they created the NHS, but, believe it or not, they were running a budget surplus. There was wartime rationing. This is a government that banned the import of sardines because they were worried about the balance of payments. It shows a government can be remembered in difficult times for doing great things

What defines the Atlee period was the emergence of the Post-War commitment to full employment and strong government intervention into resource allocation.

The Government members sang – The Red Flag – on the first day of the Atlee Parliament.

Just to get you in the mood, here is Billy Bragg singing The Red Flag.

And in case you prefer a more – traditional version. Get angry either way.

As an aside, I am giving a public lecture tonight on “The relevance of Marx today”. I might get everyone to sing along before the talk just to put us in the right mood.

Perhaps, if Ed Miliband was here he could reprise a verse or two for us.

He might recall that Denis Healey (a youthful aspiring MP in 1945 – but didn’t enter Parliament until a bit later) who told the 1945 Labour Party Conference (Source) that:

The upper classes in every country are selfish, depraved, dissolute and decadent. The struggle for socialism in Europe … has been hard, cruel, merciless and bloody. The penalty for participation in the liberation movement has been death for oneself, if caught, and, if not caught oneself, the burning of one’s homeand the death by torture of one’s family … Remember that one of the prices paid for our survival during the last five years has been the death by bombardment of countless thousands of innocent European men and women.

I hear that sentiment in Ed’s narratives about capping welfare and weeding out the scroungers (not!). I hear it when he says the Labour Party should support the austerity packages of the Tories, which are transferring real income and wealth to the rich and driving higher poverty rates at the bottom (not!).

The Atlee Government was about central planning via nationalisation of all the key industries. The National Coal Board changed the way the mining industry operated (made it safer and better paid).

Within that milieu came the commitment to full employment and universal welfare via the Beveridge reforms. I have already considered why the current British Labour MPs who wax lyrical about William Beveridge are totally misguided and untruthful.

Please read my blog – Back to William Beveridge requires a commitment to true full employment – for more discussion on this point.

The basic point is that Beveridge was writing immediately after the Great Depression which only really ended when government spending associated with the prosecution of the Second World War accelerated.

The Great Depression taught us that, in the absence of government intervention, capitalist economies are prone to lengthy periods of unemployment, the Second World War experience proved that full employment could be maintained with appropriate use of budget deficits.

The employment growth following the Great Depression was in direct response to the spending needs that accompanied the onset of the War rather than the failed Neoclassical remedies that had been tried during the 1930s. The problem that had to be addressed by governments at War’s end was to find a way to translate the fully employed War economy with extensive civil controls and loss of liberty into a fully employed peacetime model.

That was the context that Beveridge was working within.

William Beveridge’s work in the 1940 (noted above) was entirely consistent with the emerging Keynesian orthodoxy of the time, which saw unemployment as a systemic failure in demand and moved the focus away from an emphasis on the ascriptive characteristics of the unemployed and the prevailing wage levels.

Beveridge (1944, 123-135) said that:

The ultimate responsibility for seeing that outlay as a whole … is sufficient to set up a demand for all the labour seeking employment, must be taken by the State.

Welfare support for the unemployed was conceived as short-term support rather than a permanent source of income support. It was taken for granted that the state would use its fiscal policy capacity to ensure there were enough jobs available.

If British Labour is now serious about returning to the immediate Post Second War period then it has to do it wholeheartedly.

Its neo-liberal macroeconomic policy does not sit with the welfare policies proposed by Beveridge in the early 1940s.

The current British Labour Party is not remotely in the same ideological camp (collectively) as the Atlee government.

But the preposterousness of Miliband’s claim that they can have austerity and a grand social vision for Britain because Atlee ran surpluses in a few years is revealed when we reflect a little on the sectoral balances.

Britain is currently running an external deficit equivalent to around 3.7 per cent of GDP (the highest since 1989). So that is a drain on aggregate demand and national income generation. The external deficit has not fallen despite the depreciating exchange rate.

The British ONS reports – Public Sector Finances, May 2013 – that the budget deficit is currently around 6.3 per cent of GDP. So that is supporting demand but clearly given the persistent mass unemployment, the support is inadequate.

In March 2013, the Independent reported in the article – Households saving more on jobs worries – that:

Britons saved the most for 15 years in 2012 amid worries over an uncertain jobs market … Experts put the rise in the household saving ratio to 7.1 per cent, the highest since 1997, down to higher precautionary savings by families.

Regular commentator on my blog, Neil Wilson provides up-to-date analysis of the – British Sectoral Balances. His latest estimates suggest that the private domestic sector overall is running a small surplus.

Using my figures, the sectoral balance equation would suggest the private domestic sector is running a surplus of around 2.6 per cent of GDP. That is, there is some deleveraging going on (spending less overall than earning).

With the non-government sector draining demand overall, the public deficit is the only thing that is adding to demand in net terms. As noted above, it is not adding enough.

The austerity push will worsen the drain on aggregate demand and drive unemployment up further unless there is a massive net export boom or the private domestic sector starts running up increasing debt levels again.

Does Mr Miliband understand this? It would seem that he doesn’t.

The last thing the UK wants right now is for the private domestic sector to go back into increasing deficit. The behaviour of that sector signals that it intends to adopt a cautious approach and run down debt levels. That means there is not going to be a big credit-led spending boom to offset the public austerity.

The only hope then to avoid further economic malaise is for the external sector to provide a massive turnaround. How likely is that? Not likely at all.

Thus an austerity push is consistent with overall income losses, which will push the private domestic sector closer to deficit and reduce the external deficit somewhat (via import reductions).

But that sort of economic environment is nothing like that which Clement Atlee faced or created. He ran surpluses on the back of the massive public debt expansion during the World War 2 but he also had aggregate demand adds coming from the external sector (mostly).

His government was also devoted to maintaining full employment. That is, they were light years away from the current British Labour narratives.


I thought this letter from the leader of the Greens Party in the UK published by the Guardian yesterday (June 24, 2013) – Westminster now has three parties of austerity – adequately summarised the dilemma that the British population faces – all their major political parties are misguided and leading the nation along a path which will make it hard to achieve any prosperity or distributional equity.

The writer says:

Instead of trying to outcompete the government in some kind of masochistic virility test to see who can threaten the greatest austerity, an opposition party worthy of the name would be making a far stronger case that austerity isn’t working, and offering a genuine alternative.

I live in a nation with a similar dilemma.

That is enough for today!

(c) Copyright 2013 Bill Mitchell. All Rights Reserved.

This Post Has 25 Comments

  1. The Labour party has failed the British people totally.
    How difficult can it be, politically, to oppose the Tory cuts in these times ?
    It astounds me how incompetent Balls and Miliband are and how they continue to misjudge the mood of the population.

  2. Dear Larry

    I should have written The Red Flag. But thanks for The Internationale – another great anthem we can use to get in the mood.

    best wishes

  3. Andy,

    You ask “How difficult can it be, politically, to oppose the Tory cuts in these times?” My answer is “all too easy”. Reason is that as soon as Labour suggest spending more (or cutting taxes) the Tories chirp up about debts and deficits.

    The only way round this is a decent article or two in the Graudiad by Bill or some other professional economist of an MMT persuasion explaining why the debt and deficit for a country that issues its own country is a TOTAL, COMPLETE AND UTTER irrelevance.

    I actually contacted the Guardian suggesting an article of that sort, but they couldn’t have been less interested. I.e. the Guardian and the rest of the political left not understand what Keynes meant when he said “Look after unemployment and the budget looks after itself”. Secondly, they’re not even interested in having the point explained to them. They’d rather ape Cameron and Osborne.

  4. I’ve had the same response from The Guardian. It’s rare that you see anything out of the ordinary anywhere in the mainstream British media.

  5. Ralph, Neil,

    It may be that the editor, Rusbridger, when he isn’t practicing playing the piano, thinks he has it all covered. After all, he has all these critics of the Tories — Chakrabortty, Hutton, Rawnsley, Cohen, Stewart, and Toynbee. But the fact is that, with the possible exception of Chakrabortty, every one of these reporters has made egregious economic errors in their criticisms of the Tory economic program.

    Their economic ideology is the core of their program, which underlies their justifications for phasing out the NHS (see Allyson Pollock’s Follow the Money in today’s Guardian) and privatizing the justice system being pushed by a justice minister who nothing whatsoever about law or justice. William Keegan of the Observer has written that he considers Osborne the worst chancellor in living memory. I consider this government to be one of the worst I have ever seen that considers itself to be democratic, worse even than that of Nixon and Kissinger.
    Today, a small piece by Allyson Pollock, Follow the Money, argues well that the NHS is being phased out, part of the coalition neoclassical program that includes privatizing the justice system, led by a minister who knows nothing about law. Yet, more space in the paper was given over to the surprise upset of Nadal being out of Wimbledon thereby giving Andy Murray a greater chance of winning the tournament.

  6. David Graeber, an American anthropologist and academic, had a piece – There’s no need for all this economic sadomasochism – in the Observer newspaper in April praising MMT. It even contains a link to Warren Mosler’s website. Philip Pilkington gets a mention too.

    I wonder how many read it, and how many followed it up?

    In a recent video Mike Norman takes the economic theoreticians – and those bloggers who seem to know what they are talking about – to task over their seeming inability to communicate their ideas in a simple way that the ‘the-man-in-the-street’ might understand.

    Until MMTers can do that effectively they will always lose out to the neo-liberals who are adept at misleading people in order to secure their own self-interests: vide Cameron’s asinine remarks about the last government’s ‘maxing out the country’s credit card’. Such images appeal to the experiences of the man-in-the-street: lies but effective lies.

    MMT needs some good writers e.g. good red-top newspaper journalists, who understand MMT, or who, seeking expert advice, are at least sympathetic to the aim of serving public purpose, and who are skilled at explaining complex issues in a simple way: in the UK, the Daily Mirror rather than the Guardian.

    In fine, not all members of the UK Labour Party support the leadership’s neo-liberal policies. In fact some are bloody angry.

  7. What is to be done about politics as usual not working?

    ‘People’s Assembly’ launched this weekend, here (UK), which could become a broad church but much to be worked out (inc electoral instrument and constitution etc). Present organisation includes Green Party reps (Natalie Bennett is leader now, with Caroline Lucas MP the sole rep in Westminster Parliament) along with major unions, a handful of Labour MPs, and some activist/campaign groups. Ken Loach et al worried that an alternative to Labour Party is off the table (thus separate ‘Left Unity’ drive). Ha-Joon Chang (who appears in Guardian now and then) amongst a number of economists in UK aligning themselves with movement (sic).

    Would an Aussie People’s Assembly work? Perhaps this is the platform that could be used to get MMT/post-Keynesians a fairer hearing, on an international basis?

    Guardian situation is frustrating. Piece by Inman here is illustrative :

    Inman’s response to comments was that economists who had come out of 2000s rather well (e.g. as per Bezemer’s study) or Bezemer himself didn’t have a platform. What is the Guardian for?

    Maybe someone, somewhere needs to write out MMT, a thousand times, or whatever it was, a la Brian, in Life of Brian? Not beyond the bounds of present UK activism (e.g UK Uncut)!

  8. Efforts of the post war labour party was at best to make the private nature of debt extraction on the money supply sustainable.

    MMTers never want to get at the core of the problem for some funny reason.

    Bill Still gets to the core of the problem once again and even mentions the that the Greek CB is not even hiding its private nature anymore.

    The Labour party were clearly traitors.
    They gave away the highest performance jet engine of the time to the Soviets…….helping to sustain the Korean war for 3 Years!!!!!!!!!!
    They had a lot of blood on their hands.

  9. Please correct me if I am wrong but didn’t the post war labour party use VERY high progressive taxation along with creating the NHS and rebuilding the UK? The postwar labour party was all about redistributing financial power. They took financial power away from the rich by using “financial repression” and very high progressive taxation. That is what MMT pretends can be avoided. MMT is just as different from postwar labour as New Labour is from postwar Labour. We could have let much of the ten trillion pounds of inter-financial debt default in 2008 rather than using deficits to prop it up and preserve wealth inequality. Austerity is all about preserving the power of that phony paper wealth.

  10. I wonder why people continue to believe that the Labour party is making mistakes, or the The Guardian is in some sense “left wing”? It is frankly impossible to swallow the idea that they believe what they are saying unless one also accepts the notion that they are neoliberals at their very core. The Guardian has never been a left wing paper despite what the tories say: it has never claimed to be that, being broadly liberal in its political stance. Indeed there is no left wing mainstream media in the UK: none at all. The Labour party was captured by neoliberals under Tony Blair and it is interesting to recall that Kinnock paved the way. The expulsion of Militant as a “party within a party” may well have been necessary: but it is certainly true that the neoliberal entryists were not dealt with in the same way though it is hard to detect a difference in the substance of what they were doing. The problem is that they were not identified and not expelled and the party was stolen from under the noses of its traditional support. Tribalism meant that this was not really noticed for a suprisingly long time. The lack of any credible alternative in England has disenfranchised those who reject the neoliberal analysis: and the fact that almost all of the media promote neoliberal propaganda makes it very hard for anyone who wishes to discuss the faults in the underlying assumptions presented to get a platform. I do not think it is the lack of ability to present the case well that is the main problem: it is rather the lack of anywhere to present it, well or badly. One possible piece of evidence in support of that is the loss of support for labour in Scotland, largely due to the existence of an altermative in the form of the SNP. To me that suggests there is a large constituency which is opposed to the neoliberals, and if there is somewhere else to go they go there. Labour ostensibly believes that the people are fully committed to austerity and the neoliberal tale, even if they don’t like it. If that is the case then there is no point to the party at all: but I don’t believe it. They are not being forced by electoral calculus to adopt this line: it is what they wish to do and it is convenient to pretend that they are compelled. Granted there are some within the party who are appalled: but they are still there, so who can respect them? By now it is obvious that the party offers nothing: why stay? Perhaps they believe that they can mitigate the worst if they continue: but that is the Liberals job and we have seen the success of that. There is no compromise with these neoliberal creatures, and there never can be, either in practice or in principle. If they are ideologues they honestly believe that a change of course will result in national economic disaster: and if they are cynics they know that a change of course will result in personal economic pain. You can’t find common ground with that

  11. @Stone: is there something wrong with high progressive taxation? If there is can you explain what it is?

  12. @Fiona, sorry I was so unclear. My point was that progressive taxation IS necessary and I’m berating MMT for instead claiming that deficit spending can make up for a lack of progressive taxation.

  13. @Stone. Interesting: I did not know that MMT addressed that issue. I was under the impression that it really related to the origin and flow of money between big sectors in which the rich and poor are both in the same grouping (private). What we choose to do on taxation seems a bit separate to me: it is concerned with distribution and that is a flow, I think: but a flow within a sector. If we are concerned with demand it is essential to have high progressive tax so far as I can see, for the rich don’t spend their dosh much. But I freely admit I don’t understand this very well so I am very open to correction

  14. Fiona, to my mind MMT is very misguided in the extent to which it lumps together the entire non-government sector. I think a sustainable economy requires constant redistribution WITHIN the non-government sector for just the reason s you mention. MMT says that “saving desires” of the non-government sector can be satiated by government deficits but as far as I can see “saving desires” are an infinite black hole and money gathered by the financial sector is used to gather more and to exert political pressure to preserve the value of excess paper wealth -that is what austerity is all about.

  15. Brian,

    Thanks for the link to David Graeber’s article. I got mighty depressed to find that my country’s Finance Minister expressly waved away the idea of Mosler Bonds, due to a new-found belief in equitable treatment of classes of people!

    Incidentally, I would recommend Graeber’s book “Debt: The First 5,000 Years” to anyone who follows this, or any other MMT-based blog.

  16. Fiona

    I don’t see how letting rich folk hoard their keystokes affects the ablity of the Govt to create demand given the operational realities of the monetary system. In other words surely it is a political decision as to whether to redistribute or not which I assume is why MMT stays clear of whether or not to tax them to the hilt.

    Sorry if I’ve missed the point.

  17. Stone,
    Remember that in macroeconomics “saving” and repaying debt are the same thing. In other words, a large reason for the desire of the private domestic sector to run a surplus is because it allows them to repay their debts, which is necessary for them to eventually spend and invest more.

  18. @Ciaran

    I was very disappointed at his dismissal of military fiat…………going further back. to Ireland in the Iron age (the iron age came late to Ireland after the Roman collapse).

    I don’t think credit (doing favours) outside of the extended family within a ring fort was widespread.

    Given the low level of energy density you don’t build something of this scale when trust (credit) is widespread.

    I imagine given the scale of the breakdown a limited amount of unmarked metal was transacted between war like cattle based forts / proto villages.
    The first proto government fiat with a stamp on it (silver coin) was brought in by the Norse.

    This no doubt changed the dynamics of pre town settlement Ireland.
    I simply don’t buy the argument that inter village credit was widespread for much of this time period.

    People were very war like , insular and energy independent back then……………forts were built somewhat away from the coast for perhaps two reasons but the main objective of such habitation was to avoid getting killed.

  19. Andy and CharlesJ, I think you are deeply misguided on this. They are not just “keystrokes” that are being hoarded. Those “keystrokes” confer immense political power. Upholding the value of those “keystrokes” is what austerity is all about. It is UTTER DRIVEL to talk about economics disconnected from politics. They are intertwined to the core of both and you will never understand either if you shirk from facing that reality.

  20. Bourgeois politics has nothing to offer now. I intend both common meanings of “bourgeois politics”. That is;

    A. Politics dominated by the commercial, financial and industrial interests of capitalism; &
    B. Politics characteristic of the middle class and marked by concerns of self-interest, social respectability and parochial mediocrity.

    Without defeating the source of our civilizational malaise, capitalism itself, there is no chance of correcting any of its consequent problems. When the catastrophic mess capitalism is generating becomes fully manifest, people will not merely demand change, real and radical change will become mandatory for civilizational survival.

  21. @Ikonoklast, I disagree and think that what you describe as “bourgeois politics” still COULD put capitalism back on a constructive beneficial road.
    If the financial and tax system were different (eg replacing current taxes with a tax on assets) then self interest would act in that direction IMO. Capitalism has fabulous potential to benefit everyone. All it needs IMO is for wealth inequality to be moderated and then capitalism can provide “from each according to his ability, to each according to his need” far better than socialism ever can.

  22. “When the catastrophic mess capitalism is generating becomes fully manifest, people will not merely demand change, real and radical change will become mandatory for civilizational survival.”

    It’ll be too late by then.

    Sorry but what you are suggesting isn’t going to happen in sufficient time. It hasn’t happened in 150 years, and it is unlikely to happen any time in the near future.

    Human behaviour gets in the way of this sort of intellectual nirvana.

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