The problematic economics of Balls

The extent of Ed Balls’ toxic influence over Labour’s political economy does not begin and end with the current ‘austerity-lite’ agenda. The impression made by very conservative economists upon Balls was the driving force behind New Labour’s economic agenda in power too. A curtain needs to be brought down on Balls, Ballsian economics, or both

The latest issue of Chartist has given Ed Balls some special attention. Martin Rowson’s brilliant art on our front cover and Peter Kenyon’s piercing article both rise from a growing feeling that Ed Balls is as responsible for Labour’s current problems as anything else. Ballsian economics is not just at the root of Labour’s current political economy problem, but it has its fingerprints all over New Labour’s problematic political economy in government. His commitment to the theories of conservative-minded economists has been covered very little, but should further worry those already concerned with an ‘austerity lite’ cul-de-sac. The inspirations behind the economics of Balls should make Ed Miliband consider seriously what Labour’s political economy should be about, and whether Balls has any part in it.

Balls as Keynesian

Back in the early noughties Balls turned up to a Fabian conference to talk about the then government’s economic policy. It was back in the day when Gordon Brown had a spring in his step, wouldn’t walk outside to buy milk without uttering the word “prudence” and Labour thought they’d finally shot the fox of ‘economic competence’. Balls walked around with a swagger back then. He took the ‘let’s preach to the choir’ approach to this Fabian event. He sprinkled his speech with the word ‘Keynesian’ with a colander rather than a sieve, making the room swoon in appreciation of the apparent progressive economic policy intentions of New Labour. To say he was disingenuous might be harsh, although in hindsight hard not rebut. He repeated this Keynesian head-fake to much more powerful public effect in 2010 when he stood for the Labour party leadership. His much acclaimed ‘There is an alternative’ Bloomberg speech was seen as powerful treatise on why Keynesian-style reflation was the only route to our economic salvation. He raised the ghost of Keynes repeatedly; placing him upon an altar from which Balls and Labour can worship ‘the master’. In so doing, he spoke fondly of the immediate post-war era where Keynes’ ideas were most prominent, the same era that also gave us Clement Attlee and the great government Labour folk all look back on with a nostalgic tear.

His effect on Labour policy before and since becoming Shadow Chancellor sits at a quite a distance from this. His attempts to paint himself as a ‘Keynesian’ are not, and were not, sincere. He is not a ‘Keynesian’ or even an adapted ‘post-Keynesian’ or Behaviouralist that represent ‘the master’s’ true heirs. Balls is an adherent of new Keynesianism, a body of economic thought, and tragic misnomer, promoted by some dangerous people.

The misnomer that is ‘New’ Keynesian economics

In ‘new Keynesianism’, economists have provided a good example of how economists, adhering to a common slight, are really bad at labelling things. The phrase ‘new Keynesian’ sounds OK on an intuitive level to someone of the political left, but delve a little deeper and something else becomes apparent.  The first indication of this comes from identifying the key protagonists that have advanced this body of macroeconomic theory into the policy-making mainstream. We need raise only one: American Gregory Mankiw. Self avowed conservative, former Chairman of George W. Bush’s Council of Economic Advisors and former senior advisor to Mitt Romney and, yes, former tutor at Oxford to Ed Balls. Big Whoop! He taught Ed Balls. Who cares. Their relationship was actually quite close however and Mankiw’s work, and that of David Romer, has framed the Ballsian economics we’ve been drenched with since. After Balls went to work for Gordon Brown, jumping ship from that bastion of progressive economics – the Financial Times, Balls clung to the gospel of Mankiw. Moreover, Balls apparently even had the ear of Mankiw in the labelling of New Labour’s economic plans as ‘new Keynesian’ (Hay 2007) and was consistent with Balls’ firm intentions to distinguish it from the monetarism of Thatcher (Balls 1998). This was again part of the veil Balls sought to drape over his economic ideas, an endeavour not helped by Mankiw’s own statements that his theory could easily have been coined ‘new monetarism’ (Hay 2007), given the extent to which it follows monetarist precepts.

There is a very good reason for Mankiw’s assertion regarding the monetarist character of the approach. Moving away from the personal association these two individuals shared, it is important to highlight those aspects of new Keynesianism/new monetarism. The devil really is in the detail.

Labourious economics

Firstly it is worth acknowledging those aspects of new Keynesianism that chime a certain (traditional) Keynesian chord. The existence of ‘menu costs’ provide the microeconomic basis for an new Keynesian argument about the inherent ‘stickiness’ of price and wage adjustments; a key break from neo-classical and monetarist assertions that argue such adjustments occur quickly, clearing markets and returning us all to the promised land of equilibrium. The problem is that the new Keynesian policy prescriptions that result form this observation point to removing such stickiness. In labour markets this means trade unions, collective agreements and employment contracts must be softened or removed, thus pointing, effectively, straight back to the flexible labour market agenda of Thatcher, Reagan and ­— of course — New Labour and Gordon Brown (Any trade union who seek to endorse Balls in the future, would be wise to bear this in mind. Hello to the CWU!).

Continuing on this labour market front, there is a firm commitment to the NAIRU (non-accelerating inflation rate of unemployment) thesis. This provides economic ‘laws’ providing a clear a trade off between inflation and unemployment in the short run (but not the long run). Rigid commitment to this pushes policy-makers to caring more about inflation control than unemployment. Different circumstances might demand different responses, but in the abstract this is not progressive political economy. This is in keeping with a new Keynesianism that is far more skewed toward supply side policy options as well as a clear lean to monetary policy rather than fiscal policy means of affecting the demand. Again, following the sort of imbalanced economic policy programme that has been the target of much leftist critique either side of the great crash in 2008. Moreover, if an independent central bank cares more inflation but governments do not, disjointed economic policy programme is inevitably the result.

Quantitative displeasing: Bank of England independence

Of the two more renowned ‘achievements’ of our Ballsian economy is the decision to give the Bank Of England independence (a key aspect of new Keynesian thought) and ‘Endogenous Growth’ theory. The latter is not formally a branch of new Keynesianism but is considered compatible with it and its key exponent, economist David Romer, is a long time friend and associate of Greg Mankiw. Central Bank independence is based on the rationale of the different time horizons governments have compared to central banks. The latter are thought to be better prepared to model the long term in monetary policy terms than governments who are inherently short term in their outlook. This ‘time inconsistency’ argument is problematic for a number of reasons. The principal problem is perhaps the fact that an overly technocratic and orthodox central banker will impose a monetary policy regime that will restrict a more expansive fiscal policy regime seen with more activist economic policy programmes. Plus, it assumes that democratically elected governments are inherently less trustworthy than technocrato central bankers and economists who never make mistakes. Ever.

Endogenous Growth theory has got Balls plenty of flack over the years. This has been perfectly fair, although it is worth noting that it was more the Balls-Brown interpretation of it that was so problematic. The concept of growth occurring ‘endogenously’ (internally generated) within firms, industries or countries, as supposed to squarely through external market trade, is not controversial. But Balls and Brown took this to such an extreme where they implicitly denied the existence of the business cycle (remember “no more boom and bust”?). The folly of this became painfully clear in 2008.

Ed Balls is the last great pillar of economic orthodoxy in the Labour party. Others, like Rachel Reeves might carry the torch once Balls has departed the scene. But it is important that we know about these economic policy programmes and models so they can be challenged. President Obama put Janet Yellen in the Chair at the Fed – an economist of the behaviouralist stripe that offers a real Keynesian jolt to the Fed’s orthodoxy. If Labour persist with an independent Bank of England model, a similar Behaviouralist candidate in Belgian Paul De Grauwe (currently at the LSE) would be a ideal candidate, but clearly not a likely appointment with Balls around. ‘Post-Keynesians’ too provide an improvement and a critique to orthodox follies and have many active participants in public debate, Malcolm Sawyer, Englebert Stockhammer and Philip Arestis to name just three.

It is important, however boring at times, that the left engage with the often inaccessible parts of economic doctrine. Balls has pulled the wool over our eyes for too long because this hasn’t happened – a microcosm of broader society’s deference to economists and their trade. If progressive economic policy is the goal, Ballsian economics needs to be consigned to history.

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