Policy Research in Macroeconomics

It’s time for Labour to escape “Stockholm syndrome”

Child in escape chute, US National Archives, 1924

Child in escape chute, US National Archives, 1924

Mr Osborne’s most striking political achievement, with the connivance of the economics profession and media, is to reframe the debate about the most severe crisis in living memory away from finance and towards the welfare state – identified as causal of the crisis.

In reframing the debate he has succeeded in ‘capturing’ some of his opponents  and convincing them of his framing and narrative.

He has done so by accusing Labour of reckless management of state finances.

Now Labour, egged on as it was under Gordon Brown by orthodox economists in both the Treasury and academia, does share responsibility for ‘light touch regulation’ of the City. But in no way can the Labour government be found guilty of “overspending”.

The opposite is true.

Gordon Brown was a fiscal conservative. It must be remembered that it was he that (unwisely in my view) introduced the Fiscal Responsibility Act 2010.  As soon as assuming office George Osborne repealed the law, having previously called it “vacuous and irrelevant”.  He was right to do so. Had he not repealed it, he would have been forced into deeper austerity in 2012 and 2013.

Then he persuaded both politicians, but also the media to effectively ignore or downplay the foibles of London-based financiers, who all played a big part in the global financial collapse.  Both politicians and media obliged the Chancellor by largely removing from the political narrative and agenda any mention of the conduct and criminality of City bankers, or of the need for tougher management of the City.  Instead deficit mania ruled. 

As they watched this scene unfold, the City’s mandarins could not believe their luck. (They had initially been contrite, but this changed when Mr Osborne took charge of the Treasury – and even more so with the election of a Conservative government in May).

Then, as everyone knows, something extraordinary happened this summer. British politics changed. As the media focus on the speech of the new leader of the Labour Party today, I want to draw attention to some of the recent economic speeches and comments of leading figures inside the Labour Party.

Take for example the speeches of Andy Burnham, a man who has rightly commanded respect for his defence of the National Health Service. Yet he seemed to represent the views of many Labour MPs when he apologised for Labour overspending before the credit crunch of 2007-9:

“Sorry. It was a mistake, we should not have allowed the deficit to get that high.”

And again:

“Small though it was, we were still running a deficit at the peak of a booming economy…in government we should have done more to control spending in the middle of the last decade, so that we were better prepared when the crisis hit….

The question facing Britain in the future is how to clear the deficit and run a surplus…”

It strikes me that many in the Labour Party must be suffering the symptoms of Stockholm Syndrome.  

Stockholm syndrome, or capture-bonding, is a psychological phenomenon in which hostages express empathy and sympathy and have positive feelings toward their captors, sometimes to the point of defending and identifying with the captors. (Wikipedia) 

Mr Burnham’s Conservative opponents have repeatedly accused Labour of overspending and running deficits “while the sun shines”. Mr Burnham and others appear to show “empathy and sympathy” with this view, and even defend the accusations of his “captors”.

But PRIME’s Jeremy Smith has delved into the history since 1979, and made plain that there is no economic justification to empathise with  the Conservative “captors”. For these are the facts:

The post 1997 Labour government on average spent a lower percentage of GDP than the preceding and following Conservative(-led) governments.

During the years from 1998/9 to 2000/01 the Labour government ran overall budget surpluses, even taking investment spending into account. This was actually not a good thing, as it led to  a low and inadequate level of net capital investment in the country’s physical infrastructure.

By contrast, deficits have on average been considerably greater under Conservative governments. These governments presided over more years of economic weakness, leading naturally to high deficits.

Mrs Thatcher takes the prize for high government spending. Under her first government, public sector current expenditure rose from the 38% of GDP in 1979 to 42% in 1981 to 1983  –  and remained over 40% till 1986.

Under John Major’s Conservative government, current expenditure rose from 35% (1990/91) to 39% of GDP in 1993/4/5.

The incoming Labour government in 1997 inherited a debt level of 37% of GDP. As noted above, current expenditure remained at or below this level until the crisis began to hit in 2008/09.  The current budget deficit in 2007/08 (which excludes investment) was only 0.5% of GDP.

The incoming Conservative-led Coalition government inherited in 2010 a current spending level of 42% of GDP. Despite the worst crisis since the Great Depression, this was still just under the Thatcher government’s peak spending level. Under the management of George Osborne, it has remained at over 40% of GDP until 2014/15. And it was only that high because tax receipts from a devastated private sector had collapsed.

Fortunately while some Labour MPs might be suffering from Stockholm Syndrome, their supporters in the country are not. They are fully alive as to who the real ‘captors’ of our economy are, and determined that their capture should be resisted.

This, I believe, goes some way to explaining the election of Jeremy Corbyn as leader.

2 Responses

  1. Labour will always be vulnerable in the popular imagination to accusations of financial profligacy just as the Tories are vulnerable to the charge of screwing the poor for the benefit of the rich. It is the job of the political leadership of each party to ensure that such accusations are effectively rebutted. The political incompetence in this area of Labour leaders, past and would-be, is enough to make one weep. George Osborn has parked his tanks on Labour territory and it is good to see the new leadership organising themselves for the fight. Reframing the economic debate should be a top priority

  2. Two points.
    First, wasn’t the very low capital spending of Labour coincident with the blossoming of PFI? In which case, the whole PFI justification was built on a lie.
    Second, I’ve long argued that the consumerism which feeds capitalism is the trinket that binds us as captives to our capitalist captors; in other words, the whole edifice is built on the Stockholm Syndrome, and is indeed dependent on it working that way.

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