Jonathan Todd

I wrote for Labour Uncut on Monday that we should beware of George Osborne’s traps on the economy. I’m proud that the New Statesman thought this one of the best five blogs of the day.

Ostensibly, Manchester hasn’t greatly changed since Labour conference was last here. The buildings are all in the same place. The distinctive cool and charm remains. The corned beef hash at Sam’s Chop House still does the job.

Yet the British economy suffered a recession which shrank it by 6 percent in the intervening period. This is officially more than half way to a depression and a very big deal. Labour at the general election lost the trust of the people to steer the recovery from this. We won’t return to government unless we again become recognised as the party of economic competence.

The leadership election hasn’t flushed out a fully formed economic offer. Perhaps it was unrealistic to imagine that it could. However, some consensuses emerged. We want tax to play a bigger role in deficit reduction than does the government. But this risks the perception that we are a party of high tax, which is electorally arid terrain. And, while Danny Alexander may have suggested that this won’t happen, it would create a marked contrast between ourselves and the government if they do offer tax cuts in the second half of this parliament, upon which the Tories seem likely to insist.

Another consensus to develop during the leadership contest is that we want deficit reduction to begin later, proceed less aggressively and be more sensitive to GDP growth than does the government. But this risks the view that the party which built up the deficit in government lacks a serious plan for correcting it. That we are, in other words, reckless economic vandals. This is slightly hyperbolic, but isn’t so far removed from how many voters, whose support we need to form a government, see us. Consider, as an illustration of this, that 47 percent of voters in the south of England, according to new research by You Gov and Policy Network, thought that the last government’s spending had been “largely wasted”.

The attractions of the economic consensuses which were produced by the leadership election are clear. Nonetheless, to be blind to the risks which attach to these consensuses is to ignore the traps which George Osborne has laid for us. History suggests that we’ll struggle to get a full hearing for our (yet to be worked out) economic offering. We don’t want to gain an audience only to lose it immediately by blundering into Osborne’s traps.

This observation from Norman Tebbit in 2005 shows why we’ll have to fight to have our economic offer heard:  “For some 30 years prior to Black Wednesday, Gallup’s monthly tracking polls had asked respondents which party they saw as the more competent to manage the economy. Only once in all those years was the answer Labour. In the 12 years since Black Wednesday, only once has the answer been the Conservatives.”

What should this teach us? First, leadership on economic competence swept Labour into office and our loss of this lead swept us out of it. It is the economy, stupid. Second, once a party gains a lead on economic competence it doesn’t relinquish it lightly. The last time the Tories had such a lead over us it took us 30 years to overcome it. And, third, it took a catastrophe of Black Wednesday proportions for us to do so. But what made the political consequences of Black Wednesday different from, say, Black Monday, the stock market crash of 1987? Perhaps that we had Gordon Brown as shadow chancellor in 1992 and we didn’t in 1987.

As soon as he was appointed to this position, in the face of a media and political climate just as inclement as that which will greet our next shadow chancellor, Brown was utterly relentless and forensic in crafting an economic platform that would appeal to the whole country and overcome any southern discomfort. He courted prudence long before Sarah and the political impact of winning prudence’s hand was just as happy as his marriage to Sarah.

Black Wednesday, of course, helped us gain a lead on economic competence. But this lead may well not have materialised – even after the debacle of the exit from what Tebbit calls the Early Recession Mechanism – had we not had someone like Brown as shadow chancellor. Osborne’s economic stewardship undoubtedly threatens disaster. But warning of this won’t be enough for us to regain leadership on economic competence. After all, that’s what we tried to do at the general election.

Nor should we assume that the actuality of calamities induced by Osborne’s cuts will necessarily result in voters placing their economic trust in us. We will only reap a political benefit from such disasters if we can offer a credible and robust alternative approach.

Fully formulating this approach is the key task facing Ed Miliband and his shadow chancellor. Yvette Cooper, Liam Byrne and Pat McFadden are expected to address this afternoon’s plenary session on prosperity and work. While Ed Balls and David Miliband may be the front runners, this is a chance for them to make a pitch for the shadow chancellorship. Whoever comes to hold this post will be under tremendous pressure and will have only 13 days to prepare a response to the comprehensive spending review.

It would be best if they do so while making a concerted effort to avoid the traps that Osborne has carefully, but rather obviously, set. Once we accept that we won’t recover a lead on economic competence if we are seen as a party of high taxation, profligate spending and deficit denial, the way ahead on economic policy, though difficult, should be clearer. We should be party of tax justice, not high tax; effective public spending, not spending for its own sake; and a party of pragmatic and fair deficit reduction, not blanket opposition to all cuts.

The evocative sound of a blind busker whistling Jerusalem resonated around the vast tube station as I emerged at Canary Wharf. This was apt as I was on my way to see Ed Balls speak at tonight’s Open Left event. Praise from Irwin Stelzer in this week’s New Statesman may have further fortified Balls to not let his sword sleep in his hand:

“Remember, Brown and Balls got it right when the financial crisis hit; this puts Balls in the best position of all the candidates to point out that the Tories got it wrong. And it is economics that government will be all about for the foreseeable future, for the solution to the deficit problem will determine the scope of the welfare state.”

Certainly, this economic credibility makes Balls an asset to our party and tomorrow morning he will turn his economic fire on David Cameron and George Osborne. While his speech tomorrow will rightly stress the importance of having a strategy for growth, this can’t be at the expense of Labour credibility on the deficit. Part of this credibility is itself about having a growth strategy, as the deficit will be far more manageable in a growing economy. It is also, however, about tough choices on taxes and spending, which, as Pat McFadden has sensibly argued, crafts a Labour response to the deficit that is about neither Thatcherism nor denial.

At the Open Left event, Balls lamented the failure of Gordon Brown to more straight-forwardly make the case for the socially just Britain that they both believe in. “In a 24-7 media age”, Balls said, “you can only win by being straight, open and authentic”. This is as true about the tough choices that we now face on economic policy as it was about Brown’s political philosophy and motivations.

Oddly enough, this reminded me of some advice that Bruno offered to Brown at the London premiere of Sasha Baron Cohen film. “Admit who you really are”.

HSBC commissioned the Futures Company to report on the key considerations for European business of Asia’s rise. The final product,  Looking East: The Changing Face of World Business, tells a daunting story. Globalisation has entered a new stage and the sooner its lessons are absorbed by European businesses, politicians and policy-makers the better.

Globalisation brings opportunities and threats. While this observation has become cliché, it remains true. But the nature of these opportunities and threats is rapidly changing. Failing to keep pace with these changes threatens the health not just of European business but also European society. Mrs Duffy confronted Gordon Brown with some of the insecurities generated by globalisation. These insecurities may become more visceral if the next stage of globalisation is not properly responded to.

Asia’s role in this next stage is, to use a vogue word, unavoidable. Indeed, Asia’s continued rise is far more so than George Osborne’s budget; much of which was ideological choice, not unavoidable necessity. As we fret about whether these choices will reduce us to a double-dip recession, China grew at a rate of 11.9 per cent in the first three months of 2010 and India is expected to grow at 8 per cent this year and next. European growth rates may crawl from the wreckage of the credit crunch, but China and India, along with much of the rest of Asia, have rapidly returned to a gallop.

A key plank of the last government’s response to the credit crunch – the promotion of new industries and new jobs -  was a variant on a well-trodden European reaction to globalisation: stressing high skills, R&D and the fruits to be reaped by British industry on the innovation frontier. But what if Asia is reaching this frontier before Europe? While low value production may have shifted from places like Mrs Duffy’s Rochdale to Asia, Europeans have tended to seek reassurance in the view that cutting edge skills and technologies would save their bacon (even if ever less of it is consumed in places like Rochdale).

This view now seems, at best, a simplification. “Globalisation and the integration of the world economy isn’t turning out the way many people expected”, claims Joe Ballantyne of the Futures Company. Take some of the supposedly new industries proclaimed during Peter Mandelson’s tenure at the Department of Business: electric cars, nanotechnology, wind technology. No doubt these industries will continue to be eulogised by the coalition. But the HSBC report flags up examples of new technologies in each of these fields being pioneered in Asia.

These developments expose as outdated a view of globalisation that sees the West as the innovators and Asia as the producers. The outsourcing of production jobs caused the CBI to declare six years ago that by 2014 there would be no jobs for unskilled workers in this country. Asia’s growing innovative capacity places the skilled workers of Europe under the kinds of competitive pressures that the unskilled have known for a generation or more. 75,000 people graduate from Chinese universities each year with higher degrees in engineering or computer sciences; 60,000 in India. Given the ascent of a highly-skilled, entrepreneurial and innovative Asian middle-class, the extension of the CBI’s logic may be that in ten years time no jobs for unskilled or skilled people will exist in this country. But this zero-sum thinking wasn’t right six years ago and certainly isn’t right now.

Instead of fearing Asia, British firms should seize its opportunities. These exist both in terms of demand and supply. Sluggish growth in Europe and America means that if the low value of the pound is to fire an export-led recovery it will be via satiation of Asian demand. The HSBC report notes that half of Unilever’s sales come from developing markets and the company’s Indian branch – Hindustan Unilever – is one of India’s biggest consumer-goods companies and its biggest advertiser. Mumbai wants its champagne chilled. And rightly so.

But what else does it want? British firms, whether established global players like Unilever or much smaller concerns, should be asking this question. Markets have always been conversations. Our firms must now listen to and engage with new consumers. “Successful businesses will need”, according to Ballantyne, “to understand how the dynamics of cultural change play out across different markets”.

As well as servicing Asian markets, British firms should consider what impact Asia’s rise will have on their supply chains. It will be no surprise if demand for raw materials continues to rise. It may be more of a surprise to observe, as the HSBC report does, that Microsoft’s biggest R&D facility outside America is in Beijing. This facility continues an infusion of Asian and American knowledge heralded by an influx of Asian science and technology graduates to Silicon Valley. British firms that fail to structure themselves in ways that leave them open to the best new Asian thinking risk falling behind. “Innovation will need to become more global in focus”, says Ballantyne. This means seeking new kinds of partnership with Asian businesses and universities, as well as, pace Theresa May’s immigration policy, always being able to recruit the best Asian talent.

The HSBC report is not the only sign recently that globalisation is changing shape. Strikes have swept China. The low wages and poor conditions that gave Chinese production facilities an edge over facilities in places like Rochdale seem increasingly unacceptable to Chinese workers. This may limit future outsourcing to China. Equally, the HSBC report leaves a sense of China, like the rest of Asia, increasingly being less a repository for outsourcing and more a generator of new ideas, techniques and products.

This doesn’t mean that British business can no longer generate such things. But to do so they shall increasingly need to be abreast of Asian developments. The role of government is to support and incentivise firms to do so. For example, the competitiveness guru Michael Porter has recently argued that a carbon tax would drive innovation in the green economy. This drive is likely to build upon ideas pioneered in Asia. Smart government – not big government or small government – should unlock this potential. If David Cameron doesn’t deliver this, he’ll discover his own Mrs Duffy soon enough.

“The best books … are those that tell you what you know already”, wrote George Orwell in 1984. While, pace the likes of Henry Porter, our country isn’t Orwellian, there is a lot of truth in this line. And so it was when I read Martin Wolf on Iceland last week. He powerfully and intelligently argues for that which I have always instinctively felt about events there.

The British and Dutch governments are seeking agreement with the Icelandic government for the repayment of debts, which now amount to 50% of Icelandic GDP, owed to British and Dutch savers in now collapsed Icelandic banks. If we attempt to see things from the Icelandic perspective, this observation from Wolf is particularly striking: “In the UK context, this would be equivalent to a demand for £700bn. It is not hard to imagine how far Mr Brown would get with a suggestion that the UK should accept such a debt to refund depositors in foreign branches of bankrupt UK banks.”

We most probably do not have to fear the rise of Nazism in Iceland, (though, Icelanders do have unnecessary misery and Brits needlessly lost goodwill to fear), but Wolf’s analysis seems as persuasive and prescient as J. M. Keynes’ The Economic Consequences of the Peace proved to be on the Versailles Conference.

“Do Iceland’s taxpayers have a moral obligation to pay this loan? My view is: no. The delusion that finance was the path to riches was propounded by countries that should have known far better. I cannot blame Icelanders for succumbing. I certainly do not want generations of Icelanders to bear the cost.”

Iceland has many things going for it. However, not so many that more measured approaches from the British and Dutch governments could not considerably improve the prospects of Icelanders for many years to come.

“The final and, in truth, most important question is whether these demands are reasonable. After all, in every civilised country it has long been accepted that there is a limit to the pursuit of any debts. That is why we have introduced limited liability and abolished debtors’ prisons. Asking a people to transfer as much as 50 per cent of GDP, plus interest, via a sustained current account surplus is extraordinarily onerous.”

Not only is it extraordinarily onerous but it is only justified if we accept that several generations or more of Icelanders should pay the full price for the follies of a small Icelandic elite. What would the likes of the Labour Party argue in similar circumstances in the UK? Surely, we’d argue in favour of the many and not the few? So, why should we think any differently about an event in Iceland?

Let’s take a deep breath, step back and extend a modicum of decency to a fundamentally decent people, who, incidentally, were amongst the first to get aid to Haiti this week. If Icelanders can do the right thing by Haiti, Brits can do the right thing by Iceland.

Yesterday, Nick Robinson divided the PLP into plotters, quitters and fighters. Today, Cicero Consulting, Jonathan Freedland and Rod Liddle have done great jobs of putting further meat on the kind of arguments that sustain the fighters;  We’ve had a Queen’s Speech that seeks to frame the General Election in “caring Labour versus cruel Tory” terms; and reports suggest that Compass are considering joining the ranks of the plotters. So, much is going on, it would seem. But, fundamentally, nothing has changed since July, which was the last time that I said: Labour has three options: 1.) Back Brown, 2.) Replace him, 3.) Allow him to continue without backing him. The quitters only exist because they have concluded that the second of these worlds can’t be achieved by the plotters. The quitters are right to draw this conclusion. However, the continued existence of the quitters and the plotters threatens to leave Labour stranded in the third world, so to speak, which is the worst of all worlds for Labour. There remains, therefore, no logical defence for a Labour person not being a fighter and embracing the first of the three worlds. Labour should be fighters, not quitters, or even plotters, as someone didn’t quite say. The arguments of Cicero, Freedland and Liddle provide much reason to believe that the world of the fighter is far from an awful or hopeless world.