Why Ed Balls is a flawed economist

 
Allister Heath
LIKE the cat who got hold of the cream, Ed Balls, the new shadow chancellor, could hardly conceal his delight yesterday. But in addition to being the culmination of a colourful tale of personal intrigue, Alan Johnson’s shock resignation will have an electric effect on Westminster. Out goes an amiable, reasonable but incompetent and innumerate shadow chancellor; in comes a combative, ultra-aggressive political heavyweight, a master at twisting statistics and devising economic policies to wage political war. The last residues of New Labour – that centrist, relatively pro-business, pro-wealth creation, version of social democracy – have been swept away. The Brownites now control a Labour party well ahead in the polls; the coalition is about to face a fresh onslaught.

Ed Balls was the architect of Gordon Brown’s economic policies, his eminence grise, wielding massive power at the Treasury and imposing his brand of political economy onto virtually all domestic policy. Balls was as much to blame as his boss for the intellectual errors that crippled Britain’s economy.

In the mid-1990s, Balls, who studied economics at Harvard, invented an entirely new framework to manage the economy and welfare state. He dazzled political journalists with his knowledge and grasp of numbers. He emphasised the need to maintain macroeconomic credibility and to pacify bond markets; it’s a shame he has forgotten these lessons today.

Among Ball’s disastrous errors was his belief – straight out of the 1990s Harvard textbook – that central banks should be turned into agencies exclusively focused on targeting consumer prices, ignoring the money supply, credit and asset prices, and stripped of their traditional job of supervising banks and financial markets. The bubble delivered vast windfalls to the exchequer and house prices boosted consumer spending – but Balls, who thought stability would be maintained and boom and bust abolished thanks to his policies, had completely misunderstood how economies work.

A corollary to this was Ball’s doomed tripartite system of financial regulation. He also created a set of fiscal policy rules that were meant to prevent excessive deficits and state debt – they were paper tigers, with definitions changed whenever the rules were about to be breached. Public spending surged from 1999, as did the regulatory burden. Balls also promoted off-balance sheet public sector accounting of a kind that would have made Lehman Brothers blush, with billions of debt hidden from view.

An army of micro-economists was hired, placed in every government department and tasked with devising elaborate systems of incentives, tax credits, redistribution and ways of micromanaging behaviour. More people were added to the state’s payroll. In some cases, this was by hiking public sector employment; in others, by snaring millions into complex benefits; for many, work no longer paid. The outcome of all of this was to permanently cut Tory support while boosting Labour’s client state. Economics was politics; politics was economics. The way all policies were judged was redefined in Brown’s favour.

Balls learnt all he knows about the relationship between chancellor and Prime Minister from the dysfunctional Blair-Brown duumvirate. That is why Ed Miliband looked so worried last night. Internecine Labour party warfare looms – and British politics is about to become much more fun.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath