Keynesians may feel vindicated but they urgently need to find some humility

Those who have spent the last two years arguing against austerity are exhibiting a very palpable sense of vindication. Painful economic data accompanied by the shifting political mood across Europe has led to a pandemic of itoldyousoitis amongst Keynesians and their supporters. “If only they’d listened to Ed B” seems to be the underlying premise of every Labour press release.  Even the hawkish IMF is now drafted in as endorsement of the new turn.

No doubt if I was still working for the TUC I’d be joining the party but looking in now from outside, this display seems absurdly premature and potentially dangerous.

Two years ago it was the cheerleaders for austerity who were in clover arguing with forceful confidence that cuts would create the certainty and space the private sector needed to generate growth and jobs.  This vision of ‘expansionary fiscal consolidation’ was an over-selling of austerity that failed to take account of the current headwinds and volatility that make the effect of any course of economic action highly unpredictable.

So it is ironic that those urging a fiscal loosening are making precisely the same mistake. Labour in the UK, Hollande in France and Syriza in Greece are all riding an electoral high off the back of the claim that they can create jobs and growth through stimulus and other interventions. In any normal recession they may be right but this is far from a normal recession. You can take your pick of the events which might turn today’s bold stimulus and growth package into tomorrow’s damp squib.

 The biggest threat surely has to be another sudden spike in prices possibly driven by unexpectedly strong growth in China or a military conflict in the Middle East.  And there is enough political uncertainty closer to home to spring a surprise.  It was the result of the Greek elections, of course, which led to the latest crisis of economic confidence.  Similar occurrences in Italy or Spain would be felt even more deeply.

Or maybe it is just the sheer depth of our economic funk which would swamp any new package of spending.  Indeed, there is little agreement amongst the looseners about how much needs to be spent to kick-start growth.  Nor is there agreement about how to actually do the spending. Sooner or later, however, the arguing has to stop and politicians have to plump for one or other set of measures. But given there is so little certainty even amongst the proponents of extra spending, the risk is high that politicians will make the wrong choice and stimulus has little impact or simply takes too long.

The biggest threat to the looseners, however, is the obvious fact that austerity is going to continue even under their watch.  The rhetoric of Hollande and Miliband may sound like a bright new dawn awaits but neither plans to significantly alter the path of deficit reduction.  Which leaves one wondering whether things will actually feel that different once the new mood turns into real policy.

Many may feel this is little more than the political equivalent of a ‘dog bites man’ story. Politicians over-promise to win votes, fail to deliver, then lose votes at which point the electoral pendulum swings back.  Once again, under normal circumstances this conclusion may be fine but these are not normal times. The intensity of the crisis and the resulting suffering is clearly making European voters more receptive to parties once dismissed as fringe.  Should stimulus underwhelm so soon after the failure of hard-line austerity, the risk must be a more general collapse in credibility for the centre-ground.  An outcome which could be followed by the rapid rise of highly unpredictable and divisive political forces.

As a politician on the up, the temptation is great to emphasise your positive claims and downplay nuance and doubt.  There is little premium on humility in the political game. But this time around it is vital that centre-ground politicians keep in mind that the political consequences of their failure may well affect us just as deeply as them.