It might be politically fraught for Ed Miliband, it might even be dangerous for the Labour party, but Ed Balls’s appointment as shadow chancellor is great for Britain. Alan Johnson may be a more natural politician, but Ed Balls is a better economist and in these tempestuous times we need men in government who understand and can explain how the economy works.
Osborne and the Tories are focused on the government deficit and claim that unless something is done about the budget shortfall, bond markets will soon punish Britain. As his recent article for Prospect made clear, Balls represents the Keynesian school, which claims that calling for cuts during a period of high unemployment is a sign of economic illiteracy. Under Johnson and under Alistair Darling, Labour feared being tarred as “deficit deniers” and so the Labour position on the deficit was essentially “Tory-lite,” agreeing with the need to cut spending, just more gently.
Balls recognises the long-term unsustainability of budget deficits but argues, as would Keynes, that austerity must be delayed until growth is secured. For Keynes and Balls, cutting government spending during an economic downturn further dampens demand, causing the private sector to shed workers and slow investment and consumption. Some Keynesians even claim that because of automatic stabilisers, cutting spending in a recession can actually increase the deficit.
Personally, I believe history supports Balls in this argument. Britain escaped the debt burden of the second world war, not through government spending cuts, but through growth. Back in the 1930s Keynes made mincemeat of the “treasury view” that Osborne still represents.
But maybe I am wrong and Osborne is right to believe that the dynamism of the market, freed from fears of government profligacy, will bring us all prosperity. What is certain, however, is that Britain deserves to hear both sides, argued cogently and passionately. Balls has the knowledge of economics and the confidence in his opinions to explain the somewhat counterintuitive Keynesian position. George Osborne had better start swotting up. His easy ride is over—he and Britain are in for an economics education.