It's not beyond our Ken to make Ed Miliband electable

http://www.theguardian.com/business/2014/jul/27/ken-clarke-economic-recovery-ed-miliband-electable

Version 0 of 1.

Edward Heath, prime minister from 1970 to 1974, was widely considered unelectable until elected. Margaret Thatcher, PM from 1979 to 1990, was way behind her Labour opponent James Callaghan in the popularity polls of 1979, but was elected. John Major, PM from 1990 to 1997, took over from Thatcher in 1990, and was re-elected in 1992, although the bookmakers at Ascot were offering 6-1 against the Tories the day before the election.

The latest British candidate to be considered unelectable is Ed Miliband. We shall see. His luck may turn. In David Cameron he has an opponent who is manifestly losing his nerve. A prime minister who can sack his attorney general, Dominic Grieve, because the latter believes in the European court of human rights (which has nothing to do with Brussels), and who cannot accept the wise advice of such an elder statesman as Kenneth Clarke, is giving too many sops to the Eurosceptic Cerberus that is the Tory right wing.

When chancellor (1993-97), Clarke took pride in the way that the budget deficit (for current spending) came down each year, and he did not yield to colleagues who urged an irresponsible pre-election budget. Those were years of sustained expansion after the recession of 1990-92. As a cabinet member until recently, Clarke must have heard the remark George Osborne is reported to have made to colleagues about his wish for a pre-election boom in house prices. It was certainly noteworthy that in his recent interview in this newspaper, Clarke complained of the "ludicrous cycle of ridiculous housing booms followed by housing crashes".

The former chancellor was pretty forthright about the present economic recovery. "It's not firmly enough rooted on a proper balance between manufacturing and a wide range of services and financial services," he said, adding that the banking crisis was not resolved and "we don't want to be a low-wage, low-productivity, long-hours economy".

This is hardly a recovery to be proud of. And because the coalition was so savage in its programme of fiscal austerity – knocking on the head an economy that was, in fact, recovering until it took over – output is only just back to its pre-crisis peak, and real incomes and living standards are way below.

Much is made of the way the chancellor has continually missed his fiscal targets, but they are so severe that they aggravated the depression brought on by the great financial crisis. In its annual report, the Basel-based Bank for International Settlements (BIS) states: "Output is about 12.5% below the path implied by a continuation of the pre-crisis trend in the United States and 18.5% in the United Kingdom."

This reflects the fact that fiscal policy has been more restrictive here than in the US, with George Osborne actually boasting to the rightwing American Enterprise Institute in April that "the pace of our fiscal consolidation over the last four years has been steady, with an average annual reduction in the cyclically adjusted primary balance of around 1.6% of GDP according to the IMF – the largest and most sustained of any major economy."

The chief economist at the BIS in the runup to the crisis was Bill White, who issued many a perceptive warning about the unsustainability of asset-price inflation at the time. White has retired from that role, but the BIS continues to produce an eminently readable report, if to my mind it is too dismissive of the risks of deflation, most notably in the eurozone.

That the Bank of England is talking more and more about the possibility of increases in interest rates must be music to the ears of the BIS, generally known as "the central bankers' bank". While wanting tighter monetary (and fiscal!) policies generally, the BIS does at least concede that the G20 economic stimulus of 2009 "prevented the financial system and the economy from plunging into a tailspin" adding: "this is what crisis management is all about".

The question is whether, at this stage of what one hopes is emergence from the crisis, policymakers are managing things properly. It seems to me that in Britain economic policy is all over the place. Politically, the general assumption is that another year of rapid growth will work to the advantage of the Conservative party; but I wonder.

At the moment, although living standards and real incomes remain badly squeezed for the majority of the population, the opinion polls are so close that, if this were a traditional electoral cycle, a British government might be tempted to "cut and run" with an autumn election.

This possibility has been ruled out by a coalition deal. The case for expecting an extended period of growth depends partly on how much spare capacity, and potential output, there is in the economy before it might run into trouble on the inflation front.

As the BIS says: "Potential output is a key variable for policymakers. It contains information about the sustainability of output and the degree of economic slack. Unfortunately potential output is not observable, not even ex post." (My italics.)

At the Bank of England they seem to operate in an atmosphere of highly paid agnosticism. They also worry about the impact on recovery, and personal finances, of tighter monetary policy.

Pollsters say that the big worry for Labour is its reputation for economic competence. I have many times pointed out that the degree of mess inherited by the coalition was much exaggerated. The way things are shaping up, we may find that over the next 10 months, the coalition's reputation for economic competence takes a serious knock. Meanwhile, Ed Miliband has time to try to establish himself as a more credible potential leader than seems to be the case at the moment.