Download Ed Balls is the Peter Risdale of Economics - Econ

Ed Balls is the Peter Ridsdale of economics
You would have to be mad to run a football club the way Leeds United were run in the late
1990’s and early 2000’s.
Between 1995 and 2000 they spent £48 million more on players than they brought in. For a
short time this brought success. The club secured Premiership finishes of 4th, 3rd and 4th
between 1998 and 2001 earning the money spinning bounty of Champions League football.
By New Years Day 2002 Leeds United were top of the League.
Five days later came the exogenous event. Leeds were knocked out of the Cup, their form
slumped, and at the end of the season they were pipped to the fourth Champions League
spot. Without the European money Leeds couldn’t pay the interest on their loans and began
offloading players for fractions of what they had paid. By 2004 they were relegated owing
£100 million. In 2007 they were relegated again to the backwaters of the third division
where they languished until last year.
Leeds had, according to chairman Peter Ridsdale, “lived the dream”. Ridsdale’s successor
sounding like George Osborne, said he had “inherited the nightmare”
You would have to be even madder to run an economy like that. Nevertheless, that is exactly
what the last Labour government did, a government in which Ed Balls, grudgingly appointed
as Shadow Chancellor, played such a prominent part.
In 1997 Labour inherited an economy which had been growing for five years and would
continue to grow for another eleven. Money flowed into the Treasury’s coffers, income tax
receipts rose from £70 billion per year in 1997 to £130 billion in 2005.
But Brown, with Balls as his chief economic advisor, managed to spend even more than this.
Total Managed Expenditure surged from £407.8 billion (37% of GDP) in 1999-2000 to £550
billion (42% of GDP) in 2006-2007. With government spending a growing share of a growing
economy Brown and Balls ran up debt in the good years. But they didn’t need to worry, the
pair loudly and regularly claimed to have ended “boom and bust”.
In 2007 came the exogenous event. Instead of the boot of Scott Young it was sub prime
mortgages in America. The effect was the same. They huffed and with no need of further
puffing the whole house of cards came crashing down. For the British economy the third
division beckoned.
Everyone can make mistakes. The ‘This Time is Different’ syndrome identified by economists
Carmen Reinhart and Kenneth Rogoff has led to some of the biggest howlers in financial
history. It can, to an extent, explain why it might be possible for a football club chairman to
convince himself that his team will never finish lower than fourth again or for a Treasury
advisor like Ed Balls to think that there really never will be another downturn.
But what is most staggering is that Ed Balls still appears to use ‘The General Theory of Leeds
United’ as his economic textbook. This is the same textbook that saw Britain head into a
recession on the back of six years of borrowing but Balls doesn’t see anything wrong with
this. When he was running for the Labour leadership Balls said “there was no significant
structural deficit in the public finances until the collapse of tax revenues from the City of
London in 2008”. This echoed what Ridsdale said in the wake of Leeds’ meltdown, “We
gambled, but it did not seem like gambling when we finished in the top five five years
running. We thought we would be self-financing. The safety net, selling players, fell away
because the transfer market collapsed”
Both reckless gamblers, Balls and Ridsdale, saw nothing wrong with the strategy, it was the
exogenous event that was to blame, the pesky Black Swan that pooped on their windscreen.
In both cases this amounts to saying that everything was fine as long as everything was fine.
Of course, it doesn’t help much when everything is not fine, but that’s not something you
have to worry about when there will be no return to boom and bust.
When he ran as Labour leader and now Balls’ answer to the debt crisis he helped create is to
keep borrowing. Indeed, the economic philosophy the Labour party now espouse can be
summed up as when the economy is growing; borrow, when it slips into recession; borrow,
and when it’s recovering; borrow.
This is why George Osborne should not be too worried as he sits in the other dugout. His
opponent is not a follower of the economic doctrines of Adam Smith or even John Maynard
Keynes but of Peter Ridsdale. The public will not be impressed with a Shadow Chancellor
who would have them playing Yeovil.