John Rentoul: Clever talk costs livelihoods

Riots in Britain, earthquakes in Japan, panic in the eurozone... and capitalism is a survivor every time

You go away for a few days and come back to find that the Socialist Workers Party was right all along. Global capitalism is in crisis and, if the revolution is not exactly round the corner, there has been a spot of appropriation of surplus value going on in Tottenham.

That sensation of vertigo, felt in 2008 when Lehman Bros was folded into cardboard boxes and carried out of its Canary Wharf office piece by piece, is back. America's creditworthiness has been downgraded, the euro is in trouble and stock markets have dropped all over the world. Forecasts are being downgraded. When British politics resumes, things will seem different. The argument about how quickly to cut the deficit that dominated the election, the forming of the coalition and the Labour leadership election appears to have shifted. In the autumn, George Osborne, the Chancellor, will have to revise his plan to eliminate the structural deficit by 2015. And yet it seems unlikely that this will offer any chance for Labour to win support for an alternative.

We have already seen a preview of this debate. When Parliament was recalled on 11 August to discuss the riots, it also heard a statement from Osborne about the state of the world economy and a reply from Ed Balls. Osborne celebrated the confidence of the markets in the UK government, pointing out that its debt is now regarded as safer than Germany's. Mind you, that says more about the problems of the eurozone, for which Germany is going to have to pay, than it does about the credibility of Osborne's plan to cut the deficit.

But Balls was subdued in response, which may not be surprising because lower growth means that the deficit will be cut at a slower pace, which is precisely what he had been advocating. Was he now to advocate cutting it even more slowly still? He hedged his bets: "We need a tough, medium-term plan to get our deficit down."

It is possible that British politics will carry on as before, but recalibrated, with the Labour Party arguing for smaller and slower cuts in public spending than whatever new figures Osborne sets out. It may take longer to balance the books, but that would not really change the underlying argument. That argument will continue to balance Keynesian stimulus against fiscal responsibility, that is, maintaining demand against maintaining the confidence of the markets in the ability of government to repay its debts.

Our ComRes opinion poll today suggests that this debate is running in the Government's favour. When asked a tough question about whether they "trust" David Cameron and George Osborne "to make the right decisions about the economy", only 31 per cent agree, against 48 per cent who disagree (the other 21 per cent do not know). But compare that 31 per cent with the 18 per cent who "trust" Ed Miliband and Ed Balls to make the right decisions. That 13-point lead for Cameron and Osborne is, it must be suspected, more significant than Labour's notional two-point lead when people are asked the theoretical "how would you vote?" question. Even if it takes longer to fix the deficit than Osborne originally planned, it is hard to see how that balance of trust will change much. The goalposts may move, but Balls will still be shooting wide to the left.

However, the bad economic news over the summer raises the possibility of something more than mere recalibration. For the serious pessimists, there are further disasters to fear, including a collapse in property prices in China, triggering a recession there, and a long period of Japanese-style stagnation in all the main economies. Japan is an extraordinary example, not exactly of the end of capitalism, but of the limits of conventional economics. It is still a rich country, but it has hardly got any richer for 20 years.

It was odd that Balls raised the spectre of Japan in the Commons. He pointed out that "the Japanese Ministry of Finance briefly took some comfort from low and falling bond yields in the early 1990s", which may have been an argument against Osborne, but it is also an argument against himself. Throughout the 1990s, the Japanese government pursued the Keynesian policies Balls now wants for Britain. It tried to encourage people to spend more and save less, spending vast sums of money on construction projects. The main result was that government debt rose from 65 per cent of national income to its present level of 225 per cent – the highest in the developed world.

If the world economy really is turning Japanese, then Osborne's policy would be unpleasant enough, but Balls's would be one way of reliably making matters worse. (The other way, of course, is the mirror-image policy advocated by some on the Conservative right, of tax cuts, which would have a similar effect of trying to stimulate demand and of making the deficit worse.)

Fortunately for us and for the Shadow Chancellor, there are reasons for thinking that the pessimists are overdoing it. There is a tendency, in commentary as much as in markets, to overshoot. Hence there has been some rather alarmist talk about finance capitalism being broken and Emily Maitlis even asked on Newsnight last week if globalisation was to blame.

Fortunately, Gavyn Davies, the former chairman of the BBC who is now back doing what he does best, namely pontificating about the economy, points out that a lot of the gloom about the world economy comes from two shocks from which it should recover. There was the earthquake in Japan, which has had a surprisingly large effect worldwide, and there was the rise in oil prices, which is now subsiding.

As the Socialist Workers Party ought to know, Karl Marx did say that capitalism endlessly reinvents itself. Perhaps it will survive after all. And perhaps the Coalition will survive too, if anything strengthened.

independent.co.uk/jrentoul