The Labour leadership campaign came alive when Jeremy Corbyn's candidacy threw down a gauntlet. To be a genuine opposition the Labour Party has to oppose austerity when it means cutting welfare and increasing inequality, while supposedly eliminating the budget deficit as the number one economic policy objective. So is there an anti-austerity policy which the Labour party could adopt which would actually work?
The answer is that there could be. It does not mesh in easily with what is currently being advocated by Jeremy Corbyn, but nor do the 'austerity light' policies being advocated by the other more mainstream Labour leadership contenders have any likelihood of success.
The only way to get rid of austerity and all its hugely damaging consequences for the young, the disabled, the poor, those on low wages, those dependent on social services, the sick and those on meagre pensions, is to get the economy to grow much faster and more sustainably than it is at the moment.
This is the only way to ensure that more resources are available, so that public expenditure does not need to be cut and incomes can rise.
The fundamental problem that the Labour Party has at the moment is that it has no credible way of getting the economy to expand fast enough for these objectives to be achieved.
To win elections Labour has to convince the electorate that it will be able to look after the disadvantaged generously without penalising and losing the support of those who are doing better but who are not prepared to see their reasonable ambitions and standard of living blunted by levels of taxation which they do not think are fair or effective. At the moment none of the policies advocated by either the left or the right of the Labour Party looks like achieveing this.
The hard left approach is to increase public expenditure, but in ways which are very likely to run into unmanageable constraints. The soft left stance is essentially to continue with austerity but to reduce its current impact by spreading it out over a longer period. Unfortunately, neither policy has any realistic chance of getting the economy to grow fast enough to enable Labour to achieve its goals and to retain electoral support.
The hard left advocates getting the economy to grow by organising a big net increase in demand, coming primarily from the public sector, by increasing expenditure and maybe reducing taxation.
There are, however, huge constraints on getting this to work, especially on any major scale. One constraint is the size and nature of our foreign payments deficit, which is already 6% of our GDP and rising sharply. Expanding domestic demand is likely to worsen this and increase imports but not exports. Another is the already very large gap between government income and expenditure. Both these deficits are bound to increase with more net state spending. The UK economy is too unbalanced and too uncompetitive to take this kind of strain, which means that financing and borrowing constraints are likely to make this kind of expansionist policy impossible to implement.
The soft left advocates an approach that is equally problematical. Giving pride of place to austerity policies to get the government deficit down will not get the economy to grow and – worse still – they very probably will not get the deficit down either.
The excess of government expenditure over its income is not driven by too much state spending, and it is a fallacy to believe that it is.
The real reason for the government deficit is that it is largely the mirror image of the foreign payments deficit. This deficit, the sum of what we sell to the world and buy from the world, is negative. To pay for this deficit it has to be matched by a surplus somewhere else in the economy, to make the accounts balance. There has to be lending from abroad to finance the balance of payments deficit. Obviously, what is lent has to be be exactly matched by borrowing. If this is not done by consumers or by the corporate sector, it defaults back to being done by the government. I have set out this argument frequently and in depth.
If we can't get growth by simply increasing government expenditure or by cutting it, however slowly, what is the way out of austerity? How can we get the economy to grow fast and sustainably, so that austerity policies are not necessary?
The solution is for the state to harness domestic manufacturing, encouraging market forces to rebalance the UK economy. To enable us to pay our way in the world, we need to expand our manufacturing base from around 10% to at least 15% of GDP.
To do this, we need to make it possible for a substantial volume of low- and medium-tech – as well as high-tech - industries to become viable again in the UK and for this to happen we need a much lower exchange rate. The increased profitability thus generated in the most productive sectors of the economy – light manufacturing and technology-driven industry – will then drive up investment at the same time as increasing our exports and reducing import penetration.
This is the policy which will get the economy to grow at a fast and sustainable rate, reducing both national and government borrowing to a level which we can easily afford. As I have shown, the numbers hold together, so that it is both possible to reduce borrowing, to increase investment and to raise living standards all at the same time. These are the conditions Labour can seek to achieve and needs to advocate.
The problem will then be to persuade the electorate to trust Labour, if one of its main policy planks is to use a competitive but realistic exchange rate strategy to rebalance the economy and to get it back on track.
Perhaps this is impossible. Devaluation is a dirty word and a very hard sell. But if Labour shies away from articulating rational if difficult policy options, it may be doomed anyway. And it could be that an approch that aims to encourage manufactring by putting the financial sector second will prove popular. Anyway, there appears to be no other policy on the horizon which has any realistic chance of actually getting rid of austerity, and Labour must clearly seek to achieve this or it will continue to drive away Labour voters and alienate Party supporters.
This is then the dilemma. Should Labour continue to advocate either its current hard or soft left economic policies which, for different reasons, have very little prospect of being successful? Or should the Party look to an approach which will have a much better chance of working if put into practice, even if it may be hard to persuade the electorate that it should be adopted?
John Mills is a donor to openDemocracy.