Why Corbynomics can succeed
Previously published here on Socialist Economic Bulletin
The debate surrounding Labour’s leadership contest is being marred by name-calling and red-baiting. Perhaps this is inevitable but it is regrettable. Britain remains in an economic crisis, which has now entered its eighth year. A more productive course would be to discuss how to end it.
A marker of that crisis is that per capita GDP is still below where it was before the crisis began in 2008, as shown in Fig. 1 below. This remains the weakest recovery on record and the year-on-year growth rate has slowed from 3% to 2.6%. This follows a period from the end of 2012 onwards when no new austerity measures were imposed. Renewed austerity on the same scale as in 2010 to 2012 means there is likely to be a similar slowdown.
The Tory strategy is more of the same, which one commentator called a Captain Bligh policy, “the floggings will continue until morale improves”. This policy is supported by virtually all the mainstream press. Unfortunately, it is also supported by 3 of the 4 candidates for Labour’s leadership. They abstained on the Tory Welfare Bill the centrepiece of the government’s latest Budget. Only Jeremy Corbyn stands on a clear anti-austerity platform. His economic policy can be found here
No-one alive today has ever experienced in a longer economic crisis in Britain. The nearest comparison for the length of the current British economic crisis was at the end of the nineteenth century and the Long Depression. As per capita GDP has not recovered it is extremely difficult for median average living standards to rise. On the contrary, the austerity policy serves to work in the opposite direction by transferring incomes and wealth from poor and middle-income layers to the rich and from labour to big business. So, the latest Budget included a further cut in the Corporation Tax rate to 18% while cutting £12 billion in social protection to the most vulnerable in society.
The Tory policy is straightforward. These transfers of income known as austerity will continue until the business sector is making sufficient profits for it to resume investment. The crisis will be paid for by increasing the rate of exploitation. The austerity mark II of the latest Budget is not because there is still a public sector deficit, as this will fall as it does everywhere even if there is moderate nominal GDP growth. Renewed austerity is necessary because business is not yet willing to fund an investment-led recovery.
The level of investment in the British economy was £295 billion in 2014, exactly the same as the pre-crisis level of 2007. But the economy is actually larger 4.2% larger (keeping pace with population growth, but no more than that). Therefore investment is declining as a proportion of GDP. Consumption, not investment is leading very weak growth and this is not sustainable.
Yet the profit level has also recovered and accounted for 37% of GDP in 2014, compared to 36.1% in 2007. So the Tory policy is not working. Profits have increased by 6.8% in real terms since 2007, but investment is unchanged. Fig.2 below shows the official estimate of the profit rate in the non-financial sector versus the proportion of GDP devoted to business investment. These are strikingly indifferent results for 5 years of austerity policies. The profit rate has only barely returned to its pre-crisis level and is well below profitability prior to this century. The same is true for business investment. Both of these are a recipe for continued slow growth.
The profits recovery has been greater than the investment rebound. As a result, the extremely high level of uninvested profits has actually grown. The level of uninvested profits in the British economy was £355 billion in 2014, compared to £261 billion in 2007. This is the main brake on a robust and sustainable recovery. Andy Haldane, chief economist of the Bank of England says that firms are ‘eating themselves’ by refusing to invest and instead paying out ever-greater proportions of profits in shareholder dividends. This has been a recurring theme in SEB, and we might add the enormous increase in managerial pay and bonuses which are also a factor. The remainder is deposited in the banks, where it fuels ongoing speculation in financial assets, stocks, housing and commodities.
Unfortunately, it is this Tory strategy that 3 of the 4 contenders for the Labour leadership have endorsed. They have no principle difference with the centrepiece of Tory strategy, cuts to social protection ‘welfare’, privatisations and cuts to corporation tax. The recovery from crisis will be funded by workers and the poor.
This is an extremist economic policy. In the first phase of the leadership campaign it began with an attack on public spending of the Blair and Brown years, placing the candidates not only to the right of New Labour but to the Tories of the time, who effectively endorsed New Labour spending.
Economically, it also places those candidates to the right of Thatcher, who both spent and taxed more than New Labour as a proportion of GDP. It is perhaps worth recalling that main rates of taxation were significantly less regressive even when Thatcher left office in 1990 than they are under the current government (and that many of them were made more regressive by New Labour).
Table 1 Main Taxation Rates- Thatcher versus current