Whatever Osborne says, not all ‘debt’ is the same

Corbynomics: winning with policy clarity by Michael Burke first posted 15th october 2015

Economic policy is central to the survival and eventual victory of the new Labour leadership, even though it is clearly not the only issue.  Contrary to the usual Tory media reports, Jeremy Corbyn and his Shadow Chancellor John McDonnell registered an advance with the debate and vote on Osborne’s risible Fiscal Responsibility Charter.  That advance came because the correct position of voting against was adopted.  As this question will not go away, further advances will require even greater clarity.

The measure of the advance can be summed up in its political aspect with an analysis of the vote.  Just 20 Labour MPs rebelled against Labour’s line by abstaining on the Charter.  It may be recalled that of the 35 nominations, Jeremy Corbyn received from MPs in the leadership contest, only about half of them actually supported him.  During that campaign, the vast majority of MPs followed the line of abstaining on the Tories massive cuts in the Welfare Bill.  Now the overwhelming bulk of the Parliamentary Labour Party has voted against the key Tory legislation of permanently enshrining austerity and ruling out borrowing for investment.  This is despite the fact that, as recently as May, the party’s economic line was ‘fiscal rectitude’, ‘zero-based spending reviews’ and sticking to outlandish Tory spending cuts in the first two years of the Parliament (something the Tories could not do in their own June 2015 Budget).

Politically, the 20 abstainers have isolated themselves within the party (although they will no doubt find regular berths in the BBC studios and lots of column inches in the Murdoch press).  Jeremy Corbyn and John McDonnell have led the PLP to a much better economic position by opposing Tory economic policies.  As the Tories are committed to austerity and this will be central to the economic debate over the next five years, that leadership will need to keep moving forward.

Exposing Osborne’s fallacies

Labour lost the last election because its economic policies were not credible.  There is a concerted effort to distort this factual finding to suggest that Labour was too anti-austerity.  Therefore, the debate on economic policy is central both to the future direction of Labour policy and its election prospects.

Osborne’s great fallacies, like most distortions of the truth, have some connection to popular understanding otherwise it would be impossible to explain their political power.  A central fallacy is to treat all debt as essentially the same, with equally negative consequences.  Instead, as Socialist Economic Bulletin (SEB) has repeatedly shown John McDonnell and Jeremy Corbyn have made the correct distinction between borrowing for consumption and borrowing for investment.

In the homely analogies beloved by this Chancellor and by Margaret Thatcher, ordinary households understand very well the difference between different types of borrowing.  Borrowing to buy a home, or borrowing to pay for night classes, or a new work-related computer all provide an asset or additional income and so are an investment.  But borrowing to pay the electricity or grocery bills is not sustainable.  It may ‘circulate more money in the economy’ but can only be done in extremis and not in the long-term.

Likewise, businesses understand cashflow.  Business makes an appraisal of investment opportunity on the basis of cost-benefit analysis.  If a reasonable expected rate of return exceeds the cost of borrowing then the investment will be made.  But if the business is borrowing to meet day to day expenses it will soon face insolvency and possibly bankruptcy.

Government relies on these economic agents for its income.  But in truth it is not unique as all three agents, government, business and households rely on each other for their income both directly and indirectly.  In that sense, government is no different.  Government borrowing for investment delivers an economic return, either direct or indirect, will expand the economy and, just like business a key criteria will be whether the rate of return on the investment exceeds the borrowing cost.  Contrary to views Keynes did not hold, but which are misleadingly entitled ‘Keynesianism’, borrowing for day to day consumption will not necessarily expand the economy – this depends on whether extra production increases profit, and in a number of situations expansions of demand may not increase profit and may actually reduce it.  Consumption should usually be met by current revenues from taxation.  If there is a shortfall between desired government current spending and revenue, wasteful spending can be cut (e.g. Trident) and/or taxes can be increased.

SEB has repeatedly demonstrated that investment is the decisive input for growth and consumption cannot lead growth, and from this it follows that government borrowing should be used for investment over the business cycle (running deficits/borrowing for consumption as well as investment may of course be valuable in economic downturns)

Alliances

The clear opposition to the Fiscal Responsibility Charter from the ‘Corbyn/McDonnell’ team on the Labour front bench was supported by strong economic arguments from a number of quarters, not all of them long-standing allies.

In the Commons debate, Caroline Lucas said, “The Chancellor is incredibly irresponsible to imply that borrowing is always bad. If we borrow to invest, we increase jobs, stabilise the economy and increase tax revenues. That is good for the economy, not bad for it…… If we are investing in jobs, that gets taxes going back into the Revenue, which is good for the economy.”  And:

“The Chancellor is deliberately misleading the public by continuing to claim that all borrowing is irresponsible. It is not. What is irresponsible is failing to borrow to invest, providing we are able to sustainably meet the cost of borrowing.”

Jonathan Reynolds, describing the Charter as intellectually moronic said, “It essentially commits this House to never borrowing to invest, even when the cost-benefit analysis of that investment is such that the country would benefit greatly.  That is why it has not one serious economist backing it.”

Helen Goodman said:

“One of the most pernicious things about the rule that the Chancellor has chosen is that it treats capital and current spending the same.  He is ignoring the fact that investing in housing, science, broadband, transport and the university system is a way of strengthening economic productivity and increasing growth in the British economy.  Nobody thinks that it is right to max out the credit card to pay the weekly grocery bill—of course not—but families up and down this country take out mortgages to buy their homes.  There is a precise parallel here.”

Regarding what John McDonnell himself said, as much of the press will not report it accurately, here are some of his key points:

“The worst false economy is the failure to invest.  This will be a direct result of Government policy embedded in this charter, with its limits on all public sector borrowing.  This Chancellor’s strategy has given us investment as a share of GDP lower than all the other G7 countries, falling even further behind the G7 average in recent years.  It is incomprehensible for the Chancellor to rule out the Government playing a role in building our future.  For him to constrain himself from doing so in the future, no matter what the business case for a project, has no basis in economic theory or experience.”

“We will not tackle the deficit on the backs of middle and low earners, and especially not on the backs of the poorest in our society.  We will tackle the deficit, but we will do it fairly and to a timescale that does not jeopardise sustainable growth in our economy.  We will balance day-to-day spending and invest for future growth, so that the debt to GDP ratio falls, paying down our debts”.

“That is why we will establish a National Investment Bank to invest in innovation across the entire supply chain, from the infrastructure we need to the applied research and early stage financing of companies.  To tackle the growing skills shortages, we will prioritise education in schools and universities along with a clear strategy for construction, manufacturing, and engineering skills to build and maintain sustainable economic growth.  The proceeds of that growth will reach all sections of our society.”

Outside the Chamber, Chi Onwurah had previously written a strong piece deriding Osbornomics’ refusal to invest “The Osbornomic farmer wouldn’t borrow to buy a tractor unless crop prices were falling.  The Osbornomic househunter would not take out a mortgage unless her salary was being cut.  The Osbornomic CEO would only invest in a new product line when revenues were falling.”

Long-standing Corbyn/McDonnell ally, Diane Abbott made a series of similar points on Twitter:

“Osborne’s Fiscal Responsibility Charter effectively outlaws the equivalent of taking out a mortgage…..Osborne’s Fiscal Responsibility Charter is a con-trick from a charlatan. Outlawing borrowing for investment means long-term stagnation….Every household and firm knows that borrowing for investment boosts incomes. Only Osborne and the austerity fanatics are unaware of this.”

These analogies are extremely useful for popularising the alternative to austerity, which is investment.  The new leadership team has shown it can command an overwhelming majority in PLP with clear opposition to Tory austerity.  Developing a broader understanding of the distinction between borrowing for investment and borrowing for consumption, and why Labour should support the former will be key in pushing back the Tories in the period ahead.

4 thoughts on “Whatever Osborne says, not all ‘debt’ is the same

  1. ” Instead, as Socialist Economic Bulletin (SEB) has repeatedly shown John McDonnell and Jeremy Corbyn have made the correct distinction between borrowing for consumption and borrowing for investment.”

    • Continued:

      This sounds a superficially plausible argument BUT it has its problems. For example if we want to spend money on education we might think that’s a good investment for the future. Parents who do that for their own children think the same way too , of course.

      That can work if we want to spend, say, £10 million on a new school. The government can count the asset value of £10 million on the books to offset the £10 million borrowed. This is a bit of a fudge because there may be no potential buyers for that school, at least not at a price sufficient to recoup all the costs of building that school. Who else but the government would want classrooms and gymnasiums etc? A private school? Just possibly.

      What can’t be fudged are the current account costs of running the school. We need to employ teachers, caretakers, admin staff etc to keep the school running. Is spending on a teacher’s salary any less worthy than spending to build the school in the first instance? Well no, of course it isn’t, but the logic of the ‘consumption vs investment’ argument would lead us to think otherwise.

      And what about the value of all those educated children? Can that, or they, be included on a balance sheet too? Unfortunately not! The government doesn’t “own” those children in any real sense. They are free spirits to move wherever they like and do whatever they like with their education.

      We can make the same argument with hospitals, doctors and nurses etc. We don’t want to build a hospital with ‘capital account’ money and then find there is insufficient in the ‘current account’ pot to run it. That makes no economic sense at all.

      • I agree with you … and I very much appreciate, your using this BTL thread to unpick the contradictions.

        It is a dilemma for this blog. It is an imperative to challenge the deliberate cynical misuse of economic terms to further the political agenda of the ‘Right’ or neoliberalism. However this, together with the last 30y of TINA, has unfortunately resulted in a level of ‘false consciousness’ for the population, politicians and the MSM… however, well-meaning the intent of those individuals.

        We could obey ‘Lerner’s Law’ and only publish material that is strictly MMT-compliant… but at the moment, that does not ‘match’ those people who are genuinely worried by the ‘household’ analogy with the ‘debt’ and the ‘deficit’.

        I would argue that a first step, for someone ‘blinded’ by the mainstream consensus, is to take on board that ‘debt’ per se is not all bad. Psychologically and energetically, a series of smaller shifts is more likely to be a successful process than a total upheaval and rejection of previous thinking.

        This article fulfils such a ‘first step’ in challenging the simplistic mantra of ‘all debt is bad’. Your comment neatly leads the discussion on to what qualifies as ‘good debt’. Hopefully, the next step for a reader will be to understand that a currency-issuing government does not need to borrow.

  2. I’d agree you should publish all reasonable arguments that are circulating on the left and they should all be subject to discussion. MMT is just economics and we shouldn’t think that the solutions to our problems are just economic.

    Yes “good debt” vs “bad debt” is a better way of looking at it!

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