Redcar steelworkers pay UK tax. Chinese Steelworkers don’t.


Redcar steelworkers pay UK tax. Chinese Steelworkers don’t.

By Peter Martin Twitter: @petermartin52

An economic and political discussion usually and rather quickly gets around to a discussion on “the deficit”. Of course what everyone means is the Government’s deficit rather than the deficit neo-liberal politicians have created in our spending power in recent years. The other less mentioned deficit is the one the UK runs in its trade and financial dealings with the rest of the world. There are various terms used in connection with this such as current account deficit, balance of payments deficit. Then there is the capital account which includes the sale of gilts. To keep things simple I’ll just use the term external deficit for the net flow of ££ out of the economy. So we can think of this as the Surplus the Rest of the World has in its dealing with the UK in £ terms.

If we consider everything as a surplus we can say:

Government Surplus  + Private Domestic Sector Surplus(or PDS savings) + Rest of the World Surplus = 0

This is the well known sectoral balance equation. The Private Domestic Sector would essentially be the real economy and would include all publicly employed workers, local councils and their workers,  and even some Govt owned companies – though this might just depend on how the accounts are presented. This is just in £ terms. They don’t include any real assets like gold reserves or land holdings.

Going back to deficits this works out as:

Internal Deficit (Govt Budget Deficit) = PDS Savings + External Deficit (Trade)

It is common in discussions for someone to say something like ‘the trade deficit is not the fiscal Deficit.” Which is of course true, butthe two deficits are very closely related. If, as now, we are running a 5% of GDP trade deficit and the  Government is running a 4% deficit there is 1% more spending leaving the economy to pay our net import bill than is replenished by the Govt deficit. That money has to come out of everyone’s savings. So if the external deficit was zero the Government deficit would certainly be reduced substantially and may even be eliminated completely. Another way to look at it would be to say that money paid out for imports can’t be taxed but if it is paid out for local products it can be. Money generated from export sales, or import replacements can be taxed too. Redcar steelworkers pay UK tax. Chinese Steelworkers don’t.

Exporting more, to the value of 2.6% of GDP and importing 2.6% less will close the trade gap completely.  This may require a some initial discomfort to achieve but it will be nowhere near as bad as continually putting up with with tax rises and spending cuts, ignoring the external deficit and running the economy into ever deeper recession.This is a saleable message that our politicians (are you reading this John McDonnell? ) could well explain to a sceptical public.

There are those MMT supporters who will not be at all pleased with the thrust of this argument.They will be thinking that we should not be using MMT to explain how our deficits can be reduced but, rather, we should be explaining how they do not matter. They’ll argue that the deficits are just numbers on a spreadsheet, that ££ are just like runs on a scoreboard, that the government is monetarily sovereign and that it can never run out of pounds, it can never involuntarily default and it can never go broke in any debt denominated in ££. They will further argue that exports are a net real cost to the economy and that imports are a net real benefit. Therefore we should be exporting as little as possible and importing as much as possible. Of course, this is all absolutely true and intellectually incontrovertible. Except, I would just question the morality of deliberately taking more from the world than we are prepared to give in return.

It is also true is that we live in a democracy and we have to assess the chances of the voters ‘buying’ this argument in sufficient numbers for Labour to win in 2020. I am not a politician but I would say there is no chance at all. So, if this is a correct assessment, we have to look for the next best alternative. If we don’t offer that, which is an economy at relatively full employment with low internal and external deficits, stable but modest levels of growth, inflation and interest rates, we will end up with something very much worse.  An economy with high levels of unemployment and underemployment, high numbers of low paid and low productivity jobs, higher internal and external deficits, and with a government which is forever chasing its own tail with a succession of tax rises, spending cuts and the encouragement of excess private credit created asset bubbles.  In fact, just like the one we have now.

People are sick of all that. We just need sensible politicians to explain that there is a much better, if not a perfect, option

Corbynomics is the antidote to Speculation and Bubbles


Corbynomics and Crashes: Investment versus Speculation By Michael Burke

First posted 2nd September 2015

Words matter. But in economic discussion as elsewhere they are frequently abused. In economic commentary one of the most frequent falsehoods is to describe speculative activity as investment. Stock market ‘investors’ are in fact engaged in speculative activity. There is no value created by this speculation. The claim made by its apologists that it provides for the efficient allocation of capital to productive enterprises is laughably untrue in light of both recent events and long-run history. In fact, a vast number of studies show that that there is an inverse correlation between the growth rate of an economy and the returns to shareholders in stock market-listed companies.

The chart below is just one example of these studies, Fig. 1. The research from the London Business School and Credit Suisse shows the long-run relationship between real stock market returns and per capital GDP growth. The better the stock market performance, the worse the growth in real GDP per capita. The two variables are inversely correlated.

The Economist found this result ‘puzzling’. But it corresponds to economic theory. The greater the proportion of capital that is diverted towards speculation and away from productive investment, the slower the growth rate will be, and the slower the growth in prosperity (per capita GDP).

Fig.1 Stock market returns and per capita GDP growth


This is exactly what has been happening in all the Western economies over a prolonged period. SEB has previously identified a declining proportion of Western firms’ profits devoted to investment. The uninvested portion of this capital does not disappear. Instead, it is held as cash in banks and the banks themselves use this to fund speculation and share buybacks by companies (which simply omits the banks as intermediaries in the speculation). The effects of this are so marked that some analysts believe ‘financialisation’ is the cause of the current crisis, when instead it is an extreme symptom of the decline in investment and the consequent growth of speculative activity.

Stock market crashes

It is now customary in the Western financial press to routinely ascribe all aspects of the Great Stagnation to some failing in China. So, China’s fractional currency devaluation has been identified as the culprit of the recent stock market plunges, even though the 3% devaluation of the Chinese RMB followed a 55% of the Japanese yen and a 27% decline in the Euro.

The claim that the crashes were caused by China’s currency move has no factual basis. Fig.2 below shows the closing level of the main US stock market index in August. The S&P 500 rose from 2,083 to 2,102 in the 4 days after the RMB’s 3.2% devaluation which finished on August 13 (first arrow).

On August 19, the Federal Open Markets Committee (FOMC) of the US central bank released the minutes of its most recent meeting (second arrow), which was widely interpreted as indicating a strong likelihood that interest rates would be increased in September. The prior closing level for the S&P500 was 2,097 and it fell sharply thereafter. Following speeches by a number of governors of the US Federal reserve (who vote on the FOMC) questioned the need for an increase in rates, and the market has recovered in response. Yet other speeches pointing once more to a rate rise led to stock market falls once more, and so on.

Fig.2 S&P500 Index

But this uncertainty over US rate increases is only the proximate cause of the crashes. This sharp fall is a stock market verdict that it cannot easily absorb higher US interest rates. The current valuations for the stock market are based on official short-term interest rates of 0.25% and a dividend yield on S&P500 stocks of 2.24%. Even if rates were only doubled to 0.5% the level of the stock market becomes much less attractive. If rates were to rise towards 2%, the risky stock market’s dividend yield looks extremely unattractive compared to risk-free short-term interest rates.

There is a separate matter that the US economy does not look robust enough to absorb any significantly higher interest rates, but this hardly concerns stock market speculators. Fig. 3 below shows the pace of growth in US industrial production versus the same month a year ago. Production has slowed for a year and is down to a snail’s pace in the last 3 months, averaging less than 1.4% from the same period a year ago. The latest data show that the US economy is experiencing only modest growth, with GDP in the 2nd quarter just 2.6% higher than a year ago.

Fig.3 Growth In US Industrial Production


Despite the widespread hype about the British economy, the equivalent data on industrial production is growth of 1.5% for the latest 3 months compared to a year ago. For the Eurozone it is 1.2%. In China, industrial production has grown by 6.3% in the latest 3 months compared to the same period a year ago.

Corbynomics and crashes

Since 2010, the major central banks of the US, Japan, and the Eurozone have created US$4.5 trillion, Yen 200 trillion and €1.1 trillion in their respective Quantitative Easing programmes. The Bank of England has added £375bn of its own. Over the same period short-term official interest rates have been at or close to zero. Long-term interest rates have also plummeted. This has not led to a revival of investment in the advanced industrialised economies. After the short-lived stimulus in some Western economies to end the 2008-2009 slump, total fixed investment (Gross Fixed Capital Formation) has slowed to a crawl in the OECD as a whole, as shown in Fig.4 below.

Fig. 4 OECD GFCF, % change 1996 to 2013

Yet over the same period, the main stock market indices in the OECD economies have soared. The stock markets and real GDP are inversely correlated. The S&P500 index has effectively doubled since 2011. The Eurofirst 300 has risen by 55%, the Nikkei 225 in Japan has risen by 125% (boosted by currency devaluation) and the FTSE100 has risen by 25% (a poorer performance held back by the predominance of weak international oil and mining stocks). Data for 2014 is not yet available but the total cumulative increased on OECD GFCF from 2011 may not have reached 10%.

Corbynomics is the policy of attempting to address an investment crisis with an increase in investment. Its critics repeatedly claim that this policy will cause financial turmoil. In light of recent events this assertion ought to cause a wry smile. At the very least, the most powerful central banks in the world have to reassess their intentions on policy simply because of the wild gyrations in the stock markets. These have been accompanied by further large movements in global currency exchange rates.

The reason stock markets are so febrile, and policy so easily blown off course is that a bubble is being created in financial assets because of the combination of monetary creation, ultra-low interest rates and weak investment. Capital that could be directed towards increasing the productive capacity of the economy is instead being used to finance speculation; the worst of both worlds. This policy has caused inflation in financial assets such stock markets, in house prices and (previously) in commodities prices. But continued economic stagnation means that deflation is now the greater risk in the OECD economies at the level of consumer prices.

Corbynomics addresses those risks because its aim is to raise the level of investment in the economy. By increasing the productive capacity of the economy through investment-led growth it overcomes the weakness of the economy. By redirecting the flow of capital from speculation towards investment, it deflates the speculative bubble. So, to take an obvious example, by building new homes it provides housing and employment while deflating the house price bubble.

The root of the objection to Corbynomics is the insistence that the private sector, private capital must be allowed to dominate the economy in its own interests. But the current Western economic model is a combination of shopping and speculation, leading to stagnation. Corbynomics is the antidote to these; prosperity through investment-led growth.

Telegraph Tosh on Economics


Steven Hail’s point by point response to the Daily Telegraph Article by Jeremy Warner  which suggested the Jeremy Corbyn’s economic plans will turn us into Zimbabwe.

Margaret Thatcher’s Biscuit Tin – and Austerity

Margaret Thatcher’s Biscuit Tin and the Austerity Scare

From Pam Field and Syzygysue

The Austerity Scare is the greatest myth, by which the rich have deprived others of their basic needs of survival (Maslow), by some argument that those are unaffordable. How can it be justified to deny anyone these basic human rights, while others have vast resources far beyond their own personal needs? This wealth, and hence power was gained  by the systematic acquisition of resources by unjust means, much as the barons claimed land to be their own.  (Primary accumulation – dispossession of low income people from their high value land). By what right can anyone claim to have a right to own earth when others cannot?

Benn EstablishmentHaving power of the law permits reinforcement of privilege so that attempt to brainwash the public  through whatever means is available – education, press, advertisements, commercialisation  – or force. So the very rich have the means to control all the sources of food and sustenance, the media, the security and defence. Fear of destitution leads to social division, and of course with disunity no resistance can be effective. What needs to be done to redress the imbalance?

There are sufficient resources on this planet for everyone.  Oxfam  believes there can be enough food for everyone…

IF we give enough aid to stop children dying from hunger and help the poorest families feed themselves

IF governments stop big companies dodging tax in poor countries, so that millions of people can free themselves from hunger

IF we stop poor farmers being forced off their land and we grow crops to feed people not fuel cars

IF governments and big companies are honest and open about their actions that stop people getting enough food.

It is shameful that in Britain, the seventh richest nation, has 25% of children living in poverty, many people are homeless and one million people are relying on food-banks. It is a scandal created by gross mismanagement, or by wilful neglect. The Tories recall the Victorian days of Empire, like the cheering and flag waving Falkland task force, without addressing the fundamental truth.

 Any society can only measure its wealth by the poorest, and its strength as the weakest.

Having seen the horrors man can inflict on man in WW2, there was a united resolve which followed that it should never be repeated, and a determination to build a fair society fit for everyone. Rationing was accepted after the war to ensure a fairer distribution of scarce resources. Meanwhile Attlee’s Labour government invested in full employment, massive house building, a welfare state and National Health Service. There was a growth in the economy, despite the ravages left by war.

“The psychology of competition and love of Peace are uneasy bedfellows” Aneurin Bevan

One of the saddest legacies of Margaret Thatcher’s premiership must have been the destruction of optimism in society, the killing of compassion, and comradeship, and communities.  It was replaced with isolation, resentment and fear engendered by soaring unemployment, caused by destruction of manufacturing industries while attacking on trade unions, so making the working class further malleable by the ruling elite.

The idea that the nation’s wealth was somehow like the family budget, pennies hidden away in a biscuit tin in the larder, just to be taken out and spent on a trip to Margate when the factory shuts down for a fortnight in August, can be understood as people prioritise their needs by similar means.

So, unbelievably, Margaret Thatcher sold the idea to the nation, that the money which the government has to spend on schools and hospitals, is like the microeconomics of a family budget, or the ins and outs of her parents’ grocers shop. And since that time the biscuit tin idea comes into play, “There’s no money left” as Cameron carried that piece of paper to hustings in May. “The nation can’t afford it, we’ve all got to tighten our belts.”  “We’re all in it together!”

Now, where does wealth come from? It comes from the labour, skills, arts, and talents of people, from research, technology and from the natural  resources of the planet. Did Margaret Thatcher expect the nation to believe that they can be parceled up and saved in the biscuit tin?

Biscuit tin

As the cuts to basic provisions became chipped away, so fear sets in, the law of the jungle, competition, scrambling to get to the top, developing addictions to more and more material goods to satisfy a lack of something fundamental – happiness. It might seem a cliché, but this is the background to the shallow, inadequate shells we are becoming, soulless commodities suspicious of some others and hatefully despising the rest.

“The successful as well as the unsuccessful are unemancipated in the competitive society” (Bevan)

It doesn’t have to be like this. Of course money is not hidden away in some virtual biscuit tin, no longer gold hidden in vaults to be hauled from place to place. Austerity is totally unnecessary and we can change it at will once we accept what is wrong.

Money is a tool by which goods can be shared around ensuring management of resources, rewards for labour and supply, and trade.  Money doesn’t originate  from the taxpayer. It comes from the government spending.  The US dollar and the UK pound are sovereign monetary systems under control of their respective nations.

Neoliberal economics have led to the greatest inequalities in human history, based on the mystique, that market forces will adjust to give the best possible outcomes.

Considering the unhappiness, poverty, and isolation, in what sense is the current state of the UK, the best of all possible worlds?

We are told that there is no money left so that public services must be privatized and government spending cut but the actual problem is that corporations are hoarding their profits, not investing in well-paid jobs in the real economy and instead are chasing fictitious capital.

Real wages have not increased since the 1970s and consequently there is insufficient demand in the economy, and increasing levels of personal indebtedness.  Forget the national debt, it is household debt that is the real danger!

This is the slowest recovery of GDP per head on record. See graph (Touchstone Blog)

As Simon Wren-Lewis writes:

Anyone who continues to describe what is happening in the UK as a ‘strong recovery’ either has not bothered to look at the data, or is being deliberately deceptive.’

What is desperately needed is not ‘Austerity’, but a fiscal stimulus and if the banks and the corporations will not invest in the real economy, then the government should act as ‘lender of last resort’.  In other words, a stimulus such as that proposed by Jeremy Corbyn, with investment in jobs, the NHS, education and mitigating climate change.

The allegorical Frank Baum story “The Wizard of Oz” reflects clearly how the pursuit of the yellow brick road “gold”, leading to the “Emerald City” revealed merely that there was no magician, just a helpless, powerless man who admitted the capitalist ideal was a fallacy. The main characters had lacked belief in their own limitations, lack of courage, brain or heart, and believing therefore that others had power. And in that idea, we can see that economy needs to be run for the benefit of the people, not according to the vagaries of the so-called ‘wisdom of the markets’.

So what is necessary is that

… First we need to accept that economy is something which sovereign governments have the power to organise.

… The financial system has been abused for too long.  It needs to be under democratic regulation and control.

…The economy needs to be balanced and controlled to allow people and societies to function sufficiently so that all members can afford the essentials of Maslow, live comfortably, with a little bit extra for everyone to enjoy their leisure.

…There needs to be a commitment to full employment.

… Basic needs such as food, water, energy, transport, health and education need to be under democratic control.

IT IS THE RESPONSIBILITY OF GOVERNMENT to ensure adequate distribution of these services. Therefore nationalisation, and/or transparent democratic control is necessary.  To treat food, water, and medical supplies as commodities to be gambled with is an obscene and unacceptable concession to the very rich.

Cutting spending during recession/depression only delays or forestalls a recovery.  The allegory of Alice in Wonderland describes falling down a rabbit hole, and seeing the world differently, and that is what is needed – the opposite of austerity. Jeremy Corbyn’s Peoples’ Quantitative Easing is about the government producing money, as we have our currency, the government can do that,  but instead of this going to private banks, this money goes directly to the people wherever it is needed – for building, homes, schools, hospitals – and creating jobs. In other words, a responsible state in which everyone would have access to needs being met, and poverty eradicated.

We are told that the deficit is too big but the reality is that it is still too small.  Inflation is only a risk once the last unemployed/underemployed person who wants or needs a job is employed.

Since private companies are not providing sufficient employment, we need government to invest in a job’s guarantee, a buffer stock.  This would have the advantage of underpinning a living wage that the private sector would have to match in order to attract workers.  It would also allow individuals to maintain or upgrade their skills.  It would decrease the mental health problems associated with unemployment, and finally, it would mean that all sorts of worthwhile activity, which would not be undertaken by the private sector, could occur.

The anger and  resentment has been smouldering for a long time. The lack of opposition to neoliberalism and austerity has disillusioned the electorate, so many no longer see any point in even voting.  In August 2010, riots broke out in English cities, in London, and Birmingham. This August, Jeremy Corbyn has reached the ordinary people,  and has channelled that anger in such a way that people are united, and we are a witnessing the greatest political force in 64 years, a tidal wave which can sweep away neoliberalism and bring our communities back. The Labour Movement is reborn. At last, there is hope.

The politics of divide and rule, of resentment and ” benefit scroungers ” is where we have lost our way.  It is not about politics of envy.  It is about the politics of justice. We need brave political leaders to reunite our communities, put away the law of the jungle, and bring back the Spirit of ’45, the sort of social cohesion which followed WW2.

The biscuit tin myth has to be tackled,

and the sooner , the better.

Countering the Attack on Corbynomics


The counter-attack on Corbynomics

From Michael Burke

Published on Socialist Economic Bulletin

The economic policies of Jeremy Corbyn have come under widespread criticism.  This exceeds the level of scrutiny of his policies; many of his critics do not seem to have troubled themselves to read his key policy document.  It also by far exceeds the level of scrutiny devoted to any of his leadership rivals.

This is not surprising.  All major sections of big business in Britain and in the western economies as a whole are committed to austerity policies.  The economic consensus in favour of austerity arises not from economics textbooks or any appraisal of economic history – even recent history such as the stagnation from 2010 to 2012, and the rise in the deficit that resulted.  Austerity is the consensus because it represents the interests of those dominant sections of the economy and therefore society.

This explains the assault on Corbynomics, which we should expect to intensify if he wins the leadership of the Labour Party.

Therefore, it is important to address these arguments.  The BBC’s economics editor Robert Peston, led the way and was closely followed by the Financial Times’ economics editor Chris Giles.  Academics have weighed in, with one characteristic contribution from John Van Reenen at the LSE.  There are important nuances between these and other critics of Corbynomics but they have common central arguments. All summaries are reductive and readers are encouraged to review these pieces themselves.  But the central argument is this:

· the British economy is dependent on foreign capital inflows
· instructions from government to the Bank of England undermine the Bank’s independence
· the flow of international capital on which Britain depends will halt as investors take fright
· as a result, the currency will fall and interest rates will rise
· this will cause inflation and reduce investment, the very opposite of Corbynomics’ aim
· And, the existing £375bn in Quantitative Easing cannot be used as an example as this may be temporary and almost solely focused on the purchase of government bonds (gilts)

It is noteworthy that the critique begins with capital flows and rests on the absolute power of financial markets to set exchange rates and interest rates.  These are real and powerful forces and cannot be ignored.  But the dominance of finance capital in British society is so great, it influences opinion so that the argument ‘There Is No Alternative’ appears to have great weight.  The weight of this argument would be lesser in countries such as Germany, or Sweden, or even the US.

There is no denying the British economy is increasingly dependent on inflows of overseas capital, setting new lows last year. This is not simply or even primarily the chronic UK trade deficit, which has persistently oscillated around 2% of GDP in recent years.  As Fig.1 below shows it is the sharp deterioration in the primary income account which has caused a sharp and unsustainable rise in the current account deficit. It has swung from small surplus in mid-2013 to a deficit of 3% or more of GDP in recent quarters.

Fig. 1 Current account balance, % GDP & components
Source: ONS

The primary income account and its components is shown in Fig.2 below.  There are two key points to be highlighted.  The first is the very large and persistent deficit on portfolio investment, ranging between 5% and 10% of GDP.  This is a net outflow of capital representing the far greater propensity of British capital to invest overseas because of higher returns.

But this persistence means that portfolio investment outflows are not responsible for the recent sharp deterioration in the primary investment account, and therefore in the current account as a whole.  The balance of Direct Investment has swung from a surplus to a deficit and accounts for the deterioration in the external accounts.  This has taken place while corporate taxes have been cut and while the last government was claiming that ‘Britain was open for business’.

Fig.2 Primary income account and components
Source: ONS

It is a remarkable fact that the government’s repeated assertions that its policies are promoting growth and investment are rarely challenged although they are so clearly false.  George Osborne has repeatedly asserted that his policies are successfully promoting investment.  Specifically, he and his supporters have argued that the cut in Corporate Tax rates from 28% to 18% is and will promote Foreign Direct Investment.  Fig.3 below shows that FDI inflows have been declining over the medium-term, even while corporate taxes have been cut and ‘business-friendly’ policies have been adopted.

Fig.3 Net FDI Inflows and components
Source: ONS

It is no accident that the sharp deterioration in the external accounts occurred in mid-2013.  As SEB has shown elsewhere the Coalition government halted new austerity measures and even slightly increased government spending in order to get re-elected.  Borrowing, particularly for housing and other consumption was encouraged.  Unless government borrowing was to increase, or were to companies face higher taxes, then the increase in borrowing had to be sourced from overseas.

In order to get re-elected the government encouraged an unsustainable borrowing binge.  It now proposes to deal with this crisis with renewed austerity, which will cause an economic crisis.  Overseas investors have a diminishing appetite for investment in Britain because it is a slow-growth, low-investment economy.  Low British investment levels become self-reinforcing.

The entire criticism of Corbynomics can be shown to be a case of what Freudian psychoanalysts term projection.  It is the current policy which has dramatically increased the dependence of the British economy on overseas capital inflows.  And the only remedy offered is renewed austerity.  This is simply ‘TINA’ (there is no alternative) purportedly from the perspective of the all-powerful dealing room floors of the City.

One of the weakest points of the critique is that it rests on the outlandish proposition that the Bank of England retains credibility.  The independent Bank has presided over the biggest ever financial crash in Britain and the longest recession.  Throughout most of 2008, the MPC was discussing the need to raise interest rates, even as the economy had already begun its biggest slump since the 1930s.  The Bank’s record on growth since independence has been markedly worse than the rest of the post-WWII period.  It has also persistently missed its own inflation target.  It has a spectacularly bad forecasting record for growth and inflation even in the short-term.  It is even questionable how independent the Bank is on decisive matters as the bank bailout of 2008 was clearly a government plan, with Bank officials still delivering speeches about ‘moral hazard’ (pdf).

The superiority of Corbynomics 

The weakness of his opponents arguments do not by themselves mean that Corbynomics can succeed.  But this has been dealt with in a previous post.

Instead, it is important to state why Corbynomics is superior to the alternative, based on economic fundamentals.  The critics argue that government intervention may have been a necessary evil at the time of the banking crisis (and unsurprisingly acceptable to bankers) but that government intervention in the real economy is unacceptable.

This turns economic reality on its head.  The returns to productive investment in the economy are far higher than government bond yields. The rate of return for UK companies is currently around 12%, and never fell below 8% even in the depth of the recession as shown in Fig.4 below.

Fig.4 Net rate of return to Private Non-Financial Corporations, %
Source; ONS

By contrast the British government can borrow at extraordinarily low rates to fund investment, as shown in Fig.5 below.  At the time of writing the yield on 10 year UK gilts is 1.8% which is a fraction of the rate of return on private investment.

Fig. 5 UK 10 year gilt yields
Source: Bank of England

The objection raised at this point (see Peston in particular) is that there are no projects or sectors where such returns are additionally available, otherwise the private sector would be investing in them.  But this criticism is misplaced and only serves to highlight the innate superiority of state-led investment over that of the private sector.

On exactly the same investment, the returns available to the public sector are higher.

To demonstrate this, take the obvious case of housebuilding.  Private builders estimate an average construction cost per home of £100,000 in Britain, and a sale price of £175,000 to cover their fees, borrowing costs and of course profits (National Association of Home Builders estimates).

Yet government can build exactly the same home at exactly the same price.  It will naturally have far lower borrowing costs than any private sector company.  But it is the returns to government which are massively higher.  This is because government obtains tax revenues which of course are unrecoverable by any private sector developer.  This will be both income taxes on all labour employed, plus tax revenues on all consumption financed by that income, and all other consequential taxes.  There is also a benefit to government finances from the increase in economic activity arising from lower social security payments.

The UK Treasury estimates that for every £1 increase in economic activity there will be a 75p boost to government finances, 50p in tax revenues and 25p in lower social security payments*.  As a result the net cost of home construction is just £25,000 (after all returns are included) while it now has an asset with market price of £175,000.  Employment and a home have been created and a genuinely affordable rent is easily possible.

The superiority of the public sector is even greater in a strategic sense.  Government can direct investment to the most-needed or most productive sectors of the economy, energy, transport, infrastructure and education, in addition to housing in a coordinated fashion.  The vastly greater returns to the government means that it is not even the main direct beneficiary of the investment.  It is private firms who benefit most, at least in a direct sense, from investment in transport, education, infrastructure and so on.  But the key condition is that they not be allowed to act as a brake on investment, as they are currently.

The trading response of financial operators is entirely predictable.  Irrespective of their political views, their purpose is to make money.  The dire warnings against the 2009 Labour stimulus Budget, that interest rates would soar was actually followed by a sharp fall in interest rates.  Investors were more likely to get their money back from a government whose economy was growing rather than contracting.  (The political response may be another matter, but that is a separate discussion on the levers a radical government would have to use).

Government investment in the productive sectors of the economy yields very high returns, much higher than the interest payable on government debt.  Corbynomics has offered a range of options to achieve that increase in investment.  All of them are preferable to current policies because they can work.

*Treasury Working Paper No.5, Public Finances and the Cycle The author is grateful to the office of Caroline Lucas MP who managed to locate this paper. It seemed to have been buried away under the Coalition government.


Why a vote for Corbyn is a vote for electability


Why a Vote for Corbyn is a Vote for Electability

From Neil Schofield, Previously published here

Three days before the 1983 election, I attended a rally in Oxford Town Hall. It was in the days when it was still possible to come in off the street to a Labour leader’s rally, and the speaker was Michael Foot. The atmosphere was revivalist, a packed hall cheering on their much-loved leader.  How could Labour possibly lose in the face of such enthusiasm?  But of course the result is history.

More than thirty years on, I found myself attending Jeremy Corbyn’s leadership campaign rally in Cardiff – according to media coverage one of the largest political gatherings in Wales since the Miners’ Strike.  The atmosphere was incredible – more than a thousand people crowded into the hall, standing room only, people with decades of Labour activism behind them, others coming to politics for the first time.  At its heart, a speech by Jeremy Corbyn that was passionate and powerful – but also detailed; this was not rabble-rousing but thoughtful and argued through.  He was given a massive ovation by an eclectic audience.

Jeremy Corbyn addresses a rally in Cardiff, 11 August 2015

And I reflected – could we be deceiving ourselves in the same way that we were in 1983?  Was this just an audience of the converted, wanting to be enthused, oblivious to the harsh political realities outside?

But this time the fundamentals feel very different.

In 1983 the Thatcher myth was at its most potent. A year beforehand, the Task Force was still steaming south to the Falklands. The Labour Party had been split by the defections to the SDP. More importantly, the intellectual tide was flowing overwhelmingly in Thatcher’s direction; these were the halcyon days of neoliberalism, with the economy emerging from deep recession and the sale of council houses proceeding apace. Only weeks after a crushing electoral defeat, the situation for Labour, although obviously extremely difficult, is different in a way that Corbyn’s critics – especially those within Labour claiming he is unelectable – appear not to have understood.

To understand why you need to think about the wider political background.  In Britain – as in much of the Western world – the set of ideas that is often lumped together under the name “neoliberalism” has a near complete hegemony in Government.  Policies are being pursued – especially following the economic crisis of 2007/8 – that involve reducing public expenditure, shrinking the non-coercive state,  on the promise that this is the only way to engineer a sustainable economic recovery.

But that recovery is palpably not happening.  Faced with continuing and swingeing falls in living standards, increased Government deficits in the face of shrinking economies; increasingly insecure and short-term employment; continued asset price bubbles, especially in housing, to the point where the essentials of life are becoming increasingly unaffordable; and, most of all, globally increasing inequality to levels not seen for more than a century, it’s obvious there is a huge problem.  It’s perhaps best exemplified by the fact that, in Britain at least, the number of people in full-time work who are falling into poverty is rising substiantially; the basic deal behind market capitalism, that a worker can achieve a decent standard of living by selling their labour, increasingly does not hold. Morevoer, as a strategy for reducing the deficit, it has failed spectacularly.

At the same time, the social democratic parties that presided over the welfare capitalism of the 1950s and 1960s are in deep existential crisis.  In Britain, despite the cruelties of the coalition, Labour suffered a crushing defeat in the 2015 election.  It was wiped out in Scotland, once its heartland.  The official reaction to this defeat has been to assume that Labour can only win by moving its policies closer to the Tory government – on social security, on immigration, above all on deficit reduction.  In other words, the ground over which mainstream political debate is conducted is being narrowed, while increasingly those excluded from that debate are bearing the brunt of the politics of austerity.

There is a comment usually ascribed to Karl Rove about the politics of the liberal social democratic opposition to neoliberalism: “when we act, we create our own reality. And while you’re studying that reality – judiciously, as you will – we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out.  We’re history’s actors …. and you, all of you, will be left to just study what we do.”  Change that last “study” to “follow” and you have New Labour’s dilemma expressed with brutal clarity – it’s still fighting a war when the battlefront is elsewhere.  And people can see that; its language no longer inspires because reality has moved on.  Talk of “electability” is two elections out of date; it has nothing to say in particular to those who have walked away from political engagement in bewilderment and, quite often, disgust. In 2015 the Conservative Party gained a Parliamentary majority with 24% of the electorate; Labour was wiped out in its Scottish heartland by a party offering the appearance (if certainly not the reality) of being anti-austerity; but its leadership still says that electoral success lies in adopting the language and framing that wooed barely a quarter of the electorate, while millions of the young, the poor, the most vulnerable stayed at home – or voted SNP, Green or (especially in Labour’s traditional heartlands) in despair for UKIP.  Labour held millions of conversations, but, it appears, at no more than the most superficial level. Labour activists and organisers talk about the doorstep; but often seem to me to be afraid to have real conversations that offer challenge and hope.

What the Labour leadership election has done is blown that open.  In previous elections, candidates from the left have stood – and even encouraged from the Right to stand – in order to ensure a “debate”, after which the inevitable win for a centrist candidate has ensured that Westminster usiness as usual can be carried on with an apparent mandate.  Corbyn’s candidacy – apparently conceived in the same vein, as the means to a debate – has changed everything and brought people flooding into the Party.

Why? Because, for the first time in decades, a candidacy in a Labour leadership campaign has connected with intellectual, political and social currents outside the immediate Labour Party – something far bigger than the Labour Party has in recent years become, but – I’d argue – something much closer to the purpose for which Labour was founded.  It’s not about Corbyn as an individual – decent and principled though he undoubtedly is – but about the values he espouses, and most of all about the fact that he articulates a challenge to the politics and economics of austerity, in a way that reaches out to a far bigger audience than existing mainstream politics.  This is about taking control of the political narrative; about offering, not a reaction to neoliberalism but an alternative to it.  Corbyn has tapped into value systems that have remained confined to the fringes or expressed quietly by Labour members in defiance of their Westminster masters; a value system that found expression in the vote for the SNP in Scotland.

And it won’t do to talk about entryism – it’s just not credible.  Michael Crick of Channel 4 News has offered a fine and useful analysis – summed up in a sentence, there just aren’t that many Trots.  This is something bigger, to which the Labour mainstream appears to have no response whatsoever.

There is a narrative that states, Tony Blair won three elections for Labour. We can therefore only be electable from the centre.  That first of all misunderstands the nature of triangulation – it was about the use of conservative language to provide space for progressive political measures; something that New Labour achieved significantly in its pre-Iraq phase.  But more importantly it misunderstands the fact that the economic fundamentals have changed.  New Labour was based on harnessing growth from a largely functioning economic system to pay for moderate redistribution; but, after the 2007-8 crash that option has not been available – the extent to which market capitalism is broken is much more obvious. Real wages have fallen to the point where in-work poverty is rampant (making talk of being “the party of work” basically frivolous).  There is, in the UK, an effective investment strike in which capital stock is not even being renewed.  Given that the UK has a sovereign currency, all of these issues are far more significant than the deficit; yet Blair’s successors seem unable to move beyond that.  Their mindset is in the mid-1990s, unable to come to terms with what has happened since then.

Electability comes down, in the end, to relevance.  Corbyn’s insurgency, going way beyond the mainstream Labour party, has connected with trends and thinking that lies completely outside the Westminster bubble.  Above all, it has been founded in hope – a belief that things can be different and that the Labour Party can be, once again, the vehicle to make that change. In the meantime, conventional social democracy is, throughout Europe, in crisis because it cannot break out of the neoliberal framing of economics and politics – it allows itself to be defined by its opponents.

That brings huge challenges.  To win elections, form governments and effect change you need structures and discpline.   The Green Party’s disastrous track record in Brighton shows what happens when you have neither; Green councillors, faced with tough decisions, either threw a strop or threw in the towel.  Labour is a party of Government – its unique genius has been to bring together a broad progressive group of often diverse people and to build on that diversity to deliver in office – and has to do so much better than that, and the need to take tough decisions in the face of conflicts and trade-offs is going to require discipline from supporters and, from its leaders, a commitment to openness and accountability a world away from New Labour’s top-down institutional authoritarianism.

But the possibility is there.  For Labour, this looks like a choice between a high-risk vote for a leader who can lead its adaptation to a very different world to that faced by Tony Blair twenty years ago, and who can help it to lead the debate, and electing a leader who cannot see the changes going on outside the Westminster bubble and offers no real alternative to the neoliberal value system.  For me, the latter is simply a guarantee of further decline; it is the former that offers the way to move the debate away from neoliberal territory and to reconnect with the voters who have in their millions turned against a political system that simply doesn’t offer an alternative.

Obviously I do not know what the outcome of the election will be, and I suspect it will be a much closer affair than the media currently suggest.  But whoever is Labour leader will have to face some fundamental decisions; the genie cannot be rebottled.  The choice seems to me to be simple – a choice between harnessing and leading the surge in support that has brought hundreds of thousands into the Party – high risk but with the possibility of effecting real change –  or a turning away back inside the Westminster bubble and a slow but inevitable decline.  I want to see the Labour Party as a force that can deliver real change, and which does not accept austerity as inevitable; which can react to the fundamental changes in political discourse the Corbyn surge exemplifies.  And that’s why I’m backing Jeremy Corbyn as the electable candidate.

The Motives behind Corbynomics – Tax Research UK


The Motives behind Corbynomics

As seen by Economist Richard J Murphy, of Tax Research UK,

Previously published here

I had this article in the Islington Tribune (Jeremy Corbyn’s local paper) whilst taking a couple of days off:

RATHER like Jeremy Corbyn the economics that has in the last week or so, been dubbed Corbynomics is not new.

What’s new is that for the first time in years a politician who is willing to speak out for policies that might really change the wellbeing of most people in this country has hit centre-stage.

There are three key ideas at the heart of Corbynomics.

• The first is that austerity is not necessary. 

This sounds really radical when, for example, at the last election all three major parties competed to argue who could cut the deficit the most.

In fact though very large numbers of economists, including Nobel laureates Paul Krugman and Joe Stiglitz, have pointed out how bizarre this is.

There is, they say, no chance of a recovery if we deliberately reduce our government spending by enforcing government cuts.

And as they add, balancing the budget is not necessary, especially when right now government borrowing is so cheap that it would be crazy not to invest in our future.

Corbynomics in that case is what makes sense, revealing austerity as just bad politics.

• The second theme is that reducing inequality increases wellbeing for everyone, including the best off. 

Again, this is not radical.

The International Monetary Fund agrees with this claim, which is based on the logic that if you want to grow an economy fast the people who need money most are those who spend their incomes.

That’s the least well off, because the best off save, by definition. So redistribution pays when you’re recovering from a recession.

• The third theme is that it’s just not true that markets do everything well and the state does everything badly: the reality is that great people can do great work in either sector and the job is to pick the right organisation for the job that needs doing.

So how does this pan out? In four ways.

• The first is in ensuring that the money to pay for essential government services is available.

This would be done by increasing some taxes on those best off, and for large companies.

It would also come from investing heavily in HM Revenue & Customs to crack down on tax dodgers.

• Second, it would come from investing new government money to kick-start the economy by building schools, hospitals, transport systems and in creating sustainable energy systems.

This is called People’s Quantitative Easing because it’s a variation on the £375billion programme used from 2009 to 2012 to keep the financial system afloat, but this time the money is used to benefit ordinary people. Funding investment activity in this way makes it much easier to balance the government’s books in the long term.

• Third, where it is essential that to get best public service that the state co-ordinate an activity Jeremy Corbyn is not afraid to say so.

Rail services are the obvious example.

• And last, Jeremy Corbyn is committed to beating inequality, whether from unemployment, low pay, disability, or discrimination or from lack of access to education, housing and other needs people have.

What he’s quite willing to say is that if this requires a bigger state sector than we have at present, so be it.

He is saying that may be vital to all our wellbeing and we can afford it.

The UK is, after all, the sixth richest country on Earth.

What is more, the well off would really benefit: there would be growth for them too, while the risk of inflation is virtually non-existent until such time as people in the UK are as well paid and productive as the French, who beat us by 20 per cent right now.

It’s different so it seems radical. But I will give the last word to the Financial Times. Last week they said Corbynomics “could actually be a decent idea”.

As one of its authors, I can live with that.

Reproduced under a Creative Commons Attribution-Non Commercial 3.0 Unported License. –

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