Corbyn Danger? Danger for Whom?

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Backing Corbyn

The “Corbyn Danger”: Danger for Whom?

@johnweeks41

Fear & Loathing on the Campaign Trail 

Hunter Thompson chose the title above for his book relating his eccentric take on the 1972 US presidential election.  In a somewhat different way, it is singularly appropriate to the current campaign for the Labour leadership.  With the outstanding exception of Ed Miliband, the notables of the Blair-Brown era can contain neither their fear nor their loathing of the front-runner, Jeremy Corbyn.  From this collection of “yesterday’s men” the attacks on the MP from North Islington come thick and fast, slings and arrow of the outrageous (á la Hamlet, Act II, scene 1).  Ex-PM Blair advises supporters of Corbyn to consider heart transplants.  Ex-cabinet member (now Lord) Mandelson quakes before the threat of a “lurch to the left” by the Labour Party.  And to these I can add former leader Neil Kinnock, ex-spinner Alastair Campbell and in veiled language ex-PM Gordon Brown.

Equally thick and fast come the attacks on Corbyn’s economic policies, notably in the Financial Times where the insurgent is described as a doing “potential harm to…British public life” for his advocacy of “radical” policies.  An inspection of his policies seems relevant with this and other allegations including from members of the Labour Party that Corbyn inhabits some extreme/hard left territory,

To do this I went to the source, the website for Mr Corbyn’s leadership campaign a virtual visitor can download a statement of his economic policies, The Economy in 2020.

Anti-Austerity

I begin with a Corbyn policy certain to send the neoliberals into anxiety, public ownership (aka nationalization/re-nationalization).  A pledge to take the railroad into the public sector features prominently on the campaign website.  After 35 years spent selling off public assets, this commitment to public ownership comes as a shock.

But, is it radical or hard-left?  A look to the continent suggests otherwise, where the public sector owns the railroads in France, Germany, Italy and Spain.  None of these countries have or had radical governments.  In the United States, very much neoliberal territory, the passenger rail company Amtrak is publicly owned.  Further, in 2013 the citizens of Hamburg voted to bring all public utilities into public ownership.

While public ownership is less common today that in the past, it is sufficiently frequent across the globe not to be unusual or rare.  The same point applies to the Ten Priorities listed in The Economy in 2020, which fall into three categories, opposition to fiscal austerity, taxation and re-structuring of the UK economy.

We find no ambiguity in the candidate’s position on fiscal cuts.  “Austerity is a political choice not an economic necessity”, and Corbyn opposes it, promising “always to protect public services and support the most vulnerable”.  Closely related to opposition to austerity is “a publicly-led expansion and reconstruction of the economy with a big rise in investment levels”.

The commitment to “publicly-led” growth is likely to be more controversial that opposition to austerity, because anti-austerity does not necessity imply more expenditure while an increase in public investment would.  The implicit argument in defence of an increase in public investment is that it would generate faster growth and the taxation induced by the greater output would quickly eliminate the increase in the fiscal deficit required to fund the investment.

Also implicit is the “crowding in” process, that properly targeted public investment would foster private investment to restructure the economy.  Public investment priorities would be implemented through “a multibillion pound programme of infrastructure upgrades” including broadband networks.

Controversy has focused on the mechanism to fund the infrastructure update, “a National Investment Bank”, which some confuse with Corbyn’s references to a “People’s Quantitative Easing”.  The investment bank could fund its project either by sale of bonds to private buyers (“capital markets”), or by selling bonds to the Bank of England (“monetization of the deficit”).  The major difference between the two is that the former leaves the money supply unchanged, while the latter increases it by the amount of the investment.

The possibility of funding through selling bonds to the Bank of England prompted an attack on Corbyn from Labour shadow chancellor Chris Leslie, who alleged that this would be inflationary, and therefore “risks hurting some of the most poor, the most vulnerable, those on the lowest incomes”.

The “hurts those you wish to help” argument suffers from two serious problems.  First, the UK economy now suffers from pressures toward deflation not inflation, so that expansion of the monetary base is the appropriate policy.  Second, much empirical evidence indicates that contrary to Mr Leslie’s allegation very low inflation hurts the poor and benefits the rich.  One of the reasons should be obvious, inflationary pressures are associated with rising employment and wages.  In addition mild inflation devalues household debt and the poor are heavily indebted.

However, the mechanism to fund public investment and whether it would prove inflationary provides no support for the “hard left” accusation by Leslie.  We find national investment banks advocated by solidly mainstream economists (for example, Robert Skidelsky).  Funding of investment by borrowing from central banks is even more common – indeed, in the 1980s Ronald Reagan used this funding technique to cover current expenditure without generating notable inflationary pressures.

Taxation

The revenue generating policies in The Economy in 2020 focus on increasing the progressivity of the overall tax structure.  This has three components: 1) a shift from indirect to direct taxes for households, 2) stronger measures to eliminate personal and corporate tax avoidance, and 3) “large reductions” in corporate tax relief and subsidies.

Economists, even if they prefer indirect taxes (taxes on expenditures) agree that these are regressive;  their share of gross income falls as income rises.  A reduction in VAT and an increase in personal income taxes that leaves total tax take unchanged would reduce income inequality.  A reform of the tax structure that would reduce inequality hardly qualifies as “hard left”.  In a recent FT article the decidedly right of centre Chris Giles cited the negative impact of inequality on economic growth (drawing on a study by the OECD, which confirmed an earlier study by the IMF).

The tax policies proposed by Jeremy Corbyn are not hard left, but they are controversial because they would reverse the inequality-enhancing trend of our public finances over the last thirty years.

The Corbyn Danger

The economic policies proposed by Jeremy Corbyn are certainly a break with the current consensus in the Conservative, Labour and Liberal Democratic Parties (though not so different the anti-austerity Greens, SNP and Plaid Cymru).  This makes them radical only if one has an extremely narrow view of the limits of legitimate debate.

The surprising aspect of Corbyn’s economic policies is not that they are radical and hard left, but that they would be perceived as such, especially by prominent people in the Labour Party which has many MPs committed to social democratic values.

Since the other three candidates for the leadership profess to different degrees concern with inequality, I would have expected criticism to focus on the inadequacy of Corbyn’s policies rather than their radical nature.  For example, his programme could place more emphasis on enforcing a “living wage”, more on legislation to strengthen collective bargaining, plus policies to limit the grotesque inflation of corporate salaries.

It appears that the source of Jeremy Corbyn’s radicalism and the outrage his candidacy provokes in the Labour elite lies not in his policies.  While leader of the Labour Party Ed Miliband introduced fundamental reform in the process by which future party leaders would be chosen.  From a previous system of voting that gave the Parliamentary Party proportionally much greater election strength, the new system is one-member-one-vote, a change that two backbench MP called “disastrous” for which Miliband should apologize.

Therein, we find the profound radicalism of Jeremy Corbyn’s threat to  become Labour Party leader.  Should he win, it will be by a process that does not require the approval of the Labour Party elite.  Corbyn is not the danger that fills them with fear and loathing; it is the spectre of democracy.

Economist John Weeks is a Professor Emeritus of the School of Oriental and African Studies, University of London.

Has Austerity led to a Recovery? (Hint: No)

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Did austerity lead to recovery? No, GDP was increased by government spending

By Michael Burke

First posted on Socialist Economic Bulletin 9th September 2013

The government and its supporters have been quick to claim that the most recent GDP data have vindicated its austerity policy.  George Osborne says the argument in favour of austerity has been won, some more excitable commentators have even talked of a boom.

Usually, SEB would provide analysis of the GDP data after the publication of the national accounts, the third release in the cycle from the Office of National Statistics, which provides a detailed breakdown of the components on economic activity and the final revision to the data.

But the claims made for the British economy following the most recent GDP release (and some subsequent surveys) are so outlandish, and so at odds with the facts, that is worth providing a short analysis now.

The data is still partial and subject to revision.  But there is enough evidence to demonstrate factually that the weak recovery is not a reward for austerity, but is in fact entirely a function of increased government spending.

The economy has expanded by just 1.8% in 3 years of austerity, an annual rate of 0.6% which is less than one-quarter of previous trend growth.  The gap between the current level of GDP and trend growth for the British economy is widening.  In addition, the growth to date is entirely a function of increased government spending.

Factual Analysis

This verdict is so at odds, with both stated government policy and the overwhelming commentary on the latest data.  Therefore it is important to provide the hard evidence supporting this analysis.  This can be found on Table C2 of the latest release, Second Estimate of GDP, Q2 2013 (ONS).

Total government current spending was barely changed from the time the Coalition took office to the end of 2011.  (In the ordinary course of events real government spending should rise in line with population growth and in a recession should rise much faster to offset the effects of recession.  Unchanged government spending represents a harsh ‘austerity’ stance).

However, from the 4th quarter of 2011 to the 2nd quarter of 2013 government current spending has risen decisively by an annualised £15.1bn.  GDP did not begin to expand until two quarter later.  This is the time lag SEB has previously identified in the relationship between changes in government spending and changes in GDP.  Rising government spending has led the recovery.

While the increase in government spending since the 4th quarter of 2011 to the most recent quarter amounts to £15.1bn, the rise in aggregate GDP over the same period is just £14.8bn.  Therefore, the rise in government spending not only led the recovery, but more than accounts for the entire expansion over the same period (as some other components of GDP have contracted).

Rising government current spending tends to support consumption, which is exactly what has happened over the last 18 months.  The rise in household consumption has been the strongest of all components of GDP over that period, rising by £25bn.  The chart below shows the changes in the national accounts since the government began increasing its current spending after the 4th quarter of 2011.

Fig 1

But weak household spending is not the source of the crisis.  This remains the slump in investment.  GDP is still £50bn below its previous peak in the 1st quarter of 2008, but investment (Gross Fixed Capital Formation) is £65bn lower.  Household consumption also remains below £24bn its pre-recession peak.  But it has been rising continuously for 2 year and now accounts for under half of the total decline in GDP.  The fall in GFCF more than accounts for the entire fall in GDP.

It is not possible from the partial release of the data for the 2ndquarter of 2013 to establish the role of government in the continuing investment strike.  But from the 1st quarter national accounts, it is clear that declining government investment has been exacerbating the private sector decline in investment.  Government investment peaked under the last Labour government and has been cut continuously ever since.

But the analysis is confirmed by the separate ONS data on public finances.  The presentation of the public finances data vary significantly from the presentation of government consumption data in the national accounts.  Among the many differences is that the former are presented in nominal terms only.  Even so, these show (Table PSF5) that in nominal terms the level of departmental outlays rose to £305bn in the first half of 2013, from £283bn in the same period of 2012.  This is a rise of 7.8% and way above the rate of inflation.

Conclusion

There is no mystery to the current very weak recovery.  It is led by a moderate increase in government spending, which more than accounts for the entire increase in GDP over the same period.

This runs counter to the government’s stated ‘austerity’ policy.  But it is accompanied by a cut in government investment, which exacerbates the private sector investment strike.  It is this investment strike which remains the source of the crisis, which cannot be resolved by increasing current spending.

Logic would dictate that any government which wanted to support the economy would increase investment, which is the source of the crisis.  Conversely, any government fixated on deficit reduction would probably be inclined to cut both current and capital spending.

This government is committed to neither economic recovery nor deficit-reduction.  Instead, it is committed to boosting profits.  That is why it is willing to increase current spending which supports consumer demand but refuses to increase investment as this would displace private capital from potentially profitable sectors of the economy.

Since this government is not sticking to its own spending plans, it makes even less sense for an incoming Labour government to do so.  Instead, it needs to address the source of the crisis by increasing state investment.

Fig. 2

IDS, benefit cuts and making work pay.

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I agree with Zoe Williams when she writes about the Tories:

… the true division of the Conservative party – the ones who are mistaken versus those who are wrong deliberately.

Some of them are simply out of their depth, do not understand the benefits system or a government’s realistic prospects of controlling the economy…Others take the Fox News approach: if you can just get enough misinformation out there, enough people who were only half-listening might half-believe you. Competing claims don’t need to relate to facts, their validity will be judged on the manner in which they’re delivered. You may have to retract later, but what does that matter? Does it even count as humiliation when the only people talking about it are the ones who disagreed with you anyway?

This is politics at its most cynical, its most rebarbative; this is politics pursued purely for personal advancement and for the game, in defiance of the public interest and the long term. I have a feeling that the first type of Tory would despise this second type even more than I do. The trick now is to tell them apart. (1)

It is open to debate as to which camp Iain Duncan Smith belongs, given his latest pronouncements on benefits:

 ‘IDS on welfare reform -how do I lie to thee let me count the ways’

‘from factcheck analysing IDS’s claimed figures which were inflated massively as you can see here

He claimed Labour spending was up 58% when it was 8%!

He claimed massive amounts of public monies being lost to fraud – the fraud rate was 0.7%!

He said tax credits rose by 20% in the last two years under Labour – It was 8.8%

 

However regardless of motivation, as George Eaton writes:

‘… even if we accept Duncan Smith’s baseline, his logic is profoundly flawed. The fact that benefits have risen faster than wages is an argument for increasing wages (for instance, by ensuring greater payment of the living wage), not for cutting benefits.’ (3)

Henry Ford would certainly have agreed with George about the flawed logic of allowing wages to decline in real terms :

I have learned through the years a good deal about wages. I believe in the first place that, all other considerations aside, our own sales depend in a measure upon the wages we pay. If we can distribute high wages, then that money is going to be spent and it will serve to make storekeepers and distributors and manufacturers and workers in other lines more prosperous and their prosperity will be reflected in our sales.

My Life and Work – an autobiography of Henry Ford, pp 86 

Hat-tip – http://www.3spoken.co.uk/2013/01/henry-ford-on-wages.html

 

In other words, Henry Ford understood ‘Keynes’ Paradox of Thrift’ and IDS et al either do not know it, or do not choose to know it.

Fundamental to macroeconomics is a very simple formula which this government seems to completely ignore:

Spending equals income equals output which creates employment.

If IDS and the Tory/LD government really wanted to get people off benefits and into work, they would raise the minimum wage and increase benefits.  That would increase spending because unlike the rich, the poor have to spend all their income on surviving.

The increased spending would create employment which would get people off benefits and into work.  Of course, this would be even more effective if government actively invested in job creation.

And as an incidental, the resulting increased tax revenue would also close the structural deficit that they’re always banging on about.

‘…  if you are obsessed with reducing deficits, the best way is to engender growth. The dumbest thing a government can do if it wants a lower deficit is to impose fiscal austerity. There are a lot of dumb governments out there. The problem is they are aided and abetted by criminal types who know full well it is dumb to cut net public spending but pressure governments to do so as long as the space for spending on them expands.’

http://bilbo.economicoutlook.net/blog/?p=22186#more-22186

As Zoe Williams says:

‘.. this is politics pursued purely for personal advancement and for the game, in defiance of the public interest and the long term. I have a feeling that the first type of Tory would despise this second type even more than I do. The trick now is to tell them apart. (1)

I look forward to her first type of Tory coming out to demonstrate against the cynical political ploys of this government.

1)   http://www.guardian.co.uk/commentisfree/2013/jan/02/iain-duncan-smith-polemic-politics-cynical

2)  http://speye.wordpress.com/2012/12/31/ids-on-welfare-reform-how-do-i-lie-to-thee-let-me-count-the-ways/

3)   http://www.newstatesman.com/politics/2013/01/memo-duncan-smith-low-wages-are-not-argument-cutting-benefits

George Osborne says we’re running out of money ..

Labour’s deficit problem.

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By alittleecon

First posted on October 2, 2012 by 

You may have seen lots of posts with titles like the one above, talking about Labour’s deficit dilemma.  How can they restore the trust of the British people?  How can they set a credible plan to grow the economy without borrowing more?  Ed Balls’ speech at this year’s Labour Party Conference was all about treading that line between policies for growth, matched by spending constraint.  The question for Labour is always “How are you going to pay for it?”

In this post I want to take a different tack and look at Labour’s ‘deficit problem’ from the other side.  How can it get past the argument that deficit reduction is priority number 1?

To me Labour’s problem is not how it explains how it will get the deficit down, rather the issue is that the whole argument about debt and deficits is economically illiterate.  It misleads the public and completely hobbles any attempt by the left to take the initiative in the economic debate.

So what is the deficit argument?  Why is it so important to get the deficit down that as a consequence we have to suffer persistent high unemployment, increasing poverty and stagnant living standards?

Here’s everyone’s favourite punchbag Nick Clegg parading his ignorance at the Lib Dem conference last week:

So to those who ask, incredulously, what we – the Liberal Democrats – are doing cutting public spending, I simply say this: Who suffers most when governments go bust? When they can no longer pay salaries, benefits and pensions? Not the bankers and the hedge fund managers, that’s for sure. No, it would be the poor, the old, the infirm; those with the least to fall back on.

So but for austerity, Britain could go bust.  Really?  Where does this idea come?

The argument goes that when we run a deficit, we must borrow from ‘the markets’.  If the deficit gets too high the markets will start to worry we might not be able to pay back what we borrowed and so will start asking a higher rate of interest.  If we keep borrowing, eventually the markets will say “no more”.  Nick Clegg believes at this point, we could literally run out of money – we would be bankrupt.

In answer to this I’ll quote Chris Dillow (read his excellent blog here) who put it better than I could:

…this is plain wrong. In countries with their own central banks, governments cannot go bust because the central bank can simply print money to buy government debt: this is what QE is. Of course, this might or might not be a bad idea. But Clegg didn’t argue this. He just made a prat of himself.

So we need to get past this nonsense (and it really is nonsense) that if we don’t ‘deal with our deficits’, financial armageddon awaits.  But what about the Eurozone?  Aren’t they on the brink of bankruptcy?  Couldn’t that happen here too?

The countries of the Eurozone took the decision to give up their own currencies and replace it with a common currency, the Euro. I n doing so they gave up the ability to issue their own money, to set interest rates and to manipulate their exchange rates.  This means that Government spending really is constrained by how much they can raise in taxes or borrow from the markets.  They can run out of money because they gave up their ability to create currency.  This has lead to the markets periodically raising interest rates on Eurozone country’s debt to the point where in Greece, they actually were unable to borrow any more money on the markets and they had to accept their first (of many) bailout.  This was the backdrop to the 2010 election here when we had Nick Clegg and George Osborne running around saying we were days away from becoming the next Greece.  This was a fiction though.

As long as the UK keeps the pound, it cannot run out of money.  Nick Clegg’s idea that we can (or even already have), while idiotic, somehow still frames the economic debate in this country.  Every suggestion of a new spending plan has to be ‘paid for’ by a corresponding tax rise or pay cut elsewhere for it to be seen as ‘credible’. NO IT DOES NOT!

Until we get away from this spurious framing, we will never have a country we can be proud of.  If Labour really want to work in the interests of working people (and to me, the jury’s still out on that one), the whole framing of the economic issues needs to be moved away from deficit reduction, and onto what we want our society to look like.  To me, this is Labour’s deficit problem.

We on the left should set out a vision for what we want society to look like (for me it would be the right to a job, adequate housing, free education including university and healthcare amongst other things), and communicate the policy changes required to get us there.  The deficit should not even enter into the debate until such a time as we reach maximum potential output.  It should be allowed to float, rising in the bad times, falling in the good. Only then can we bring about real change.  The response when asked about the deficit should follow Keynes’ mantra:

It is the burden of unemployment and the decline in the national income which are upsetting the Budget. Look after the unemployment, and the Budget will look after itself.