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

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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.

The economy is not growing strongly

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Crisis hasn’t gone away.  Corbynomics will be increasingly necessary.

By Michael Burke   First posted 17.09.15 at http://socialisteconomicbulletin.blogspot.co.uk

 

One of the most widely repeated falsehoods about the British economy is the assertion that it is growing strongly and that the crisis is over.  This is not borne out by even a perfunctory economic analysis but it serves a political purpose.  In the first instance, the assertion was important in order to blunt any criticism of renewed Tory austerity policies, which will begin again earnest with the Comprehensive Spending Review in December.  Now that Jeremy Corbyn has won the leadership of the Labour Party the same falsehood is pressed into slightly different service- with the idea that his policies represent a threat to the current recovery, or are at least unnecessary.

In reality, the extremely limited upturn in output is already giving way to renewed weakness.  UK industrial production and manufacturing fell in July.  Monthly data can be erratic but this is the second consecutive fall for industrial production and manufacturing peaked in March, shown in Fig. 1 below.

Fig.1 Industrial production and manufacturing index from April 2013 to July 2015

Source: ONS

This is not the boom that is repeatedly claimed.  The recovery to date is primarily based on consumption not investment.  Since the beginning of the recession to the 2nd quarter of 2015 consumption has risen by £70bn, a modest rise of 5%.  But investment has risen by just £4bn, a cumulative rise of just 1.3% over 7 years, less than 0.2% annually.

In terms of output and investment, the notion of a boom amid austerity is entirely misplaced.  There is only stagnation.  In fact, the levels of industrial production and manufacturing are effectively unchanged since the Coalition took office in May 2010, despite inheriting a mild recovery.  In May 2010, the index levels of industrial production and manufacturing were 100.2 and 97.6 respectively.  In the most recent data they were 99.2 and 100.6.  The trends in output are shown in Fig.2 below.  They clearly show that under austerity, production has stagnated.

Fig.2 Output trends from January 2008 to July 2015

Far from a boom, the current economic situation is best characterised as stagnation.  In one form or another this also characterises the Western economies as a whole.  Since the recession began in the OECD as a whole, the average annual level of GDP growth has been under 1%.  Consumption has risen by US$2.5 trillion over that time.  But Gross Fixed Capital Formation has declined by $200bn over the same period.

For the British economy, this continued reliance on consumption holds a particular threat. The relative weakness of investment, and hence the relative weakness of productivity, is a chronic one in Britain. The current crisis has deepened these severe long-term problems.  Output has fallen back to levels last seen in the 1980s, as shown in Fig.3 below.  This represents a combination of both the long-term weakness of manufacturing and the decline in the output of North sea oil, a financial windfall that has been almost entirely wasted.

Fig. 3 Industrial production over the long-term

As it is not possible to consume that which is not already in existence, consumption must follow output.  It cannot lead it.  As the output of the British economy is experiencing both a structural and a cyclical decline, its increased consumption has been funded by its surplus on ‘financial services’, the money British banks extort from the rest of the world, and on increasing indebtedness.

As the revenue from financial services has now also gone into decline, so the resources for consuming without producing are increasingly through borrowing.  The broadest measure of Britain’s overseas borrowing requirement is the balance on the current account.  The current account includes both the trade balance and the balance on all current payments , primarily company dividends and interest payments by borrowers.  Any deficit on the total current account must be met by increased borrowing from overseas (or asset sales to overseas).  The latest 3 quarters have seen the worst current account deficits as a proportion of GDP since records began, as shown in Fig.4 below.

Fig.4 Current account blance as a proportion lof GDP

The financing of this deficit depends on the willingness of overseas investors to buy UK assets.  It is impossible to predict the precise point or catalyst for them to stop doing so.  But what is known is that the British economy has faced a number ‘balance of payments’ crises before when the relative level of overseas borrowing was far lower.  One possible way of reducing the current account deficit is to impose higher savings rates on the household sector, raising the taxes and reducing the welfare transfers to them from government, which is one effect of renewed austerity.  But even austerity Mark II will be unable to close the current account gap of this magnitude entirely.Therefore the British economy is facing a series of interrelated crises, of production, slow growth and unsustainable borrowing.  In reality they are key products of a single crisis – the crisis of weak investment.  Contrary to the Tory propagandists, the supporters of austerity and their apologists, the crisis of the British economy has not at all gone away.  As a result Corbynonics, a state-led increase in investment, is vital to end it.

Antidote to Osborne’s fairytale economics

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Panel of leading economists discuss and debate the true state of the economy and the lies underpinning the Government’s austerity programme.

The panel includes:
Owen Jones, Journalist
James Meadway, Senior Economist, New Economics Foundation
Ann Pettifor, Prime Economics
Micheal Burke, Economist
Chaired by:
Christine Blower, General Secretary, NUT

This economic briefing was recorded just a few days ahead of George Osborne’s Autumn Statement… but none of the panellists came close to anticipating the level of hubris, triumphalism and double-dealing that accompanied the Osborne Autumn Statement.  It was a truly breath-taking performance!

Find out the real effects and intent of austerity that George Osborne and the Government don’t want you to know…

 

The People’s Assembly Against Austerity – Economic Briefing – 27.11.14

It is the Tories who have a 30% strategy

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It is the Tories who have a 30% strategy by Michael Burke

First posted on Socialist Economic Bulletin 20.05.14

Ed Miliband is accused of having a ‘35% strategy’, meaning that he is banking on doing only just enough to win an overall majority at the next general election.  Polling models suggest that 35% would be enough for Labour to achieve an overall majority in Parliamentary seats.  This is because the Tory vote is increasingly concentrated, while Labour’s is far more widely spread geographically.
Since Labour’s electoral strategy has not been divulged to SEB, it is idle to speculate on it, although this has not prevented others from doing so.  Instead, it is possible to demonstrate that the Tory policy is based on an electoral strategy that is focused on an even narrower section of the electorate.  It is the Tories who have a 30% electoral strategy.

The map below (which the present author first saw published by Ian Wright MP) shows the cumulative effect in English constituencies of cuts under the Coalition government during this parliament.  The Tory Party is a fringe grouping in Scotland and is headed in that direction in Wales.  Despite repeated attempts it has also failed to resurrect Conservative Unionism in Ireland.

Chart 1. Cumulative effect on change in spending power 2010/11 to 2015/16

The areas in beige have been barely affected by government cuts (although these are averages, there will be many people living in those areas who are badly affected by austerity).  The areas in green have experienced no net cuts at all.

By contrast, areas coloured in red have seen a fall in living standards of between 15% and 20%.  Those areas coloured deepest red have seen falls of greater than 20% and take in all the large cities, including London.

The economic map almost precisely coincides with the electoral map of Britain.  The Economist and others are keen to argue that this is a North-South divide in British politics.  To that end, they are obliged to perform some logical contortions.  In order to make the main divide in British politics North versus South, The Economist excludes the Midlands from the North and excludes London from the South!

In reality, the Tory Party has been forced out of Ireland, Scotland, the cities, Wales and the North in succession.  It is retreating to its birth place and stronghold in the English shires.

The economic response of the Coalition government led by the Tories is to protect and promote those Tory heartlands, as shown in Chart 1 above.  SEB has previously shown how a minority of society, the owners of capital and the rich, are benefitting from the ‘recovery’ in which most people’s living standards continue to fall.

Perhaps the most flagrant policy in this regard is Osborne’s ‘Help to Buy Scheme’.  The entire policy of increasing demand for housing while doing nothing to increase supply inevitably leads to higher prices.  A number of commentators and economists from the Right have attacked the scheme as an absurd policy, designed solely to boost property prices rather than housing availability.  It is a ‘help to get re-elected’ scheme.  The resulting property price bubble is concentrated in London and the South-East, and even here there is growing resentment at the unaffordability of housing, not a feel-good factor.

Politically and economically, the Tories are pursuing a core vote strategy.  This may not amount to much more than 30% at the next general election, and will certainly be less than the 36.9% they received in 2010.
As a result, support for the LibDems has collapsed as this does not at all coincide with the interests of their electoral base, higher-paid workers, professional classes and small business owners.

Labour’s winning electoral strategy should be equally clear and substantially broader.  In terms of political geography it should embrace the democratic demands for greater national rights within the British state, as well as finally ending the British presence in Ireland.  It needs to have a programme of economic regeneration for the North and the big cities.  It should adopt a very large scale programme of council house building with London at its centre-piece.  Socially, it needs to be a champion of equality and democracy, tackling the huge inequalities faced by women and tackling the endemic racism of British society, which cannot be done while promising to be tough on immigration.

Above all now, it needs to reverse the policy of austerity which is lowering the living standards of the overwhelming majority and will continue to do so.  The Tory policy, of government spending cuts and inducements to the private sector to invest has not worked.  A policy of government-led investment is required, combined with other policies that will directly lift standards.  The Tory party is pursuing a narrow electoral strategy to shore up its support.  Labour can offer something better.